06/26/2008
Importance of Financial Planning
Can you believe this is the 26th week in 2008? With only one-half of 2008 left, it’s time to look at your financial plan. Let’s discuss some important facts about the financial planning process.
Financial planning is a process that helps you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources. A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture, helping you to focus on your goals and understand what it will take to reach them.
One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related--for example, saving for college versus saving for retirement. Then you can use this information to decide how to prioritize your goals, implement specific strategies, and choose suitable investment products. The peace of mind that comes from knowing that your financial life is on track is priceless.
Creating a comprehensive financial plan involves working with financial professionals to:
- Review your income, assets, liabilities, insurance coverage, investment portfolio, tax exposure, and your estate plan
- Establish financial goals and time frames for achieving these goals
- Implement strategies that build on your financial strengths
- Choose investments that are tailored to meet your financial objectives
- Monitor your plan, making adjustments as your goals, time frames, or circumstances change
The financial planning process can involve a number of professionals including financial planners, accountants, tax attorneys, insurance professionals, and estate planning attorneys. A financial planner generally coordinates the whole process that ultimately provides you with information to make informed decisions about your financial future.
The financial planning process never ends. Your plan should be reviewed at least annually. Some of the events that might trigger a review of your financial plan include:
- Changing goals or time horizons
- Life-changing events such as marriage, the birth of a child, health problems, or a job change
- Immediate financial planning needs such as: drafting a will, or paying long-term care expenses
- Substantial increases or decreases in income or expenses
- Unmet portfolio performance expectations
- Changes in tax laws
Contact your home town banker to help you structure a financial plan to meet your financial goals and objectives.
06/19/2008
Income in Respect of a Decedent
Income in respect of a decedent (IRD) is income a decedent earned but did not receive prior to death. IRD is taxed to the person or entity receiving it. This can be the decedent's estate, the surviving spouse, or some other beneficiary. IRD is reported on the recipient's income tax return in the year it's received. The inclusion of IRD on both the estate tax return (Form 706) and the recipient's income tax return creates the potential for double taxation. To avoid this result, the tax code provides an income tax deduction for any estate tax paid that is attributable to IRD.
Common sources of IRD include: Uncollected salaries and earnings, uncollected alimony, uncollected rent, uncollected interest and dividends, deferred compensation distributions, taxable distributions from retirement plans and IRAs, and certain other uncollected income and/or distributions related to sole proprietorships and partnerships.
Tax treatment to the recipient of IRD is similar to that of the decedent, prior to his/her death. Capital gains are still taxed as capital gains, and compensation and interest are still taxed as ordinary income.
There are also deductions in respect of a decedent (DRD), which can offset IRD. DRD items are deductible expenses that were owed at the time of death, but not yet paid. Such items might include real estate taxes, state income tax, and deductible interest. The deduction can be taken by the IRD recipient who is obligated to and actually pays the DRD items. DRD items are deductible in the year in which they are paid.
If you think that IRD items will make up a large portion of your estate, failing to plan for them may have unintended results. Here are some strategies to consider:
- Leave IRD items to charity, which is exempt from income taxes.
- Leave an IRA to a young beneficiary, which has the potential to defer the payment of income taxes for as long as possible.
- Leave IRD items to a credit shelter trust. This postpones the payment of estate tax until the death of the surviving spouse, and thus the payment of income taxes.
Your friendly home town banker can assist you with planning for IRD and make a personal recommendation to an estate planning attorney or tax planning professional who can get your strategies in writing for the benefit of those who will be receiving the IRD.
06/12/2008
Helping Grandchildren with College Costs
Helping pay for a grandchild's college education is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. Let’s discuss some ways to accomplish this goal.
One way to help with college costs is to make a gift of cash or securities, but this method has drawbacks. A gift of more than the annual federal gift tax exclusion amount--$12,000 for individual gifts, $24,000 for joint gifts--might have gift tax and generation-skipping transfer tax (GSTT) consequences.
A 529 plan is an excellent way to contribute to a grandchild's college education, while simultaneously paring down your own estate. Contributions grow tax deferred, and withdrawals used for qualified education expenses are completely federal and state tax free.
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual accounts offered by most states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today's prices for the colleges that participate in the plan.
