Archive for September, 2009

One of the easiest, and most rewarding ways to reduce one’s income tax and estate tax is with charitable gifts. Around 89% of American households make annual gifts to charities which accounts for 2.2% of the annual gross domestic product. A person may make an unlimited amount of gifts during their lifetime and receive favorable tax treatment for their good deed. Gifts of cash, property, and services all qualify for the charitable tax deduction but there are several issues to consider when valuing the deduction. First thing to consider when valuing the gift, is ensuring the organization is a qualified charity. This includes churches and temples, public parks, colleges, and non-profit charities. Political groups, social clubs, individuals, and for-profit groups do not qualify. The website Guidestar, www.guidestar.com, will verify the organization’s status.

If a gift is made in cash, and any benefit is received on account of the donation, the deduction must be reduced. A perfect example is donating money to a college in order to receive athletic tickets. Only 80% of the donation will be allowed for the deduction. Another example is purchasing a ticket to a charitable event and receiving a tangible benefit; the deduction must be reduced by the fair market value. However, this does not apply to low value items with the organization’s logo on it, such as a tee-shirt.

A common, overlooked charitable deduction is gift of services. Any unreimbursed out-of-pocket expenses relating to the service are deductible, but not the value of the service itself. If any driving expenses are incurred, oil and gas are deductible or 14 cents for every mile driven. Foster parents are able to deduct expenses in excess of payments received, if there is no profit motive. If an accountant offered free tax planning advice, he would not be able to deduct their typical fee for this service. There are many other issues that need to be considered when planning charitable gifts; I will continue to provide information regarding the specific issues throughout the month.

This past year has left many wondering about the longevity of their retirement account. While researching some options, I stumbled across a particular option that must be provided to married participants of a pension plan or profit sharing plan. A Qualified Joint and Survivor Annuity, QJSA, and a Qualified Preretirement Survivor Annuity, QPSA, are options within these plans that may be a beneficial option for some plan participants. A QJSA would pay a retirement benefit to a participant and their spouse for as long as they live. Depending on the plan document, after the death of the first spouse, the QJSA would continue to provide either 50 to 100 percent of the original benefit. Since the benefit covers the entire life of the both spouses, the payments received from the QJSA are less than the benefit if only the participant’s life were covered. Once the participant retires, the nonparticipant spouse may elect to waive their right to the QJSA before benefits are received.

A QPSA provides a benefit to the nonparticipant spouse in the event the participant dies before reaching normal retirement age. The QPSA is easily compared to a term-insurance policy on the participant’s life. If this option is elected, assets within the retirement plan will be used to fund the QPSA. The spouse is able to waive their right to a QPSA once the participant spouse reaches age 35. Any benefit received from the QPSA is taxed as ordinary income and is included in the estate tax of the decedent.

If a married couple believes that this may be a beneficial option for their retirement, a few things must be considered. The couple should review their retirement plan to ensure a QJSA and QPSA are offered. A plan does not have to offer the QJSA or the QPSA if the plan already provides the surviving spouse with the entire nonforfeitable accrued benefit. This option must be given to the surviving spouse within 90 days following the participant’s death, and the account is adjusted for any gains or losses. This is a pretty complicated issue regarding retirement plans, and may only be beneficial for a particular financial situation. Please review the terms with a trusted financial adviser.

On Thursday, I talked about securing a life insurance policy within a trust. It is an excellent way to reduce the size of an estate, and avoid the estate taxes. However, the government is usually not about to let a large asset go untaxed. When an irrevocable life insurance trust is established, the grantor of the trust is relinquishing any right to the policy and gifts it to the future beneficiary. Even though the beneficiary does not have access to the funds until the grantor dies, the government still sees the transfer as a gift. Once the policy is set aside, annual premiums may face gift taxes as well. This is where it can get a little sticky. The government allows gifts under the annual exclusion to avoid the gift tax (the annual exclusion is updated annually, so make sure to look it up). However, a gift must be a present interest gift, meaning the beneficiary must have immediate access to the gift. Therefore, paying premiums on a life insurance policy is a future interest gift. Well, someone got really upset and took this to court and actually won. Thanks to Crummey vs. U.S., trust beneficiary’s are able to withdrawal the annual contribution to the trust within 30 days. This now makes the annual premiums paid to a trust a present interest gift. This may seem scary, considering the same irresponsible son mention in Thursday’s blog has a right to withdrawal the annual contributions made to the trust. Hopefully, after discussing the power of asset accumulation within a insurance policy, the son will be less tempted to affect his future policy.

