07/31/2008

Protecting Your Assets - Part 2

In part 1 of Protecting Your Assets, we discovered that three main forms of asset protection are insurance, statutory protection, and asset placement. The last asset placement technique we discussed was the transfer of assets to a “C” corporation for business owners. We will continue this discussion by looking at limited liability companies (LLCs), limited liability partnerships (LLPs), family limited partnerships, (FLPs), and protective trusts.

An LLC is a hybrid of a general partnership and a C corporation. Like a partnership, income and tax liabilities pass through to the members, and the LLC is not double-taxed as a separate entity. An LLC is considered a separate legal entity that can be used to own business assets and incur debt, protecting your personal assets from other nontax claims against the LLC.

Doctors, lawyers, accountants, and other professionals face liability for damages that result from the performance of their duties. An LLP will protect you from the professional mistakes of your partners. Your personal assets aren't at stake if your partner commits malpractice, although your investment in the business may still be at risk.

An FLP is formed by family members only. One family member is the general partner; the others are limited partners. A creditor can't obtain a judgment against the FLP--it can only obtain a charging order. The charging order only allows the creditor to receive any income distributed by the general partner. It does not allow the creditor access to the assets of the FLP.

A protective trust can protect both business and personal assets from most creditors' claims. A trust works because it splits ownership of trust assets; the trustee has equity ownership and the beneficiaries have beneficial ownership.

An irrevocable trust is a trust that you can't revoke or change. Once you have established the trust, you can't dissolve the trust, change the beneficiaries, remove assets from the trust, or change its terms. So, you lose control of the assets once they become part of the trust.

Offshore trusts provides for the transfer of assets to trusts that are formed in foreign countries. While the laws of each country are different, they share one similarity--they make it more difficult for creditors to reach trust assets. In order for a creditor to be able to reach assets held in a trust, a court must have jurisdiction over the trustee or the trust assets. When the trust is established in a foreign country, obtaining jurisdiction over the trustee in a U.S. court action will not be possible. So, a U.S. court will be unable to exert any of its powers over the offshore trustee.

A self-settled trust is one in which the person who creates the trust can name himself primary beneficiary. The key to this type of protective trust is that the trustee has the discretion to distribute or not distribute the trust property, and they can only be established in certain states like Delaware, Alaska, and Nevada. A self-settled trust may not be as effective as an offshore trust.

Contact your friendly home town banker for all of your asset protection and financial planning needs.

07/24/2008

Your Money and FDIC Insurance Coverage

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to supervise banks, insure deposits and help maintain a stable banking system. In 1980, Congress voted to increase FDIC insurance coverage from $40,000 to $100,000 per general account. In 2006, President Bush signed a bill to increase coverage on retirement accounts to $250,000 and to begin increasing FDIC insurance coverage on general and retirement accounts in 2010 using an inflation index. The coverage on retirement account’s increase to $250,000 is significant because it approximates a true inflation-adjusted amount from 1980-2006; it also demonstrates the level of importance Washington is placing on consumer savings.

It’s important then to know that FDIC insurance only covers the following: checking accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit, i.e. cash deposit accounts which anyone can open at their own risk. These accounts are designated as either general or retirement accounts (IRAs), and you can be covered for more than the current $100,000 limit according to how you designate your accounts to be named and titled.

For example, a family of five could, under the right circumstances, insure $1 million in a single bank. How? The husband and wife could have $200,000 in a joint account, $250,000 each in separate IRA accounts and $300,000 could be set up in a revocable trust account naming their three children as beneficiaries. That’s a hefty sum to have insured all at one place, and the amount could be even larger if you were to include other qualified beneficiaries in the mix.

Keep in mind though FDIC insurance does NOT cover stocks, bonds, mutual funds, treasury securities, savings bonds, insurance and annuity products, so always ask your banking representative if the account you are opening will be FDIC insured. You can also determine this for yourself using the FDIC’s website: www.fdic.gov. From here, click on “Ask EDIE” (Electronic Deposit Insurance Estimator); you will find this to be a positive tool to help you sort out your FDIC insurance questions.

