Irrevocable Life Insurance Trust (ILIT) – by John Jastremski

One of the main reasons we buy life insurance is so that when we die, our loved ones will have enough money to pay off our remaining debts and final expenses. We also purchase life insurance to provide for our loved ones’ future living expenses, at least for a while. That’s why it may seem unfair that life insurance proceeds can be reduced by estate taxes. That’s right–the general rule is that life insurance proceeds are subject to federal estate tax (and, depending on your state’s laws, state estate tax as well). This means that as much as 40% (currently the highest estate tax rate) of your life insurance proceeds could be going to Uncle Sam instead of to your family as you intend. Fortunately, proper planning can help protect your family’s financial security.

The key is ownership

Generally, all the property you own at your death is subject to federal estate tax. The important point here is that estate tax is imposed only on property in which you have an ownership interest; so if you don’t own your life insurance, the proceeds will generally avoid this tax. This begs the question: Who should own your life insurance instead? For many, the answer is an irrevocable life insurance trust, or ILIT (pronounced “eye-lit”).

What is an ILIT?

An ILIT is a trust primarily set up to hold one or more life insurance policies. The main purpose of an ILIT is to avoid federal estate tax. If the trust is drafted and funded properly, your loved ones should receive all of your life insurance proceeds, undiminished by estate tax.

How an ILIT works

Because an ILIT is an irrevocable trust, it is considered a separate entity. If your life insurance policy is held by the ILIT, you don’t own the policy–the trust does.
You name the ILIT as the beneficiary of your life insurance policy. (Your family will ultimately receive the proceeds because they will be the named beneficiaries of the ILIT.) This way, there is no danger that the proceeds will end up in your estate. This could happen, for example, if the named beneficiary of your policy was an individual who dies, and then you die before you have a chance to name another beneficiary.
Because you don’t own the policy and your estate will not be the beneficiary of the proceeds, your life insurance will escape estate taxation.

Because an ILIT must be irrevocable, once you sign the trust agreement, you can’t change your mind; you can’t end the trust or change its terms.

Creating an ILIT

Your first step is to draft and execute an ILIT agreement. Because precise drafting is essential, you should hire an experienced attorney. Although you’ll have to pay the attorney’s fee, the potential estate tax savings should more than outweigh this cost.

Naming the trustee

The trustee is the person who is responsible for administering the trust. You should select the trustee carefully. Neither you nor your spouse should act as trustee, as this might result in the life insurance proceeds being drawn back into your estate. Select someone who can understand the purpose of the trust, and who is willing and able to perform the trustee’s duties. A professional trustee, such as a bank or trust company, may be a good choice.

Funding an ILIT

An ILIT can be funded in one of two ways:

  1. Transfer an existing policy–You can transfer your existing policy to the trust, but be forewarned that under federal tax rules, you’ll have to wait three years for the ILIT to be effective. This means that if you die within three years of the transfer, the proceeds will be subject to estate tax. Your age and health should be considered when deciding whether to take this risk.
  2. Buy a new policy–To avoid the three-year rule explained above, you can have the trustee, on behalf of the trust, buy a new policy on your life. You can’t make this purchase yourself; you must transfer money to the trust and let the trustee pay the initial premium. Then, as future annual premiums come due, you continue to make transfers to the trust, and the trustee continues to make the payments to the insurance company to keep the policy in force.

Gift tax consequences

Because an ILIT is irrevocable, any cash transfers you make to the trust are considered taxable gifts. However, if the trust is created and administered appropriately, transfers of $14,000 or less per trust beneficiary will be free from federal gift tax under the annual gift tax exclusion.
Additionally, each of us has a gift and estate tax applicable exclusion amount, so transfers that do not fall under the annual gift tax exclusion will be free from gift tax to the extent of your available applicable exclusion. The gift and estate tax applicable exclusion amount is equal to the basic exclusion amount of $5,490,000 (in 2017, $5,450,000 in 2016) plus any applicable deceased spousal unused exclusion amount. Both the annual exclusion and the basic exclusion amount are indexed for inflation and may change in future years.

Crummey withdrawal rights

Generally, a gift must be a present interest gift in order to qualify for the annual gift tax exclusion. Gifts made to an irrevocable trust, like an ILIT, are usually considered gifts of future interests and do not qualify for the exclusion unless they fall within an exception. One such exception is when the trust beneficiaries are given the right to demand, for a limited period of time, any amounts transferred to the trust. This is referred to as Crummey withdrawal rights or powers. To qualify your cash transfers to the ILIT for the annual gift tax exclusion, you must give the trust beneficiaries this right.

The trust beneficiaries must also be given actual written notice of their rights to withdraw whenever you transfer funds to the ILIT, and they must be given reasonable time to exercise their rights (30 to 60 days is typical). It’s the duty of the trustee to provide notice to each beneficiary.

Of course, so as not to defeat the purpose of the trust, the trust beneficiaries should not actually exercise their Crummey withdrawal rights, but should let their rights lapse.

The key duties of an ILIT trustee include:

  • Opening and maintaining a trust checking account
  • Obtaining a taxpayer identification number for the trust entity, if necessary
  • Applying for and purchasing life insurance policies
  • Accepting funds from the grantor
  • Sending Crummey withdrawal notices
  • Paying premiums to the insurance company
  • Making investment decisions
  • Filing tax returns, if necessary
  • Claiming insurance proceeds at your death
  • Distributing trust assets according to the terms of the trust

 

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.  The information in these materials may change at any time and without notice.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.

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Credit Shelter Trust- by John Jastremski

Credit Shelter Trust
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What is a credit shelter trust?

A credit shelter trust (also called a B trust, family trust, or bypass trust) is an irrevocable trust typically used by a married couple to minimize federal estate taxes on their combined estates.

How does a credit shelter trust work?

Prior to 2011, individuals could only use the estate tax exemption that was allotted to him or her, and any unused exemption would be lost. A married couple could fully use their respective exemptions by splitting a spouse’s estate into a marital portion and credit shelter portion (this type of planning is often referred to as A/B trust planning). Here’s how it works:
A credit shelter trust is funded with assets sufficient to fully utilize the exemption of the first spouse to die. The trust can be funded during the spouses’ lifetimes or at the death of the first spouse to die.
The surviving spouse is given restricted access to and control over the assets in the trust. If the surviving spouse is given unrestricted access to and control over the assets in the trust, the assets would be included in his or her estate when he or she dies (which would have negated the sheltering purpose of the trust). The surviving spouse can receive:

  • All annual income earned by the trust
  • The annual, but non-cumulative right to withdraw the greater of $5,000 or 5% of the trust principal, for any reason
  • The right to invade the trust principal if necessary for his or her health, education, support, and maintenance (referred to as the “ascertainable standards”)

The surviving spouse can also be given a power to appoint all or any of the assets in the trust to a limited class of beneficiaries excluding himself or herself, his or her creditors, his or her estate, or the creditors of his or her estate (this is called a “special” or “limited power of appointment”). The surviving spouse can appoint the assets in the trust to the specified beneficiaries in any proportion that he or she desires. This allows the surviving spouse to appoint the assets to the beneficiaries who need the assets the most.

Bypass trusts can be funded using a formula or a disclaimer. If a disclaimer is used, the trust document should not include a special power of appointment provision.

The surviving spouse can also serve as trustee.

In some cases, it may be better to have other family members or a professional (e.g., a bank) serve as trustee, either alone or with the surviving spouse. A neutral trustee is especially appropriate in second marriages.

