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  • 20Aug

    The Taxes Are Coming…Back!
    Jerry Lynch CFP® CLU ChFC

    Five Notable Tax Increases Scheduled to Return on January 1, 2011

    Unless Congress decides to extend tax cuts or make new changes, income tax rates, capital gains taxes, and estate taxes are scheduled to revert back to what they were in 2001 on 1/1/2001.
    Here are five changes that you should be aware of:

    1. 1.
    The top federal tax rate will rise from 35% to 39.6%.

    2.

    The 10% federal tax bracket will expire and revert to 15%.

    3.

    The maximum long-term capital gains tax will rise from 15% to 20%.

    4.

    The tax rates on qualified dividends will increase from 15% to ordinary income tax rates

    (which could be as high as 39.6%).

    5.

    The estate tax redemption will move from $3.5 million in 2009 and unlimited in 2010

    back to $1 million in 2011.

    Paul Revere is most remembered today as the nighttime messenger who, just before the battle of Lexington, warned of the British troop movement. He rode at midnight on April 18 (morning of April 19) 1775, from Boston to Lexington, to warn John Hancock and Samuel Adams about the British Army’s movement.  Historians say that Revere could not actually shout the famous phrase attributed to him, “The British are coming! The British are coming!” because the mission depended on secrecy and the countryside was filled with British subjects. The Massachusetts Historical Society, in accounting for Paul Revere’s famous ride, claims that he actually shouted, “The regulars are coming,” and this was understood as a warning that the British were moving.

    As the year 2010 is starting to wind down, a battle cry that could be made famous for this year would be “The taxes are coming! The taxes are coming!” However, a more accurate saying could be, “The taxes are coming back!” Many temporary tax cuts that were enacted in 2001 and 2003 are scheduled to expire on December 31, 2010. Starting on January 1, 2011, unless Congress decides to extend certain tax cuts or make new changes, there will be increases in some income tax, capital gains, and estate tax rates and rules.

    With all of the uncertainty surrounding this situation, this may be a good time to review your investment portfolio to see if your current plan will hold up in the future. Starting in 2011 tax rates that were in effect prior to 2001 are scheduled to return. Specifically, the top income tax rate will go back to 39.6% and the special low 10% bracket will be eliminated. There have been discussions this year over making some potential changes or extensions of the current conditions. However, as of the date of this article, nothing has been passed.

    Also, the tax rate reductions for long-term capital gains and dividends are scheduled to expire in 2010. Specifically, in 2011, the maximum long-term capital gains tax rate will go back to 20% from its current 15%.

    Another adjustment to think about is the taxation of dividend income. Starting in 2011, dividend income (other than capital gains distributions from mutual funds) will change from being taxed at 15% to being taxed at ordinary income tax rates (once again dividend income will be taxed at your highest marginal tax rate). This means that in 2011 you could pay as high as 39.6% federal taxes on qualified dividends.

    As if things weren’t bad enough, the estate tax will be revived. For those who die after 2010, the estate tax will return with a $1,000,000 exemption and a 50% maximum rate. Currently, there is no Federal estate tax for those who pass away during 2010.

    Some other smaller changes for 2011 include an adjustment in the child tax credit. Specifically, the credit of $1,000 per eligible child will be reduced to $500 after 2011. Also, after December 31, 2010, none of the child tax credit will be refundable to taxpayers if their earned income is more than $12,550.

    These are just some of the changes that 2011 will bring to taxpayers. Once again, our question is: has someone taken a look at your personal situation to make sure that you are prepared for these changes? January 1, 2011 could prove to be a day of reckoning for many taxpayers.

    If you look ahead to the year 2013, the potential tax environment could get even more confusing. As part of the new Health Care Bill that was passed by Congress earlier this year, a new 3.8% Medicare surtax is scheduled to be assessed starting January 1, 2013. This new surtax will be on or the lesser of “net investment income” or the excess of “modified adjusted gross income (MAGI)” over the threshold amount. For purposes of this calculation, currently “net investment income” is defined as the sum of gross investment income over allocable investment expenses. This “investment income” (for the purpose of this 3.8% surtax) includes: interest, dividends, capital gains, annuity income, rents, royalties and passive activity income. Currently it does not include distributions from IRAs or qualified plans.

    This surtax can take the top tax bracket of the 39.6% up to 43.4%. It can also take the top capital gains tax of 20% to 23.8%.

    Earlier this year President Obama’s office presented a new proposal for 2011 tax rates that differs from both the current and scheduled rates. According to an ABC News February 2010 press release following this topic, when discussing the President’s tax bracket plan, a Senior Administration official told reporters that “the sounds you hear are the sounds of hard choices being made.”

    That same logic should apply to taxpayers. Now is the time to review your personal tax situation to prepare for these changes.

    While the tax situation may take some time to settle, we still should plan on reviewing and preparing for the upcoming changes.

    Some good questions to ask yourself now are:

    • How will the change in tax rates affect my current investments?
    • How will the change in tax rates affect my taxable income?
    • Are there things I can do to prepare for these pending changes?
    • Is my estate best positioned for the return of the estate tax?

    This is a time when a tax return, estate plan, and investment portfolio review by a qualified financial advisor can prove to be helpful.

    For those readers who are not currently clients of ours, we invite you to schedule a complimentary appointment with our office to see if we could potentially add some value to your situation. Please call Pam Karkenny in our office at (973) 439-1990 to schedule your appointment today.

    For both clients and friends of our practice, as we stated in the beginning of this article,
    “The taxes are coming…back!” We look forward to keeping you updated as this process continues.

    About Jerry Lynch:

    Jerry Lynch is President of JFL Consulting and has over 23 years in insurance and financial planning.  He has been a regular guest on CNBC, WABC and does regular articles for the Star Ledger.

    If you’d like a copy of this article sent to someone else who would benefit from this information, please contact Pam at (973) 439-1190.

    This article is for informational purposes only.  This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional.

    Jerry Lynch is a Financial Planner with JFL Consulting, Inc., and also offers Securities as a

    Registered Representative of Comprehensive Asset Management & Servicing Inc. – Member of FINRA/SIPC

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  • 27Jul

    Jerry Lynch’s
    Quarterly Economic Update
    The second quarter of 2010 reminded us that things can look unnecessarily gloomy the morning after a party. It’s true that growth appears to be slowing from the first quarter, and the markets acted as if they needed to sober up from last year’s stimulus-induced recovery. While many investors are still concerned about a double-dip recession, several indicators are pointing toward continued global growth.

