Archive for September, 2015

Sometimes the retail solution is the best solution.  Take tax incentives for higher education.  We can argue until the cows come home as to who actually benefits from such incentives – the taxpayer or the institution.  Nevertheless, we can also agree that the taxpayer is harmed if s/he does not take advantage of them.  But. most of the incentives are what I call “tax gimmee’s” – they produce a nice, after-the-fact perk but do little to incentivize saving for college.  They are not planning opportunities per se; they are rewards for meeting certain income and educational criteria.  Into that bucket I toss the American Opportunity credit (up to $2,500), the Lifetime Learning credit (up to $2,000) and the student loan interest deduction (up to $2,500).  So, if you qualify, take ‘em, but don’t call ‘em planning opportunities.  Nobody has ever financed college based on these gimmee’s.CollegeFund

Now, the 529 plan is a completely different story and is the “retail” solution to which I alluded above.  529 plans, creatively named after the Internal Revenue Code section that spawned them, come in a number of different flavors.  “Savings plans” are like 401(k) plans (another creatively named technique) in that the grantor socks away a slug of cash, invests it, and ends up with a market return.  “Prepaid tuition plans,” on the other hand, are like pension plans – you put in a certain amount of cash and at the end of the cycle, voila, the tuition to a particular institution is locked in.  The common denominator is that the investment is tax sheltered during the build-up period and is withdrawn tax-free if used to pay qualified higher education expenses.  You can comparatively examine the various plans in the 529 universe at www.savingforcollege.com.

The reason I am so high on 529 plans?  They are for everyone – there is no income ceiling that limits participation.  And, while there is a cap as to the amount you can contribute, that cap is pretty high.  The grantor can set up a fund to benefit whomever s/he pleases, and within limits, can change the beneficiary designation without any adverse tax impact at any time.  Because contributions to 529 plans are considered present interest gifts, they qualify for the annual gift tax exclusion to the extent of $14,000 per beneficiary[1].  But wait, there’s more – this is the “gracious grandparent” technique at work here – grantors can front end load their gifts by funding up to five years’ worth of annual exclusions provided that they do not use the annual exclusion for other gifts during that time period.  So, assuming that they split the gift, grandma and grandpa can make a gift tax-free transfer of $140,000 today into a tax free 529 plan for that newborn angel.  Multiply that by “x” number of grandchildren and you can see the power of the “gracious grandparent” technique for both college savings and estate planning purposes.

By the way, you don’t have to be a grandparent to employ this technique.  Aunts, uncles, even parents – it is powerful stuff.

I have only scratched the surface here and there are many caveats and nuances.  However, suffice it to say, the 529 plan should be a consideration in every family’s wealth planning.

[1] Or $28,000 if a married couple elects to split gifts.

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This week’s guest blogger is Tom Farrell, an investment advisor with PWM Advisory Group, LLC, an independent registered investment advisor and joint venture of Pinnacle Associates Ltd. and WithumSmith+Brown.TFarrell


Does your wealth management plan connect all your dots?

As a child, playing connect-the-dots helped bring an image together that, at first, seemed scattered and perhaps even chaotic.  The same can be said when constructing a comprehensive wealth management plan.  Often times it is imperative to incorporate a particular area of life that may not seem so obvious when identifying goals and objectives.  For example, the live-in nanny who’s here for the summer helping with the kids at the beach house increases the risk of liability.  Protecting the wealth that’s been created is a crucial piece of an effective wealth management plan.  The “dot” in this example becomes an updated umbrella liability policy.

Goals: some are clear and others are complicated

It’s important to begin to define some of the more complicated goals so they can be combined with traditional topics like retirement age, vacation home and gifts to charity.  Many families deal with difficult relationships with the next generation, their spouses or the sale of a business.  It’s analogous to fixed and variable expenses in budgeting.  A sound wealth plan will consider: when the burden of funding lifestyle expenses will shift from the business or the employer to the portfolio; whether the business sells in two years or five; if the adult children will be treated equally or fairly when it comes to gifts or distributions; even if the charitable goal can be fully funded now versus a more flexible annual approach.  Testing for these and other variables allows for a more customized wealth plan.