When the surviving spouse dies, the remaining assets in the trust pass estate tax free to the beneficiaries as named by the first spouse to die in the trust document, or as appointed by the surviving spouse.

If the trust will continue after the surviving spouse dies, the trust document may need to name a successor trustee, and the trust terms must comply with the rule against perpetuities.

An experienced attorney should draft the trust document because if it is not precisely drafted the trust may be deemed invalid.

Different rules apply to non-U.S. citizens.

The 2010 and 2012 Tax Acts allow the executor of a deceased spouse’s estate to transfer any unused estate tax exemption to the surviving spouse without the use of a credit shelter trust. The executor of the first deceased spouse’s estate must file an estate tax return on a timely basis and make an election to permit the surviving spouse to use the deceased spouse’s unused exemption.

Credit Shelter Trust Illustration

Suitable clients

  • Spouses with combined assets that exceed the estate tax exemption, which is $5,490,000 (in 2017, $5,450,000 in 2016 — double these amounts for a married couple).

Example

John and Mary are a married couple who own $9,860,000 in assets in 2017. Assume the basic exclusion amount is $5,490,000 and the top estate tax rate is 40%. The basic exclusion amount is assumed to increase by 2% annually (with appropriate adjustments for indexing and rounding applied to projections of the exclusion below), the estate assets are assumed to grow 4% annually, and Mary is assumed to die 10 years after John.
If John dies leaving everything to Mary, there will be no federal estate taxes due because, generally, the law allows an unlimited amount of property to pass to a spouse free of estate taxes. John’s estate elects to pass his unused $5,490,000 exclusion to Mary. Mary can live off the earnings of the entire $9,860,000 estate. When Mary dies, her entire estate will pass to their children. When Mary dies 10 years later, Mary’s estate will have grown to $14,595,209 and her basic exclusion amount will have increased to $6,700,000. Mary’s applicable exclusion equals $12,190,000 ($6,700,000 + John’s unused $5,490,000 exclusion). The excess of Mary’s estate over Mary’s applicable exclusion is subject to taxes. That means that $962,083 would have gone to the IRS and $13,633,125 would have gone to John and Mary’s children (assuming no other variables). Taxes would consume 6.6% of their combined estates.
Now, let’s say that John executed a will leaving an amount equal to his available exemption to a credit shelter trust, and the rest of his estate to Mary. Say John’s gross estate was $6 million. $5,490,000 passed to the trust tax free under John’s exemption, and $510,000 passed directly to Mary tax free under the unlimited marital deduction. Mary can live off the earnings of her $4,370,000 estate ($3,860,000 plus $510,000), and can also access the income earned by the trust, as well as the principal of the trust to the extent she needs it for her health, education, maintenance, and support.
If Mary died 10 years later, Mary’s estate will have grown to $6,468,668 and her basic exclusion amount will have increased to $6,700,000; the assets in the trust, which have grown to $8,126,541, would not have been included in her gross estate. John and Mary’s children would have received the entire corpus of the trust. Of Mary’s $6,468,668 estate, all of it would have passed to their children tax free under Mary’s exemption, and nothing would have passed subject to tax. That results in $0 that would have gone to the IRS and $6,468,668 that would have gone to John and Mary’s children. When their estates are combined, the children would have received $14,595,209. Taxes would consume 0% of the combined estates. By using a credit shelter trust, John and Mary’s children would have received an additional $962,083 of their parents’ estates that the IRS would have received had the trust not been used.

If John didn’t want the property to go outright to Mary, John could leave the residuary estate to a marital trust instead, naming Mary as the primary beneficiary. When a credit shelter trust is used in conjunction with a marital trust, the arrangement is usually called an A/B trust arrangement.

Calculations

Without Credit Shelter Trust
Mary’s Taxable Estate $14,595,209
Tentative Federal Estate Tax $5,783,883
- Unified Credit $4,821,800
Federal Estate Tax $962,083
***
Mary’s Estate $14,595,209
- Federal Estate Tax $962,083
Mary’s Net Estate $13,633,125
+ John’s Net Estate $0
Combined Net Estate $13,633,125
With Credit Shelter Trust
Mary’s Taxable Estate $6,468,668
Tentative Federal Estate Tax $2,533,267
- Unified Credit $2,533,267
Federal Estate Tax $0
***
Mary’s Estate $6,468,668
- Federal Estate Tax $0
Mary’s Net Estate $6,468,668
+ John’s Net Estate $8,126,541
Combined Net Estate $14,595,209
Net Estates
With Credit Shelter Trust $14,595,209
Without Credit Shelter Trust $13,633,125
Difference $962,083

Advantages

Achieves tax goal while giving surviving spouse maximum access to and control over trust assets

With this type of trust, if the children of the marriage are minors or have special needs, or if the surviving spouse were to otherwise need the money, he or she would be able to access the property that passes to the trust under the deceased spouse’s exemption (although access would be limited, see Disadvantages).

Preserves assets for descendants

Because assets that fund the credit shelter trust bypass the surviving spouse’s estate, they are preserved for the ultimate intended beneficiaries. This can be especially attractive when there are children from a previous marriage.

Protects assets from future creditor claims

Because a bypass trust is irrevocable, future creditors of the beneficiaries (the surviving spouse or the children) will be unable to reach the assets while they are in the trust. So, this strategy also works well if the children are adults and the parents don’t want them to own property outright for some reason. If this is the case, a spendthrift provision should be included in the trust agreement.

Disadvantages

Surviving spouse’s access to the credit shelter trust must be restricted

The deceased spouse can give the surviving spouse access to all, a portion, or none of the income from the credit shelter trust. If access to principal is allowed, it must be limited to health, education, maintenance, or support only. Health, education, maintenance, and support, or “HEMS”, are four magic words used by the IRS, and there’s some guidance about what they mean, but the surviving spouse will have to be careful when withdrawing principal to make sure the money’s use will fall within these parameters.

Adds complexity to the surviving spouse’s life

If the surviving spouse is trustee, he or she will have to maintain separate records for the trust, and ensure that he or she does not overstep the trustee’s powers. If a neutral trustee is used, the surviving spouse will have to cooperate with the trustee.

Impact of portability

For the estates of persons dying in 2011 or later, the executor may transfer any unused estate tax exemption to the surviving spouse.While this portability has some appeal, it also has issues:

  • In the case of multiple marriages, only the most recent deceased spouse’s unused exemption may be used by the surviving spouse.
  • Although the estate tax exemption is portable, the GST exemption is not. Couples seeking to create trusts for the benefit of their children and more remote descendants cannot take advantage of portability because the first spouse’s GST exemption cannot be transferred to the second spouse.
  • Any unused exemption is not indexed for inflation. As a result, if the assets transferred to the surviving spouse appreciate, the appreciation may be subject to estate taxation at the surviving spouse’s death.
  • Assets passing directly to an individual are subject to the claims of creditors, as explained above (see Advantages).
  • The executor must make an election on a timely filed estate tax return. Such an election, once made, is irrevocable.

The information in these materials may change at any time and without notice.Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.

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Donor-Advised Fund-by John Jastresmki

What is a donor-advised fund?

Technically, a donor-advised fund is an agreement between a donor and a host organization (the fund) that gives the donor the right to advise the fund on how the donor’s contributions will be invested and how grants to charities (grantees) will be made. Contributions may be tax deductible in the year they are paid to the fund, subject to the usual limitations, if they are structured so they aren’t considered earmarked for a particular grantee. Though they can bear the donor’s name, donor-advised funds are not operated as separate entities like private foundations are, but are merely accounts held by the fund. The fund owns the contributions and has ultimate control over grants.

