Monday, July 26, 2010

Where There's a Will, There's a Way

When the actor Gary Coleman died on May 28th at the age of 42 after suffering a brain hemorrhage, he left three different wills--including one that was handwritten. Legally, the last will written is the binding document. However, battle lines have been drawn, and it is likely his family and friends are in for a long court fight.

Coleman’s situation underscores the fact that without a well-executed and clearly written will, everything you worked for can go up in smoke. I would add that often overlooked in the estate planning process is the fact that proceeds from life insurance, investments in Individual Retirement Accounts (IRAs), annuities, and qualified retirement plans (such as 401(k)s, 403(b)s, and SEPs), as well as trust property pass outside your will directly to your named beneficiaries.

In fact, the beneficiaries you name for your IRAs and 401(k)s take priority over instructions in your will. That is, a beneficiary you forget naming for your retirement account twenty years ago will inherit those assets even if you later specify in your will that someone else will inherit everything you own. Accordingly, it’s crucial that you review your beneficiary forms on a regular basis.

Other documents that help ensure your wishes are carried out include a Durable Power of Attorney, a document that designates a person to act on your behalf during times of incapacitation, and an Advance Medical Directive, a document that lists your health care treatment preferences and designates a person or persons to make those decisions on your behalf.

Once you have developed and signed these documents, instruct your executor and family members where to find them.  And if you are uncertain about your documents, consult your attorney to discuss your need for a will, living trust, durable power of attorney and/or advance medical directive.

Wednesday, July 21, 2010

How Do You Solve a Problem Like Jobs?

The question posed in the title of this blog has a double meaning--jobs as in employment and Jobs as in Steve Jobs of Apple.

Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas--and that’s where Steve Jobs comes in.

Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can’t get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting within our borders.

According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000 full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S., there are 10 Foxconn employees building Apple products in China. Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?

Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S., particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others argue for protectionist measures to rebuild our domestic manufacturing base.

Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.

Monday, July 19, 2010

The Grim Reaper at Work without the Tax Man

The recent death of two billionaires has thrust back into the spotlight the fact that Congress let the federal estate tax expire .

You may recall that 2010 began with personal finance pages running headlines like “On Your Mark, Get Set, Die!” Because Congress failed to pass a new estate tax law before the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 2010 began without a federal estate tax. (Currently, if there’s no Congressional intervention, the estate tax will be re-instituted in 2011 at levels that applied prior to 2001--a $1 million exemption and a top tax rate of 55%. In 2009, the exemption was $3.5 million and the top rate was just 45%.

But let’s return to the families of the billionaires. In March, Texas billionaire Dan Duncan passed away with a fortune estimated by Forbes magazine to be worth $9 billion. Forbes estimates that had he survived until 2011, his estate would have been subject to approximately $4.95 billion in federal estate taxes. Also, last week when sports-business legend George Steinbrenner died of a heart attack, leaving behind a fortune estimated by Forbes worth $1.15 billion, his estate escaped paying an estimated $632 million in federal estate taxes--unless Congress makes whatever tax they settle on retroactive.

How did this happen in a nation where Ben Franklin famously quipped there are two guarantees--death and taxes? The fact Congress has failed to address the estate tax issue is a major breach of fiduciary duty as far as I am concerned. Their inaction has already cost the US government billions in taxes. Furthermore, it places families in the uncomfortable position of having to decide whether to unplug Mom or Dad to save millions in taxes.

Monday, July 12, 2010

Pay It Now, Or They Pay Later

Legislators in Congress are reportedly considering creating a kind of Roth IRA version of the estate tax. “On The Money,” a blog of the congressional newspaper The Hill, recently reported that lawmakers are debating whether to let taxpayers opt to pay estate taxes in advance so their heirs owe nothing. One version being bandied about would set the pre-paid tax at 35 percent on estates valued at more than $3.5 million.

The pressure is on to address the federal estate tax before the end of the year, when the rate jumps to 55 percent on estates worth more than $1 million. (Last year, estates were taxed at a rate of 45 percent on values greater than $3.5 million, a record exclusion.)

If you die this year, of course, you pay nothing—thanks to the repeal of the estate tax for 2010 that was part of a vast array of sunset provisions in the Economic Growth, Tax Relief and Reconciliation Act of 2001. Of course, Congress could still pass a retroactive estate tax for 2010.

Tuesday, July 6, 2010

New IRS Rules Ease 401(k) Stock Sales

New rules approved this May by the Internal Revenue Service require 401(k) providers to offer participants at least three investment alternatives to company stock. Most plan providers do this anyway, but the new rules also address the common corporate policy of disallowing employees from selling or diversifying out of company stock except at certain times.

The new rules, which take effect immediately and apply to plan years beginning on or after January 1, 2011, require plans to allow company participants to exit out of company stock as quickly and easily as they can move out of other investments in the plan.

There was a time was when I typically saw an over-concentration in company stock in the portfolios of new clients. After all, the option of investing in company stock, often at much lower prices than other investment options, can seem like a bargain. And we are all prone to look through rose-colored glasses when it comes to evaluating the prospects of the company we work for.

Today, thanks to the lessons of the tech bubble and companies like Enron and Bear Stearns, I see less "company stock tunnel vision." More investors understand that over-concentrating in one stock can be risky. In fact, a recent study by the Employee Benefits Research Institute (EBRI) shows that the share of 401(k) accounts invested in company stock has seen a steady decline since 1999, falling by nearly 1 percentage point to 9.7 percent by the end of 2008.

If you would like to discuss the allocation of your 401(k) plan, please feel free to contact me.

Monday, July 5, 2010

Fourth of July

To commemorate the Fourth of July I thought I would share three of the many photos I took while on the National Mall observing Independence Day with my niece, Elizabeth.  I hope you had a happy and safe Fourth of July holiday and weekend!