Death and Taxes are Certain, but Probate Doesn’t Need to Be

Posted by dfederman on May 4, 2011 in Market News | Comments Off

Probate is a legal process that takes place after someone dies. It includes proving in court that a deceased person’s will is valid, identifying and inventorying the deceased person’s property, having the property appraised, paying debts and taxes, and distributing the remaining property as the will (or state law, if there’s no will) directs.

The probate process may take as little as three months, but may take up to two years or more for some complex estates, tying up the assets that your family may need immediately. Also, for a larger estate, the cost may be as high as 5 percent of the estate’s value.

To save both time and money, many people prefer to avoid probate as part of their overall estate planning strategy. Listed below are five ways to avoid probate.

1. Title Assets to Pass by “Designation” Rather than by Will

• Set up payable-on-death (P.O.D.) accounts at your bank and transfer-on-death (T.O.D.) accounts at your brokerage firm (for individual accounts). P.O.D. and T.O.D. forms allow the account owner to name beneficiaries, including family members, trusts, and charities, allowing assets to be transferred quickly and efficiently as directed by the account owner.
• Name beneficiaries on annuities, life insurance, and retirement accounts (IRAs, 401k’s, 403b’s,etc.)

2. Set up a Revocable Living Trust

A trust is like a “box” that holds your assets. A revocable living trust may include almost any asset that you own. While you are living, you can act as the trustee and can add or remove property as you see fit. You can also terminate or amend the trust at any time. When you die, your successor trustee distributes the trust assets to the trust beneficiaries, according to the trust agreement. Trusts usually require an attorney to draw up the trust documents.

3. Make Gifts of Property and Money

Give your money to your heirs while you’re alive.

• Each year you are allowed to gift $13,000 to as many individuals as you’d like (this is the annual gift tax exclusion amount as of 2011), without incurring a gift tax. A married couple may gift as much as $26,000 to as many individuals as they’d like ($52,000 to couples).
• In contrast, the lifetime gift tax exemption is the amount that can be given away by a taxpayer over his or her entire lifetime to any number of people that will be free from gift taxes but will reduce the amount that can be given away by the taxpayer tax free after death. In other words, the lifetime gift tax exemption is tied directly to the federal estate tax exemption such that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption after you die. For 2011, the lifetime gift tax exemption is $5,000,000, which is the same as the federal estate tax exemption.

4. Hold Property in Joint Ownership

5. Special Procedures for Small Estates

Almost every state now offers shortcuts through probate — or a way around it completely — for “small estates.” Each state defines that term differently. Because of the way the laws are written, however, many large estates, worth hundreds of thousands of dollars, are eligible for special transfer procedures that speed property to inheritors.

Definitions*

Joint Tenancy – A type of property right where two or more people own or rent a property together, each with equal rights and obligations, until one owner dies. Upon an owner’s death, that owner’s interest in the property passes to the survivors without the property having to go through probate.

Joint Tenants with Rights of Survivorship (JTWROS) – A type of brokerage account which is owned by at least two people, where all tenants have an equal right to the account’s assets and are afforded survivorship rights in the event of the death of another account holder.  All that the surviving owner will need to do to remove the deceased owner’s name from the asset is to show a death certificate or record a new deed which indicates that one of the joint tenants has died.

Joint Tenants in Common – A way for two or more people to have equal ownership interests in a property. Each owner has the right to leave his or her share of the property to any beneficiary upon the owner’s death. Each party (owner) in a tenancy-in-common agreement has the right to use the property even if the physical size of the stake is different. *

Tenants by Entirety - When a property is owned by two or more tenants (husband and wife only). If one owner dies, the survivor takes the whole estate.

Community property is a special type of joint ownership recognized between married couples in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. With Communitiy Property when one spouse dies, if there isn’t an estate plan, then the intestacy laws of their state will dictate where the community will go. If there is an estate plan, then the terms of the estate plan will supercede state law and the community property will go exactly where the spouses want it to go.

For a more comprehensive and personal review of your estate plan, consult with an estate attorney and/or your financial adviser.

*definitions from Investopedia.com

To request a free portfolio review or learn more information about Ariba, visit www.aribaasset.com, or call 1-800-808-7488 x101 or x104

What Did Risk Say to Return?

Posted by dfederman on Apr 21, 2011 in Market News | Comments Off

by Dan Federman, CFP^®

“No Pain, No Gain!”

In order to achieve investment returns that outpace inflation and taxes (two of the biggest hurdles to accumulating lifetime wealth), investors must assume risk. This does not mean investors must roll the dice with their money. It just means they need to include “risky assets” in their diversified portfolio. Risky assets are simply investments with returns that are not guaranteed. For example, a stock is considered riskier than a corporate bond. US Government bonds are about the only type of asset considered “riskless.”