Donor-Advised Fund Illustration

The community foundation was the first type of host organization to offer donor-advised funds but, today, many financial institutions offer them, and many public charities have funds or will create a fund upon request.

How does a donor-advised fund work?

It’s easy to set up a fund account. The donor first signs a letter of understanding with the fund, establishes an account, names the account, and recommends an investment strategy. Then, the donor makes required minimum contributions of assets, which may include cash, marketable securities, and other types of assets, depending on the fund. The required minimum contributions vary from fund to fund, but are usually less than those required by private foundations.
During life, the donor (or the donor’s designee) can make ongoing, non-binding recommendations to the fund as to how much, when, and to which charities grants from the fund should be made. Additionally, the donor can offer advice to the fund regarding how contributions should be invested. The donor may suggest that, upon death, grants be made to charities named in his or her will or other legal instrument such as a revocable living trust. Or, the donor may designate a surviving family member(s) to recommend grants. However, the fund is not obligated to follow any of the donor’s suggestions–hence the name “donor-advised fund.” As a practical matter, though, the fund will generally follow a donor’s wishes. Distributions to grantees are typically identified as being made from a specific donor’s account, but they can be made anonymously at the donor’s request.

Donor-advised funds vs. private foundations

Both private foundations and donor-advised funds allow a person to take tax deductions now and decide later to whom to give. Both donor-advised funds and private foundations can be named to honor the donor, a family member, or other person.
A donor-advised fund usually receives contributions from many unrelated donors (though donors’ accounts are kept separate), while a private foundation is typically funded by one source (an individual, family, or corporation). While donors to a donor-advised fund may only offer advice regarding grants and investments, private foundations offer the donor exclusive control and direction over grants and investments, an attractive feature to some philanthropists.
However, various legal restrictions imposed on private foundations are not imposed on donor-advised funds, and the federal income tax treatment of a donation to a private foundation is less favorable than that afforded to a donor-advised fund. Because contributions to a donor-advised fund are considered gifts to a “public charity,” they may allow a greater income tax deduction than contributions to a private foundation. Furthermore, private foundations are required to distribute a minimum of 5% of their assets each year. Donor-advised funds have no such minimum distribution requirement (though some funds follow the 5% rule voluntarily), and donors may be allowed to let their accounts build up tax free for many years and be distributed only upon a specified date or upon the occurrence of a specified event.
Also, donor-advised funds do not need to fulfill many of the reporting and filing requirements that are imposed on private foundations. And because the fund handles any legal, administrative, and filing requirements (including tax returns), the donor is completely freed from these responsibilities. In addition, since separate accounts within a donor-advised fund are administered as part of the larger host organization, the administrative costs borne by the donor are generally lower than those incurred by a private foundation.

Endowed funds vs. non-endowed funds

Endowed funds only distribute income, not principal. These funds invest a donor’s assets in perpetuity for potential growth over time. Because they are permanent, endowed funds provide a lasting memory of the donor’s philanthropic nature.
Non-endowed funds permit a donor to make ongoing recommendations for grants up to the entire fund balance (principal and income). Such funds remain non-endowed, unless the donor specifies otherwise, until such time as the donor or the donor’s designees are no longer providing advice to the fund.

Income taxes

A donor can generally take an immediate income tax deduction for contributions of money or property to–or for the use of–a donor-advised fund if the donor itemizes deductions on his or her federal income tax return. The amount of the deduction depends on several factors, including the amount of the contribution, the type of property donated, and the donor’s adjusted gross income (AGI). Generally, deductions are limited to 50 percent of the donor’s AGI. If the donor makes a gift of long-term capital gain property (such as appreciated stock that has been held for longer than one year), the deduction is limited to 30 percent of the donor’s AGI. The fair market value of the property on the date of the donation is used to determine the amount of the charitable deduction. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.
Additionally, donor-advised funds are not subject to the excise taxes levied against private foundations.

Gift and estate taxes

There are no federal gift tax consequences because of the charitable gift tax deduction, and federal estate tax liability is minimized with every contribution since donated funds are removed from the donor’s taxable estate.

Suitable clients

  • High-net-worth individuals
  • Individuals who have no children or ultimate beneficiaries
  • Individuals who do not want to leave too much money to their children
  • Individuals who do not want to be actively involved in the ongoing operations of their charitable plan
  • Individuals with highly appreciated assets

Example

Harry, Wilma, and their children own a business that has enjoyed financial success for many years. Harry and Wilma show their appreciation to their customers by making donations each year to many of their community’s charities. Harry and Wilma would like to continue the family legacy for successive generations, but no longer want the year-end stress of selecting the charities they want to support and distributing checks.
Harry and Wilma set up a donor-advised fund with a community foundation and donate half of their shares in the business along with an investment account. To open the donor-advised fund account, Harry and Wilma simply completed the host community foundation’s 3-page application form. Within a few hours, Harry and Wilma delivered the shares to the fund, and a short time later, their investment account was electronically transferred to the fund. Harry and Wilma incurred no legal or accounting fees for the set up.
Because of the host community foundation’s charitable status, Harry and Wilma can take an immediate income tax deduction for the fair market value of their shares and investment account. If Harry and Wilma had created a private foundation instead, their deduction would have been limited to their cost basis in the donated assets.
The fund subsequently sells the donated shares with no capital gains tax liability. The assets in the fund appreciate tax free, and when Harry and Wilma die, the assets will not be subject to estate taxes.
The fund will handle all the bookkeeping and tax reporting, make the ongoing investment decisions, and assume fiduciary responsibilities. Harry and Wilma can put their time and effort into running their business.
From time to time, Harry and Wilma recommend to the fund that grants be made to their favorite charities. The fund follows their recommendations whenever it is appropriate to do so, and makes the grants in Harry and Wilma’s names, and sometimes in Harry and Wilma’s children’s names.
Harry and Wilma name their children as successor advisors after they die.

Advantages

  • Lower contribution minimums (e.g., $10,000), easier and less costly to set up and maintain than private foundations or supporting organizations
  • Some involvement in grantmaking
  • Donors can obtain expert advice on grantmaking
  • Donors may receive immediate income tax deductions
  • Can reduce or eliminate capital gains, gift, and estate taxes
  • No excise tax or payout requirements
  • Accounts can be personalized or donors can give anonymously
  • Accounts may be transferable to the next generation

Disadvantages

  • Contributions are irrevocable
  • Lack of control over investments and grants; investment options may be limited
  • Grants may be limited geographically to a particular state or community, or by the fund’s charitable mission
  • Assets that pass to charity do not pass to heirs
  • Duration of donor’s philanthropy may be limited

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice

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Dynasty Trustby – by John Jastresmki

What is a dynasty trust?

Each time one taxpayer transfers wealth to another, the transfer is potentially subject to federal transfer taxes, including gift and estate tax. The federal transfer tax system is designed to impose a tax on each and every generation (e.g., father to son, son to grandson, etc.). The transfer tax system accounts for the fact that a transfer might “skip” a generation by passing from parent to grandchild, for example. This is accomplished by imposing an additional tax whenever transfers of wealth are made to persons who are more than one generation below the taxpayer (e.g., father to grandson). This additional tax is called the generation-skipping transfer (GST) tax. GST tax is imposed at the highest estate tax rate in effect at the time of the transfer.

