Faith Based Investing

Question of the week: What are some of the best ways to save for college?

If you want to save for college, you may wish to consider an UGMA or UTMA account. These custodial accounts are typically created by parents and other relatives who want to gift minors without having to set up a trust.  Many parents and grandparents create UGMA or UTMA accounts as college savings vehicles. You can invest for a child’s education while transferring income-producing assets to that child (and their presumably lower tax bracket).

The Uniform Gifts to Minors Act (UGMA) allows a child or teenager to take ownership of cash, securities or insurance policies. The successive Uniform Transfers to Minors Act (UTMA) extended the UGMA parameters: it lets minors receive gifts of art, real estate, patents and royalties, and other non-securities assets.

UGMA and UTMA accounts address a minor concern. You may be thinking, “Well, I know outright gifts to a minor aren’t subject to federal tax, so why set up an UGMA or UTMA? Why don’t I just gift the money or securities outright?”

Do you really want to do that?
Let’s face it, you probably want control. Most likely you don’t want your teenager buying and selling securities any more than brokerages do. You might also want to be certain that the cash you gift is not spent frivolously. If these concerns speak to you, UGMA and UTMA accounts may be worth a look.

In 2010, you can use these accounts to gift up to $13,000 in money or property to a minor. In fact, you can gift up to $13,000 each to multiple minors. If you stay under the annual federal gift tax exclusion amount each year, you will only trigger federal gift tax if you transfer more than $1 million during your lifetime.

You are the custodian; the minor is the owner. In colloquial terms, these UGMA or UTMA accounts are “trust funds” – yet they are not trusts that would require the involvement (or fees) of an attorney. While the minor owns the cash or property within the UGMA or UTMA account as soon as the asset transfer occurs, the custodian manages that cash or property until the child reaches the age of maturity (18 or 21 in all but a few cases).

As custodian, you are not the only one who can make irrevocable transfers of cash or property into the account; parents, grandparents, relatives and friends may all do so. A sizable college fund may be built with an UGMA or UTMA account, whether the assets are held in cash or invested. When the account owner reaches “maturity”, he or she may spend that money for college.

Is there a potential downside of UGMA or UTMA accounts?
Yes. To repeat, you are the custodian, the minor is the owner. When that minor becomes an adult under state law, the account terminates and the account owner gets to spend the funds as he or she wishes. It’s a free country … and it is possible that today’s college fund will become tomorrow’s Corvette. So you do want the owner and the custodian on the “same page” when it comes to the intent of the account, and on good terms as well.

Another potential issue to consider: if you are custodian of one of these accounts and you pass away before the account terminates, the assets within the UGMA or UTMA account may become part of your taxable estate.

An underpublicized option worth checking out. UGMA and UTMA accounts may give your family the potential to create a nice pool of money for college while lowering your income taxes in the process.

Save the tax cuts!

What might happen if they went away? The debate is gaining volume. In July, Treasury Secretary Timothy Geithner said that very few taxpayers would be affected if the landmark tax cuts of 2001 and 2003 expired. “I do not believe it will affect growth,” he calmly commented on ABC’s This Week. Many legislators and observers on Wall Street and Main Street are far less calm about their potential end.

Why should they end now?

The federal government undeniably needs more revenue to help shrink the deficit, and Geithner feels that letting these tax cuts go would not trigger a double-dip recession, as they affect only 2-3% of U.S. taxpayers.  However, many Republicans and more than a few Democrats see danger here as the richest Americans are also the most influential in job creation.

Deutsche Bank says “don’t do it”

Analysts at the banking titan recently offered their opinion: letting the Bush tax cuts expire would exert a drag of anywhere from 1.1% to 1.5% on U.S. GDP. The analysts warn that letting the tax cuts sunset as the federal stimulus winds down could create an economic scenario in the U.S. akin to the one Japan experienced back in the 1990s.

Grassroots momentum gathering

A new website created by the conservative League of American Voters (ReviewTheTaxCuts.com) is gathering signatures in conjunction with a TV ad campaign starring ex-presidential candidate Fred Thompson. This effort comes on the heels of Rasmussen and Gallup polls showing increased concern about taxes. In a mid-July Rasmussen Reports poll, 68% of Americans surveyed said taxes had become a “very important” issue. In April, 63% of Americans surveyed by Gallup felt their taxes would rise in 2011, the largest percentage to respond this way since 1977.