    The second quarter was a bad time for most stock investors. The Dow Jones Industrial Average (DJIA) ended the second quarter down 10% and was down 6.3% for the first 6 months of 2010, although it is up 49.3% from its 12-year low of 6,547 on March 9, 2010. The Standard and Poor’s 500 Stock Index also dropped during the second quarter, with a loss of 11.9%, and was down 7.6% year-to-date. The NASDAQ fell 12% for the quarter and was down 7% for the 6-months ending June 30, 2010. Currently, the stock market is extremely volatile—in fact, for the first eight trading days in July, there has been an increase of over 6% for DJIA, S&P 500, and the NASDAQ.

    Despite the recent increase, there is a good deal of pessimism caused by a number of recent investor concerns, such as:

     BP oil crisis
     Are we headed toward inflation or deflation?
     Lack of trust and confidence in the global economy and world leaders
     Social Security concerns
     The housing market
     Growing U.S. deficit
     High unemployment

    These are only a handful of the various worries that contributed to the stock market’s drop in the second quarter. Uncertainty equals confusion, and confusion often causes anxiety and fear.
    The European Debt Crisis
    Many overseas stocks, especially the European stock market, took a double blow—they fell more sharply than U.S. shares in local currency terms, and the strengthening of the dollar further reduced their value when translated back into dollars. The debt crisis that spread across many parts of Europe is seen as one of the biggest threats to the performance of the U.S. stock market over the next 12 months, according to a survey of professional money managers. (Source: Russell Investments – Investment’s Latest Quarterly Survey May 31, 2010)

    Investors shouldn’t totally ignore or give up on Europe—at least not yet. The weaker Euro will make European products more competitive in foreign markets. Plus, profits generated in other currencies will translate into a greater number of Euros, which means higher earnings for European companies. However, the primary reason to hold European stocks today is that they are cheap compared to most other stock market exchanges. The average European stock sells for only 10 times the estimated 2010 earnings; their P/E ratio is 25% less than the average P/E of U.S. stocks. (Source: Kiplinger’s Personal Finance August 2010 p.36). Note: It is important to note that international investing involves special risks including greater economic and political instability, as well as currency fluctuation and risk.

    The EU recently announced a plan of nearly $1 trillion to avert a public-debt crisis that threatened to derail the worldwide economic recovery. Stocks surged in Europe and the U.S. after the EU leaders agreed to a massive action to prevent Greece’s financial troubles from spreading throughout the region. (Source: WSJ, May 11, 2010, A1)

    Gold vs. Treasuries
    Many investors have piled into gold and Treasury Bonds recently, seeking investment alternatives. History suggests that possibly only one of those bets might end up paying off. After their strong increases, both gold and treasury debt are expensive, which could mean increased risk and less potential for profits.

    Gold is not a truly efficient inflation hedge. Gold was one of the few bright spots, up 11.9% for the quarter and 12.7% for the 6 months ending June 30, 2010, and surging to a record $1,243.10 an ounce at quarter end. However, the real price of gold, adjusted for CPI inflation, has fallen about 45% in the last 30 years. Compare that to the real price of equities, adjusted for CPI inflation, which has risen approximately three and a half times in the last 30 years. (Nick Murray Interactive, January 2010)

    Gold can be a hedge against fear and chaos. It has the potential to offer reassurance, and as global finance has grown ever more complex, it has also become a badge of mistrust in the modern political economy. Whatever you do, please remember that gold (just like any commodity) is considered a high risk investment. Note: Please remember the price of commodities, such as gold, are subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and therefore concentrated investing may lead to higher price volatility.

    As investors have piled into Treasuries in recent months, this demand has driven the yield of the benchmark 10-year note down to below 3%! Consider that 20 years ago the yield on 10-year Treasuries was 8.38%. (Source: Treasury Department, By The Numbers, June 14, 2010) The only time in history that 10-year Treasury yields were lower was in the fall and winter of 2008 – 2009, during the worst of the financial crisis. (Source: WSJ June 11, 2010 C1).

    Treasuries and gold typically move in opposite directions depending on investors’ concerns about inflation or deflation. Each offers potential preservation against further market turmoil, and may be a good hedge against the other. While both have benefited from worries that the European debt crisis might continue to spread, they may not move together forever and past performance is no indication of future trends and results. If inflation increases, Treasuries could fall and gold could gain, but if inflation continues to slow or turns into deflation, it could be the opposite.

    Should you worry more about inflation or deflation? Financial markets are sending mixed signals, so it seems that investors fear both scenarios. Many economists are not worried about inflation, since the latest government figures show that U.S. consumer prices, excluding food and energy, were up only 0.9% in April from a year earlier, which is the lowest level in 44 years. (Source: WSJ, May 20, 2010, A1)

    According to most economists, deflation is more dangerous than most forms of inflation. When prices fall, consumers often put off their purchases to get great bargains later. There is a significant amount of money sitting on the side in money market accounts, bank accounts and Treasury Bills—$8 trillion, according to some estimates. When you combine a sizeable chunk of available money with extremely low interest rates (0.16% on the Treasury Bill as of July 12th, the lowest rates on record), in many cases the end result is inflation!

    Hypothetically, let’s review an investor that wanted to earn $3,000 per month from their investments. If their money is invested in Treasury Bills that are earning a little less than 0.1%, in our example, the investor would need $36 million to generate $3,000 per month! Without that large sum, the investor would likely add money from their principal to their earnings to reach the $3,000 mark. This would create demand for alternate investments, which might push the price up for these investments, which could lead to inflation! (Material discussed herewith is meant for general illustration and/or informational purposes only. This example is not indicative of any specific investment product or investor.)

    Wall Street loves a Goldilocks economy – one that is neither “too hot” and likely to fuel inflation and higher interest rates (both bad for stocks), nor “too cold”, which often crimps corporate profits. In some respects we are seeing such an economy today, one that has struck a “just right” balance between growth and inflation. (Source: Economist June 5, 2010 pg 18)

    Bonds
    For investors who own bonds, that part of your investment portfolio has most likely come through the recent market turmoil in fairly good shape. However, don’t take that steady performance for granted. While safe from a credit perspective, Treasury investments still entail interest-rate risk.

