New Ideas for Philanthropy to Reduce Your Tax Bill

Last Updated (Friday, 01 August 2008 12:18)

When looking for ways in which to further reduce your income tax bill, the charitable deduction remains as one of the easiest ways to do so.  This assumes that you have sufficient itemized deductions (including year-end charitable gifts) to not take the standard deduction.

While there is no rule prohibiting charitable donations to be made 365 days a year, unfortunately the vast majority of us choose to do our giving at year's end.  We seem to get caught up by the holiday spirit and greatly increase our generosity in December.  Rather than wait until the holiday season to begin a charitable giving strategy, I've compiled a couple of ideas for philanthropy that you can begin immediately. 

Ideas for Philanthropy: Property Owner

Real estate, whether agricultural, commercial or rental residential, may sometimes be a problem for the owner.  It may be low earning, time consuming or facing a declining market value.  An outright charitable gift of the property may be very helpful, assuming it is readily marketable.  If used to fund a “net income plus make-up” charitable remainder unitrust, what was a problem becomes a source of improved income.  When long-term appreciated real estate is used, either for an outright gift or for funding an income-producing gift, there will be avoidance of capital gains tax as well as income tax savings from the charitable deduction.

Ideas for Philanthropy: Crowded Collector

Individuals that have downsized their living circumstances often find themselves with an assortment of valuable works of art, historical documents, antique furniture and scientific collections that they no longer have room to display.  Rather than storing these items in a storage unit or basement, a donation to charity can be a very satisfying alternative for the donor.  The collector is able to share beauty or knowledge with others, reduce impediments, and realize income tax savings.  One of the caveats of this approach is that to be tax deductible at present fair market value, tangible personal property gifts must be something that can be used in ways related to the purpose or the function of the charity. 

Ideas for Philanthropy: Business Owners

Closely held non-marketable stock in a profitable corporation may be used to make cost effective charitable gifts.  The firm may have profits it needs to distribute, and the sole stockholder does not need additional taxable income.  A gift of a minority block of stock is deductible at its independently appraised fair market value, subject to a minority position value.

Most charitable organizations do not normally want funds invested in non-marketable securities.  If the corporation, or its employee stock ownership plan, later wants to redeem the stock at its appraised value, it naturally prefers to have cash.  If the stock is then placed in the corporation treasury, the sole stockholder still has 100% of the equity.  Should younger executives or family members purchase it, a capital gains tax is likely avoided.  Neither subsequent event, however, can be a prearranged condition of the gift.

Charities may also want to avoid "S Corporation" stock, which can lead to either "phantom income" or unrelated business income to the charity.

Ideas for Philanthropy: Investors

Because unrealized capital gains are subject to one's top combined federal and state income tax rates, using a charitable gift in kind instead of a sale avoids the tax. This will also increase the tax savings compared to a cash gift of the same value.  Stock gifts to charities can be considered when:

• A take-over bid has raised the value of holding stock

If it succeeds, the stockholder faces a forced sale with heavy capital gains tax.  If the take-over is unsuccessful, the stock is likely to fall back in value.  Making an outright gift of the stock, or using it to fund a life income charitable remainder trust, can be advantageous alternatives.

• A part of the portfolio needs to be shifted from equities to fixed

An older donor wants to shift a portion of a portfolio from equities to fixed income, without erosion of principal by taxation of long-term gains.  A charitable remainder annuity trust can make the shift with no erosion and with an improved effective rate of return after considering the combined tax savings.

• Continuing equities investing with tax-free changes

A middle-aged donor may like to continue investing in equities for retirement years, with the ability of the trustee to make changes in the portfolio free of taxes on realized gains.  A charitable remainder unitrust of the “net income only, plus make-up” type provides tax sheltered growth and complete flexibility in shifting investment objectives to produce retirement income.

• Cash is available to make a significant gift

However, the gift can be made with highly appreciated stock, using the cash to purchase replacement shares of the same stock with a new and much higher basis.  There is the same charitable deduction for the current year, and the prior appreciation will no longer be subject to capital gains tax when the stock eventually is sold.