Needs versus wants/wishes

A good wealth plan will test for funding the goals that are essential to financial independence and peace of mind.  This is where the planning should begin not end.  Once the crucial goals have been built into the plan they help to serve as the foundation from which further testing can be applied to the less integral “what ifs” assumptions (think vacation home, funding the wedding(s), college funding, and philanthropic endeavors).

Finally, it is imperative to understand how the volatility of investment returns, state/federal income taxes and inflation impact the results of the wealth plan.  A wealth plan can often include decades of time until a future date of death and much can and will change as time passes.  It is recommended to err on the side of conservatism when creating the plan and incorporate lower projected rates of returns, a long-term average rate of inflation and higher than expected federal and state income taxes.  This approach helps to reduce the probability of misleading or “rosy” outcomes in any given plan.  In the end a great wealth plan helps to provide confidence that as many of the relevant inputs as possible have been considered and all the “dots” have been connected.

Important Disclosure: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group. [“PWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from PWM. Please remember to contact PWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. PWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the PWM current written disclosure statement discussing our advisory services and fees is available for review upon request.

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Have you ever broken all the rules and written down your login credentials for your various accounts?  I’m talking about the keys to the kingdom here:  name of institution, account number, user ID and password?  They tell us not to do this but boy, I have a hard enough time remembering my login information for the company network, let alone about 40 other sets of such data!

But why am I complaining – it’s easy, right?  Take it from our own IT guru, Jim Bourke:

When selecting a password, please select passwords that are complex, but still easy for YOU to remember without the need to store the password.

For example….


How do I remember this?

JJ – Represents my first initial and that of my wife

ebk – First initials for my children. They are in lower case because they are my children!

? – Because we are still asking ourselves why we decided to have 3 kids

311 – Because it is Mickey Mantle’s rookie card and the only Topps baseball card that I do not own

198b – Because I started at WSB in 1986 but I changed the “6” to a “b” just to make it a little more complex

The above password is not a super complex password, but it is a password that is more secure than one which you would otherwise create. On another note, it is not my password, but it is one that only I could easily remember!

Really?  Maybe the password itself is not super complex, but the algorithm for getting there – oy, why can’t I just use my home phone number as a password?

All kidding aside, data protection is critical.  People pay good money to find ways to protect their data from hackers yet the hackers always still seem to be one step ahead of us.  Sometimes, without thinking, we expose ourselves when using unprotected wireless networks to interface with what should be secure data.  On the other end of the spectrum, widespread data breaches in the corporate and government sector make us worry about not if, but when our identities are stolen and how we will cope.  And, none of it shows any sign of letting up.

But, let’s bring it down to a personal level – what if something did happen to you?  Identity theft and other shenanigans aside, how would your family deal with numerous financial accounts, bill paying services, and the other conveniences of the modern digital life?  And then there is the seemingly frivolous, but really not so frivolous side of all of this – social media accounts, photo sharing services and e-mail.

Granted, there’s always “an app for that” but, if you use one of these software solutions to store your login credentials, be certain that the data is truly secure – you do not want to unwittingly give access to just any virtual provider who comes along.  Of course, keeping a written list is discouraged (don’t write it down!) because physical lists often get into the wrong hands.  However, if you decide to break this cardinal rule, be sure to keep the list under lock and key or in the hands of a VERY trusted advisor.  Whatever system you use, be sure to update for changes on a regular basis.

Ironically, much of this comes down to mere convenience.  You should, of course, have up-to-date wills, powers of attorney, health care proxies and living wills which, while authoritative, are not necessarily convenient.  Having the bank account password may make your family’s life easier if something were to happen to you, but the appropriate documents will enable them to eventually and legally gain full access.

Not so much with social media – the laws are a bit murkier here and providers are erring on the side of personal privacy, which makes it difficult if not impossible to gain access to someone’s Facebook or Google account, even after death.  It’s ironic, but if you want your family to be able to access these accounts, you may have to break the rule yet again and share your credentials with them.

Welcome to the 21st century!  The existence of such digital assets adds yet another wrinkle that bears discussion with competent counsel when engaging in estate and contingency planning.

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