The Bypass Trust:

 

A planning strategy for married couples to minimize estate taxes…

 

It’s easy to let fun summer activities distract us from business and responsibility, but for some families, taking a moment to focus on this very important issue could significantly impact your financial legacy.  

 

Married couples have an unlimited deduction to shelter assets from federal estate tax passing to a surviving spouse (American). Each individual also has federal estate tax exclusion (currently $2 million) to shelter assets passing to a non-spouse.   Unfortunately, a simple will directing assets to your surviving spouse will waste the estate tax exclusion of the first-to-die (due to the unlimited marital deduction) and potentially overfunding the estate of the surviving spouse.  Estate taxes currently run as high as 45% so an effective estate plan could make a substantial difference in the value of your legacy.

 

Let’s look at an example of a Mr. and Mrs. Smith with a combined $3 million estate. Mr. Smith dies in 2008 and leaves his portion of the estate to his loving wife.  Mrs. Smith claims the unlimited marital deduction eliminating any current federal estate taxes. Mrs. Smith now has a $3 million estate and she dies a few months later.  Her children use her $2 million federal estate tax exclusion but this leaves $1 million exposed to federal estate tax.  They now must write a very large check to the IRS. How could this have been avoided?

 

What if Mr. and Mrs. Smith left direction in their will or living trust to fund a bypass trust at the death of the first-to-die to the extent of the federal estate exclusion?  Since Mr. Smith died in 2008, the bypass trust was funded with $2 million sheltered by his federal estate tax exclusion. Mrs. Smith is the beneficiary of the trust so she is entitled to receive income from the trust and may even receive principal if needed for support and maintenance.  When Mrs. Smith dies a few months later, the assets in the trust pass to the children without federal estate tax and her $1 million estate is sheltered by her federal estate tax exclusion. The entire estate is passed to the children without any federal estate tax due.  (This example does not consider the effect of state estate tax)

 

The federal estate tax exclusion is scheduled to increase to $3.5 million in 2009 and disappear in 2010.  As the law stands now, in 2011 the exclusion will revert to $1 million and the top estate tax rate will increase to 55%.  If your marital estate exceeds the federal estate tax exclusion, you should consult your financial and legal advisors to see if a bypass trust makes sense for you. 

 

Christopher S. Laws, CFPÒ

100 North Point Center East

Suite 530

Alpharetta, GA 30022

(770) 995-7101

 

 

 Securities offered through LPL Financial  ●  Member FINRA/SIPC

 

June 20th, 2008

 

Perhaps the clearest movement over the past quarter has been the movement of the sun higher in the sky as we reach the summer solstice today. Economic climate indicators have been far less resolute, and the stock market has been down, then back up, then back down with each round of news. The media, whose mantra is “bad news sells”, are having a field day. When the economy does not fall into recession, everybody starts worrying about inflation. The Federal Reserve (the Fed) starts hinting that it will raise interest rates, then the bond market tanks and the Fed takes it back. We think the big financial institutions are done with subprime mortgage related write-downs and then we get another round. More CFO’s get replaced. Oil prices start to fall and then go back up again. The dollar exchange rate starts to rise and then swoons. Frankly, for me it feels like being on a cheese grater – and that may be the good news.

 

It looks like we will be fl at to down in U.S. equity markets for the second quarter; still well above the mid-March lows, but down year to date. It is a similar story for bonds, likely down a bit over the second quarter, and not up much year to date. It is a bit unusual to have both stocks and bonds doing poorly at the same time. Safe havens are hard to find. Energy and materials have done okay so far this year, but look risky given sky high product prices, slowing energy demand and rising supply. Large cap foreign and emerging markets are down about as much as U.S. equities year to date.

 

There is some positive news. It does not appear that the economy is falling off a cliff – employment declines have been moderate, it looks like GDP will be up again in the second quarter, and inflation, despite soaring food and energy prices, is still fairly low. The Index of Leading Indicators has been up slightly two months in a row. The Fed is meeting next week to set their interest rate target and I expect they will keep it at 2%. Labor productivity has remained strong – controlling business costs and keeping us competitive in global markets. U.S. exports are booming.  And did I mention the sun is high in the sky?

 

On the negative news side, my expectations and hopes for lower oil prices and a convincing dollar exchange rate rebound have yet to materialize. We are seeing falling demand for energy throughout the developed nations, and a number of developing nations – China, India, Indonesia, Taiwan and Malaysia – have lifted energy price caps; I expect this will further slow demand. And energy supply is rising. The Saudis are hosting a big meeting of producer and consumer nations this weekend and have indicated that they will send more oil to the market, with their oil minister saying that prices are way too high. I rarely find myself in agreement with Saudi oil ministers, but I am with him on this one. The record low dollar is providing U.S. companies and investors with a double advantage. First, it makes U.S. companies very competitive in global markets and second, it makes U.S. assets attractive to international investors. If the dollar would just put in a convincing bottom and begin a slow recovery, I think we would see a return to rising U.S. asset prices, but that has yet to happen.

 

I think that now is a time for patience. Usually when I have felt the cheese grater it has been around market bottoms. And, while I do not expect a return to a roaring bull market, I do think that there is good value in equities and decent value in bonds at this time. I will be watching the economy and markets closely and will continue to report developments to you. As always, please call your financial advisor with any questions or concerns.

