Financial Planning

Financial Tips for October 2012

Asset Allocation Adjustments
Review the asset allocation of your portfolio. Increases and decreases in the value of your portfolio can upset the asset allocation you consider optimal. Should you shift some stock investments into or out of bond investments? Should you shift some funds into tax-free investments?

Health Spending Checkup
If your employer has a flexible spending arrangement (FSA), determine the balance left in the plan. Your plan may allow you to carry over a year-end balance for use early in the following year.

If your plan doesn’t allow unspent money to be carried over, then you may want to incur discretionary medical, dental, or optical costs prior to year-end. If you do not participate in such a plan, find out if one is available at your company. Also, find out if you are eligible for a Health Savings Account.

Review Budget vs. Actuals
Compare September income and expenditures with your budget. Make adjustments as appropriate to your October expenditures. Make sure you have invested your planned savings amount for September.

Estimate Your 2012 Tax Liability
Total up your taxable income, capital gains, and deductions through this date. Estimate the amounts expected through year-end. Determine where you stand, and what steps, if any, you should take prior to year-end to minimize your tax liability. Please feel free to call our office if you need help figuring this out.

By Leon Clinton
October 31, 2012

Living Trusts 101

A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Further, you can actually be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

Note: Property held in trust is actually “owned” by the trustees of the trust, subject to the rights of the beneficiaries. The trust itself doesn’t actually own anything.

There are many kinds of trusts. A living trust (also called an inter vivos trust) is simply a trust you create while you’re alive, rather than one that is created upon your death under the terms of your will.

All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.

Do I need a living trust?
Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee, the person you appointed to handle the trust after your death, simply transfers ownership to the beneficiaries you named in the trust.

In many cases, the whole process takes only a few weeks and there are no attorney or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust?
The cost of creating a living trust depends on what you want to achieve. The more complicated a living trust is, the more expensive it will be. Also important to note is that while the fees associated with creating a living will are paid upfront a living trust actually saves you money and time by avoiding probate court.

Is a trust document ever made public, like a will?
A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate – inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a trust protect property from creditors?
Holding assets in a revocable trust does not shelter those assets from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor’s time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they’re out of luck forever.

Do I need a trust if I’m young and healthy?
Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your premature death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don’t need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance is sufficient.

Can a living trust save taxes?
A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.

If you’re wondering whether you need a living trust give us a call. We’ll help you figure out the answer.

By Leon Clinton
October 15, 2012

A SIMPLE Retirement Plan for the Self-Employed

Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners. Here’s why…

Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLE plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $11,500 in 2012, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or over can make an additional $2,500 deductible “catch-up” contribution (for a total of $14,000) as an employee in 2012.

2. Employer “matching” contribution
The employer match equals a maximum of 3% of employee’s earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee, and an additional $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, for a total of $15,200.

SIMPLE plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

A SIMPLE plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules – in investment options, spousal rights, creditors’ rights – don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan’s custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.

What’s Not So Good About SIMPLE Plans

Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.

Example: If you are under 50 with $50,000 of self-employment earnings in 2012, you could contribute $11,500 as employee to your SIMPLE plus an additional 3% of $50,000 as an employer contribution, for a total of $13,000. In contrast, a 401(k) plan would allow a $29,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $42,000 with a 401(k).

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).

It won’t work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

If the SIMPLE plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE plan and the 401(k) combined (in 2012) can’t be more than $17,000 or $22,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $9,000 in her 401(k) can’t put more than $8,000 in her SIMPLE 2012. The same limit applies if you have a SIMPLE plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started with a SIMPLE Plan

You can set up a SIMPLE account on your own, but most people turn to financial institutions. SIMPLE Plans are offered by the same financial institutions that offer IRAs and 401k master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

401k, SEPs, and SIMPLES Compared

401k	SEP	SIMPLE
Plan type: Can be defined benefit or defined contribution (profit sharing or money purchase)	Defined contribution only	Defined contribution only
Number you can own: Owner may have two or more plans of different types, including an SEP, currently or in the past	Owner may have SEP and 401k	Generally, SIMPLE is the only current plan
Due dates: Plan must be in existence by the end of the year for which contributions are made	Plan can be set up later – if by the due date (with extensions) of the return for the year contributions are made	Plan generally must be in existence by October 1 of the year for which contributions are made
Dollar contribution ceiling (for 2012): $50,000 for defined contribution plan; no specific ceiling for defined benefit plan	$50,000	$23,000
Percentage limit on contributions: 50% of earnings for defined contribution plans (100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan.	Lesser of $50,000 of 25% of eligible employee’s compensation ($250,000 in 2012). Elective deferrals in SEPs formed before 1997 not subject to this limit.	100% of earnings, up to $11,500 (for 2012) for contributions as employee; 3% of earnings, up to $11,500, for contributions as employer
Deduction ceiling: For defined contribution, lesser of $50,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings.	Lesser of $50,000 or 25% of eligible employee’s compensation. Elective deferrals in SEPs formed before 1997 not subject to this limit.	Same as percentage ceiling on SIMPLE contribution
Catch-up contribution age 50 or over: Up to $5,500 in 2012 for 401(k)s	Same for SEPs formed before 1997	Half the limit for 401k and SEPs (up to $2,500 in 2012)
Prior years’ service can count in computing contribution	No	No
Investments: Wide investment opportunities. Owner may directly control investments.	Somewhat narrower range of investments. Less direct control of investments.	Same as SEP
Withdrawals: Some limits on withdrawal before retirement age	No withdrawal limits	No withdrawal limits
Permitted withdrawals before age 59 1/2 may still face 10% penalty	Same as 401k rule	Same as 401k rule except penalty is 25% in SIMPLE’s first two years
Spouse’s rights: Federal law grants spouse certain rights in owner’s plan	No federal spousal rights	No federal spousal rights
Rollover allowed to another plan (Keogh or corporate), SEP or IRA, but not a SIMPLE.	Same as 401k rule	Rollover after 2 years to another SIMPLE and to plans allowed under 401k rule
Some reporting duties are imposed, depending on plan type and amount of plan assets	Few reporting duties	Negligible reporting duties

Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE plans.