CNBC.com writer Paul Toscano recently wrote, “In a global economy that has been plagued by troubles in the world’s financial systems, the word ’safe’ and ‘bank’ are rarely put together.”

I was particularly pleased to see BNY Mellon rated as the safest bank in the United States by Global Finance magazine, which has published its “World’s 50 Safest Banks” list for the past 18 years. Global Finance began with the 500 largest banks by asset size, then whittled the list to the top 50 using a comparison of long-term credit ratings and an analysis of total assets owned.

Our CEO, Bob Kelly, has spoken on many occasions to the financial press and to legislators in Washington about the state of banking today, and we are proud of the recognition our company’s integrity and compelling credentials have earned — qualities that have made us the oldest, safest and most admired bank in the nation. Please let me know if you have any questions or comments. I can be reached at 404-353-1589 or forrest.simmons@bnymellon.com. The information contained in this e-mail, and any attachment, is confidential and is intended solely for the use of the intended recipient. Access, copying or re-use of the e-mail or any attachment, or any information contained therein, by any other person is not authorized. If you are not the intended recipient please return the e-mail to the sender and delete it from your computer. Although we attempt to sweep e-mail and attachments for viruses, we do not guarantee that either are virus-free and accept no liability for any damage sustained as a result of viruses.

The Nation’s Safest Bank
BNY Mellon was recently named the safest U.S. bank by Global Finance magazine in the
publication’s 18th annual “World’s 50 Safest Banks 2009” list. BNY Mellon was one of only
six U.S. banks to make the annual list and was ranked #32 overall out of an initial fi eld of 500
banks worldwide. The ranking underscores our industry leading credit ratings and strong
capital position and builds on other demonstrations of our stability and strength.
BNY Mellon Capital and Credit Ratings
• Assets under management1
– $926 billion
• Assets under custody and administration
– $29.7 trillion
• Tier 1 capital ratio1
– 12.5%
• Long-term credit ratings2
– Standard & Poor’s: AA–
Moody’s: Aa2
– Fitch: AAU.
S. Treasury Stress Test
• May 7, 2009 results announced
• BNY Mellon’s results among the best in the industry
– Debt rating among the highest of all major U.S. banks
• Highest rating from Moody’s, second highest from Standard & Poor’s
– Tier 1 capital ratio among the highest of all major U.S. banks
• Large percentage is common equity
– Large proportion of very liquid assets
• Refl ected in our risk-weighted assets, further highlighting our capital position strength
Fortune Magazine’s Most Admired Super-regional Bank3
• 2nd consecutive year
• BNY Mellon achieved top scores across four key attributes of reputation
– Global competitiveness
– Quality of products and services
– Innovation
– Long-term investment
1 As of 6/30/09
2As of 9/18/09
3Fortune Magazine, March 16, 2009

When one passes away with a substantial estate, his assets are subjected to the large estate tax. This can leave heirs with less than the intended amount desired by the decedent. One way to protect assets from estate taxes is an Irrevocable Life Insurance Trust. Lets go back to the basics of estate planning. In order to shield assets from estate taxes, the decedent must have removed any property within his estate three years prior to his death. This tells the government that the decedent did not purposefully remove the assets with the intention of escaping estate taxes. By placing a life insurance policy within an irrevocable trust, three years prior to death, the decedent is removing any ownership rights to the policy and leaving it in the hands of a trustee. After the decedent’s death, the beneficiary will have to pay income tax on the distributions. Creating an irrevocable life insurance trust also gives the decedent a great power over the distribution of assets. The decedent has the power to instruct the trustee on how to distribute the proceeds. Suppose the decedent has a child, whom he loves very much, but has an excessive gambling problem when it comes to horse racing. The father does not want to leave his son an excessive amount of money because he is afraid it will be gambled away within a year. The father instructs the trustee to manage the money and ensure its conservation. Now, lets say after the father’s death, the son becomes very depressed and racks up large credit card bills. The creditors will be unable to take the assets from the trust because they are not owned by the son. I know that I have left a vital aspect of information out of the details; but stayed tuned for tomorrow’s blog where I’ll discuss the very exciting gift tax associated with the trust.