Your bank will gladly help you get your deposited money FDIC insured…all you have to do is ask your friendly home town banker.

07/17/2008

Asset Protection

You work hard to maintain the lifestyle you desire and to accumulate assets. But what are you doing to protect your assets from potential legal claims against them? Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. Even if you think you’re safe, misfortune can befall even the most careful person.

Let’s explore the concept of asset protection and some steps you can take to protect your assets against unexpected liability claims.

Unexpected liabilities can come from: the IRS, accident victims, doctors, health-care providers, financial creditors, business creditors, and other sources.

What can you do to protect your assets? First, identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure.

There are three basic asset protection techniques: insurance, statutory protection, and asset placement.
Insurance protection involves buying coverage that will shift the risk of loss to an insurance company. Review your existing coverage and be certain you are insured against death, disability, medical risk, long-term care, and property and liability losses for business and personal interests.

Statutory protection involves exemption planning. Liens or judgments cannot be attached to property that is exempt under federal or state law. Exemption planning can offer shelter only for certain assets. Both federal and state laws govern whether property is exempt or nonexempt. You must know how much of an exemption is allowed for a particular type of property.

Asset placement involves transferring legal ownership of assets to other persons, corporations, limited partnerships, or trusts. Once you relinquish ownership and control of your assets, they cannot be taken from you. If you have high exposure to potential liability because of your job or business, you may want to shift assets to your spouse. Your spouse would retain the assets that are subject to the exposure as his or her separate property, and you would retain assets that enjoy statutory protection, such as the homestead, life insurance, and annuities, as separate property.

If you own a business, a C corporation separates your business assets from your personal assets, so your personal assets will generally not be at risk for the acts of the business. Limited liability companies, limited liability partnerships, and family limited partnerships are other entities used in asset protection planning. A discussion of these will be reserved for part 2 of this column.

Talk to your friendly home-town banker about all of your financial planning and asset protection needs.

07/10/2008

About Mutual Funds

A mutual fund is a pool of money managed by a professional investment advisor on behalf of individual investors who have purchased shares of the fund. The fund manager buys securities to pursue a stated investment strategy. By investing in the fund, you'll own a piece of the total portfolio of securities.

The two most common types of mutual funds are stock funds and bond funds. A stock fund invests in common stocks issued by U.S. and/or international companies. Funds are often named and classified according to investment style or objective. This can include long-term growth, income-producing, large/midsize/small companies, or sector funds such as health care or technology.

A bond fund is made up of debt instruments that governments or corporations issue to raise capital. They are designed to provide investors with interest income in the form of regularly scheduled dividends. Bond funds are classified according to the issuers of the bonds. Classifications include municipal bonds, U.S. Treasury bonds, U.S. Agency bonds, short/intermediate/long-term bonds, and corporate bonds.

A balanced fund is one which invests in stocks, bonds, and cash equivalents. A money market fund is often used to hold cash until it is needed elsewhere. Index funds attempt to duplicate a broad-based index such as the S&P 500 stock index.

So which funds are right for you? It depends. Consider developing an investment strategy that blends your age with your risk tolerance. Determine your sources of investible income along with short/long-term financial goals. Research various funds that seem to be aligned with your goals by checking their performance over 3-5-10 years and learn about the funds’ managers. Obtain a prospectus on the funds to learn about sales charges and other costs that may be associated with buying them. When you’ve decided, you can purchase the funds by phone and set payment to be by check or bank transfer. You can also purchase mutual funds on the internet and authorize your bank to pay for them electronically. This can be especially helpful when you’re investing small amounts on a weekly or monthly basis.

Let’s review. Mutual funds provide diversification, professional money management, the ability to make small investment amounts, and liquidity. You can pick and choose the funds that are aligned with your investment goals, and change them as your goals change. Remember that mutual funds are not guaranteed investments. Know and understand their risks before buying them.