To measure the true risk of your mutual fund or investment portfolio check its “standard deviation,” which is the amount of fluctuation in performance that an investment can be expected to have from year to year, compared to its average return. A high standard deviation means greater volatility (and greater risk).  A low standard deviation means lower volatility (and lower risk).

To demonstrate the concept of standard deviation, below is a bell shaped curve (Figure 1) showing a hypothetical “normal distribution” of investment results. Based on 84-years of actual risk and return data for the S&P 500 Index (1925-2009), the average return was 10.4%, with a standard deviation of 19.2%. Statistically, this means there is a 68.2% probability that returns will fall within one standard deviation of the average, and a 95% probability that returns will fall within two standard deviations. Thus, 68.2% of the time the S&P 500 earned between -8.8% and 29.6%, and 95% of the time the S&P 500 earned between -28% and 48.8%.  Talk about a roller-coaster ride. Generally, an investment will typically earn returns above or below its average, and very rarely will it achieve its “average” return any given year. To see a comparison of returns and risk for seven asset classes, see Figure 2 below.

Investors who ignore standard deviation often place too much money in risky investments, leading to wild gyrations in their portfolio. On the opposite end of the spectrum are investors who place too much money in CDs, money markets, and other “safe” investments that earn very little in returns. There actually is a method to the madness when it comes to successful portfolio management. The method involves blending negatively correlated assets (such as stocks and bonds) to smooth out volatility. Just like chocolate and peanut butter, two negatively correlated assets go well together. The blended portfolio of two negatively correlated assets has lower volatility than either individual asset.

Since stocks are riskier than bonds, one can reasonably expect stocks to provide higher returns than bonds in the long run. So why include bonds in a portfolio? The two main reasons are emotional risk tolerance and age. Investors who do not have the stomach for the roller coaster ride will avoid some of the pain associated with a bear market in stocks if they allocate a portion of their portfolio to bonds. Also, a retiree who is no longer earning an income and withdrawing from his portfolio to meet monthly expenses cannot afford to experience wild gyrations in his portfolio, and will therefore want to include bonds in his portfolio.

So, the next time someone touts the average performance of a particular mutual fund or manager, ask him what’s the standard deviation?

# # #

Figure 1: Standard Deviation Demonstrated

Figure 2: Risk and Return of Asset Classes Over Specific Time Periods

To request information about Ariba call 1-800-808-7488 x101 or x104, or contact us at http://aribaasset.com/contact.html

Keeping it Simple with The Investment Answer

Posted by dfederman on Apr 14, 2011 in Market News | Comments Off

by Dan Federman, CFP^®

In November 2010 the New York Times had an article about a book called “The Investment Answer,” co-authored by former Goldman Sachs veteran bond salesman, Gordon Murray and Daniel Goldie, CFA, CFP^®, a former tennis professional turned financial adviser. This article created a lot of buzz for the book, in large part because Mr. Murray was dying of brain cancer when he wrote it, and the book is only 66-pages in length, making it an easy read, even for people who are not interested in investing books.

Mr. Murray wanted to leave this book as a parting gift to anyone who would listen. His goal was to enlighten unaware investors to the benefits of a sensible, low-cost strategy called index fund investing. The advice in the book is not new. All of the concepts can be found in textbooks and countless other investment books. Below is a synopsis of the concepts discussed in the book.

For ordinary, everyday investors, this is a great place to start in the path to wealth accumulation and financial security.

Five investor decisions

• The Do-It-Yourself Decision – Should I invest on my own or seek help from an investment professional?
• The Asset Allocation Decision -    How should I allocate my investments among stocks, bonds, and cash?
• The Diversification Decision – Which specific asset classes within these broad categories should I include in my portfolio?
• The Active vs. Passive Decision -  Should I take an actively managed approach to investing, or follow a passive alternative?
• The Rebalancing Decision -  When should I sell assets and when should I buy more?

Key principles

• The global capitalist system generates a positive return on capital over time (otherwise, it just wouldn’t be capitalism).
• Investing broadly and cheaply in global capital markets with asset class funds and index funds is a winning strategy over the long term because global capital market returns are available to everyone overall.
• With a proper time horizon and discipline, investors can capture global capital market returns which should beat most active investors (who try to beat the market) with less risk.
• The most effective and efficient way to invest in stocks and bonds is in public equity and debt markets.
• Stock picking and market timing are speculation, while asset allocation, broad diversification of portfolio risk, reducing costs and staying the course are investing.