    Many professional money managers worry that the huge stimulus the Federal Reserve and the U.S. government have provided to the economy over the past few years will inevitably push up both interest rates and consumer prices. While the threat does not appear imminent, it is not too early to take steps to help protect the bond part of your portfolio. Individual situations will vary; therefore, these strategies and products may not be appropriate for all investors. It is important to speak with an investment professional prior to investing or making changes to your existing portfolio.

    Rising interest rates and renewed inflation would be a double blow to bond investors. When interest rates rise, the market value of existing bonds falls and in an inflationary environment, the purchasing power of bonds’ fixed income payments usually drops as well. This can be more pronounced for longer-term securities.

    Many factors, including the European debt crisis, have sparked renewed worries about the durability of the global economic recovery and have probably delayed the time when the Fed might start raising interest rates. Many economists expect this to begin by the first half of 2011 to hopefully avoid a return of inflation. If the federal government has to sell larger quantities of Treasury bonds to finance its enormous budget deficit, this would add to the upward pressure on interest rates. Higher interest rates would most likely push down the prices of many kinds of bonds.

    There are a number of ways to diversify your bond portfolio planning for these risks:

    1. Foreign bonds often provide protection against interest rate risk because they often own securities issued by other nations whose economies aren’t necessarily in sync with that of the U.S. Major commodity-exporting nations can also provide some diversification. One risk is the changing price of foreign currencies, which increases the volatility of foreign bonds compared to domestic bonds. Please note foreign securities entail special risks (such as currency fluctuations and political uncertainties) and may have higher expense and volatility. Some foreign bonds may involve below-investment-grade (“junk”) bonds, which are more at risk of default and are subject to liquidity risk. Investments in emerging markets may be especially volatile and diversification does not guarantee profit or protect against loss.

    2. Shorter-term maturity bonds decrease in value if interest rates rise, but usually fall less sharply in price than longer-term bonds.

    3. U.S. Treasury Inflation-Protected Securities, or TIPS, allow the principal amount to rise along with the Consumer-Price Index. Unfortunately, because the recent readings on U.S. inflation have been low, the yields on TIPS are unattractively low. TIPS are also more sensitive to any broad rise in interest rates. Investors should be aware that the TIPS principal is adjusted downward for deflation, and interest payments may be less than they would be if inflation occurred or if the Consumer Price Index remained the same.

    The Global Economy
    The $58 trillion global economy is almost too big to imagine. California is about $1.8 trillion strong, so we can think of the world economy today as about the same size as 32 Californias. (Source: Fortune Magazine, July 5, 2010, “New Global Opportunity”) The U.S. accounts for 8 Californias and it is larger than the economies of the next 4 countries combined: Japan, China, Germany and the United Kingdom. (Source: Nick Murray Interactive, August 2009) The European Union plus Switzerland, Norway, Canada, New Zealand and Australia make up another 10.5 Californias, and prosperous Asia—Japan, South Korea, Taiwan, Hong Kong and Singapore—gives you another 3.5. That brings us now up to 22 Californias, which means the rest of the world—the BRICs, (Brazil, Russia, India and China), the whole Islamic world, including its oil-rich states, most of southeast Asia, all of Latin America and Africa—is the equivalent of about 10 Californias, with China accounting for about a third of that output.

    Now let’s divide the world using another method: The population in the first group is about 1.1 billion, or 16% of the world’s total. The rest of the world is home to 84% of the people of this planet. This enormous disparity between the distribution of the world’s population and its economic wealth has led to two distinct arguments:

    First there is the case that the global economy is both wrong and dangerous. It is wrong because we diminish our humanity if we in the “rich world” allow billions to live stunted and miserable lives when they don’t need to; it is dangerous because poverty and disease don’t stay confined. (Source: Fortune Magazine, July 5, 2010)

    The second argument is concerned more with the markets and less with morals. The pragmatist sees 4 billion potential producers and consumers and huge opportunities for economic growth and corporate earnings.

    Though these two beliefs are often argued by people who like debating each other (for example, corporate titans and antipoverty activists), there’s a growing agreement that they are not in conflict. A great example is China.

    China
    The global recovery has been driven by growth in China.

    China has become a major part in the business community, growing 8.7% in 2009. On the consumption side, China is a huge and growing market and managed its stellar growth despite a 16% drop in the value of its exports. China has now surpassed Germany as the number one exporter in the world, and is considered the largest automobile market in the world. (Source: Fortune Magazine, July 5, 2010)

    Following pressure from the U.S. and other members of the group of 20 major economies, China moved during the second quarter to make the exchange rate more flexible for its currency. This could be an important milestone on the path to rebalancing the global economy. (Source: WSJ, June 21, 2010, A1)

    Stock market gains of more than 80% in 2009 occurred against the backdrop of massive fiscal stimulus and an explosion of debt—the root of America’s wrenching 2008-2009 correction. According to official figures, Beijing injected the equivalent of $575 billion into its economy starting late in 2008. At almost 15% of China’s GDP, that push, in relative terms, dwarfed America’s $787 billion stimulus, which amounted to less than 6% of the U.S. economy. (Source: On Wall Street, 2010, page 42)

    During the second quarter, the Chinese government reported two worrisome statistics: Gross Domestic Product (GDP) is growing at 12% a year—which is serious inflationary territory—and urban property prices are rising just as fast despite efforts to cool the housing market. Home-buying activities surged 82% in 2009, and house prices rose 24% nationally. In places such as Shanghai, home prices rose during 2009 to a level that was 87% higher than the previous 2007 peak.

    China has tens of millions of people with significant disposable income, and a significant number of purchasers of real estate actually pay cash. However, it isn’t just real estate that consumers are buying. China was considered the world’s second-largest market for luxury goods (after Japan) for 2007, according to the research center Li & Fung. Many men went straight from shabby to silk ties!

    There can be little doubt that the pace of asset growth in China will slow from last year’s remarkable record. The markets may suffer a period of retreat. However, there is little to support the parallels the media has made comparing China and the economic crisis in Japan and in the United States.