Consult your friendly home town banker to help in developing your investment strategy.

07/03/2008

Spending Your Economic Stimulus Check

If you are eligible and have timely filed your 2007 federal income tax return, chances are you have either gotten your Economic Stimulus check or soon will. Most are supposed to be issued by the end of July. What do you plan to do with it? Retailers want you to spend the money, and many are coming up with great offers to get you to do just that. But these offers often involve tying up the entire amount with one retailer and/or incurring fees associated with the offer. Here are some other ideas you could consider:

• Cash the check and use the money when and where you want. By doing so, you won't be locked into spending all the money in one place, and there are never any fees involved in using cash.
• Pay or prepay a bill. The lump sums provided by the stimulus checks may be just what you need to pay your real estate taxes or car insurance. Or you might start prepayment plans with your home mortgage company which could save you thousands of dollars in interest over the term of your mortgage loan.
• Start or add to an emergency fund. If you haven't saved enough to have 3 to 6 months living expenses in a cash reserve account, you might deposit your stimulus check in a savings account, money market account, or short-term CD to create that fund. You'll earn some interest on your deposits, and bank accounts are FDIC-insured.
• Pay off some or all of a high-interest debt. If you have outstanding credit card balances, you might want to give some thought to paying off some or all of those balances, starting with the balance that carries the highest interest rate. $600 applied toward a credit card balance with an annual percentage rate (APR) of 14.9% could save almost $90 in interest charges over the course of a year.
• Invest in the future. You could start a tax-advantaged investment such as a 529 plan, a Coverdell education savings account, or a Roth or traditional IRA.

Whatever you decide to do with your stimulus check, remember that you do not have to pay state taxes on it, thanks to recent legislation passed in the special session.

Contact your home town banker to help you determine the best investment or pre-payment plans for you to get the most benefit from your stimulus check.

Back to President's Articles

07/31/2008

Protecting Your Assets - Part 2

In part 1 of Protecting Your Assets, we discovered that three main forms of asset protection are insurance, statutory protection, and asset placement. The last asset placement technique we discussed was the transfer of assets to a “C” corporation for business owners. We will continue this discussion by looking at limited liability companies (LLCs), limited liability partnerships (LLPs), family limited partnerships, (FLPs), and protective trusts.

An LLC is a hybrid of a general partnership and a C corporation. Like a partnership, income and tax liabilities pass through to the members, and the LLC is not double-taxed as a separate entity. An LLC is considered a separate legal entity that can be used to own business assets and incur debt, protecting your personal assets from other nontax claims against the LLC.

Doctors, lawyers, accountants, and other professionals face liability for damages that result from the performance of their duties. An LLP will protect you from the professional mistakes of your partners. Your personal assets aren't at stake if your partner commits malpractice, although your investment in the business may still be at risk.

An FLP is formed by family members only. One family member is the general partner; the others are limited partners. A creditor can't obtain a judgment against the FLP--it can only obtain a charging order. The charging order only allows the creditor to receive any income distributed by the general partner. It does not allow the creditor access to the assets of the FLP.

A protective trust can protect both business and personal assets from most creditors' claims. A trust works because it splits ownership of trust assets; the trustee has equity ownership and the beneficiaries have beneficial ownership.

An irrevocable trust is a trust that you can't revoke or change. Once you have established the trust, you can't dissolve the trust, change the beneficiaries, remove assets from the trust, or change its terms. So, you lose control of the assets once they become part of the trust.

Offshore trusts provides for the transfer of assets to trusts that are formed in foreign countries. While the laws of each country are different, they share one similarity--they make it more difficult for creditors to reach trust assets. In order for a creditor to be able to reach assets held in a trust, a court must have jurisdiction over the trustee or the trust assets. When the trust is established in a foreign country, obtaining jurisdiction over the trustee in a U.S. court action will not be possible. So, a U.S. court will be unable to exert any of its powers over the offshore trustee.