• Gifting the difference of market value and sale price

If stock to be used in a charitable gift plan is in the form of a single certificate worth more than the intended gift, there may not be time to have two replacement certificates issued by the company’s transfer agent this year.  A “bargain sale” may be feasible, with the deductible difference between the fair market value and sale price as the charitable gift.  Any gain of the stock is prorated between the gift and sale portions of the transaction, with no tax on the gift portion.

Just a quick note before you jump out and start implementing any of these ideas for philanthropy.  It is always a good idea to meet with your financial advisor before taking on a new tax strategy.  A qualified financial professional will be up-to-date on current tax laws and will know of subtle nuances that may affect the effectiveness of your strategy. 

Brock and Associates, LLC is a Utah based financial planning firm.  We specialize in retirement, estate, legacy, and tax planning.

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11 Keys to Selecting a Financial Planner

Last Updated (Wednesday, 30 July 2008 12:06)
Written by Hank Brock

What do you look for when selecting a financial planner?
You need to find a financial planner with a rudder. What do I mean by a rudder?

A lot of financial planners consider it smart to travel on the "fast track." They've set their sails, and they're moving full speed ahead a hundred miles an hour with the wind in the sails. So, how do you find one with a rudder that can stay on course?

Unfortunately, many two- or three-man financial planning companies latch onto the latest fads. They're the ones sailing full speed ahead while large, national financial institutions seem to lack speed in comparison.

They're old and stodgy. But what's really happening? Conservative companies are steering with the rudder. They're conservative because they have a reputation to maintain. Because they don't want to get sued. Because they have the backup -- the legal and financial support staff -- to provide the rudder for their financial advisors. They don't get tossed by the whims of financial fads.

Contrary to what the popular press may say, never assume that so-called objectivity and independence are the supreme virtues. Of far greater supremacy are conservatism, integrity, competency, trust. Of greatest importance is a rudder set to timeless correct principles.

Select a financial planner with a rudder, one whose competence, integrity, outlook, and philosophies are well determined. You will want one who has the character traits presented in Chapter 13, and who cherishes his individual freedom the way you do yours. A financial planner who isn't already on the road to security and success, can't lead you there.

One who doesn't know how to set goals and achieve them himself will be ineffective in helping lead you toward yours.

A couple of tell-tale questions:

1. Does he/she think you should borrow out your home equity and invest it so it is "working harder"? If yes, stay away.
2. Does he believe you would be better off if you replaced your whole life policies, bought term insurance, and invested the difference? If yes, politely excuse yourself and leave. Your meetings with us have hopefully taught you how to discern sense from nonsense.

Here are the key questions to ask when selecting a financial planner:

How Much and What Kind of Service Do I Need?

Are you looking for comprehensive financial planning? Portfolio management? Estate planning? Insurance advice? Retirement planning? Asset protection strategies? Tax advice? Or something else? You need to find an advisor that specializes in the services you need-or that is part of a firm large enough to provide specialists for you. The vast majority -- 80 to 90 percent -- of financial planners come from organizations of five or fewer. Many are not trained in areas other than life insurance sales or stock trading.

A financial planner may be able to provide you additional and broader services if he has a relationship with other financial planners within a large organization or a major financial institution. (For some, an affiliation with a major financial institution is looked upon as an evil conflict of interest. But, I often observe that such an affiliation provides an anchor and a rudder, which is preferable to having a loose gun on the deck of your financial ship.) Don't discount the value of these services.

Is the Financial Advisor Properly Licensed?

To become a financial planner, certain state requirements must be met to show minimum knowledge of the industry. Financial planners may give investment advice, and if so must become registered as investment advisors. Financial planners may offer various insurance and securities products, and if so they must also pass the state insurance exam and several exams given by the FINRA. Financial planners must also meet state and federal continuing education requirements for most designations and licenses.

What Is the Advisor's Designation?