    Investing in a Rising Tax Environment
    This report is not meant to be political, but many of the problems that we are faced with today are the result of earlier issues. President Obama has had to “pick up the pieces” and try to reconcile these items, including dealing with the recession and the resulting significant drop in federal tax revenues. To address the mounting deficit, there have been a number of different proposals to increase taxes on affluent families.

    This year, Congress enacted the largest social program in decades. To finance this sweeping national healthcare program, Congress approved an additional 0.9% tax on employment compensation in excess of $250,000 ($200,000 in the case of individual taxpayers) and an additional 3.8% tax on taxable investment income earned by families with Adjusted Gross Income (AGI) above $250,000.

    Furthermore, it is likely that additional tax revenues will be needed to finance mounting federal expenditures. The deficit is still projected to grow significantly, even before incurring additional costs of economic stimulus, healthcare reform, and the increase of Social Security and Medicare outlays. The bulk of new taxes would likely be borne by higher-income families. Many taxpayers are unsure whether or not this is “fair,” for while the wealthiest 1% of Americans own 35% of the total net worth in the nation (Source: Edward N. Wolf, New York University, By The Numbers), they already pay more in Federal income taxes than the bottom 95% combined. (Source: Fortune May 24, 2010 pg 52)

    There are also a number of proposed tax changes in the works. However, the odds of a tax increase will probably be higher after the fall elections—is anyone surprised? Many affluent taxpayers should also be on the lookout for changes in the estate tax laws. The estate tax expired at the end of 2009 and has been zero for 2010. Unfortunately, it is scheduled to return next year with top estate tax rates at 55%! That compares with 2009’s $3,500,000 exemption and a top estate tax rate of 45%. Many taxpayers are expecting/hoping for a reinstatement of last year’s exemption and rates. We will keep you posted.
    Bear Market vs. Bull Market
    Stocks still remain under pressure, with the Dow being hurt by concerns about Europe’s debt-plagued economy and China’s efforts to slow its growth. While the market action during the second quarter has been discouraging, there are a number of reasons to still maintain the course:

    • The Dow has yet to issue a major sell signal. The question is whether or not the pullbacks indicate a Bear market or merely a correction in a Bull market. Based upon the indicators, it is more likely that this is a blip in the Bull market—no cause for panic! Corrections are a natural part of the economic cycle. In order to plan your investment strategies properly, it is best to look at the long term rather than the short term. Corrections can be scary, but we’ve seen them before and we’ll see them again. The retrenchment that began in late April is no different.

    • Stocks are reasonably valued. The S&P index trades at roughly 13% expected 2010 earnings—modest relative to 20-year norms and very modest relative to bond yields. Many U.S. stocks are similarly cheap, and high-quality stocks are unusually cheap relative to low-quality stocks. Many stocks have raised or initiated dividends this year, whereas only 2 companies have cut or suspended dividends. (Source: Dow Theory Forecasts, June 14, 2010) Recent readings on inflation, interest rates, and corporate earnings (widely viewed as among the most important drivers of stock prices) have been favorable.

    • U.S. companies are holding more cash in the bank than at any point in history. While this indicates persistent worries about financial markets and about the sustainability of the economic recovery, it may also represent a longer-term behavioral shift. Although this has helped many companies reduce their worry about short-term borrowing as banks continuing to pull back on lending, they are earning almost no interest on their holdings of cash, making it more difficult for them to achieve expected returns. Therefore, many economists believe that they are either going to use this excess cash through hiring, investments, or to make payouts to shareholders in the form of dividends or share buybacks. (Source: WSJ June 11, 2010 C1)

    All these indicators are at least slightly encouraging for most stock investors. Profit-estimate trends suggest Wall Street analysts are becoming more optimistic about the future; however, there is no guarantee that these results will be achieved. Unfortunately, sentiment can change quickly at any time. Diversification is still extremely important.

    There are roadblocks to a successful recovery. For example, the housing market is crucial. The severity of the recession has eroded the credit quality of many households and business borrowers, and many banks remain hesitant to lend. In addition, if interest rates increase, mortgage rates will most likely rise along with them. This would reduce the ability of some investors to make their mortgage payments and could, in turn, cause more problems for both the banking and housing economies.

    Unfortunately, real estate didn’t do well either for the second quarter. New-home sales fell almost 33% in May, the biggest drop since 1963 when the government began keeping records. The median price of a new home ($200,000) is down 9.6% from a year ago. This was primarily due to the expiring of the first-time homebuyer’s tax credit at the end of the quarter.

    The recovery that started last summer with the help of Government stimulus now hopes to evolve into a self-sustaining expansion. In the first quarter of 2010, GDP reached an all-time high. Following the Great Depression, the U.S. took 15 years to return to its previous GDP level. Japan’s growth took nearly as long to recover following its “lost decade” of the 1990s. But in just a few quarters, the U.S. economy has taken monumental steps toward recovery. (Source: WSJ, June 8, 2010 A19)

    Bulls argue that corrections are part of all Bull markets and that stocks will get back on track as investors refocus on the favorable fundamentals. Bears argue that expectations for earnings’ growth are widely optimistic and that stocks are not cheap considering the risk of a double-dip recession in the U.S. The outlook for many Bears is clouded by growing worries about Europe and the vitality of the U.S. job market. Jobs are a major key toward recovery; unfortunately, many economists believe that unemployment will still be above normal (8.6%) by the end of December 2011. (Source: WSJ, June 10, 2010 A8)

    Although retail sales are bouncing back from recessionary lows, hiring in this sector is returning at a much slower pace. This bodes poorly for unemployed Americans who have long looked to retail for a dependable source of jobs. In the short-term, we have a jobless recovery, and if you don’t have employees, you don’t have customers. Only Government payrolls are up substantially year over year. (Source: Barrons, June 14, 2010 pg 32)

    Federal Reserve Chairman Ben Bernanke offered reassurances about the economy in testimony to the House Budget Committee last month, saying that a new recession was unlikely and that the Fed still expected the U.S. economy to grow at 3.5% annual rate in the months ahead. However, his tone was cautious, given the headwinds facing Europe and the recent turmoil in financial markets. (Source: WSJ June 8, 2010 A19)

    Balancing the Budget
    Our nation’s financial position does not look good. We have never in modern times faced such dangerous, ongoing imbalance between the levels of federal spending and revenues. Our federal debt as a percentage of our economic output is greater than at any time since the end of World War II. The Congressional Budget Office projects that in a decade our national debt will reach 20 trillion dollars, more than half of which is owed to foreigners. That represents 90% of our economic output (GDP)! At that pace, interest on the federal debt is expected to cost us $1 trillion per year.