Sources:

http://en.wikipedia.org/wiki/The_Investment_Answer

Amazon.com – Editorial Review

Seven Reasons to Move Your Former Employer Retirement Plan to an IRA Rollover

Posted by rpicon on Apr 4, 2011 in Market News | Comments Off

by Dan Federman, CFP^®

Many people who switch jobs or retire often leave their retirement plans with the old employer. In most cases, it is more beneficial to move these assets into an IRA Rollover. Here are some of the reasons to consider.

1. 401k expenses may be high, or may not be transparent

Under a 401k, the average annual administration fee charged to your account is 0.50 percent. Most IRA rollover accounts do not have any administrative fee associated with them and this represents an immediate saving. In addition, because you can choose where to invest with an IRA account, you’ll get to take advantage of funds that typically have lower expense ratios than funds available through your 401k. Furthermore, it is extremely difficult for an individual plan participant to determine exactly what fees and expenses they are paying.

2. Investment choices

When you move your 401k assets to an IRA in your name, you have an unlimited choice of investments in mutual funds, exchange traded funds, stocks, bonds, options,etc. compared to the limited choices available in most 401k plans.

3. Consolidate your assets.

By consolidating your retirement assets with one custodian, it makes it easy to track your investments, simplifies paperwork, and eliminates administrative hassles of dealing with multiple account registrations.

4. Required Minimum Distributions (RMDs)

When it’s time to make mandatory withdrawals by April 1st of the year after you turn 70 ½, the IRS does not allow RMDs to be made out of an IRA in lieu of a 401k RMD. They each have separate rules, so you may be required to withdraw from your 401k account and any Traditional IRA you have open at that time. By having it at one location, it much easier to determine your RMD, and more likely to avoid penalties.

5. Easier Asset Allocation

With one account for consolidating your retirement assets, you’ll be able to more readily see the mix of investments in your portfolio and adjust the balance as necessary to stay on track with your retirement goals.

6. Estate Planning – Manage the tax burden on your beneficiaries.

A Rollover IRA is better from an estate planning view. If you die before taking minimum distributions at 70 1/2, your named non-spousal heirs have the option to take your IRA assets and move them into IRA accounts under their name and extend the minimum distributions to their life expectancy. This gives your heirs the power of tax deferral over their lifetimes. There is no such opportunity with a 401k account held at the time of your death.

7. Option to convert to a Roth if it makes sense for your situation

A Roth IRA provides some advantages such as tax-free withdrawals, no minimum distributions at age 70 ½, and no penalties for certain early withdrawals.

2011 Second Quarter Commentary – April 1, 2011

Posted by rpicon on Apr 1, 2011 in Market News | Comments Off

2011 Second Quarter Commentary - April 1, 2011

The stock market advanced over the past nine months without a significant pause or price decline, supported by continuous massive fiscal and monetary stimulus.  The 2011 U. S. deficit is estimated at $1.7 trillion and the Federal Reserve is making direct market purchases of securities in the amount of $600 billion. We are in an era of unparalleled federal intervention in the private market sector.  Thus, government policies are especially important in financial planning and investment analysis.  What happens when quantitative easing ends in June?

Our recent report, “WEALTH OF NATIONS”, (See our website – http//2020insight.com/wealth-of-nations/ or call 703 683 8488 x 104 for a copy) compiled the many strengths and abundant assets available to the U. S. to solve financial and budgetary problems.  When we consider our system of laws and a resilient political system, the nation’s wealth of natural resources and human resources, augmented by a tradition of solving problems; it is only prudent to remain constructive on the United States as political leaders work through very real issues.  Winston Churchill observed: “You can always count on Americans to do the right thing – after they have tried everything else.”  This statement can be applied to the democratic process which is designed for deliberation, not quick solutions.  The investment community and the general public know that the solution to financial problems currently faced involve living within our means, i.e. reduction in spending on entitlements and benefits promised by political leaders in the past, to a level supported by sound tax policies.  The political will to address spending issues appears to be growing and it is not too late to do the right thing.

THE DEFICIT

The current government spending problem looms large as the fiscal 2011 federal deficit is projected to reach $1.7 trillion.  In addition, $2.7 trillion in U. S. Treasury debt is coming due and must be rolled over along with $200 billion in interest expenses, resulting in a total funding requirement of $4.6 trillion.  If tax revenues come in at the estimated $2 trillion level, the remaining $2.6 trillion will be financed through the sale of Treasury notes and bonds.  In other words, the Treasury must sell over $200 billion in new debt securities every month.  We have passed the point where investors and foreign governments are purchasing 100% of bond auctions (only 62% in the last auction) and the rest is funded by “printing new money”, albeit via bookkeeping entries rather than by running the presses.  Nonetheless, some of this new money will work its way into the economy and contribute to rising inflation.  Many economists believe the run up in commodity prices has been caused by printing money to financing the deficits and emerging nations claim that the U. S. policies are exporting inflation.  Even a nation as large and as strong as the U. S. cannot sustain deficits at the current level for a prolonged period without igniting inflation and impacting markets.

