The moment of truth: our national budget

Slightly less than one-fifth of the federal budget is dedicated to other mandatory programs. These include civilian and military retirement, income support programs, veterans’ benefits, agricultural subsidies, student loans, and other

Here’s a startling summary of our national budget, deficit and expenditures from The National Commission on Fiscal Responsibility and Reform. See attached PDF [download id=”17″]. Download for your reading.

Do you have a tax summary?

Do you know what the new tax rates are for 2011 or how they effect you?

One of the valued services we provide at TRI Financial group for our clients is a tax summary. It gives you a snapshot of your current income, tax bracket, deductions and more. To see an example click this [download id=”16″]. To receive your free tax summary contact us for a free consultation.

*The tax summary is for informational purposes only and does not constitute tax advice. Please seek the advice of a tax professional.

Reducing taxes through discounting

Reducing Transfer Taxes Through Discounting

The preceding summary is intended to be a general discussion of the topic presented, and is based on our current understanding of applicable tax laws, regulations and rulings. In actual practice, the transaction discussed may be more complex and will require the attention and expertise of professional advisors. In no way should this summary be construed to constitute tax or legal advice.

Do you have clients with substantial wealth who could benefit by transferring assets at a fraction of their fair market value?

Minority interests in certain types of entities (i.e. Family Limited Partnerships, Family Limited Liability Companies, etc.) can be transferred for less than the value of the assets owned by the entity. This is because the ownership of a minority (i.e. noncontrolling) interest in a family business does not: (1) provide the ability to control the entity or its underlying assets; or (2) provide a market where the ownership interest can be freely transferred to non-family members. This lack of control and lack of marketability reduce the value of the business interest and therefore allows a reduction in transfer (gift and/or estate) taxes.

Lack of Control Discount

This discount is often applied to transfers during life or at death and reflects the inability of the minority owner to control the entity and the assets owned by the entity. Minority owners cannot dictate management decisions regarding the entity’s direction; cannot dictate investment decisions regarding the entity’s assets; and are at the mercy of those who “control” the entity. Lack of control discounts are applicable not only to “minority interests” (less than 51% ownership) but can be applied to “non-voting” and “limited” interests in the entity. Typical discounts for lack of control generally range between 20 percent and 30 percent.

Lack of Marketability Discount

This discount is often applied to transfers of minority interests because of the inability to negotiate the sale of the interest in a readily available market. Most family-owned businesses contain specific provisions ensuring that ownership of the interests will remain within the family group. Each of these provisions, by design, reduces the owner’s ability to sell his/her interest and thereby reduces its value. Several factors can influence the level of discount for lack of marketability. These factors include, but are not limited to, the entity’s asset mix (i.e. marketable securities, real property, etc.) and transfer restrictions contained in the entity’s legal documents. Typical discounts for lack of marketability also range up to 30 percent.

Bottom Line

Valuable assets such as a successful family business, real estate, etc., can be transferred to the next generation in a very tax-efficient manner. Parents can gradually give away business units which represent the bulk of the economic ownership of the entity while maintaining control of the business. Discounting for transfers of minority interests, limited interests and/or nonvoting interests can be an effective way to transfer significant amounts for a fraction of the overall value. These discounts must be determined by a qualified appraiser in conjunction with an experienced estate planning attorney.

Flexible (ILIT) Irrevocable Life Insurance Trust

Flexible ILIT

• An Irrevocable Life Insurance Trust (ILIT) is used to remove the death benefit from the insured’s estate for estate tax purposes. If the insured has an “incident of ownership” in the life insurance policy at death (or within 3 years prior to death) the death benefit value is brought into the insured’s gross estate (the designated beneficiaries will receive the actual proceeds but the amount of those proceeds will be included in the insured’s gross estate value).

• An “incident of ownership” includes, but is not limited to:

– the right to change the beneficiary; the right to surrender the policy; the right to take policy loans; the right to assign the policy; the right to revoke a previous assignment; the right to pledge the policy as collateral; the right to receive disability income that reduces the policy death benefit.

– paying premiums is not an incident of ownership. However, there are potential gift taxes associated with paying premiums on a life insurance policy that is not owned by the premium payor.