    In addition, our population is aging, with fewer workers funding Social Security payments for each retiree. We have no proven plan to control excessive and rapidly rising health care costs, so the nation’s financial situation appears to only get gloomier. Many economists believe that the primary ways to balance our budget are to:

    • Curb government spending.
    • Increase taxes.

    Unfortunately, most taxpayers will be affected by these changes and it appears that Congress cannot come to terms with many of these issues.

    Conclusion
    Unlike when we experienced our sub-prime crisis, Europe has not provided a fiscal stimulus. So, there is a possibility of Europe slowing down, which could then cause global growth to slow, indeed that is a possibility.

    The problems facing the equity markets today are no longer an anomaly. The market has battled many catastrophes. Remember SARS? How about the Asian Bird Flu? Or even the Great Stock Market Crash in 1987? Guess what? The stock market is based more on psychology than on numbers. Unfortunately, confidence is an important and fragile commodity. Confidence in big U.S. banks and the resilience of the U.S. economy has been hurt by the worries over Europe’s problems, but feelings are notoriously unreliable.

    Since 1950, economic expansions have lasted 6 times as long as economic contractions. Economic expansions are defined as “trough to peak” periods and economic contractions are defined as “peak to trough” periods. The average expansion has lasted 62 months while the average contraction has lasted 10 months. (Source: By The Numbers) So think long term—for yourself and your beneficiaries—and don’t forget the power of positive thinking.

    One of the worst things that you can do is obsess over the stock market, minute to minute. If you do that, you’re likely to buy when people are optimistic about rising prices and the market is expensive, and bail out when pessimism reigns and the market is relatively cheaper. One of the best things you can do is to ignore the day-to-day peaks and valleys. You can ride out declines without losing sleep (or at least not much) if your food-and-lodging money is not at risk, so try to avoid investing in the stock market unless you have at least a cash reserve large enough to cover your living expenses for a minimum of 3 to 9 months.

    If you have any questions on any of these subject matters, please write them down and we would be happy to discuss them with you personally. As always, we appreciate and thank you for being our client.

    Note: The views stated in this letter are not necessarily the opinion of Comprehensive Asset Management and Servicing Inc., and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.
    Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
    Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs or expenses. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.
    There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.
    This optimism about the future does not minimize the fact that we have gone through one of the worst economic periods in market history. Remember that equity markets are volatile and an investor may lose money and there is no guarantee that securities will appreciate. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.
    The price of commodities is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.
    In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. The investor should note that investments in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default.
    Investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes.
    Sources: Wall Street Journal (68/10, 6/10/10, 6/11/10), Business Week (), New York Times (), By The Numbers (3/15/10, 5/24/10, 6/14/10), Barron’s (6/14/10), Times Magazine (5/3/10), Kiplinger’s Personal Finance (6/9/10, 8/2010),The Economist (6/5/10, 6/19/10), Bob LeClair’s Finance Newsletter (), Forbes (7/19/10), USA Today (), Nick Murray Interactive (September 2009), Fortune Magazine (5/24/10, 7/5/10), Market Watch (7/8/10), Dow Theory Forecasts (6/14/10), Investment News (7/6/10), AARP Magazine (June 2010), Monday Morning Outlook Newsletter (6/7/10)

    Investment Advisory services offered through Comprehensive Capital Management, Inc., an SEC-Registered corporation. Securities offered through Comprehensive Asset Management and Servicing, Inc. Member, FINRA/SIPC/MSRB

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  • 15Jun

    Wow—are we on a rollercoaster? If you’ve been feeling like the stock market has been much more volatile lately, guess what?  You’re right!

    Nothing rattles investors quite like the storm after the calm.  After its low in March 2009, the market rose as smoothly as an escalator. Over the previous 12 months, the typical daily swing averaged just 1.4%. Then came May 6th—the day when the market fell almost 1000 points, or 9.6%, before rebounding and ending the day up being down “only” 3.2%. On May 7th the Dow swung 3.3%; the day after that 4.2%,  and since then the market has continued bouncing back and forth almost like a ping pong ball.  (Source: WSJ, May 7, 2010, A1) Over the previous 12 months, the typical daily swing had averaged just 1.4%.  (Source: WSJ, May 15, 2010, B7)

    If you feel shaken, that is understandable.  Volatility is back.  May 2010 was a bad month for equities with the S&P 500 falling 7.9 %.  Market volatility isn’t bad in itself—it is your reaction to it that matters the most.  Many psychological experiments have shown that the stress induced by watching a volatile market may lead you to try to lock in your gains, especially your winners, often before you should.  Yet the stock market is no more or less predictable today than it ever has been before.

    For example, on Thursday, May 27th, the Dow increased 284 points, its second-best day of the year.  Oil had its best one-day gain since last September.  The rally was sparked primarily by China’s promise not to unload European debt and by the perception that the market had overshot and the US economy remained relatively healthy

    Yes, the thousand-point drop of the Dow Jones Industrial Average in less than an hour was heart-stopping, but the decline at the end of the day was only 347 points, and the thousand point drop was less than 10%.  It wasn’t even half the 22.6% drop that the index experienced on October 9, 1987 (see chart for comparison).  Resist the temptation
    to react impulsively to the market drop. (Source: Investment News, May 17, 2010, Page 10)

    While we’ve all heard a number of explanations for such a significant drop and rebound, we’re still waiting for the government to officially announce their specific reasons (and hopefully ways to prevent this from happening again). We will keep you informed.

