2011 Changes in Tax Law

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010″ (the “2010 Tax Act”), signed by President Barack Obama on December 17, 2010, makes important changes to the taxation of estates and gifts, which will affect many grandparents. This Act significantly increases the prior exemptions for estates and gifts. It will affect many existing wills and estate plans, so it would be wise for grandparents to review their estate-planning documents with their attorneys to determine if changes are appropriate.

The 2010 Tax Act reinstates the federal estate tax at rates of 35 percent (as opposed to 45 percent under prior law) and provides for a federal exemption of $5 million for individuals and $10 million for a husband and wife for 2011 and 2012. It also keeps the tax rate at 35 percent for gifts made in 2010 through 2012. The lifetime gift-tax exemption amount is reunified with the $5 million estate-tax exemption, providing for a unified gift and estate tax exemption of $5 million for decedents in 2011 and 2012. This makes lifetime gifts much more attractive as an estate-planning vehicle.

Keep in mind that even though federal estate taxes have been eliminated on estates of less than $5 million (or $10 million, in the case of a surviving spouse), there may still be significant state estate taxes on estates of less than $5 million. New York State, for example, has not changed its $1 million exemption to conform to increases in the federal estate-tax exemption, and thus, a decedent with a $5 million estate who dies in New York will be subject to state estate tax of approximately $400,000, even though there is no federal estate tax.

7 Good Reasons to Change Your Will

1. You Get Married

Your new spouse doesn’t automatically become your chief heir. Most states give a spouse one-third or one-half of an estate. If you don’t have any children, your parents or siblings would get the rest. To leave all your property to your spouse, you’ll need a will. You cannot disinherit a spouse without his or her consent.

If you are living with someone but are not married and you want your significant other to inherit any of your property, you need a will.

2. You Become a Parent

Obviously, the big question is how your children will be cared for if both you and your spouse die. Now you definitely need a will to name a guardian for your children, as discussed earlier.

Consider using trusts, perhaps in your will, to handle assets that would go to your children. Execute a durable power of attorney naming your spouse or someone else to act for you in financial matters when you can’t. Durable power remains effective even if you become mentally unable to handle your own affairs.

3. You Approach Middle Age

Your assets are growing, so tax planning could save your heirs thousands in federal estate taxes. The time to act is when you and your spouse have a combined net worth, including house, retirement plans, and insurance proceeds, that approaches the amount vulnerable to the federal estate tax. You can give an unlimited amount to your spouse tax-free, by designating it in your will or by owning all assets jointly, for example. But with a little more planning, a married couple can leave twice the amount of the estate-tax exemption–up to $7 million after the second spouse dies, assuming that Congress reinstates the estate tax that lapsed at the end of 2009 and continues the $3.5 million exemption in effect at that time.

Some in Congress would like to boost the estate tax threshold to $5 million and reduce the tax rate to 35%. If they have their way, a married couple could exempt up to $10 million from estate taxes.

 Update your will to reflect family births, deaths, separations, or divorces. Review guardian, trustee, and personal-representative appointments. Reevaluate the nature of specific gifts to people or groups. And recalculate how much life insurance you need.

 4. You Get Divorced

Review absolutely everything. The people in your life are changing. So must your estate plan. You need a new will altogether because in most states a divorce automatically revokes the provisions of a will that apply to a former spouse. In some states a divorce revokes the entire will.

You’ll want to set up trusts to control the assets you plan to leave your children. And revise any living trusts to remove your former spouse as a beneficiary or trustee. Do likewise with a durable power of attorney or a living will. Plus, unless restricted by a divorce decree, change the beneficiaries on your life insurance, pensions, and IRA.

5. You Remarry

You and your new spouse may have to plan for families from prior marriages and for children you have together. Consider a prenuptial agreement, should you want to keep assets separate and nullify your inheritance rights to each other’s estates.

You’ll want to provide for your new spouse and still be certain your children are taken care of. To do this, talk to an estate-planning lawyer about a qualified terminable interest property trust — QTIP, for short. This trust can be set up in a will to give your spouse the income from the trust property and some rights to principal. But when he or she dies, the assets go to beneficiaries you have chosen.

6. You Retire or Move to Another State

If you retire to another state (or any time you move to a new state, for that matter), have your estate-planning documents reviewed in light of that state’s laws and your current needs.

Durable powers of attorney become even more important. For example, if you are stricken with Alzheimer’s disease, you may become unable to give the required consent for financial transactions. Life insurance coverage may not be needed anymore. But if your estate faces an estate-tax liability or if your spouse is dependent on retirement income that will end with your death, consider keeping the coverage.

7. Your Spouse Dies

This loss can leave you emotionally vulnerable to financial mistakes. For at least several months, avoid selling your house or making other drastic changes.

Seek expert advice. There may be tax benefits to disclaiming some of your inheritance in favor of alternate beneficiaries, such as your children, if your spouse’s estate is subject to the federal estate tax and you have enough assets of your own, including liquid assets.