• The client (grantor/insured) creates an irrevocable trust then transfers any life insurance policies owned to the trust and/or gifts funds to the trust sufficient to pay premiums. There are gift tax issues associated with gifting life insurance policies and/or cash to an irrevocable trust.

– The gift tax associated with transferring a policy is (1) total premiums paid – newly issued policy; (2) cost of a comparable policy with insured’s attained age – paid up or single premium policy; or (3) the “interpolated terminal reserve” plus unearned premium – previously issued policy still in premium paying status.

– Transferring cash to an irrevocable trust is considered a “future interest” gift and therefore the annual exclusion ($12,000 for 2008) is not available. It is a “future interest” gift because the trust’s beneficiaries cannot currently access and use the gift. However, the gift can be made a “present interest” gift by giving some or all of the trust’s beneficiaries a temporary right to withdrawal some of the entire gift.

– The trustee sends information (Crummey notice) to the beneficiary notifying him/her of the temporary right to withdrawal funds from the trust. If the beneficiary does not exercise his/her right to withdrawal those funds within the stated period (usually 30 – 45 days) then the right “lapses”. Once the withdrawal right lapses, the trustee can then use the gifted funds to pay premiums and the gift is considered a “present interest” gift.

• At the insured’s death, the trust should receive income-tax-free and estate-tax-free death benefit proceeds. These proceeds can be used for estate liquidity to pay estate taxes (i.e. make loans to decedent’s estate or purchase assets from decedent’s estate).

• ILITs can be designed with certain provisions or funded in certain ways that allow flexibility. These provisions include:

– Giving the client’s (grantor’s/insured’s) spouse a withdrawal power limited to $5,000 or 5% of the trust’s principal

– Giving the client’s spouse rights to annual distributions of trust income

– Giving the client’s spouse rights to discretionary distributions (if spouse is not trustee); or for distributions for health, education, maintenance and support (if spouse is trustee)

– Funding through private demand loan

The preceding summary is intended to be a general discussion of the topic presented, and is based on our current understanding of applicable tax laws, regulations and rulings. In actual practice, the transaction discussed may be more complex and will require the attention and expertise of professional advisors. In no way should this summary be construed to constitute tax or legal advice.

School Counselors & Advice: What can go wrong

*FREE MP3 & PDF Report* A recently released study by Public Agenda illustrates what can go wrong when there are not enough school counselors to support students …. The result, as this study confirms, is a significantly decreased ability of school counselors to work individually with students in navigating the complex financial aid and college admission process.

ASCA Response to Public Agenda Report

Listen to rebroadcast of radio show interview on what can go wrong with school counselors here.

Download FREE PDF report “Can I Get A Little Advice Here?”. [download id=”13″]

A recently released study by Public Agenda illustrates what can go wrong when there are not enough school counselors to support students and when school counselors are placed in positions preventing them from performing the functions they were trained and hired to do. Although the American School Counselor Association, the American Counseling Association, the American Psychological Association, the American Medical Association and other organizations recommend a pupil-to-school-counselor ratio of 250-to-1, the national average is 460 students to one school counselor, with some school districts as high as 1,000-to-1.

The result, as this study confirms, is a significantly decreased ability of school counselors to work individually with students in navigating the complex financial aid and college admission process.

In addition, as the study notes, school counselors are increasingly called on to do work outside of their mission, including: “discipline issues and sorting out scheduling and other administrative mix-ups with the high school.”

ASCA agrees with many of the conclusions of the Public Agenda study: more school counselors are needed, and existing school counselors should not be overloaded with non-counseling duties preventing them from spending time successfully guiding students to academic success and postsecondary education. ASCA works closely with school administrators, professional school counselors and the colleges that train school counselors to ensure the highest level of professionalism, but the burden on even the best school counselors has obvious implications for their ability to help students.

ASCA believes the findings of this study can serve as a wake-up call that could bring about substantial and needed changes. The study points out that “young people who characterized their interactions with counselors as anonymous and unhelpful were less likely to go directly from high school into a postsecondary program.” Therefore, strong relationships between school counselors and students can lead to more students seeking postsecondary education. This is a good opportunity to provide a positive perspective on the problems and to highlight the need for supporting school counselors so they can be effective, rather than eliminating their positions because some consider them to be ineffective.