A battle this fall in Washington

Republicans on Capitol Hill ardently want the tax breaks to remain in place. Democratic leaders in the Senate are striving to introduce a bill in September that would seek to preserve the cuts for the middle class only. Most Democrats seem to favor letting the tax cuts expire for households earning more than $250,000. House Speaker Nancy Pelosi (D-CA) is among the voices contending that they didn’t aid the economy much in the first place. Closer to the White House, Secretary Geithner feels that letting the cuts expire would send a message to the world that America is serious about tackling its deficit.

This is an election year for many members of Congress, and it wouldn’t be surprising if some seats changed hands as a result of the influence of this issue.

More voices

Former Federal Reserve vice-chairman Alan Blinder favors letting the cuts expire. “We couldn’t afford them then (and knew it), and we can’t afford them now (and know it),” he recently told the Washington Post. “What might be the argument for retaining the tax cuts even though the long-run budget is deeply in the red? That America needs more income inequality? Seems to me we have enough.”

MoodysEconomy.com chief economist Mark Zandi calls for moderation. Zandi feels the 2001 and 2003 cuts “should be extended permanently for families with annual incomes of less than $250,000 and should be phased out slowly for those making more than that.”

If the sun sets on these cuts, taxes revert to pre-2001 levels

EGTRRA gave us six tax brackets (10%, 15%, 25%, 28%, 33% and 35%). If EGTRRA went away, so would the 10% tax bracket (the lowest bracket would become 15%) and the 25%, 28%, 33% and 35% rates would be respectively bumped up to 28%, 31%, 36% and 39.6%. (Households earning more than $379,650 would pay taxes at the 39.6% rate.)

Then we have capital gains, of course. The ceiling on capital gains tax rates would move back up to 20% if these cuts expired. Additionally, qualified dividends would again be taxed at a taxpayer’s regular rate … which could be as high as 39.6% (see above).

The death of EGTRRA would also wipe out the child tax credit, restore the “marriage penalty” (married joint filers wouldn’t be able to take 2x the standard deduction allowed for single filers) and bring back the phase-out for the personal exemption and itemized deductions.

There is much to consider

This will, most likely, become one of the hottest issues on Capitol Hill and across the country as we get closer to November.

A good coach can bring light to your situation

After 6 years, Tiger Woods recently made a major change.  Before you start with the infidelity jokes, I’m talking about major changes in his career – professional golf.    Tiger got to the top of his golf game with a little help from his coach.  However after six years of coaching, Tiger called it quits.

Why is Tiger Woods parting ways with his golf coach?  The reality is Tiger needed to make a move.  When something isn’t working, it is really frustrating – for everyone involved!

I talk with hundreds of people each month via the telephone, email, and in person. Money always seems to be a hot topic!  With the stock market back on a roller coaster course – people are more dazed and confused!  Many coaches, financial advisors, and stock brokers are asset gatherers not asset managers.  They have a vested interest to keep you invested in the markets even when it may not be the best choice for you.   Is your coach part of your team or do they have a hidden agenda?  Why not find an advisor who help bring light to your situation?

It may be time for you to change coaches too

Just like Tiger, it may be time for you to change coaches. The sharp ups and downs recently in the markets are a shocking reminder of what we saw in 2008 and 2009.  Don’t go back down that path! If you have found that you are not where you need to be financially or not getting the help you desire, it may be time for a coaching change! Take control of your future today.  Email me at jay@jayperoni.com for a FREE 30 minute evaluation of your financial situation!

With over 15 years of experience, I can look at your:

• Investment strategies
• Retirement plans
• Business ideas and ways to grow business
• Estate and legacy plans
• Tax efficiency (or lack thereof)
• Savings and spending
• Debt management
• And how all these tie together with your faith and values

Should you have a living trust?

from my post at ChristianPf.com

Not everyone needs a living trust. However, the larger and more complex your estate becomes, the greater your need for effective estate planning to minimize taxation and pass assets and property to those you care about most.  A living trust can be an essential tool to facilitate that planning.