    Many investors have been taken from one extreme to the other during much of the past decade, celebrating as stocks soared to unprecedented highs and suffering as equities endured some of the steepest declines on record. For example, after declining 37% in 2008, the Standard and Poor’s 500 Composite Index continued to drop sharply in the first 9 weeks of 2009.  It reached a low on March 9, 2010—55% below the peak of October 2007, representing the largest-to-point decline in 70 years.  Then, after hitting its bottom in March, the market turned its decline into a breathtaking rally. From that day until the end of the year, the S&P 500 soared 68%. For the full year, the index advanced 26% (all S&P returns include reinvested dividends).  (Source:  Insight – American Funds, Spring 2010)

    The steady advance in the broader stock market since early March 2009 had to end eventually. No market advance in history has proceeded without periodic pullbacks.  With all of the talk of the potential collapse of the European Union (EU) and Euro, a major oil spill in the Gulf of Mexico and the Chinese government’s efforts to cool its nation’s red-hot economy, it is easy to worry, but this decline does not necessarily mark the beginning of a new Bear market. Instead, it appears the market is in a routine correction, declining from an overbought condition after an 80% advance over the last 14 months.

    Let’s compare today’s situation with the last time the S&P rushed to 1100 on the way down. Last time, interbank lending and general credit conditions were in severe distress, whereas today they are still well within their normal zones. Last time, the worst of the economic shocks were ahead of the market, whereas today domestic fundamentals are solidly improving, as many companies have experienced better-than-projected first quarter corporate earnings. Also, the S&P 500 is now at 14 times current year-ahead projected earnings (P/E), which reflects the price decline plus the higher-than-expected earnings. This is usually a positive indicator.

    It’s true that today we face a very mixed bag of economic data:

    • Unemployment still remains high at almost 10%.
    • Inflation appears not to pose a problem, with the Consumer Price Index over the last 12 months ending April 30, 2010, increasing only 0.9%, the smallest year-over-year increase since 1966.
    • Housing statistics were mixed—some good news, some not so good. Housing starts were better than expected, coming in above 0.8% in April. However, building permits, an indicator of future growth, fell -11.5%, probably due to the expiration of the First-Time Homebuyer’s Credit on June 30, 2010.
    • Another area of concern is North and South Korea.  North Korea has been accused of sinking a South Korean warship in March, prompting the US and South Korea to plan a joint military exercise.
    • Some investors are worried that the US economy could be headed for another downturn.
    • The debate over the restructuring of our financial system has put many investors on edge, anxious about how these changes might affect Wall Street.  (Source:  Bob LeClair’s Finance & Markets Newsletter, May 22, 2010)

    Europe’s Credit Problems

    Another cause for our current volatility is Europe’s recent credit problems, especially Greece, Portugal and Spain.  However, Greece accounts for less than 0.6% of the global economy.  Its debt is huge relative to the size of the Greek market, but isn’t significant in a global context.  (Source: Personal Finance, May 26, 2010)

    The real fear is contagion.  Many investors are worried that a Greek default would soon spell trouble for Portugal and Spain, who are also heavily indebted. Even more worrying is the question of whether these problems could spread to Europe’s larger core markets, such as the U.K. and Italy. The credit freeze that followed the Lehman Brothers’ bankruptcy is still fresh in many investors’ minds, and they worry that Europe’s debt crisis could spiral out of control with similarly dire consequences for the global economy.

    Recognizing these risks, the EU announced a trillion-euro bailout to support the region’s weaker economies.  The package includes money for a stabilization fund and provides monies to countries that are unable to issue bonds at reasonable rates in the private market.

    The Dow celebrated Europe’s one trillion dollar bailout plan with its biggest 1-day jump in over a year, rebounding 4.4% on Monday, May 10th, from the selloff the week before that. (Source: Barron’s, May 17, 2010, Page 9)

    The EU will also monitor the fiscal condition of countries using the Euro far more closely.  This will force countries in the Euro-zone that require stabilization funds to take concrete steps to reduce their deficits and spending. While many economists believe that this stabilization package should be more than sufficient to address the credit contagion in Europe’s periphery, many investors are convinced that longer-term fiscal problems still need to be addressed and solved.

    Many investors are worried that the incident that occurred in Europe could happen here in the United States, too.  Just look at the numbers. Greece has a budget deficit of -9.9% of GDP, Spain is -8.8% and Portugal is -7.6%. How about the US? We’re at -9.4%!  This is certainly a concern! (Source: Bob LeClair, May 22, 2010)


    Conclusion

    The significant volatility over the last several weeks illustrates continuing confusion about the economic environment, concern about the instability of the European economy and fear that this might also affect other global economies, including the United States!  Wall Street has also become more jittery thanks to the SEC’s fraud charges against Goldman Sachs and the progress of the financial reform bill. This volatility also reflects many investors’ current lack of trust and confidence in Capitol Hill.

    Have the economy’s boom-to-bust cycles shortened significantly, or does our mood just make it seem that way? One minute we are basking in the glow of job growth and reawakened consumerism, and the next we are pondering a slowdown brought on by Europe’s spending cuts and China’s credit constriction. But despite the sensationalist headlines, the stock market hasn’t crashed; the S&P 500 is down less than 10% from its highs, well within historic norms for market pullbacks. The European credit concerns haven’t caused a global credit crunch or economic slowdown.  Meanwhile, although China’s economy appears to be slowing, it is still estimated to grow more than 9% this year. (Source: Kiplinger’s Personal Finance, May 26, 2010)

    Given the recent volatility and the returns on equities, many investors’ concerns about equity investing are understandable.  In fact, the recent volatility may have changed the way some investors think about their portfolios and diversification.  However, it would be wise not to make too many drastic changes at this point before you consider the following general rules of thumb:

    1. When investing in equities you should maintain a long-term view. This approach requires holding enough money in liquid assets to cover personal expenses for the next couple of years, along with an ability to look beyond the short-term and maintain a steady hand during times of volatility. An adequate emergency fund should help prevent you from being forced to sell your portfolio during a Bear market.

    1.Remember the old adage; “Be fearful when others are greedy, and greedy when others are fearful.” This important guiding principal could be seen during 2008 and 2009. Those who sold their stocks in fear when the market was at its worst simply turned paper losses into real ones.  Those who bought during this period may be looking at healthy gains.  Many investors that simply held through it all are essentially back to where they were before the crisis began. Whether 2009 was a good year or not is merely a matter of perspective.