Every morning this summer I would ride my bike on the back streets of Tybee. And every time, I would ride past this one house that had a plaque hanging above the garage entitled “My Tax Break.” That got me thinking about the types of property that can be owned and how the property was used by the owners. This article is not intended to give any tax advice; just pretend I’m the Nancy Drew of Tybee Island real estate. There are three basic ways that an additional property can be used. I’ll start off by explaining how each classification is defined. If one purchases an additional house and rents it out for less than 15 days, the house does not generate enough income to be considered a taxable activity. That’s easy. But, if the property is rented for more than 15 days and the property is used by owner for more than the greater of 10% of the days rented or 14 days then the house is classified as a mixed-use property. If the home is not used by the owner by more than the 14 days or the 10% of rental dates, then it is a rental activity. Not too complicated, but not a walk in the park either. What this basically comes down to is how expenses related to the property will be reported. When the owner of a nontaxable rental property files their income taxes, neither expenses nor income will be reported. However, depending on his own tax situation he may be able to deduct the mortgage interest and or property taxes relating to the property. This is where the use of a professional accountant would be needed. Now, if it is a rental property, all of the income generated from the property must be reported, but all the ordinary, necessary, and reasonable expenses related to the property can be deducted, even if the property had a loss for that year. For the mixed-use property, expenses may only be deducted up to the amount of income generated for the property. With the current real estate market, many may be thinking about purchasing that additional property that they always wanted. But before they decided where or what to buy, the use of the property should be considered. There are a few more fun, and complicated issues that come into play when figuring out the taxes such as depreciation and what certain expenses are not deductible, but this Nancy Drew is going to leave it up to an accountant.

A Flexible Spending Account and a Health Savings Account are beneficial tools that allow families to use pretax dollars to pay for necessary medical expenses. A flexible spending account is offered through an employers cafeteria plan. The way a flexible spending account works is very simple. An employee can choose to defer a certain percentage of their salary into the account and withdrawal funds when needed to pay for out-of-pocket medical expenses and even over-the-counter drugs. The money that is used within the FSA is not subject to income or payroll taxes. However, the deferred income must be used within the plan year or the money will be forfeited back to the company. The employer also benefits from providing this option because the only cost they incur is maintenance of the funds. This allows employers to provide greater benefit choices to it’s employees without increasing out-of-pocket costs. Many FSAs allow the funds to be used to pay for dependent care. This is an excellent income tax savings tool for family’s with an income that is too large to fully utilize the dependent care credit.

A Health Savings Account can be established by anyone with a high deductible health insurance plan. Contributions to a health savings account are not subject to a “Use it of Lose it” policy which can allow for great earnings growth. When funds are contributed to an HSA, the earnings and withdrawals are not taxable as long as they are used for qualified medical expenses. Contributions to an HSA are limited to the health insurance plan deductible and are subject to a maximum level that changes annually. An employer may elect to contribute to an employee’s HSA and these contributions are excluded from the employee’s gross income. A Flexible Spending Account and a Health Savings Account may be valuable tool for a family. The specific details regarding the FSA can be found through one’s employer and for more information about HSA’s visit the IRS’s website. http://www.irs.gov/publications/p969/ar02.html#en_US_publink100038736