Additionally, most of the individual states impose their own transfer taxes. Together, these taxes can take an enormous bite whenever wealth is being handed down, and eventually eat away a family’s fortune. This can be troublesome to individuals with substantial wealth who would prefer to have their legacies benefit their own family members. It’s from these circumstances that the dynasty trust evolved.

A dynasty trust is created to provide for future generations while minimizing overall transfer taxes. With a dynasty trust, a taxpayer transfers assets to the trust. This transfer, from the taxpayer (the grantor) to the trust, is potentially subject to transfer taxes (although the taxpayer may use his or her exemption amounts to shield the transfer from tax). The trust then provides for future generations for as long as it exists. Although the trust assets effectively move from generation to generation, there are no corresponding transfer tax consequences.

How does a dynasty trust work?

Structuring the trust to last for generations

At one time, the laws of all 50 states prohibited a trust from lasting beyond 21 years after the death of the last beneficiary alive at the time the trust was created. This rule against perpetuities has been modified or abolished in many states. A trust created in one of those jurisdictions can be structured to last for many generations. Even in states that still maintain the rule, a trust can be created that will last for a substantial period of time.

Leveraging tax advantages

Although assets will be subject to transfer taxes when initially funding the trust, the assets (and subsequent appreciation) will be untouched by transfer taxes for as long as they remain in the trust.
Typically, dynasty trusts are funded with amounts that take full advantage of the grantor’s transfer tax exemptions. The federal gift and estate tax exemption equivalent amount is $5,490,000 (in 2017, $5,450,000 in 2016), and the GST tax exemption is also $5,490,000 (in 2017, $5,450,000 in 2016). These amounts can be doubled if both spouses are funding the trust. Though dynasty trusts can be created at death through a will or living trust, it may be more advantageous to create this type of trust during the grantor’s life because, if planned properly, the trust can continue to be funded transfer tax free with annual exclusion gifts (currently $14,000 per trust beneficiary).

As this type of trust is taxed more heavily on income, it may be more advantageous to fund the trust with non-income-producing property, such as growth stocks, tax-exempt bonds, and cash value life insurance. Other appropriate assets might include real estate, discounted property, and property expected to highly appreciate.

Protecting and preserving principal

To enjoy the tax benefits summarized above, access to trust property by the beneficiaries must be limited. The grantor can decide how narrow or broad the beneficiary’s access will be within those limits. For example, a grantor who wishes to give a beneficiary as much control as possible can name the beneficiary as trustee, and give the beneficiary the right to all income and the right to consume principal limited by the ascertainable standards (i.e., health, education, maintenance and support). The beneficiary can be given even more control by granting a special (or limited) testamentary power of appointment (i.e., the power to name successive beneficiaries, but not to himself/herself, his/her creditors, his/her estate, or the creditors of his/her estate).

Dynasty Trust Illustration

On the other hand, a grantor who wants to restrict access to the trust as much as possible can name an independent trustee who has sole discretion over distributions coupled with a spendthrift provision. The trustee will have full authority to distribute or not distribute income or principal to the beneficiary as the trustee deems appropriate. The spendthrift provision will prevent the beneficiary from voluntarily or involuntarily transferring his or her interest to another before actually receiving a distribution.
The greater the restrictions, the less likely creditors or other claimants will be able to reach trust property.

Suitable clients

  • High net worth individuals
  • Individuals with family heirloom assets (e.g., vacation home or jewelry) or who desire to keep assets within the family for more than one generation

Example

John and Mary, a married couple, own property with a net value of $10 million, which they would like to pass on to their children and future generations. John and Mary’s financial planner describes the following three scenarios:

  • Scenario 1 –John and Mary leave $10 million outright to their two children.
  • Scenario 2 –John and Mary leave $10 million to a trust for the benefit of their two children and then distributed to grandchildren.
  • Scenario 3 –John and Mary leave $10 million to a dynasty trust created in a state that has no rule against perpetuities.

Assume that a generation is 26 years, the estate and GSTT exemptions are $5,490,000, the estate tax rate is 40%, the growth rate is 7%, principal is not spent, and state variables and income taxes are ignored.
In scenario 1, $10 million passes to John and Mary’s children free from estate taxes. In 26 years, the money grows to approximately $58 million, but after estate taxes are deducted, John and Mary’s grandchildren receive approximately $39 million.
In scenario 2, $10 million passes to the trust free from estate taxes. In 26 years, the money grows to approximately $58 million and is distributed to John and Mary’s grandchildren.
In scenario 3, $10 million passes to the dynasty trust free from estate taxes. In 26 years, the money grows to approximately $58 million. 26 years later, the money grows to approximately $337 million that can provide benefits to John and Mary’s great-grandchildren and beyond.
Of course, this is a hypothetical illustration only, and is not indicative of any specific investment.

Advantages

  • Can be structured to preserve family wealth for generations
  • Minimizes transfer taxes
  • Can be structured to protect assets from spendthrift beneficiaries, spousal divorce claims, and unforeseen creditors and claimants

Disadvantages

  • Trust is irrevocable
  • Leaves future generations with limited flexibility to manage changes in circumstances

 

 

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice

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Financial Basics for Millennials – by John Jastremski

With age comes responsibility, so if you’re a young adult in your 20s or 30s, chances are you’ve been introduced to the realities of adulthood. While you’re excited by all the opportunities life has to offer, you’re also aware of your emerging financial responsibility. In the financial realm, the millennial generation (young adults born between 1981 and 1997) faces a unique set of challenges, including a competitive job market and significant student loan debt that can make it difficult to obtain financial stability.

Poor money management can lead to debt, stress, and dependency on others. Fortunately, good money management skills can make it easier for you to accomplish your personal goals. Become familiar with the basics of planning now, and your future self will thank you for being responsible.

Figure out your financial goals

Setting goals is an important part of life, particularly when it comes to your finances. Over time, your goals will probably change, which will likely require you to make some adjustments. Start by asking yourself the following questions:

  • What are my short-term goals (e.g., new car, vacation)?
  • What are my intermediate-term goals (e.g., buying a home)?
  • What are my long-term goals (e.g., saving for your child’s college education, retirement)?
  • How important is it for me to achieve each goal?
  • How much will I need to save for each goal?

Once you have a clear picture of your goals, you can establish a budget that will help you target them.

Build a budget

A budget helps you stay on track with your finances. There are several steps you’ll need to take to establish a budget. Start by identifying your current monthly income and expenses. This is easier than it sounds: Simply add up all of your sources of income. Do the same thing with your expenses, making sure to include discretionary expenses (e.g., entertainment, travel, hobbies) as well as fixed expenses (e.g., housing, food, utilities, transportation).
Compare the totals. Are you spending more than you earn? This means you’ll need to make some adjustments to get back on track. Look at your discretionary expenses to identify where you can scale back your spending. It might take some time and self-discipline to get your budget where it needs to be, but you’ll develop healthy financial habits along the way.
On the other hand, you may discover that you have extra money that you can put toward savings. Pay yourself first by adding to your retirement account or emergency fund. Building up your savings using extra income can help ensure that you accomplish your financial goals over the long term.