Grandparents can open a 529 account and name a grandchild as beneficiary, but only one grandparent can be the account owner. Grandparents can contribute to an existing 529 account with a lump sum or in smaller, regular amounts. Lump-sum gifts have a big advantage in 529 plans because individuals can make a lump-sum gift of up to $60,000 ($120,000 for joint gifts by married couples) and avoid federal gift tax. A special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time. This money is considered removed from your estate, even though one grandparent can still retain control over the funds if he or she is the 529 account owner. Note that if the donor were to die during the five-year period, a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes. Under current law, a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for federal aid. Note that funds in a grandparent-owned 529 plan may still be included when determining Medicaid eligibility, unless these funds are specifically exempted by state law.
Your home town banker can help you create a plan to help grandchildren pay for college.
06/05/2008
How Much Annual Income Can Your Retirement Portfolio Provide?
Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. Your withdrawal rate is defined as the annual percentage that you take out of your portfolio, whether from returns or the principal itself. Determining an appropriate initial withdrawal rate is critical in retirement planning and presents many challenges. Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could.
Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last. Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you'll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.
So what withdrawal rate should you expect from your retirement savings? The answer: it depends. A withdrawal rate of slightly more than 4% could provide inflation-adjusted income for at least 30 years. A higher initial withdrawal rate--closer to 5%--might be possible during the early years of retirement if withdrawals in later years grow more slowly than inflation. Broader portfolio diversification and rebalancing strategies can have a significant impact on initial withdrawal rates. Adding asset classes such as international stocks and real estate can increase portfolio longevity. You might consider freezing the withdrawal amount during years of poor portfolio performance. By applying some specific decision rules that take into account portfolio performance from year to year, it could be possible to have "safe" initial withdrawal rates above 5%.
More ways to help stretch your savings include: Don't overspend early in retirement, plan IRA distributions so you can preserve tax-deferred growth as long as possible, postpone taking Social Security benefits to increase payments, frequently adjust your asset allocation, and adjust your annual budget during years when returns are low.
Your home town banker can help you determine a retirement withdrawal rate that will work best for your situation.
Back to President's Articles
06/26/2008
Importance of Financial Planning
Can you believe this is the 26th week in 2008? With only one-half of 2008 left, it’s time to look at your financial plan. Let’s discuss some important facts about the financial planning process.
Financial planning is a process that helps you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources. A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture, helping you to focus on your goals and understand what it will take to reach them.
One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related--for example, saving for college versus saving for retirement. Then you can use this information to decide how to prioritize your goals, implement specific strategies, and choose suitable investment products. The peace of mind that comes from knowing that your financial life is on track is priceless.
Creating a comprehensive financial plan involves working with financial professionals to:
- Review your income, assets, liabilities, insurance coverage, investment portfolio, tax exposure, and your estate plan
- Establish financial goals and time frames for achieving these goals
- Implement strategies that build on your financial strengths
- Choose investments that are tailored to meet your financial objectives
- Monitor your plan, making adjustments as your goals, time frames, or circumstances change
The financial planning process can involve a number of professionals including financial planners, accountants, tax attorneys, insurance professionals, and estate planning attorneys. A financial planner generally coordinates the whole process that ultimately provides you with information to make informed decisions about your financial future.
The financial planning process never ends. Your plan should be reviewed at least annually. Some of the events that might trigger a review of your financial plan include:
- Changing goals or time horizons
- Life-changing events such as marriage, the birth of a child, health problems, or a job change
- Immediate financial planning needs such as: drafting a will, or paying long-term care expenses
- Substantial increases or decreases in income or expenses
- Unmet portfolio performance expectations
- Changes in tax laws
Contact your home town banker to help you structure a financial plan to meet your financial goals and objectives.
06/19/2008
Income in Respect of a Decedent
Income in respect of a decedent (IRD) is income a decedent earned but did not receive prior to death. IRD is taxed to the person or entity receiving it. This can be the decedent's estate, the surviving spouse, or some other beneficiary. IRD is reported on the recipient's income tax return in the year it's received. The inclusion of IRD on both the estate tax return (Form 706) and the recipient's income tax return creates the potential for double taxation. To avoid this result, the tax code provides an income tax deduction for any estate tax paid that is attributable to IRD.