 

LPL Financial

100 North Point Center East

Suite 530

Alpharetta, GA 30022

(770) 995-7101

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

 

Securities offered through LPL Financial  ●  Member FINRA/SIPC

 

How to Reach Your Retirement Goals

Our past generations did not have to worry or plan as much for their retirements.  They put in their forty years at a job and received a pension plan – problem solved.  Today, it isn’t that easy.  We spend forty years working, usually not at one particular company, and do not receive a pension plan.  So, how do you achieve your financial retirement goals in today’s professional world?  Sure, you still need to work hard for about forty years, but you may also need to decide how your retirement savings are invested, employ tax-minimization strategies in a world where tax rules rarely stand still for long, and wind your way through an increasingly wide array of retirement accounts with odd names like, 401(k), 403(b), and SEP.  With the help of Keystone Wealth Management, you can explore numerous options for a retirement plan that will help achieve your future goals.   

START EARLY. As the old saying goes “Time is money,” and this couldn’t be any truer when it comes to planning and saving for your retirement.  Even small amounts you invest have the potential to grow to very large amounts over time, thanks to the power of compound earnings.  The longer you have your money invested, the more time it has to generate earnings on top of earnings.   

TAKE THE FREE MONEY. If you are in a position where your employer is willing to match any or all of the money you contribute to your 401(k) or 403(b), it is generally in your best interest to accept the offer.  The employer matches are free money that, together with income-tax breaks, can really boost your savings pace.  Of course a company’s matching offered maybe on a longevity bases; in which you would have to complete a certain number of years in order have the employer’s money vested and yours to keep. 

SPREAD IT AROUND. “It is the part of a wise man to keep himself today for tomorrow, and not to venture all his eggs in one basket.”  Diversification is a key component to managing volatility within a properly constructed portfolio.  Asset classes, such as stocks, bonds, real estate, commodities, and cash, rarely move in tandem.  Each asset class should be further diversified based on geography, style, size, and risk profile. Most investors overweight domestic holdings and miss out on opportunities abroad.  This has proven costly over the past 5 years as international markets have outpaced domestic markets.   The cornerstone of successful portfolio management is to achieve maximum potential return for each unit of acceptable risk taken by the investor.  Diversification adds value to a portfolio by reducing risk without necessarily reducing potential return. 

STAY BALANCED. Keep an eye on it.  After your initial allocation of assets you have 70% in stocks, 15% in bonds, etc.  The odds are that after a year or so, the actual percentages you hold in each class have changed.  So you will need to rebalance.  This can be accomplished in a couple of different ways.  You might sell some of your investments in the over-weighted area and reinvest the proceeds in the under-weighted area.  Or, you might invest new money in the under-weighted area until your asset allocation is back in line.   Rebalancing the portfolio forces you to under-weight asset classes that have become over-valued and over-weight asset classes that are relatively under-valued. This systematic process helps eliminate the human nature to chase the winners until they become losers; and ignore the losers until they become winners.

LIMIT EMPLOYER STOCK. While diversification is one of the best ways to insulate a portfolio, it can be difficult to achieve with employer securities that are held in employer-sponsored retirement plans.  Many plans contained rules restricting the sale of employer securities, such as employer stock.  The Pension Protection Act of 2006 abated those rules for publicly-traded employer securities held in certain defined contribution retirement plans, including 401(k) plans.   As of 2007, you can immediately trade any employer securities that were purchased with your own contributions.  You can also immediately trade any new employer securities that your employer contributes as long as you have at least three years of service with the company.  There are several other rules and restrictions surrounding these new changes – talk to your financial advisor for more information.  

MINIMIZE TAXES. Uncle Sam has the potential of taking a large chuck out of your retirement plans via taxation.  There are ways to minimize these taxes or at least defer them.  When considering which retirement plan is best for your goals, you need to consider the tax treatment that comes along with each plan.  For example, traditional plans offer an upfront tax break; while Roth plans offer a future tax break.  Your age, income, current tax rate, and future tax rate will all play a role in determining the best strategy. While minimizing your taxes is important, it is not the sole factor one should look at when choosing a plan. 

KEEP YOUR HANDS OFF IT. For many, it is very tempting to withdraw money from your retirement plan when leaving a company.  DON’T.  Remember “time is money”.  When it comes to investing, time is one of the few variables we actually have complete control over. Keep the money invested and roll it over to another retirement plan; this will put the power of compounding earnings on your side.   

KEEP AN EYE ON IT. Just like when it comes to rebalancing at the end of a quarter or year – watch what your investments are doing.  This will give you the opportunity to analyze your investment strategy, make different allocations, rebalance, or gather information on alternative investment options.  

SEEK PROFESSIONAL ADVICE. While these few pointers will help drum up ideas of what you want in a retirement plan – it is always important to seek the advice of a Certified Financial PlannerÔ.  Developing and maintaining a clearly articulated investment strategy will help avoid costly mistakes that could alter the timing or diminish the quality of your retirement.   

Christopher S. Laws, CFPÒ

100 North Point Center East

Suite 530

Alpharetta, GA 30022

770-995-7101

Securities offered through LINSCO/PRIVATE LEDGER   Member FINRA/SIPC