    2. Practice patience. Many money managers think that times like now provide a potential buying opportunity. Among the various reasons optimists think this is a passing storm are that the Federal Reserve is committing to exceptionally low benchmark interest rates for months to come, the Central Bank recently boosted its forecast for economic growth, and many companies are reporting stronger profits than expected. In addition, profit forecasts for most of the companies in the S&P 500 stock index have been little changed over the past 2 weeks, according to Thompson Reuters. (Source: WSJ, May 24, 2010, C2)

    3. One of Sir John Templeton’s “Rule’s for Investment Success” was “Do not be fearful or negative too often”.
    Once again as we have mentioned in this report, it is not time to panic.  The recent market turbulence reminds us that it is always a good idea to re-evaluate your current financial situation and confirm that your risk tolerance, goals and needs are still appropriate.  I will be doing this at our next review, but if you feel you would like to do this sooner do not hesitate to call us immediately!

    As always, thank you for having the confidence in us to help you with your finances.
    P.S.   Remember—the stock market is one of the few things that people don’t buy when it goes on sale!

    About Jerry Lynch:

    Jerry Lynch is President of JFL Consulting and has over 24 years in insurance and financial planning, working with individuals in a variety of different planning areas.  He is one of the few advisors to be listed in the 2004-2010, “America’s Top Financial Planners” by Consumer Research Council of America.  In addition, Jerry is a regular contributor to the Star Ledger, WABC’s Talk Radio, and CNBC.

    If you’d like a copy of this article sent to someone else who would benefit from this information, please contact Pam at JFL Consulting Inc, at (973) 439-1190.

    This article is for informational purposes only.  This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a tax professional or financial professional.

    Due to volatility within the markets mentioned, opinions are subject to change without notice.  Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs or expenses.  No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.  International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards.  These risks can be accentuated in emerging markets.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment.  Remember that equity markets are volatile and an investor may lose money and there is no guarantee that securities will appreciate.

    Jerry Lynch is a Financial Planner with JFL Consulting, Inc., and also offers Securities as a Registered Representative of Comprehensive Asset Management & Servicing Inc. – Member of FINRA/SIPC

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  • 15Jun

    N.J. couple’s saving habits lead to financial security in retirement
    Published: Sunday, June 13, 2010, 4:00 PM

    Karin Price Mueller/The Star-Ledger Karin Price Mueller/The Star-Ledger
    Follow

    George and Josie, both in their early 50s, are almost done funding college educations for their two children, 22 and 19. They’re looking ahead to the next stage in their lives. “Our biggest financial concern is having enough money for a comfortable retirement in New Jersey,” George says. “How long do we both have to work to reach that stage?”

    The couple, whose names have been changed, have set aside $686,000 in 401(k) accounts, $5,000 in IRAs, $179,000 in mutual funds, $76,000 in a brokerage account and $60,000 in liquid accounts. They also have $99,000 ready to pay for college bills. They each expect a small pension upon retirement, which will add up to $31,200 of income a year.

    The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple assess retirement age and savings strategies so they never have to worry about outliving their money.

    “They want to know if they have enough money to retire at $5,000 monthly income after taxes — approximately $6,000 pre-tax, or $72,000 per year — and the answer is definitely yes,” Lynch says.

    THE SITUATION

    George, 53, and Josie, 51, want to know how much longer they need to work to have a comfortable retirement. They’re phenomenal savers — when you take into account their company matches, they save about 25 percent of their income. They also live well below their means.

    See the couple’s retirement cash flow

    NET WORTH

    ASSETS
    Checking: $10,000
    Savings: $40,000
    Money market: $10,000
    IRAs: $5,000
    401(k): $686,000
    Brokerage account: $76,000
    Mutual funds: $179,000
    College savings: $99,000
    Home: $900,000
    Personal property: $20,000
    Autos: $5,000
    Total assets: $2,030,000

    LIABILITIES
    Mortgage: $155,000
    Total liabilities: $155,000

    Total net worth: $1,875,000

    BUDGET

    ANNUAL INCOME
    George: $140,000
    Josie: $110,000

    MONTHLY EXPENSES
    Income taxes: $3,900
    Housing $2,805
    Utilities: $755
    Food: $750
    Personal care: $350
    Transportation: $875
    Medical: $500
    Entertainment: $200
    Vacations: $600
    Gifts: $50
    Charity: $25

    THE WAY OUT

    The Somerset County couple should feel very comfortable about their prospects, and now it’s time to fine-tune their plan. They should diversify their investments, making sure they’re not overly aggressive, and they should reconsider the use of their managed account because that doesn’t seem to be adding to their overall portfolio health and it’s costing them money. Estate planning is also a concern.

    George and Josie are big savers, and that’s what put them in such a good position. They save close to 25 percent of their income (including the company match) and they live well below their means. Lynch says anyone who saves that much, even if they are making little mistakes, will be financially successful over the long term.

    Lynch had suggestions to correct those mistakes.

    First, they have a managed account, meaning there’s an adviser who chooses investments for them. That adviser is doing absolutely nothing for the fees he or she is being paid, Lynch says. For example, the account holds exactly the same funds and basically the same allocation as other accounts the couple holds, with no differentiation among the investments in the tax-deferred and the taxable accounts

    “Taxable accounts should focus on funds that have lower turnover, longer holding periods and using more tax-efficient holding tanks like tax-free money market accounts,” Lynch says.

    He recommends more diversification.

    Next, the couple desperately need some tax advice. Based on their managed account, Lynch says, it appears the adviser has no clue they’re in the 35 percent marginal tax rate, which would go up to 38 percent next year with the repeal of the Bush tax cuts.

    “How can you manage taxable accounts without having a clue of the tax impact of the investments that you are selecting for your client?,” he says. “The adviser has no tax strategy and is totally unaware that the investor will lose 35 percent (38 percent next year) of every additional dollar that they earn.”

    Lynch says they need to consolidate their investment accounts. Right now their assets are spread all over, making it very hard to keep track of their overall portfolio.

    While George and Josie have been very successful 401(k) savers, Lynch says it might be time to pare back their contributions so they invest enough for the company match but not much more.