Establish an emergency fund

It’s an unpleasant thought, but a financial crisis could strike when you least expect it, so you’ll want to be prepared. Protect yourself by setting up a cash reserve so you have funds available in the event you’re confronted with an unexpected expense. Otherwise you may need to use money that you have earmarked for another purpose–such as a down payment on a home–or go into debt.
You may be familiar with advice that you should have three to six months’ worth of living expenses in your cash reserve. In reality, though, the amount you should save depends on your particular circumstances. Consider factors like job security, health, income, and debts owed when deciding how much money should be in your cash reserve.
A good way to accumulate emergency funds is to earmark a percentage of your paycheck each pay period. When you reach your goal, don’t stop adding money–the more you have saved, the better off you’ll be.
Review your cash reserve either annually or when your financial situation changes. Major milestones like a new baby or homeownership will likely require some adjustments.

Be careful with credit cards

Credit cards can be useful in helping you monitor how much you spend, but they can also lead you to spend more than you can afford. Before accepting a credit card offer, evaluate it carefully by doing the following:

  • Read the terms and conditions closely
  • Know what the interest rate is and how it is calculated
  • Understand hidden fees such as late-payment charges and over-limit fees
  • Look for rewards and/or incentive programs that will be most beneficial to you

Contact the credit card issuer if you have questions about the language used in an offer. And if you are trying to decide between two or more credit card offers, be sure to evaluate them to determine which will work best for you.
Bear in mind that your credit card use affects your credit score. Avoid overspending by setting a balance that you’re able to pay off fully each month. That way, you can safely build credit while being financially responsible. Take into account that missed payments of any sort can cause your credit score to suffer. In turn, this could make it more difficult and expensive to borrow money later.

Deal with your existing debt

At this stage in your life, you’re probably dealing with debt and wondering how to manage it. A 2015 Pew Research study revealed that 86% of millennials have debt. (Source: “The Complex Story of American Debt,” July 2015) In particular, you might be concerned about how to pay off your student loan debt.
Fortunately, there are many repayment plans that make it easier to pay off student loans. Check to see whether you qualify for income-sensitive repayment options or Income-Based Repayment. Even if you’re not eligible, you may be able to refinance or consolidate your loans to make the repayment schedule easier on your budget. Explore all your options to find out what works best for you.

Beware of new borrowing

You’re doing your best to pay off your existing debt, but you might find that you need to borrow more (for example, for graduate school or a car). Think carefully before you borrow. Ask yourself the following questions before you do:

  • Is this purchase necessary?
  • Have you comparison-shopped to make sure you’re getting the best possible deal?
  • How much will this loan or line of credit cost over time?
  • Can you afford to add another monthly payment to your budget?
  • Will the interest rate change if you miss a payment?
  • Are your personal finances in good shape at this time, or should you wait to borrow until you’ve paid off pre-existing debt?

Weigh your pre-existing debt against your need to borrow more and determine whether this is a wise decision at this particular point in your life.

Take advantage of technology

Access to technology at a young age is one major advantage that benefits millennials, compared with their parents and grandparents when they were starting out. These days, there’s virtually an app or a program for everything, and that includes financial basics. Do your homework and find out which ones could be the most helpful to you. Do you need alerts to remind you to pay bills on time? Do you need help organizing your finances? Are you looking for a program that allows you to examine your bank, credit card, investment, and loan account activities all at once?

Researching different programs can also help with number crunching. Many financial apps offer built-in calculators that simplify tasks that may seem overwhelming, such as breaking down a monthly budget or figuring out a loan repayment plan. Experiment with what you find, and you’ll most likely develop skills and insight that you can use as a starting point for future planning.

Although apps are one way to get started, consider working with a financial professional for a more personalized strategy.

 

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice

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Common Annuity Riders – by John Jastremski

An annuity is a contract between you (the purchaser or owner) and the issuer (an insurance company). In its simplest form, you pay money to the annuity issuer, the issuer invests the money for you, and then the issuer pays out the principal and earnings back to you or to a named beneficiary.
An immediate annuity is a contract between you and an insurance company in which you pay a single sum of money to the company in exchange for its promise to make payments to you for a fixed period of time or for the rest of your life.
Annuity riders are optional features that provide added benefits to a basic annuity contract. For example, some riders focus on offering greater access to the annuity’s principal, or providing long-term income.
Annuity riders usually come with an annual cost, generally ranging from.1% to 1.0% or more of the annuity’s value. Review the annuity sales materials and prospectus for a description of applicable fees and charges. The availability of a specific annuity rider usually depends on the annuity issuer and the type of annuity you are considering.

Cost-of-living adjustment rider

The cost-of-living adjustment rider, available on some immediate annuities, increases immediate annuity payments by a stated annual percentage to offset the effects of inflation. However, due to the added cost of this rider to the issuer, the first few payments from an annuity with this rider are typically less than they would be without the rider. It usually takes several years before cost-of-living immediate annuity payments equal or exceed immediate annuity payments without this rider.

Cash/installment refund rider

Available on some immediate annuities, the cash refund rider provides that if the total of all immediate annuity payments received by the time of your death is less than the investment (the premium) you paid into the immediate annuity, the difference is paid in a lump sum to your annuity beneficiary. The installment refund rider is similar to the cash refund rider, except that your beneficiary receives the balance of the immediate annuity premium in installment payments instead of a lump sum.

Impaired risk (medically underwritten) rider

This rider may be added to an immediate annuity. Ordinarily, an insurance company bases the amount of immediate annuity payments on the amount of premium you pay, your age at the time payments begin, and how long you are expected to live if payments are to be made for the rest of your life. If you have a medical condition that reduces your life expectancy, the impaired risk rider bases your annuity payments on your shortened life expectancy. This results in payments being greater than they would be for a person in good health, or the payments can be the same but for a smaller premium.

Commuted payout rider

This immediate annuity rider allows you to withdraw a lump-sum amount from your immediate annuity in addition to the regular payments you are receiving. Usually, this option is available for a limited period of time, and may be limited to a maximum dollar amount or a maximum percentage of your premium.

Guaranteed minimum accumulation benefit rider (GMAB)

The GMAB rider, available with some variable annuities, restores your annuity’s accumulation value to the amount of your total premiums paid if, after a prescribed number of years (usually 5 to 10), the annuity’s accumulation value is less than the premiums you paid (excluding your withdrawals). Some issuers offer this rider with the ability to lock in any gains in the accumulation value. Thereafter, your guaranteed minimum accumulation value will equal your total premiums paid, plus locked-in gains, less withdrawals.

Guaranteed minimum withdrawal benefit rider (GMWB)

The GMWB rider provides you with a minimum income by allowing you to take withdrawals from your annuity up to an amount at least equal to the premiums you paid. Annual withdrawals are usually limited to a percentage of the total premiums paid (5% to 12% per year). Both the GMAB rider and the GMWB rider provide you with the opportunity to secure the return of your investment (the premium) in the annuity, even if the annuity’s accumulation value decreases due to poor subaccount performance.

Guaranteed minimum income benefit rider (GMIB)

The GMIB rider, included with some variable annuities, offers a minimum income regardless of your actual accumulation value. The annuity issuer adds a growth rate to your premiums (usually 5% to 7% per year) that becomes your guaranteed minimum account value. After a minimum number of years (often 5 to 10), the rider allows you to convert the variable annuity to an immediate annuity and receive payments based on the greater of the minimum account value or the annuity’s accumulation value.

Guaranteed lifetime withdrawal benefit rider (GLWB)

The GLWB rider may be added to some annuity contracts. It allows you to receive an annual income for the rest of your life without having to convert to an immediate annuity. And you can usually access the remaining accumulation value in addition to the income payments received. Income payments and withdrawals are subtracted from the annuity’s cash value.