You’ll need to get a new will and, if needed, a revocable living trust. Execute a new durable power of attorney and a living will (which expresses your wishes in case of an illness that leaves you permanently incapacitated). Put these in a safe place, and tell people who need to know where they are.

Five Financial Tips for Women

Five Financial Tips for Women

  1. Make it a Priority to Understand What You Already Have – For working woman, make sure you fully understand your employee benefits and your company’s retirement plan.  Make it a point to see what your short and long term disability and life insurance can offer you and then fill in the gaps with individual policies. You may be surprised what your benefits do and do not cover.  It’s better to know now then at the time you may need to use them. 
  2. Fund Your Retirement Plan:  Most employers offer employees a retirement plan and you must take advantage of it. Make sure though that you consult with a qualified financial advisor when choosing your fund choices.  Leave the selection up to the professionals and review it once a year to make sure your maximizing your returns. Beyond your company’s retirement plan, look into getting your own IRA or Roth IRA, which allows you grow wealth tax-free through the course of your lifetime – it’s worth looking in to.
  3. Recognizing the Challenges is Half the Battle: There’s no doubt about it – women face obstacles that men do not.  Women still earn less than their male counterparts, live longer and are typically out of the workforce for 12 years, on average, taking care of children and now more than ever, aging parents. Recognize these challenges, set goals and build a plan to action to overcome your specific hurdles.  Things such as making a career move or initiating salary negotiations, refinancing your mortgage, opening up an IRA or Roth IRA and adjusting your risk tolerance on your investments can all make a powerful impact on your financial picture. 
  4. Don’t be Afraid to Fire a Bad Advisor:  Let’s face it, there are thousands of financial advisors out there…some of which may suit you better than others.  Choosing a financial advisor is like choosing a doctor.  Choose a person who focuses on your needs and not there’s, someone who listens to your goals, keeps you on track and meets with you at least once a year to review your situation.  If you’re not satisfied with the relationship you have, move on! 
  5. It’s Never Too Late:  Regardless of your age, there are ideas and options that can help your financial picture – we see it everyday.  There is no better time to start investing than right now. Make it a priority to meet with an advisor in 2011.  Ask people you trust to refer you to someone that listens and achieves results and get started as soon as possible.

Three Financial Pioneers Create the Power of Index Investing

The Conception of Index Investing

In 1974 John Bogle founded and created The Vanguard Group – now one the world’s largest mutual fund companies offering 120 different mutual funds holding over $1 trillion.  In 1975, Mr. Bogle championed the first low-cost, index fund which transformed the mutual fund industry crediting him with the title “Father of Index Investing”.    His investment philosophy was simple; it advocated capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.

Bogle felt that indexing was a logically compelling method of investing. “In the world of investing, there are very, very few sure things. But the closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by 1.5 to 2 percentage points a year over a sustained period. The logic behind this startling fact is as follows:  all mutual fund managers together provide average investment performance, but in fact, investing in an index fund that matches the average market return can be your best chance of getting an above average return compared to other non-indexing investors.

His theory was supported by three crucial points: superior diversification/allocation, lower annual operating expenses and lower taxes.  Bogle felt that indexers had the advantage of these three things plus steady, cumulative power of broad diversification and lower expenses, not just short pockets of strong investment performance such as in 1995, 1996 and 1997.


People Begin to Take Notice

After 3 years of excellent performance, two the world’s most respected financial experts took notice and began to research Bogle’s theories – they wanted to take an acadeic approach to proving his theories.  Rex Sinquefield and Roger Ibbotson sought out to create strong theoretical support for indexing and they did just that. In 1979 they published Stocks, Bonds, Bills and Inflation (SSBI) which is now updated annually and serves as the standard reference for informaiton on investment market returns.  Together Sinquefield and Ibbotson executed a large volume of academic studies examining the performances of mutual funds under actual market conditions establishing, very convincingly, that the ‘beat the market’ efforts of investors who pick stocks and time markets are impressively and overwhelmingly negative. In contrast, they found that indexing stands on solid theoretical grounds, has enormous empirical support and works very well for investors. The message ofindexing is therefore unmistakably obvious: they found that the only consistent superior performer is the market itself and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds.

After publishing their study, Sinquefield became the co-chairman for Dimentional Fund Advisors, an index mutual fund manager that began in 1981 – a company that now holds $227.6 billion in assets.  Roger Ibbotson, who was already a professor at Yale, founded Ibbotson and Associates which continued to focus on bridging the gap between academic knowledge and industry practice on asset allocation.  For over 30 years Roger Ibbotson has been committed to delivering innovative asset allocation solutions, helping investors reach their financial goals and providing asset allocation thought leadership to money managers, mutual fund companies and other investors all over the globe.  Still today, Ibbotson supports his roots and is a Board Member, one of 9 “Academic Leaders”, which advises Dimentional Fund Avisors – the world’s leading index mutual fund manager.

You owe it to yourself to check out the benefits of index investing…