The advisor's designation tells you about his educational background. Designations include Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP), Certified Public Accountant (CPA), Chartered Life Underwriter (CLU), or attorney (JD), among others. These signify backgrounds in finance, business, accounting, insurance, and law.

Remember, though, that background is only one aspect of a planner.

For example, you might naturally assume that CPAs have greater background in income tax than other professionals. But that's primarily due to their experience, not their CPA designation. Did you know that the CLU exam has more questions about taxation than does the CPA exam? As another example, the ChFC exam is clearly a broader and more rigorous exam (and therefore accredited like other colleges and universities) than the CFP designation, though CFP is marketed better and is more popular.

Even areas of specialty don't mean everything. CPAs, for example, major in accounting. College accounting courses take a historical perspective.

They look at recorded historical data -- which the CPA then records, puts on a form, and prepares as a financial statement or a tax return. Every business owner should have a good CPA who can assist with financial statements and money management. But that's not the same as a financial planner. Even colleges recognize finance and accounting as different majors. Financial planning is applied economics. It takes a futuristic approach. It is analytical and has a long-term strategic perspective.

It's proactive, not reactive.

The worst financial advice comes from journalists. They are notorious for describing an extreme market position, emphasizing the sensational in order to sell magazines. In my view, journalists are more concerned with making a story than reporting one. Seldom do I read the complete facts as given to the reporter, but rather a hazy half-truth intended to make a warped yet sensational point. Seldom do I find good judgment. Usually I find a pickle-sucker sitting on the fence pointing his finger of scorn at those in the arena who live with media judgments day to day. No wonder consumers feel like ping pong balls.

Planning your financial future by a magazine is like reading a medical dictionary and then performing surgery on yourself.

Is the Financial Planner Competent?

When selecting a financial planner, ask how long the advisor has been in business -- and the breadth and depth of his experience. An exam, degree, or designation will not make anyone an expert in financial planning. Even the designations listed above provide only a basic level of knowledge about financial planning. Expertise is seldom acquired under the tutelage of any professor, book, or designation. It comes only after long years of advanced studies combined with many years of intense application in the real world.

I regularly discover financial planners with years of experience and who have participated in extensive in-house training programs who have more prudent insights and judgment than others who simply hold the recognized designations. I'll take experience over designations anytime, though I would prefer a planner who had both.

But of more value than either designations or experience, is a rudder, an anchor, a philosophical commitment to timeless principles of wisdom, prudence, balance, and freedom.

Does the Financial Advisor Have High Ethical Standards?

Look for membership in at least one industry organization that enforces a code of ethics.

How do you deal with conflicts of interest, which exist with every professional, not just financial planners? Everyone has biases, philosophies, professional opinions shaped by years of experience and exposure to ideas. For example, a physician may recommend medication instead of surgery if he owns the pharmacy attached to his clinic. Architects and contractors have conflicts of interest as they prescribe building approaches. CPAs and attorneys have conflicts of interest as they recommend services. Journalists would have us believe that they are the only ones without a conflict of interest (all they have to do is to sell newspapers and magazines). But, do any of the examples above indicate that the professional acted improperly? No.

So how do you deal with them? Ask. Have them disclosed to you. Request a comparison of various fees, loads, charges, and expenses that might be associated with each particular recommendation from your financial advisor. After understanding the impact of the up-front transaction costs of each alternative recommendation, you are in a better position to make a sound decision.

In my experience, contrary to what some would have us believe, the answer to this dilemma is not the legislating away of potential conflicts of interest, but reasonable disclosure. Attempting to legislate away potential conflicts of interest once again puts the government in the position of knowing what's best for the consumer. I believe that, with disclosure, the consumer is perfectly capable of choosing how to do business. He realizes that he may be buying convenience, simplicity, service or a whole host of other things when he chooses to do business.

Is the Financial Advisor Committed to Continuing Professional Education?

Laws governing finance and taxes are complex and constantly changing. Now add the fact that the economy fluctuates regularly. How many hours each year does the advisor spend staying on top of things? If he holds a professional designation or maintains membership in a professional association, he is probably required to complete a number of hours each year in formal continuing education.