Common sources of IRD include: Uncollected salaries and earnings, uncollected alimony, uncollected rent, uncollected interest and dividends, deferred compensation distributions, taxable distributions from retirement plans and IRAs, and certain other uncollected income and/or distributions related to sole proprietorships and partnerships.
Tax treatment to the recipient of IRD is similar to that of the decedent, prior to his/her death. Capital gains are still taxed as capital gains, and compensation and interest are still taxed as ordinary income.
There are also deductions in respect of a decedent (DRD), which can offset IRD. DRD items are deductible expenses that were owed at the time of death, but not yet paid. Such items might include real estate taxes, state income tax, and deductible interest. The deduction can be taken by the IRD recipient who is obligated to and actually pays the DRD items. DRD items are deductible in the year in which they are paid.
If you think that IRD items will make up a large portion of your estate, failing to plan for them may have unintended results. Here are some strategies to consider:
- Leave IRD items to charity, which is exempt from income taxes.
- Leave an IRA to a young beneficiary, which has the potential to defer the payment of income taxes for as long as possible.
- Leave IRD items to a credit shelter trust. This postpones the payment of estate tax until the death of the surviving spouse, and thus the payment of income taxes.
Your friendly home town banker can assist you with planning for IRD and make a personal recommendation to an estate planning attorney or tax planning professional who can get your strategies in writing for the benefit of those who will be receiving the IRD.
06/12/2008
Helping Grandchildren with College Costs
Helping pay for a grandchild's college education is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. Let’s discuss some ways to accomplish this goal.
One way to help with college costs is to make a gift of cash or securities, but this method has drawbacks. A gift of more than the annual federal gift tax exclusion amount--$12,000 for individual gifts, $24,000 for joint gifts--might have gift tax and generation-skipping transfer tax (GSTT) consequences.
A 529 plan is an excellent way to contribute to a grandchild's college education, while simultaneously paring down your own estate. Contributions grow tax deferred, and withdrawals used for qualified education expenses are completely federal and state tax free.
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual accounts offered by most states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today's prices for the colleges that participate in the plan.
Grandparents can open a 529 account and name a grandchild as beneficiary, but only one grandparent can be the account owner. Grandparents can contribute to an existing 529 account with a lump sum or in smaller, regular amounts. Lump-sum gifts have a big advantage in 529 plans because individuals can make a lump-sum gift of up to $60,000 ($120,000 for joint gifts by married couples) and avoid federal gift tax. A special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time. This money is considered removed from your estate, even though one grandparent can still retain control over the funds if he or she is the 529 account owner. Note that if the donor were to die during the five-year period, a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes. Under current law, a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for federal aid. Note that funds in a grandparent-owned 529 plan may still be included when determining Medicaid eligibility, unless these funds are specifically exempted by state law.
Your home town banker can help you create a plan to help grandchildren pay for college.
06/05/2008
How Much Annual Income Can Your Retirement Portfolio Provide?
Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. Your withdrawal rate is defined as the annual percentage that you take out of your portfolio, whether from returns or the principal itself. Determining an appropriate initial withdrawal rate is critical in retirement planning and presents many challenges. Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could.
Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last. Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you'll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.
So what withdrawal rate should you expect from your retirement savings? The answer: it depends. A withdrawal rate of slightly more than 4% could provide inflation-adjusted income for at least 30 years. A higher initial withdrawal rate--closer to 5%--might be possible during the early years of retirement if withdrawals in later years grow more slowly than inflation. Broader portfolio diversification and rebalancing strategies can have a significant impact on initial withdrawal rates. Adding asset classes such as international stocks and real estate can increase portfolio longevity. You might consider freezing the withdrawal amount during years of poor portfolio performance. By applying some specific decision rules that take into account portfolio performance from year to year, it could be possible to have "safe" initial withdrawal rates above 5%.
More ways to help stretch your savings include: Don't overspend early in retirement, plan IRA distributions so you can preserve tax-deferred growth as long as possible, postpone taking Social Security benefits to increase payments, frequently adjust your asset allocation, and adjust your annual budget during years when returns are low.
Your home town banker can help you determine a retirement withdrawal rate that will work best for your situation.
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