Here are a few advantages of having a living trust and 5 reasons why it may make sense for you:

1. A revocable living trust trumps a basic will. It contains all the instructions on where you want your money to go, and it offers you (the trustee) additional benefits.
2. A correctly funded trust avoids probate while a will ensures probate to prove its validity. Probate will cost your beneficiaries time and money.  In certain states, the probate process can drag on for years. Additionally, a will can be made public and can be challenged in court.  A living trust preserves your family’s privacy and cannot be contested.
3. A living trust can be used to tell your love ones your wishes if you were to become severely ill, disabled, or incapacitated. While a durable power of attorney gives someone the power to act legally on your behalf, not all financial institutions will recognize it. Valid living trusts are accepted by all financial institutions. Living trusts allow other trustees such as your spouse or another alternate trustee to step in and manage your affairs if you are unable to, without court approval.
4. A living trust can also save on estate taxes if properly structured – split into two trusts upon the death of one spouse (what is commonly referred to as an AB trust). This preserves the estate tax credit of the spouse who died and the unlimited marital deduction for the remainder of the estate.
5. A living trust lets you transfer assets to your heirs with conditions attached to preserve your final wishes. This allows you to control the way your assets are distributed even after you’re gone.

So a living trust sounds perfect…well what about the downside of these trusts?

With all these advantages what could possibly be the downside?  Well, for starters, many who have simple estates may not need a trust…just now.   If you are in your 30s, 40s, or 50s, you may have another 20 plus years before you pass away.  Laws and estate tax situations change.  It may be years before any of your instructions are implemented.  Your final wishes could change several times before now and the time the Lord calls you home.

As an alternative, a well-written will and durable power of attorney may suffice until later in life. If you are married, any joint assets and property generally will pass from one spouse to another without probate.

Another downside to a trust is cost.  What costs a few hundred for a will can often cost thousands of dollars for a trust.  Is this expense justifiable at this stage of your life?  It may or may not make sense to set up a trust today.

Be careful if you have setup a trust.  Even if setup, some people never fund them. Meaning, they have the trust drawn up, but they never transfer assets from their name into the name of the trustee of the trust.  I have seen far too many people make this common mistake! They properly fill out the paperwork or say they’ll get around to it “someday.” They then pass away without placing their bank accounts, investments, real estate, etc. into the trust. This would then expose those assets to probate and defeat the whole point of the trust.  You need someone to look over your estate planning documents to make sure they are in good order.

It is often wise to have both a will and a trust.

Most likely, you would not put all of your assets into a living trust. There could be some assets outside of your trust that could be left in a will such as jewelry, family heirlooms, or other sentimental items. You could also use a document such as a pour over will to transfer any remaining assets outside the trust into the trust.  This would allow those assets to be distributed according to the terms of the trust. So as you can see, wills and trusts can often complement one another.

What makes the most sense for your situation?

In order to find out what makes the most sense for you personally, I advise talking with a Certified Financial Planner™ and an estate planning attorney.  Form a team to help you implement your final wishes and pass wealth in the most tax advantageous way.

Have you set up a living trust or a will?

Miracle on the Hudson

Captain Chesley “Sully” Sullenberger avoided catastrophe by safely landing a US Airways plane on the Hudson River.  On January 15, 2009, Sullenberger was the pilot in command with an extensive flight and military experience, the kind of guy you want in the control pit with the slightest hint of danger.

According to reports:

“Shortly after taking off, Sullenberger reported to air traffic control that the plane had hit a large flock of birds, disabling both engines.  Several passengers saw the left engine on fire. Sullenberger discussed with air traffic control the possibilities of either returning to LaGuardia airport or attempting to land at the Teterboro Airport in New Jersey. However, Sullenberger quickly decided that neither was feasible, and determined that ditching in the Hudson River was the only option for everyone’s survival.  Sullenberger told the passengers to “brace for impact”, then piloted the plane to a smooth ditching in the river at about 3:31 P.M.”

The Miracle?

Every passenger survived!  To land the way Sullenberger did in such a small space with no casualties was beyond a miracle.  With God’s protection and Sullenberger’s expert skills, this flight is remembered for what was saved not what was lost…

There are some things best left to a professional

I can think of a short list of professionals I would want by my side in a jam:

• Doctor for my health issues/problems
• Attorney for my legal issues/problems
• CPA for my tax issues/problems
• CFP for my financial issues/problems

People often refer to the professionals when it comes to legal and health issues, but when finances enter the picture, all too often people tackle their 401ks, IRAs, and investments alone without consulting a professional.  I’d like to say these do-it-themselves-ers often land safely, but unfortunately miracles are few and far between…

This  only confirms to me that sometimes having a professional makes all the difference in the world!