Is There a Satisfied Client Base?

Before you select a financial advisor, ask if the advisor will give you client referrals. Want an easy way to find out if clients are satisfied? Find out how long the average client stays. advisors may be hesitant to disclose the names of many clients for reasons of confidentiality or because they don't want them called all the time. In that case, perhaps some clients have allowed themselves to be quoted in a firm brochure. If you really need to talk to someone, go ahead and ask. The advisor should give you several names.  Having said this, in recent years privacy legislation has been passed that makes it more difficult to give names of clients.

What Is the Average Client Like?

Assume you earn $50,000 a year. If the advisor primarily deals with people who earn $150,000 a year, will you get the attention you need? Does the advisor primarily work with professionals, business owners, middle-income clients, women? Do you fit the profile? Will the advisor meet your specific needs -- or is he part of a firm that's large enough to handle all types of clients?

Is the Financial Planner a Full-time Professional?

When selecting a financial planner, be wary of people who are part-time, lack membership in professional societies, ignore continuing professional education, and criticize others who do commit to high standards. There is a proliferation of those types -- they are multiplying like rabbits.

Beware the friend who took a quickie course, got a quickie insurance license, and now wants to replace all your existing policies. You may be better off to write him a quickie check for a thousand bucks and send him on his way. It would be a lot cheaper.

How Is the Advisor Compensated?

Financial planners may receive fees, commissions, or both, in four possible ways. This distinction is important to you, because it may affect your cost and the service you receive. "Fee-only" planners charge a fee for their services, but don't receive a commission when you purchase a product. The advantage is that you may get more objective advice. The disadvantage is that the planner may have little incentive to make sure you follow through by implementing the plan, and may lack the ability to coordinate all facets of its implementation.

He may also be inexperienced when it comes to actually implementing the plan-dealing knowledgeably with insurance companies, stock brokerages, etc. And you will probably end up paying the product company an additional fee for implementation -- after already paying the fee-only planner. In essence, you're paying twice for the same service.

"Fee-based" planners charge you a fee that's enough to fairly compensate for planning work, but they may also get a commission on any products you purchase. By law, their "engagement letter" must disclose conflicts of interest and all terms relating to the engagement, allowing you five business days for a full refund of any fees paid. The disadvantage here is that you will need to be sure you understand fees, loads, charges, and expenses of any recommendations offered. The advantages will probably include increased convenience, one-stop service, broader competencies, and increased influence when it comes to representing your needs with major financial institutions. And you'll probably not be paying double when it comes to implementing recommended product purchases: both a fee to the planner for oversight and a commission to the product salesperson.

"Fee-plus-commission" planners sometimes charge a fee, but most of their compensation comes from commissions. So, what's the difference between a "fee-based" planner and a "fee-plus-commission" planner? In my experience, the fee-based planner initiates virtually every engagement by charging a fee significant enough to provide a comprehensive financial plan. By contrast, the "fee-plus-commission" planner is set up to charge fees, but seldom does it unless you insist on paying him a fee -- 99 percent of the time he is commission only. As a result, although he will suggest a comprehensive engagement, he must be focused more on insurance and investment products.

"Commission-only" planners don't charge any fees; their only pay is commission from the products you purchase. (Remember, even most commission levels are government-regulated to balance consumer and industry interests.) Commission-only "planners" are seldom planners at all, but are focused solely on the products they sell. (Having said that, I have usually found very competent, thorough, and ethical CLUs, ChFCs and CFPs.)

Find a Planner Who Will Perform

What difference can the right planner make? Consider the following scenario: Chris was a CPA, had spent time with a "Big 6" accounting firm, and had risen during his 30-year career to become Chief Operating Officer of a company that employed many thousands. We visited, and I explained our services. We met in his home to gather some data, and as I was leaving he said, "Hank, by the way, here's a copy of a financial plan prepared by the accounting firm I was with years ago. We still use them for our corporate work. Maybe you'll find this plan helpful in your analysis." I looked at the plan, which was less than six months old. I asked Chris, "Why don't you work with them? How much did you pay for this?" "Well, Hank, even though I paid $5,000 for this plan, it's just been gathering dust on my shelf. No follow-through. I'd rather start over with someone who'll get the job done." True story, no kidding. He had the right CPA firm for the big corporate work, but they didn't get the personal job done. (Ironically, I had just finished an engagement with that Big 6 firm a year previous to teach them how to add a "Personal Financial Planning Division" to their practice).

