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.

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.

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”

Protecting your business

There are some simple and effective strategies to protect your business and reduce your overhead expenses. Learn the keys to avoiding “business-killers” for small & medium sized companies.

Launching and growing a business takes lots of hard work and determination. Without proper insurance coverage, however, a business risks being severely damaged or even destroyed when disaster strikes.

While the specific types of insurance you should consider depend on the type of business you operate, the different types of business insurance fall into these general categories:

Property Insurance: If your business owns and uses property in the course of conducting business, that property can be lost or destroyed through, for example, fire or theft. Property insurance protects not just buildings, but also the items used in conducting business operations, such as office furnishings, machinery, supplies and computers.

Liability Insurance: A business can be sued for causing third party bodily injury or property damage. Liability insurance pays damages up to the insured limits, as well as attorney’s fees and other costs associated with a legal defense. Liability insurance is also available to protect against other risks, such as lawsuits alleging libel or slander.

Business Auto Insurance: Business auto insurance covers vehicles owned by a business and used for business purposes, such as cars, trucks and vans. The coverage also pays the costs of third party bodily injury or property damage for which your business is legally responsible. If you or any of your employees use your own vehicles for business purposes, discuss with your agent whether your personal auto insurance policy will provide coverage if the vehicle is involved in an accident.

Workers’ Compensation Insurance: Workers’ comp insurance requirements are determined by state law. Most states require that a business with more than a stated number of employees purchase workers’ compensation insurance that pays the costs of an employee’s work-related injuries, as well as replaces a portion of wages lost due to injury or death in a work-related accident.

Business Owners Policy (BOP): A business owners policy or BOP is an insurance package that generally provides coverage insuring against property damage, business interruption and comprehensive general liability. It is generally more cost effective to purchase multiple coverages bundled into a single policy than to purchase them separately.

Life Insurance: Life insurance proceeds can be used to help reimburse a business for the loss of a key employee’s services at death. Life insurance can also be an effective way to fund a buy-sell agreement between multiple business owners, or to help surviving family members continue a business at the owner’s death.

Disability Insurance: Some states require businesses to provide some level of short-term disability benefits replacing a portion of an employee’s wages if the employee is sick or hurt and cannot work. On an optional basis, a business can also provide disability benefits for a longer duration, after the short-term benefits run out.

Our Protecting Your Business Life Guide is intended to help you evaluate the types of insurance coverage your specific type of business may need and to provide tips on managing premium costs. Contact my office for your free copy.

The best kept secret in America…

The best kept secret in America  …

TRI Financial Group understands that preparing and paying for college can be a very stressful time.  We know how important it is for you to have answers you can depend on.  And, most importantly, answers from your point of view, not the colleges’ or a misinformed third party.

Most college information sources only talk about the fluff, while avoiding the real “nuts and bolts” of the process.  The College Planning Program, on the other hand, considers issues like …

Our program helps high schools students explore career options … find the perfect college … improve their odds of being admitted … and get the best education for the money.

We also help parents make sense of the process … stay on track … weed through the stacks of paperwork … secure funding … and relieve many of the headaches and worries associated with sending a child off to college.

Getting started …

Over 50% of all college students are forced to drop out – many due to the lack of money … they didn’t plan to fail, they simply failed to plan!

Don’t wait – get started today!  Remember, students are competing for admission spots and funding dollars as early as the 9th grade

Next: Funding your child’s education

Funding your child’s education

Funding your child’s education

It is a fact that a college education is expensive, very expensive.  Even at lower-priced, state-supported colleges a four-year degree can still cost in excess of $50,000.  College tuition and fees continue to increase at an alarming rate.  These increases have made “paying for college” practically impossible.

In a recent survey conducted by the American Council on Education it was found that financing their children’s college education is one of the top five concerns facing American parents today.  Although parents generally have good intentions, there are many unforeseen circumstances along the way that prevent them from saving a sufficient amount of money to pay for their children’s college education.

With today’s economy, and the inflation we have experienced over the past twenty years, this problem is far more evident now than it ever has been in the past.  It most often takes two incomes just to meet the family’s budget.  Unfortunately, after paying the family’s monthly expenses, there is usually not much left over for the student’s college education.

Fortunately, you do have options!

Next: The truth about supply & demand