A self-settled trust is one in which the person who creates the trust can name himself primary beneficiary. The key to this type of protective trust is that the trustee has the discretion to distribute or not distribute the trust property, and they can only be established in certain states like Delaware, Alaska, and Nevada. A self-settled trust may not be as effective as an offshore trust.

Contact your friendly home town banker for all of your asset protection and financial planning needs.

07/24/2008

Your Money and FDIC Insurance Coverage

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to supervise banks, insure deposits and help maintain a stable banking system. In 1980, Congress voted to increase FDIC insurance coverage from $40,000 to $100,000 per general account. In 2006, President Bush signed a bill to increase coverage on retirement accounts to $250,000 and to begin increasing FDIC insurance coverage on general and retirement accounts in 2010 using an inflation index. The coverage on retirement account’s increase to $250,000 is significant because it approximates a true inflation-adjusted amount from 1980-2006; it also demonstrates the level of importance Washington is placing on consumer savings.

It’s important then to know that FDIC insurance only covers the following: checking accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit, i.e. cash deposit accounts which anyone can open at their own risk. These accounts are designated as either general or retirement accounts (IRAs), and you can be covered for more than the current $100,000 limit according to how you designate your accounts to be named and titled.

For example, a family of five could, under the right circumstances, insure $1 million in a single bank. How? The husband and wife could have $200,000 in a joint account, $250,000 each in separate IRA accounts and $300,000 could be set up in a revocable trust account naming their three children as beneficiaries. That’s a hefty sum to have insured all at one place, and the amount could be even larger if you were to include other qualified beneficiaries in the mix.

Keep in mind though FDIC insurance does NOT cover stocks, bonds, mutual funds, treasury securities, savings bonds, insurance and annuity products, so always ask your banking representative if the account you are opening will be FDIC insured. You can also determine this for yourself using the FDIC’s website: www.fdic.gov. From here, click on “Ask EDIE” (Electronic Deposit Insurance Estimator); you will find this to be a positive tool to help you sort out your FDIC insurance questions.

Your bank will gladly help you get your deposited money FDIC insured…all you have to do is ask your friendly home town banker.

07/17/2008

Asset Protection

You work hard to maintain the lifestyle you desire and to accumulate assets. But what are you doing to protect your assets from potential legal claims against them? Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. Even if you think you’re safe, misfortune can befall even the most careful person.

Let’s explore the concept of asset protection and some steps you can take to protect your assets against unexpected liability claims.

Unexpected liabilities can come from: the IRS, accident victims, doctors, health-care providers, financial creditors, business creditors, and other sources.

What can you do to protect your assets? First, identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure.

There are three basic asset protection techniques: insurance, statutory protection, and asset placement.
Insurance protection involves buying coverage that will shift the risk of loss to an insurance company. Review your existing coverage and be certain you are insured against death, disability, medical risk, long-term care, and property and liability losses for business and personal interests.

Statutory protection involves exemption planning. Liens or judgments cannot be attached to property that is exempt under federal or state law. Exemption planning can offer shelter only for certain assets. Both federal and state laws govern whether property is exempt or nonexempt. You must know how much of an exemption is allowed for a particular type of property.

Asset placement involves transferring legal ownership of assets to other persons, corporations, limited partnerships, or trusts. Once you relinquish ownership and control of your assets, they cannot be taken from you. If you have high exposure to potential liability because of your job or business, you may want to shift assets to your spouse. Your spouse would retain the assets that are subject to the exposure as his or her separate property, and you would retain assets that enjoy statutory protection, such as the homestead, life insurance, and annuities, as separate property.

If you own a business, a C corporation separates your business assets from your personal assets, so your personal assets will generally not be at risk for the acts of the business. Limited liability companies, limited liability partnerships, and family limited partnerships are other entities used in asset protection planning. A discussion of these will be reserved for part 2 of this column.