It's important that you understand the differences in compensation, but don't get hung-up on it. Keep it in perspective with the other eight criteria for selecting a planner. It's far more important to hire a planner who cares, who can be trusted, who is competent, who shares your philosophies, and who gets you ahead financially. This can't be stressed enough.

No one approach to planner compensation instantly converts anyone into a paragon of virtue, competency, and trustworthiness. Stay away from those self-righteous individuals who have the audacity to judge someone else's integrity by how he is compensated; they are usually projecting onto someone else their own cynical thinking and motives. A competent and trusted commission-only planner who gets you ahead is forever better than any fee-only planner who loses your money. Don't be self-defeating and small-thinking, like the person who focuses more on what the planner earns, than on what he's earning by following the planner's advice. A good financial planner will be worth every penny he earns.

It's like the sign on the wall: "I have no argument with others who sell their services for less. They know what their services are worth."

There are many things to consider when selecting a financial planner.  Remember to select a financial planner that not only fits your needs and situation, but also has a rudder set to timeless correct principles.

Hank Brock, CPA, MBA, CLU, ChFC is President of Brock and Associates, LLC and author of "Your Complete Guide to Money Happiness." Hank has been in the financial planning industry since 1979.

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Senior Inflation is Increasing

Last Updated (Monday, 21 July 2008 09:55)
Written by Scott Slater

As you assess whether or not senior inflation is a topic that affects you, ask yourself these questions:

1. Are you a senior in perfect health?
2. Do you hate to travel?
3. Do like to live on very little food?
4. Are you a complete do-it-yourselfer?

If you answered yes to all of these questions, you should do just fine during retirement.  If however, you are like most of us, senior inflation can turn these into major concerns during retirement. Health costs, food, travel expenses, and day to day maintenance items are some of the major costs facing seniors in retirement. Food in the supermarkets has increased by 5.7% since last year, hospital services by 8.5%, nursing home care by 4.5%, and even funeral costs are up by 4.8% over last year.

Seniors should be very cautious when planning their retirements based on the published CPI index because it currently does not reflect what seniors are experiencing in retirement. To make matters worse, millions of baby boomers are beginning to enter into retirement.  This will add additional inflationary pressures on those goods and services that seniors need most.

Cost of living increases for pensions and social security are primarily based on the official CPI index and that index will not adequately keep seniors ahead of the costs that truly affect them. What is needed to keep seniors from experiencing problems later is to have an accurate and comprehensive plan that takes into account all the complexities that seniors will face. A good financial plan will give you a realistic view of what standard of living to expect during retirement, and how to minimize the devastating effect inflation has on seniors. “Senior inflation" should be of great concern, but professional planning and counseling can prevent a carefree retirement from turning into one of worry and stress.

Scott Slater is an Associate of Brock and Associates, LLC and specializes in meeting the unique needs of seniors through specialized retirement planning.

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Is Retirement Right For You?

Last Updated (Wednesday, 16 July 2008 15:35)
Written by Hank Brock

The Top Questions You Need To Ask Yourself About Retirement

Working beyond retirement age might appeal to you for a number of reasons. You will have ongoing socialization, an opportunity to keep mentally and physically active, and hopefully an escape from boredom.  It may give you a reason to get up in the morning. It exposes you to a mixed age group. And, of course, it can help supplement other income sources. Plus, it may help you feel like you are contributing to society in a meaningful way.