Long-term care rider

The long-term care rider is available with many fixed deferred annuities. If you become confined to a nursing home, or are unable to take care of yourself, this rider allows you to access more of your annuity’s accumulation value, possibly up to 100%, without the imposition of surrender charges or distribution costs otherwise applicable.

Disability/unemployment rider

These riders are offered with fixed and variable annuities. If you become disabled for an extended period of time (usually from 60 days to 1 year), or if you are unemployed for a similar length of time and are eligible for unemployment benefits, these riders allow you to access a portion or all of your annuity’s accumulation value without the imposition of surrender charges.

Terminal illness rider

This rider, available with both fixed and variable annuities, waives surrender charges otherwise applicable for a portion or all of your annuity’s accumulation value if you suffer from a terminal illness with a medical life expectancy of one year or less.

Immediate Variable Fixed
Cost-of-Living GMAB LTC
Cash/Installment GMWB Disability
Impaired Risk GMIB Terminal Illness
Commuted Payout GLWB GLWB
Disability Disability
Terminal Illness Terminal Illness

 

 

 

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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Social Security Claiming Strategies for Married Couples – by John Jastremski

Deciding when to begin receiving Social Security benefits is a major financial issue for anyone approaching retirement because the age at which you apply for benefits will affect the amount you’ll receive. If you’re married, this decision can be especially complicated because you and your spouse will need to plan together, taking into account the Social Security benefits you may each be entitled to. For example, married couples may qualify for retirement benefits based on their own earnings records, and/or for spousal benefits based on their spouse’s earnings record. In addition, a surviving spouse may qualify for widow or widower’s benefits based on what his or her spouse was receiving.
Two popular claiming strategies that have been used to boost Social Security income were recently eliminated by new rules contained in the Bipartisan Budget Act of 2015. However, depending on your age, you may still have a limited window to take advantage of these strategies before the new rules take effect. Both can be used in a variety of scenarios, but here’s how they generally work.

File and suspend

You may be able to use this strategy if you reach age 66 by April 2016 and file your suspension request by April 29, 2016. Under the new rules, effective for suspension requests submitted on or after April 30, 2016 (or later if the Social Security Administration provides additional guidance), a worker who has reached full retirement age (currently age 66) can file an application for retirement benefits, suspend it, and accrue delayed retirement credits (up to age 70), but no one can collect benefits on the worker’s earnings record during the suspension period.

Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker’s benefit) or as much as 50% of what his or her spouse is entitled to receive at full retirement age (a spousal benefit). But here’s the catch: under Social Security rules, a husband or wife who is eligible to file for spousal benefits based on his or her spouse’s record cannot do so until his or her spouse begins collecting retirement benefits. However, there is an exception–someone who has reached full retirement age but who doesn’t want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.
The file-and-suspend strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways.

  1. The spouse with higher earnings who has suspended benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing his or her retirement benefit by as much as 32%.
  2. The spouse with lower earnings can immediately claim a higher (spousal) benefit.
  3. Any survivor’s benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death.

Here’s a hypothetical example. Leslie is about to reach her full retirement age of 66, but she wants to postpone filing for Social Security benefits so that she can increase her monthly retirement benefit from $2,000 at full retirement age to $2,640 at age 70 (32% more). However, her husband Lou (who has had substantially lower lifetime earnings) wants to retire in a few months at his full retirement age (also 66). He will be eligible for a higher monthly spousal benefit based on Leslie’s work record than on his own–$1,000 vs. $700. So that Lou can receive the higher spousal benefit as soon as he retires, Leslie files an application for benefits, but then immediately suspends it. Leslie can then earn delayed retirement credits, resulting in a higher retirement benefit for her at age 70 and a higher widower’s benefit for Lou in the event of her death.

File for one benefit, then the other

To file a restricted application and claim only spousal benefits at age 66, you must be at least age 62 by the end of December 2015. At the time you file, your spouse must have already claimed Social Security retirement benefits or filed and suspended benefits before the effective date of the new rules. If you were born in 1954 or later, you will not be able to use this strategy because under the new rules, an individual who files a benefit application will be deemed to have filed for both worker and spousal benefits, and will receive whichever benefit is higher. He or she will no longer be able to file only for spousal benefits and will not be able to switch from one benefit to another at a later date.

A second strategy that can be used to increase household income for retirees is to have one spouse file a restricted application for spousal benefits at full retirement age, then switch to his or her own higher retirement benefit later.
Once a spouse reaches full retirement age and is eligible for a spousal benefit based on his or her spouse’s earnings record and a retirement benefit based on his or her own earnings record, he or she can choose to file a restricted application for spousal benefits, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits. This may help to maximize survivor’s income as well as retirement income, because the surviving spouse will be eligible for the greater of his or her own benefit or 100% of the spouse’s benefit.
This strategy can be used in a variety of scenarios, but here’s one hypothetical example that illustrates how it might be used when both spouses have substantial earnings but don’t want to postpone applying for benefits altogether. Liz files for her Social Security retirement benefit of $2,400 per month at age 66 (based on her own earnings record), but her husband Tim wants to wait until age 70 to file. At age 66 (his full retirement age) Tim applies for spousal benefits based on Liz’s earnings record (Liz has already filed for benefits) and receives 50% of Liz’s benefit amount ($1,200 per month). He then delays applying for benefits based on his own earnings record ($2,100 per month at full retirement age) so that he can earn delayed retirement credits. At age 70, Tim switches from collecting a spousal benefit to his own larger worker’s retirement benefit of $2,772 per month (32% higher than at age 66). This not only increases Liz and Tim’s household income but also enables Liz to receive a larger survivor’s benefit in the event of Tim’s death.

Things to keep in mind

  • Deciding when to begin receiving Social Security benefits is a complicated decision. You’ll need to consider a number of scenarios, and take into account factors such as both spouses’ ages, estimated benefit entitlements, and life expectancies. A Social Security representative can’t give you advice, but can help explain your options.
  • Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.
  • Delaying Social Security income may have tax consequences–consult a tax professional.
  • Spousal or survivor’s benefits are generally reduced by a certain percentage if received before full retirement age.

 

 

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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Planning Lessons for Educators: Addressing Your Financial Issues- by John Jastremski

Being an educator requires expertise and that you stay current on developments in your field. However, that level of ongoing attention can make it difficult to find the time to stay on top of issues that affect your finances, or to put together a comprehensive financial plan. Whether you work directly with students or focus on research, whether you are just starting your career or have achieved distinction in your field, you may benefit from working with a financial professional who understands an educator’s special concerns. Here are some issues that may not have been at the top of your to-do list, but that can affect your long-term comfort and happiness.

Addressing tax issues

Many educators, particularly contingency or adjunct faculty members, have multiple sources of income. For example, you may teach at several institutions, and/or earn consulting fees or royalties on your work. Welcome as that income doubtless is, it also may complicate tax planning and preparation. Other tax issues you may need help with include the deductibility of student loan payments, tax issues that arise from pursuing an advanced degree, and the taxation of employer-provided benefits such as faculty housing.
Getting tenure is cause for celebration, but it also is likely to affect your tax situation. Moving into a higher tax bracket could mean it’s time to make or rethink decisions about how much you need to save for retirement, the immediate and long-term benefits of various retirement savings accounts–both taxable and tax-advantaged–and how your retirement savings are invested.

