Business Life Insurance

Suppose you are a small business partner, running your company with one other owner. It is likely that much of your net worth is tied up in your business, and if you died, much of your estate would involve assets of the company. If your family doesn't want to take over your roll, and they (rightly) want your share of the business value, what should your partner do? One of the easiest solutions is for both of you to purchase life insurance on each other at a value approximately equal to your share of the business. Then, when you die, your business partner receives the life insurance proceeds and pays it to your family. This is called a "cross purchase" agreement. If more than two of you own the business, buying a policy on everyone can be more complicated. In this case, it's more likely the business itself would purchase insurance on the lives of the owners, which could be used to pay each owner's business value to their families. This is called an "entity purchase" agreement. Many small businesses have had to close due to the death of one of the owners. Don't let your business become a statistic!

Be Prosperous!
Peggy

Life Insurance

Life insurance is designed to manage the risk associated with your death. For many people, life insurance helps provide funds for their families to pay off the house, pay for children's college educations, or provide income replacement. For others, it provides a way for a small business partner to have sufficient funds to "buy out" your half of the business if you die.

The two major types of life insurance are term insurance or whole life insurance. Term insurance is pure insurance that provides a benefit for a predetermined period of time (like twenty years). Term insurance is less expensive, but it is not permanent. If insurance is needed to pay off a liability with a definite end (like a mortgage), then term insurance can be an excellent choice. If, however, the risk has an uncertain time horizon or a certain loss (like a small business partner or estate tax), then permanent insurance is a more appropriate choice. The concept of "buying term and investing the difference" (with the idea that the investment can grow to meet the need) works at times, but be careful to do enough financial planning to determine that this is the best decision for you.

Again, I remind you that working with an insurance agent who is also a CERTIFIED FINANCIAL PLANNER (TM) pracitioner might help ensure that the person giving you advice looks at your finances holisitically, and not just as a sale.

Be prosperous!
Peggy

Managing Risk

I didn't call this column "Introduction to Insurance" for a reason. I believe that many times, with all of the complicated products available, people forget that the goal of insurance is to manage risk. I want to start with how we can control the risk in our lives.

We can AVOID it. We simply don't participate in those activities that lead to the risk. Of course, some risks cannot be avoided, so we must choose another strategy.

We can REDUCE it. We engage in the risky behavior less.

We RETAIN it. We simply live with the risk the event will happen.

We TRANSFER it. This is the purpose of insurance. We transfer the risk to the insurance company by paying them a small amount, so we can avoid a large gain.

Over the next few blogs, we will look at different kinds of insurance and choices we have in insurance products.

Be prosperous!
Peggy

The Cleveland County Chronicle is Changing Formats

Some of you may know that I write a column for The Cleveland County Chronicle, a local newspaper serving Cleveland County. Today I learned that the publication is becoming electronic. I would like to encourage you to check out the website, theccchronicle.com, and enjoy the hometown content. At first, I was disappointed that the "paper" wouldn't be paper anymore, but I realized that I get much of my news from the internet, and what I don't get there, I watch on cable television. I don't read papers either!

A problem of this transition involves some people's reluctance or fear of learning how to use the internet. I would like to challenge you to work with someone who still views themselves as computer illiterate, and teach them how to go online. Share your email address with them, and correspond until they feel comfortable on their own. Seniors can be particularly uncertain in using the technology, but the fear isn't limited in generations. Some of my senior clients love emailing grandchildren and checking out the latest pictures on Facebook! But you will do a great deed if you help someone make the transition.

Be Prosperous!
Peggy

Estate Taxes

If there is a confusing area of tax law it involves the current status and future changes in the Federal estate tax laws. For several years, the amount of an estate that was within the estate tax credit amount has been increasing. This means that you could have a bigger and bigger estate without owing any estate tax. This year (2010), there is no Federal estate tax for anyone. However, the shoe drops next year!

If you die next year, and your estate is greater than one million dollars, you will have estate tax liability. Your estate includes anything in your name or anything over which you can exert control. If you are married, it's likely that half the value of your house is included in this value.

It's expected that the law will change, raising the amount of the tax credit, and therefore, allowing you to leave a bigger estate without tax. However, it hasn't happened yet. It's very important to work the an attorney and a CERTIFIED FINANCIAL PLANNER(TM) practitioner to help you with your estate planning needs. If you might owe estate tax, it matters even more.

We'll talk more about your estate planning issues later this year!

Be prosperous!
Peggy

Census Scams

I heard this on the news tonight, and it seems worth sharing, as identity theft is a financial issue. Apparently, some enterprising scammers have created bogus census documents requesting Social Security numbers, bank accounts, and credit card numbers. The real census is a 10-question document that doesn't request personal financial information! I'm sure you know this, but it seems worth saying. Also, anyone taking census data door to door must have identification.

It's easier to be careful than fix damage!

Be prosperous!
Peggy

Putting the Client First

Did you know that by law, someone can call themselves a financial advisor and not have to uphold a fiduciary standard? What's a fiduciary standard, you ask. It means that they put the clients' best interest ahead of their own best interest. Now, the fiduciary standard allows the advisor to be paid, but it means that this payment needs to be within a fiduciary level of care.