Talk to your friendly home-town banker about all of your financial planning and asset protection needs.

07/10/2008

About Mutual Funds

A mutual fund is a pool of money managed by a professional investment advisor on behalf of individual investors who have purchased shares of the fund. The fund manager buys securities to pursue a stated investment strategy. By investing in the fund, you'll own a piece of the total portfolio of securities.

The two most common types of mutual funds are stock funds and bond funds. A stock fund invests in common stocks issued by U.S. and/or international companies. Funds are often named and classified according to investment style or objective. This can include long-term growth, income-producing, large/midsize/small companies, or sector funds such as health care or technology.

A bond fund is made up of debt instruments that governments or corporations issue to raise capital. They are designed to provide investors with interest income in the form of regularly scheduled dividends. Bond funds are classified according to the issuers of the bonds. Classifications include municipal bonds, U.S. Treasury bonds, U.S. Agency bonds, short/intermediate/long-term bonds, and corporate bonds.

A balanced fund is one which invests in stocks, bonds, and cash equivalents. A money market fund is often used to hold cash until it is needed elsewhere. Index funds attempt to duplicate a broad-based index such as the S&P 500 stock index.

So which funds are right for you? It depends. Consider developing an investment strategy that blends your age with your risk tolerance. Determine your sources of investible income along with short/long-term financial goals. Research various funds that seem to be aligned with your goals by checking their performance over 3-5-10 years and learn about the funds’ managers. Obtain a prospectus on the funds to learn about sales charges and other costs that may be associated with buying them. When you’ve decided, you can purchase the funds by phone and set payment to be by check or bank transfer. You can also purchase mutual funds on the internet and authorize your bank to pay for them electronically. This can be especially helpful when you’re investing small amounts on a weekly or monthly basis.

Let’s review. Mutual funds provide diversification, professional money management, the ability to make small investment amounts, and liquidity. You can pick and choose the funds that are aligned with your investment goals, and change them as your goals change. Remember that mutual funds are not guaranteed investments. Know and understand their risks before buying them.

Consult your friendly home town banker to help in developing your investment strategy.

07/03/2008

Spending Your Economic Stimulus Check

If you are eligible and have timely filed your 2007 federal income tax return, chances are you have either gotten your Economic Stimulus check or soon will. Most are supposed to be issued by the end of July. What do you plan to do with it? Retailers want you to spend the money, and many are coming up with great offers to get you to do just that. But these offers often involve tying up the entire amount with one retailer and/or incurring fees associated with the offer. Here are some other ideas you could consider:

• Cash the check and use the money when and where you want. By doing so, you won't be locked into spending all the money in one place, and there are never any fees involved in using cash.
• Pay or prepay a bill. The lump sums provided by the stimulus checks may be just what you need to pay your real estate taxes or car insurance. Or you might start prepayment plans with your home mortgage company which could save you thousands of dollars in interest over the term of your mortgage loan.
• Start or add to an emergency fund. If you haven't saved enough to have 3 to 6 months living expenses in a cash reserve account, you might deposit your stimulus check in a savings account, money market account, or short-term CD to create that fund. You'll earn some interest on your deposits, and bank accounts are FDIC-insured.
• Pay off some or all of a high-interest debt. If you have outstanding credit card balances, you might want to give some thought to paying off some or all of those balances, starting with the balance that carries the highest interest rate. $600 applied toward a credit card balance with an annual percentage rate (APR) of 14.9% could save almost $90 in interest charges over the course of a year.
• Invest in the future. You could start a tax-advantaged investment such as a 529 plan, a Coverdell education savings account, or a Roth or traditional IRA.

Whatever you decide to do with your stimulus check, remember that you do not have to pay state taxes on it, thanks to recent legislation passed in the special session.

Contact your home town banker to help you determine the best investment or pre-payment plans for you to get the most benefit from your stimulus check.

Back to President's Articles