Planning for retirement and beyond

One key to any potentially successful retirement plan is starting early. The sooner you can put a well-thought-out plan in place, the better your chances of financial security. Saving for retirement is like building up an endowment; it gives you the freedom to expand your horizons. Because academic salaries tend to remain relatively predictable (at least compared with corporate salaries) once you’ve gotten tenure, you may have an advantage when it comes to retirement planning. Why? Because you may be able to make more accurate forecasts of your lifetime earning capacity than people in other professions, which can in turn help you make more informed decisions about how you should manage your money now. Statistical analysis tools can estimate the likelihood that a given financial strategy may be adequate to meet your long-term needs.
Take full advantage of the tax benefits of your employer’s 401(k), 403(b), or 457(b) plan, especially if there’s an employer match (it’s essentially free money). You can defer up to $18,000 in 2017 ($24,000 if you’re 50 or older), or 100% of your pay if less. Also, any deferrals you make to a 457(b) plan don’t reduce the amount you can contribute to a 401(k) or 403(b) plan. So, for example, if you’re eligible for both a 403(b) and 457(b) plan, you can contribute the maximum to both, for a total contribution of up to $36,000 ($48,000 if you’re 50 or older) in 2017.
Beyond employer-sponsored plans, you may also be able to use other tax-advantaged retirement savings vehicles, such as a traditional or Roth IRA. In 2017, the annual contribution limit for traditional and Roth IRAs is $5,500 (plus an additional $1,000 if you’re 50 or older).

Investing responsibly

An understanding of investing fundamentals is essential to making informed decisions with your money. A financial professional can help you understand not only the mechanics of investing, but demonstrate why a given strategy might be appropriate for you. Most common investing strategies are derived from a wealth of research on the historical performance of various types of investments. Though past performance is no guarantee of future results, it can help to understand the various asset classes, the way each class tends to behave, and the function each fulfills in a balanced portfolio. Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. You might find assistance especially useful if you are the recipient of a lump sum, such as a cash award, prize or grant for your work.
Do you have ethical concerns about investing? Socially conscious investing has entered the mainstream, and there are many investment options that could help you address your financial needs and still support your convictions.
Even if you’re an experienced investor, you may need to adjust your strategy periodically as your circumstances change over time–for example, after you receive tenure or as you near retirement. The sooner you establish a relationship with a professional, the sooner you might benefit from the expertise of someone who deals with financial issues daily.

Creating an estate plan

A will is the cornerstone of every estate plan; without it, you have no control over how your assets will be distributed. You also should have a durable power of attorney and a health care directive.
If you’ve amassed substantial outside business interests or intellectual property assets (e.g., copyrights, patents, and royalties), an estate plan is particularly important. Managing those assets wisely while you’re alive can help make an enormous difference in your ability to maximize their benefits for your heirs.
Estate planning also can further your legacy in other ways. Charitable giving to your heirs, your educational institution, or another nonprofit organization can both further your philanthropic goals and be an effective  tool to help reduce taxes. For example, by establishing a trust, you may be able to benefit from an immediate tax deduction as well as provide an ongoing income stream for you or the charitable institution of your choice. While trusts offer numerous advantages, they incur up-front costs and often have ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.

Protecting your assets

You also might want to think about whether you and your family are adequately shielded from emergencies. Types of insurance you might consider include:

  • Life insurance
  • Disability insurance
  • Liability insurance (particularly if you’re involved in applied research projects or consulting engagements)

Managing debt

Being in debt can make managing all other financial issues more challenging. If you’re in the early part of your career, you may still be facing years of student loan payments; if you’re more senior, you may be trying to pay off a mortgage and eliminate all debts before retirement. Balancing debt with the day-to-day demands of raising a family, seeking support for your work, finding good housing, and saving for your children’s education and your own retirement can be a formidable task.
Handling debt wisely can have consequences over time. Having someone review your finances might uncover some new ideas for improving your situation. It also can help you understand the true long-term cost of any debt you incur.
Whether you have a specific concern or just want to be better prepared for the future, a financial professional may be able to help. However, there is no guarantee that working with a financial professional will improve investment results.

 

 

The information in these materials may change at any time and without notice. Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. 

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Adjusting to Life Financially after a Divorce – by John Jastremski

There’s no doubt about it–going through a divorce can be an emotionally trying time. Ironing out a divorce settlement, attending various court hearings, and dealing with competing attorneys can all weigh heavily on the parties involved.
In addition to the emotional impact a divorce can have, it’s important to be aware of how your financial position will be impacted. Now, more than ever, you need to make sure that your finances are on the right track. You will then be able to put the past behind you and set in place the building blocks that can be the foundation for your new financial future.

Assess your current financial situation

Following a divorce, you’ll need to get a handle on your finances and assess your current financial situation, taking into account the likely loss of your former spouse’s income. In addition, you may now be responsible for paying for expenses that you were once able to share with your former spouse, such as housing, utilities, and car loans. Ultimately, you may come to the realization that you’re no longer able to live the lifestyle you were accustomed to before your divorce.

Establish a budget

A good place to start is to establish a budget that reflects your current monthly income and expenses. In addition to your regular salary and wages, be sure to include other types of income, such as dividends and interest. If you will be receiving alimony and/or child support, you’ll want to include those payments as well.
As for expenses, you’ll want to focus on dividing them into two categories: fixed and discretionary. Fixed expenses include things like housing, food, and transportation. Discretionary expenses include things like entertainment, vacations, etc. Keep in mind that you may need to cut back on some of your discretionary expenses until you adjust to living on less income. However, it’s important not to deprive yourself entirely of any enjoyment. You’ll want to build the occasional reward (for example, yoga class, dinner with friends) into your budget.

Reevaluate/reprioritize your financial goals

Your next step should be to reevaluate your financial goals. While you were married, you may have set certain financial goals with your spouse. Now that you are on your own, these goals may have changed. Start out by making a list of the things that you now would like to achieve. Do you need to put more money towards retirement? Are you interested in going back to school? Would you like to save for a new home?
You’ll want to be sure to reprioritize your financial goals as well. You and your spouse may have planned on buying a vacation home at the beach. After your divorce, however, you may find that other goals may become more important (for example, making sure your cash reserve is adequately funded).

Take control of your debt

While you’re adjusting to your new budget, be sure that you take control of your debt and credit. You should try to avoid the temptation to rely on credit cards to provide extras. And if you do have debt, try to put a plan in place to pay it off as quickly as possible. The following are some tips to help you pay off your debt:

  • Keep track of balances and interest rates
  • Develop a plan to manage payments and avoid late fees
  • Pay off high-interest debt first
  • Take advantage of debt consolidation/refinancing options

Protect/establish credit

Since divorce can have a negative impact on your credit rating, consider taking steps to try to protect your credit record and/or establish credit in your own name. A positive credit history is important since it will allow you to obtain credit when you need it, and at a lower interest rate. Good credit is even sometimes viewed by employers as a prerequisite for employment.
Review your credit report and check it for any inaccuracies. Are there joint accounts that have been closed or refinanced? Are there any names on the report that need to be changed? You’re entitled to a free copy of your credit report once a year from each of the three major credit reporting agencies. You can go to www.annualcreditreport.com for more information.
To establish a good track record with creditors, be sure to make your monthly bill payments on time and try to avoid having too many credit inquiries on your report. Such inquiries are made every time you apply for new credit cards.

Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement. However, you may have additional insurance needs that go beyond that which you were able to obtain through your divorce settlement.
When it comes to health insurance, make having adequate coverage a priority. Unless your divorce settlement requires your spouse to provide you with health coverage, one option is to obtain temporary health insurance coverage (up to 36 months) through the Consolidated Omnibus Budget Reconciliation Act (COBRA). You can also look into purchasing individual coverage or, if you’re employed, coverage through your employer.
Now that you’re on your own, you’ll also want to make sure that your disability and life insurance coverage matches your current needs. This is especially true if you are reentering the workforce or if you’re the custodial parent of your children.
Finally, make sure that your property insurance coverage is updated. Any applicable property insurance policies may need to be modified or rewritten in order to reflect property ownership changes that may have resulted from your divorce.

Change your beneficiary designations

After a divorce, you’ll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts you may have in place. Keep in mind that a divorce settlement may require you to keep a former spouse as a beneficiary on a policy, in which case you cannot change the beneficiary designation.
This is also a good time to make a will or update your existing one to reflect your new status. Make sure that your former spouse isn’t still named as a personal representative, successor trustee, beneficiary, or holder of a power of attorney in any of your estate planning documents.

Consider tax implications

You’ll also need to consider the tax implications of your divorce. Your sources of income, filing status, and the credits and/or deductions for which you qualify may all be affected.
In addition to your regular salary and wages, you may have new sources of income after your divorce, such as alimony and/or child support. If you are receiving alimony, it will be considered taxable income to you. Child support, on the other hand, will not be considered taxable income.
Your tax filing status will also change. Filing status is determined as of the last day of the tax year (December 31). This means that even if you were divorced on December 31, you would, for tax purposes, be considered divorced for that entire year.
Finally, if you have children, and depending on whether you are the custodial parent, you may be eligible to claim certain credits and deductions. These could include dependency exemptions, the child tax credit, and the credit for child and dependent care expenses, along with student loan interest and tuition deductions.

Consult a financial professional

Although it can certainly be done on your own, you may want to consider consulting a financial professional to assist you in adjusting to your new financial life. In addition to helping you assess your needs, a financial professional can work with you to develop a plan designed to help you address your financial goals, make recommendations about specific products and services, and monitor and adjust your plan as needed.

 

 

Securities offered through FSC Securities Corporation, member FINRA / SIPC . Investment advisory services offered through The Retirement Group, LLC, a registered investment advisor which is not affiliated with FSC Securities Corp. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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Investing as a Couple: Getting to Yes -by John Jastremski

In a perfect world, both halves of a couple share the same investment goals and agree on the best way to try to reach them. It doesn’t always work that way, though; disagreements about money are often a source of friction between couples. You may be risk averse, while your spouse may be comfortable investing more aggressively–or vice versa. How can you bridge that gap?

First, define your goals

Making good investment decisions is difficult if you don’t know what you’re investing for. Make sure you’re on the same page–or at least reading from the same book–when it comes to financial goal-setting. Knowing where you’re headed is the first step toward developing a road map for dealing jointly with investments.

In some cases you may have the same goals, but put a different priority on each one or have two different time frames for a specific goal. For example, your spouse may want to retire as soon as possible, while you’re anxious to accept a new job that means advancement in your career, even if it means staying put or moving later. Coming to a general agreement on what your priorities are and roughly when you hope to achieve each one can greatly simplify the process of deciding how to invest.

Make sure the game plan is clear

Making sure both spouses know how and (equally important) why their money is invested in a certain way can help minimize marital blowback if investment choices don’t work out as anticipated. Second-guessing rarely improves any relationship. Making sure that both partners understand from the beginning why an investment was chosen, as well as its risks and potential rewards, may help moderate the impulse to say “I told you so” later. Investing doesn’t have to be either/or. A diversified portfolio should have a place for both conservative and more aggressive investments. Though diversification can’t guarantee a profit or ensure against a loss, it’s one way to manage the type and level of risk you face–including the risks involved in bickering with your spouse.

It takes two

Aside from attempting to minimize marital strife, there’s another good reason to make sure both spouses understand how their money is invested and why. If only one person makes all the decisions–even if that person is the more experienced investor–what if something were to happen to that individual? The other spouse might have to make decisions at a very vulnerable time–decisions that could have long-term consequences.

If you’re the less experienced investor, take the responsibility for making sure you have at least a basic understanding of how your resources are invested. If you’re suddenly the one responsible for all decisions, you should at least know enough to protect yourself from fraud and/or work effectively with a financial professional to manage your money.

If you’re the more conservative investor …

• If you’re unfamiliar with a specific investment, research it. Though past performance is no guarantee of future returns, understanding how an investment typically has behaved in the past or how it compares to other investment possibilities could give you a better perspective on why your spouse is interested in it.

• Consider whether there are investments that are less aggressive than what your spouse is proposing but that still push you out of your comfort zone and might represent a compromise position. For example, if you don’t want to invest a large amount in a single stock, a mutual fund or exchange-traded fund (ETF) that invests in that sector might be a way to compromise. (Before investing in a mutual fund or ETF, carefully consider its investment objective, risks, charges, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.) Or you could compromise by making a small investment, watching for an agreed-upon length of time to see how it performs, and then deciding whether to invest more.

• Finally, there may be ways to offset, reduce, or manage the risk involved in a particular investment. Some investments benefit from circumstances that hurt others; for example, a natural disaster that cuts the profits of insurance companies could be beneficial for companies that are hired to rebuild in that area. Many investors try to hedge the risks involved in one investment by purchasing another with very different risks. However, remember that even though hedging could potentially reduce your overall level of risk, doing so probably would also reduce any return you might earn if the other investment is profitable.

If you’re the more aggressive investor …

• Listen respectfully to your spouse’s concerns. Additional information may increase a spouse’s comfort level, but you won’t know what’s needed if you automatically dismiss any objections. If you don’t have the patience to educate your spouse, a third party who isn’t emotionally involved might be better at explaining your point of view.

• Concealing the potential pitfalls of an investment about which you’re enthusiastic could make future joint decisions more difficult if your credibility suffers because of a loss. As with most marital issues, transparency and trust are key.

• A spouse who’s more cautious than you are may help you remember to assess the risks involved or keep trading costs down by reducing the churn in your portfolio.

• Remember that you can make changes in your portfolio gradually. You might be able to help your spouse get more comfortable with taking on additional risk by spreading the investment out over time rather than investing a lump sum. And if you’re an impulsive investor, try not to act until you can consult your partner–or be prepared to face the consequences.

What if you still can’t agree?

You could consider investing a certain percentage of your combined resources aggressively, an equal percentage conservatively, and a third percentage in a middle-ground choice. This would give each partner equal input and control of the decision-making process, even if one has a larger balance in his or her individual account.

Another approach is to use separate asset allocations to balance competing interests. If both spouses have workplace retirement plans, the risk taker could invest the largest portion of his or her plan in an aggressive choice and put a smaller portion in an option with which a spouse is comfortable. The conservative partner would invest the bulk of his or her money in a relatively conservative choice and put a smaller piece in a more aggressive selection on which you both agree.

Or you could divide responsibility for specific goals. For example, the more conservative half could be responsible for the money that’s being saved for a house down payment in five years. The other partner could take charge of longer-term goals that may benefit from taking greater risk in pursuit of potentially higher returns. You also could consider setting a predetermined limit on how much the risk taker can put into riskier investments.

Finally, a neutral third party with some expertise and a dispassionate view of the situation may be able to help work through differences.

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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