When one gets married, they typically don’t expect their marriage to end in divorce. However, with 50% of marriages ending in divorce, it is beneficial to consider the possibility and one’s financial situation if it occurred. One of the biggest assets of a couple is their retirement account. In order to protect one spouse in the event of a divorce, a Qualified Domestic Relations Order, QDRO, should be considered. A QDRO enables a spouse to receive a portion of the other spouse’s retirement account. The QDRO can be used for child support, alimony, or marital property rights. When a QDRO is issued, the document must state how the assets in the qualified plan will be divided. There are two methods used when dividing the assets: the shared payments approach and the separate interest. The shared payment approach entitles one spouse to receive a particular percentage of the monthly benefit once they retire. With the special interest approach, the nonparticipant spouse would receive a percentage of the account balance as a lump sum distribution. Once assets are distributed, the assets will be taxed as ordinary income. However, if they are deposited into an IRA or another qualified plan, they will not be taxed. Each qualified plan has a particular method when dealing with QDROs; the plan administrator can be contacted to inform participants about the QDRO rules.

Alberty: New ways to teach children about fiscal responsibility

If you follow this column, you might remember a past missive about teaching my 5-year-old son, Walker, about money. We opened a checking account and he even has his own debit card. He receives $2 per day for good behavior and chores and can make a purchase on payday, which is every Friday. The idea was to teach Walker about the value of a dollar, saving and responsibility. Payday was good in theory.

Walker did learn the value of money and even saved for five weeks to buy a toy for his father (of course it was a toy he also would enjoy). Walker also learned to overcome some of his shyness as we required him to make his own purchase, which meant he had to converse with the check-out clerk. Unfortunately, payday was not a complete success.

Through my own fault, I did not have well structured tasks for Walker to earn his income. We also accumulated a ridiculous number of toys due to the weekly purchase. Due to the excess, he became disenchanted with toys and would spend an hour at a time on Fridays in the toy aisle unable to find anything of interest. It always seemed to end in a disagreement and disappointment with whatever toy he chose. None of us were enjoying payday.

Recently, one of my friends came up with a new way to teach her son about money and responsibility. It was a vast improvement from my attempt at payday. In their family, a calendar is posted with measurable daily tasks. Each task is worth a quarter with the potential to earn $1 per day five days a week. His tasks range from good behavior at school to putting away his clean laundry. They have three jars for deposits: spend, save and give. The parents do not influence his choice in deposit.

Another mother in our group of friends has decided to implement the same strategy with a twist. They implemented a match of any amount deposited into the save and give jar. This new strategy is a fantastic motivator for developing healthy wealth building habits.

I am so excited to try this new strategy with Walker. He already is enthusiastic and looking forward to making the calendar and jars. Sometime in the future I will update my column with how the new strategy is working out.

• Laurel S. Alberty is a certified financial planner and president of Watkinsville-based Alberty Financial Planning Services Inc.

Originally published in the Athens Banner-Herald on Sunday, September 20, 2009

Group benefits are an important part of the total income package offered by employers. Health, disability and life insurance benefits can be the deciding factor for choosing one job over another. Group benefits can be particularly important to those of us with pre-existing conditions. The ability to offer an employee the ability to qualify for quality insurance, that would otherwise be inaccessible, is a tremendous benefit that builds loyalty and employee retention.

If you are lucky enough to be healthy, you should consider supplementing your group insurance with an individual policy. Losing a job, employers discontinuing group coverage and the desire to start a new business are situations that have become more prevalent in our new economy. Unfortunately, each of these scenarios can leave you exposed to a tremendous amount of risk if you do not have individual coverage.

An individual health, disability and life insurance policy is portable which means it stays with you even if you are in transition or if your employer can no longer afford to offer group benefits. Individual coverage can be customized to meet your specific needs and may even be less expensive than the coverage offered through your employer. Purchasing individual coverage can protect you from the risk of finding yourself uninsurable without any coverage.

The issue of insurance is delicate and personal. You may decide to take full advantage of your employer coverage, purchase individual coverage or both. Either way, it is very important to make sure you fully understand your insurance options and the impact of an unexpected transition in employment.