The down side, of course, is that you will probably have less time for leisure activities, a possible reduction in Social Security benefits, and the inability to plan vacations, travel, and family time at your convenience.  Weigh the advantages and disadvantages, and then ask yourself the following questions:

• Are you ready to retire?
• Have you prepared financially?
• Not only do you have enough dollars set aside, but are those dollars invested in a portfolio that will provide an inflation hedge as well as downside risk protection?
• Do you have an estate plan?
• Have you raised your children to be financially independent? Or, are they still coming home to siphon from mom and dad?
• Are you emotionally ready?

According to Dr. Thomas H. Holmes, retirement can be a major source of stress for many people.

• Have you prepared yourself mentally and emotionally to cope with these potential stressors?
• Has your spouse likewise prepared for the mental or emotional adjustment?

Dr. Thomas H. Holmes, at the University of Washington School of Medicine, has developed a scale to measure the psychological stress that may be caused by various changes in life circumstances. Dr. Holmes indicates an accumulation of 200 or more "life-change units" in a single year may be more disruptive than individuals can withstand, and make them susceptible to depression and other illnesses.

• How is your health?

Everyone has heard stories about workaholics who would take little relaxation, and then die when they had nothing to do. That is not uncommon, because of the stress factors and the lifestyle adjustment.

I remember well a CPA client whose wife was an author.  She needed quiet time at home during the day in order to write. When he retired, his constant presence drove her nuts!

• Have you and your spouse talked things over, and made provision for the amount of time together and the amount of time away from each other?

It is important to work out a schedule that meets both of your needs.

• Are your hobbies, interests, or part time job engaging enough that you feel you have purpose?

Don't expect to live a life of boredom, monotony, and lack of purpose, and then suddenly develop a purpose upon retirement. If you are a couch potato before retirement, you are not going to develop interests overnight.

Finally, try practicing retirement with your spouse. Develop a weekly schedule, and try living it. Imagine what you would be doing day in and day out. Try living on the amount of income that you would have at retirement. Evaluate your physical activities and your diet. Get involved in those activities which you might be pursuing after retirement. Start looking for a new residence, if you plan to move when you retire.  Work on developing social contacts outside your office environment.  Then, make the retirement decision that will work best for you.

Hank Brock is President of Brock and Associates, LLC and author of "Your Complete Guide to Money Happiness." Hank is an expert at making your retirement plan a success!

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Why Utah Has One of the Best 529 College Savings Plan

Last Updated (Tuesday, 07 October 2008 15:27)
Written by Scott Slater

A great way to save for either a child’s or grandchild’s college education is through a states’ 529 plan, and according to the investment research firm, Morningstar, we have one of the best right here in Utah. 

The Utah Educational Savings Plan has one of the lowest management fees of any plan and waves the $25 administration fee for Utah residents. Utah’s plan is so popular 80% of participants are non-residents.

The Utah plan allows contributions to grow both state and federal income tax free if withdrawn for qualified higher education expenses here in Utah or abroad. Another bonus for Utah residents, contributions are state tax deductible up to $1,620 ($3,240 filing jointly) per beneficiary.

Or instead of the deduction you could take a tax credit of $87 ($173 filing jointly). The beneficiary needs to be younger than 19 when the account is opened to take advantage of this perk.  You may also contribute up to $60,000 ($120,000 filing jointly) at one time without triggering gift taxes as long as you prorate that gift over 5 years.

529 plans remain under the donor’s control and can be transferred to another family member if the original recipient decides not to go to college. If the beneficiary dies or ends up being awarded a full scholarship the donor can transfer the funds to another qualified family member or withdraw the funds and just pay taxes on any earnings in the account.

Investment choices available can range from money market funds to mutual funds, but remember they are not guaranteed by any government entity as to their performance.  One last note, you can rollover series EE or series I savings bonds into a 529 plan and avoid paying any interest earned on those bonds. The rollover is considered equivalent to using the proceeds for qualified education expenses.

Scott Slater is an Associate of Brock and Associates, LLC, a financial planning firm that specializes in retirement, estate, and tax planning. Scott has professional knowledge of Utah's 529 College Savings Plans.