The latest financial reform legislation originally required that everyone who worked with your money as a financial advisor had to follow fiduciary standards; however, due to heavy industry pressure, this language was dropped, and the current legislation does not require it.

In today's investment news, a dozen industry leaders, including Nobel prize winners, and Vanguard founder John Bogle, are asking that the fiduciary language be put back into the bill.

The language needs to be there. Clients believe it to be true that their advisor is always acting in their best interest, so the laws need to be changed to make it true. If you feel like being an activist, contact your senator asking him or her to support that the Fiduciary Statement language be added to the bill.

Tomorrow, we will review the different names and titles that financial advisors can use and what they mean.

Be prosperous!
Peggy

Procrastination

In short, don't do it! Today's thoughtful, data-filled blog isn't going occur because I am teaching a new class for the College for Financial Planning, and I need to read the module before I teach it! Always plan ahead.......
Be prosperous!
Peggy

Gifts and Taxes

Most of us don't really think about tax implications of gifts we want to give. However, the IRS has rules about how much money we can gift each year without reporting it, and how much we can gift over our lifetimes without owing gift tax. Let's review some of the highlights:

If you want to give someone a gift, you can give $13,000 in 2010 without having to file a gift tax return. If you and your legal spouse want to gift together, you can "gift split" and give $13,000 each to a person. (As an odd note, if you choose to split your gifts for one person, you must split all your gifts to everyone all year.) This allows you to give away $26,000 a year to someone (like a child or grandchild) and not have to report your gift. Many people use this as a chance to lower the value of an estate and potential liability for estate tax.

What if you give more than $13,000? Well, then you file a gift tax return. The value of your gifts begins to accumulate over time, and when you have eventually gifted over $1,000,000, you must pay gift tax. Remember that gift tax is always paid by the gifter, not the recipient. You don't owe any gift tax until your lifetime gifting exceeds a million dollars.

If you want more information about this, check out IRS Publication 950, available at www.irs.gov.

Be prosperous!
Peggy

Last Chance to Fund Your IRA

Quick blog tonight to remind you that April 15 is your last day to fund a traditional IRA or a Roth IRA for 2009. Even if you file for a tax extension, April 15 is still your deadline. Now, if you have a small business retirement plan or your employer has a small business retirement plan, the plan may be able to be funded as late as the business tax return is filed, including extensions. However, your traditional and Roth IRA funds are due in April. So if you need your last chance for a 2009 deduction, consider a traditional IRA if you are eligible. (Check earlier blogs to see if you can.)
Be prosperous!
Peggy

Income Tax Tips

Here are a few tips when you complete and submit your income taxes.
1. If you aren't going to be finished in time, file for an extension. You will owe interest, then, on any unpaid liability, but you won't owe penalties, as well.
2. Use a CPA or tax preparation software to help you avoid tax errors. If your return is complicated, the CPA may well save you more money than his or her fee, giving you a net profit.
3. If you choose to go it alone, get everything organized well in advance to help you when you actually begin completing the return.
4. If you calculate your own taxes or use software, proofread everything once you have entered it, just to avoid typos. The IRS knows what was reported, and they will check to make sure the numbers match.
5. Use the Internal Revenue Service website www.irs.gov to help you check regulations.
6. SIGN YOUR RETURN! It's a leading cause of audits!!!

Be prosperous!
Peggy

Capital Gain Tax

If you hold investments in a taxable account, you have to pay capital gains tax on them. If you just hold investments in an IRA, you don't pay capital gains each year. Instead, you will pay income tax when you take a distribution. Further, if you are currently in a very low tax bracket, you might not owe capital gains tax, but this rule is expected to change shortly, so don't count on it!

Capital gains tax has two different rates. If you hold an investment a year and a day, your rate currently is 15%. I have heard that in 2011, the rate may increase to 20%, which is still likely lower than your income tax rate. If you sell an investment in less than a year, you pay tax at your nominal income tax rate. This difference is one reason why long-term investment strategies might result in lower taxes.

Be prosperous!
Peggy

'Cause I'm the Tax Man!

As you know, April 15 is the deadline for filing your taxes (or an extension if you just can't make it). I thought today I'd define a few terms that are confusing. First, is your "nominal bracket." Well, this always makes me think that somehow, they want me to believe the bracket is low--that it's nominal. That's not what it means. We have a series of tax rates that increase as you earn more money. Everyone begins by paying the lowest income tax rate, until they earn more money than applies to that bracket. Then, they fill the next lowest bracket. They continue this process until they run out of money in a certain bracket. This bracket is called their "nominal bracket," and it's the highest bracket the person pays. Any additional dollar they earn will be taxed at this bracket, until eventually they might move to an even higher bracket. As a result, if you take your income and multiply it by your nominal bracket, you will get a tax liability much higher than you actually owe. The tax tables and income levels are available on irs.gov. (If I reproduced them here, you would all fall asleep!) We'll cover more terms tomorrow.

Be Prosperous!
Peggy