INFLATION

The attached Chart A shows a more realistic measure of real inflation than the government’s CPI numbers indicate.  The money supply, Chart B, shows a trend reversal to a rising rate of growth in the money supply which confirms a growing economy.  Thus, the Fed is succeeding in defeating deflationary forces and the fundamentals are in place for inflation to broaden beyond commodities, oil and stock prices.  The CPI rose 0.5% in February – 6% annual rate.  The Producer Price Index (PPI) rose 1.6% in February for a 19% annual rate.  Import prices were up 1.4% in February.  Food and energy increased 4% and 1.6% respectively in latest monthly report and inflation expectations are at the highest level since 2008.  If markets were free from government intervention, interest rates would be considerably higher than the 3.5% range.  Two prominent Federal Reserve governors have voiced concern over further quantitative easing and suggested that less stimulative policies would be considered at the next Fed meeting.  We believe that moderate economic growth can continue with less government intervention and that the recovery will be self sustaining.

STOCK PRICES

Stock prices have risen strongly during the past two years and the price rise since August 2010 has been one of the longest in history without so much as a 5% to 10% correction.  The recent sell off, sparked by the Japanese earth quake and Middle East political turmoil, took the S&P 500 Index down 3.6% before investors moved in to buy the dip.  The sweet spot for stock prices appreciation that currently prevails has traditionally occurred during the period after recession has bottomed, but while interest rates remain low to foster the recovery.  If economic growth continues to be moderate, but not so strong as to cause the Fed to start tightening credit, growth in corporate earnings should support stock market stability despite political instability in various parts of the world.  In addition to robust earnings, S&P 500 companies hold $3.4 trillion in cash reserves available for capital expansion as end demand recovers.  Equally important is the flow of funds into the market.  Mutual funds that are invested in U.S. stocks had inflows of $19.71 billion in January and $12.97 billion in February, the fourth month in a row of positive inflows. It is always prudent to follow the money flows which determine the direction of stock price movements.

In view of improvement in the economy and rising inflation expectations, this is a good time for you (or friends and family) to review your investment goals and we would be happy to provide any assistance that you feel would be helpful.

As always, we welcome your questions and comments.

Robert E. Long, CFA                                       Dan Federman, CFP®

Chairman & CEO                                             Managing Director

Chart A                                                                                    Chart B

What is a Financial Plan?

Posted by rpicon on Mar 25, 2011 in Market News | Comments Off

By Dan Federman, CFP^®

At its very basic level, financial planning is a process that begins by assessing your current financial situation (net worth, income, monthly expenses, medical and other insurance coverage, employee benefits, tax returns, and estate planning). This type of data gathering is an effort in itself, but it really gets the ball rolling in terms of looking at where you stand today.  Digging in deeper, it may also lead to additional questions such as “have you looked into refinancing your mortgage?” “what are the terms of your stock ownership agreement?” and “what is your overall attitude toward the financial markets?”

Once you have an idea of where you stand financially, a logical next step is to think about where you’d like to be.  It’s a good time to think about the vision you have for your life and what you hope to accomplish (i.e. your goals) in the near-term, in 5 years, 10 years, etc.

• Newlyweds just starting a family will want to look at life insurance policies, disability income insurance, setting up a will, contributing to retirement and college plans, if possible, and making sure they have ample cash reserves (9 to 12 months of spending) in the event of job loss or a medical emergency.
• For most people, building up enough retirement savings is the primary long-term goal. By examining your monthly expenses you can get an idea of how much you can save each month into your 401k or your Individual IRA or Roth IRA. A good general goal is to save 10-15% of your annual income. Obviously, if you can afford to save more, save to the maximum amount possible.
• Those who have reached retirement age may be interested in income strategies from their investments to supplement social security, pensions, and other income sources they may have.
• Retirees who do not need income from their investments may be interested in investing with their children and grandchildren in mind. Alternatively, they may be interested in leaving a legacy by setting up a donor advised fund in their name.

The habit of saving on a regular basis is so much more important than choosing the “right investment.” The reason for this is because the more time you have to let your investments grow, the more you will benefit from compound (exponential) growth provided by a globally diversified portfolio of stocks, bonds, real estate, precious metals, oil & gas pipelines,etc.

The bottom line is that anything involving a “$” sign should be thought of in the context of one’s overall financial plan.

For a free portfolio review contact Ariba Asset Management Inc. at 1-800-808-7488 x101.