ASCA hopes to work with policymakers, education leaders and the Gates Foundation, which underwrote this survey, to place more certified professional school counselors in our schools and to allow them to help students improve academic achievement, career planning including postsecondary education, and personal and social development.

Educational Bonds: Pros & Cons

Education Bond Program

The Education Bond Program makes the interest on certain savings bonds tax free when the bonds are redeemed to pay qualified higher education expenses or to roll over into a section 529 plan.

Eligible bonds include Series EE Bonds issued after December 31, 1989 and all Series I Bonds. Series HH bonds are not eligible. Bonds purchased before 1990 may not be exchanged for bonds issued later to make them eligible.

The bond owner must be at least 24 years old on the bond issue date (the first day of the month in which the bonds were purchased). Parents can purchase bonds for their children, but the bonds must be registered in the parent’s name. The child cannot be listed as a co-owner, but may be listed as a beneficiary. You can also purchase bonds for your own education, in which case the bonds must be registered in your name.

Continue reading “Educational Bonds: Pros & Cons”

Federal Debt and the Risk of a Fiscal Crisis

From the Congressional Budget Office (CBO)

Over the past few years, U.S. government debt held by the public has grown rapidly—to the point that, com- pared with the total output of the economy, it is now higher than it has ever been except during the period around World War II. The recent increase in debt has been the result of three sets of factors: an imbalance between federal revenues and spending that predates the recession and the recent turmoil in financial markets, sharply lower revenues and elevated spending that derive directly from those economic conditions, and the costs of various federal policies implemented in response to the conditions. Read More (PDF)… [download id=”12″]

Taxable vs Tax Deferred: Why it matters

See the potential benefits of a tax-deferred investment vs. a taxable investments. Depending on your tax bracket it can save or cost you thousands of dollars.

This chart illustrates the potential benefits of a tax-deferred investment vs. a taxable investment. For example, if an investor in the 25% federal income tax bracket purchases a tax-deferred investment with a 5% annual yield, that investor’s taxable equivalent yield is 6.67%. This means the investor would need to earn at least 6.67% on a taxable investment in order to match the 5% tax-deferred annual yield.

This chart is for illustrative purposes only and is not indicative of any particular investment or performance. In addition, it does not reflect any federal income tax that may be due when an investor receives distributions from a tax-deferred investment.

Please contactm y of ice ifyou’d like m ore inform ation on taxable vs. tax-deferred investments.

The purpose of this newsletter is to provide information of general interest to our clients, potential clients and other professionals. The information provided is general in nature and should not be considered complete information on any product or concept described. For more complete information, please contact me (916) 781-3373.

Tax Recovery Act

Summary of the American Recovery and Reinvestment Act of 2009

Provided by:
Robert M. Ingram

The American Recovery and Reinvestment Act of 2009 was signed into law by President Obama on February 17, 2009.

Also known as the economic stimulus package, the American Recovery and Reinvestment Act of 2009 has four broad categories: tax breaks, investments in health care and alternative energy, funding for “ready-to-go” infrastructure projects and funds to aid state and local governments, including expanded benefits for the unemployed. The legislation comes with a $787 billion price tag, of which approximately $300 billion, or over 35%, is directed to tax relief.

This paper reviews the tax relief and tax incentives made available by the legislation to both individuals and businesses, as well as summarize the new assistance available to the unemployed. Continue reading “Tax Recovery Act”

When you change jobs: You & your 401k

You MayHave an important decision to make…

What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets

Why Taking a Lump-Sum Distribution May Be a Bad Idea:

While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penaltiesandlostgrowthopportunities…moneythatwilnotbeavailableforfutureusein retirement.

Please contact my office if you would like additional information on rolling funds over from a previous employer’s retirement plan.

The purpose of this newsletter is to provide information of general interest to our clients, potential clients and other professionals. The information provided is general in nature and should not be considered complete information on any product or concept described. For more complete information, please contact us at (916) 781-3373.