    “If they keep putting away the amount that they are, they will have too much in the account,” he says. “Generally you will not want to take distributions from this account in retirement as you have to then pay taxes, so this will continue to grow until the year following 70½ when you are required to take a minimum distribution or you get hit with a 50 percent penalty plus income taxes.”

    Instead, he recommends converting part of their 401(k)s with former employers into Roths after retirement because Roths don’t have required minimum distributions. They also can take the money they had been contributing to the 401(k)s and add those funds to taxable accounts, which will give them more spending flexibility in their early retirement years.

    Next, they need to review their estate plans, which haven’t been updated in a long time. It appears they’ll have far more cash flow than they’ll need in retirement, and that means they need to make plans for the money.

    It would make sense to meet with an estate planning attorney to discuss setting up a trust to make sure assets they want to go to their children will be set up correctly.

    “Using a trust may provide for better benefits such as divorce protection and just making sure that they are spending the money wisely,” Lynch says.

    The couple also need to look at all the beneficiaries listed on their accounts because they say they never established contingent beneficiaries on many accounts. IRAs, for example, will not pass through a will, so the proper beneficiary designations is essential.

    They need to make sure they have proper medical directives and related paperwork.

    While they’re in a good position now, Lynch warns them not to make any big mistakes.

    He says there’s no need for them to be overly aggressive with their retirement investments in order for them to have a comfortable retirement. A big loss from riskier investments could have a big impact on their outlook, while a big gain would do little to change their lifestyle.

    Get With the Plan involves readers anonymously divulging their personal financial information in exchange for free advice from a professional. Readers who would like to participate may contact Karin Price Mueller at kmueller@starledger.com.

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  • 27May

    We are all familiar with the two famous sayings, “The only thing that is constant is change,” and, “Confusion is an enemy of planning.” In 2010, when it comes to estate planning, both of these are true.

    When you first examine the fact that Congress did not reinstate an estate tax for 2010, it appears to be positive for the heirs of wealthy parents and of little consequence to anyone else. However, when you analyze the details a little further, you might conclude that Congress has increased the chances that many Americans will owe estate taxes on an inheritance from those who pass on after 2010.  Sadly, many current wills and trusts are written with the assumption that there is an estate tax and this could therefore become problematic for a surviving spouse or beneficiary.

    Congress has looked at several different proposals to finalize estate tax rules and rates starting immediately (or even retroactively to January 2010).

    Here are some things that those of you who have accumulated wealth need to know about the estate tax as well as some suggestions to protect you and your heirs, at least until Congress takes further action.

    • The estate tax and generation skipping transfer tax (a tax on assets given to grandchildren) were both repealed under current law at the end of 2009.
    • Both the estate tax and the generation skipping tax are scheduled to return in 2011 at the same unfavorable rate that applied 10 years ago. That is, currently for 2011 there will be a $1,000,000 exemption with a 55% tax on the remainder of the estate.
    • Currently, there is still a gift tax if you give away more than $1,000,000 in your lifetime, but the current tax rate has been reduced from 45% to 35%.
    • Your heirs now have to use the original price paid for an asset when computing the tax liability instead of the value at the time of the owner’s death. This drastic change of “cost basis” could become very expensive and difficult for your heirs to manage. For example, if you inherit shares of a security that your parent accumulated many years ago, you now need to find the original price purchased, adjusted if at all, for reinvested dividends (the taxes you already paid). When you sell these shares, you may owe a capital gains tax on the appreciation of these securities. Currently, each estate can exempt $1.3 million in gains from this “carry-over basis rule” while another $3,000,000 exemption applies to assets inherited from a spouse.

    These are just some of the confusing facts that financial professionals and estate planners have to work with in this year of change. As for the future, as we said earlier, “The only thing that is constant is change.” Congress has recently looked at several proposals that restore estate taxes (some of them even retroactively to the beginning of this year). In fact, one proposal that has continuously been bantered about is restoring the $3,500,000 exemption for estate tax and generation skipping transfer taxes and leaving a 45% tax rate for the remainder. Unfortunately, this does not make the job of estate planning easier.

    Year

    Lifetime Gift Tax Exemption

    Total Gift and Estate Tax Exemption*

    Generation Skipping Tax (GST) Exemption

    Gift, Estate
    and GST Taxes/Top Rates

    2009

    $1 million

    $3.5 million

    $3.5 million


    45%

    2010

    $1 million


    Unlimited


    Unlimited

    35%

    2011

    $1 million

    $1 million

    $1 million


    55%

    * The estate tax exemption amount is reduced for lifetime taxable gifts.

    Source: www.irs.gov

    The table above offers the current rates and exemptions that existed in 2009 and are in place today for 2010 and 2011. If you think the table is confusing, consider the fact that there has been discussion that if Congress passes any retroactive legislation, people with enough money at stake will bring potential lawsuits arguing that a retroactive tax is unconstitutional. Regardless of whether or not this happens, if Congress is to make a change for this year, the sooner they act, the fewer number of people will bring potential lawsuits and the quicker the government can start collecting taxes on large estates again. Congress must act quickly in order to reduce the number of potential lawsuits and continue collecting taxes on large estates.

    So what can you do to prepare in these confusing and changing times?

    Here are some steps to consider:

    How organized are your records?

    Everyone involved will benefit if you organize all of your records now to show the assets and the cost basis of those assets on anything that your heirs will inherit. In fact, if you are helping a sick parent or family member, it is probably worth your time to see if they kept records in order to avoid
    possible bookkeeping nightmares should you be affected by the carry-over basis rule.


    Review your Will and Living Trust.

    If you have these documents, please make sure they include language that protects you against the
    change in estate tax exemption amounts. Instead of naming a specific sum that will fund a trust, many investors refer to a percentage. Phrases such as “that amount,” or “that fraction,” or “that portion” are many times standard practice.  Although this year there is no estate tax, your documents will reflect your current intent.

    Consider a Bypass Trust.

    A Bypass Trust often includes a formula clause that allocates the maximum tax-free amount to the trust if you die before your spouse. This trust can then distribute your assets as you specify in the trust document. For example, it can leave money to your spouse and family members while your spouse is still alive and eventually pay what is left to the family members upon the death of your spouse. By using a trust rather than leaving your funds to your spouse outright you can be sure that neither the assets nor their appreciation will be considered a part of your spouse’s estate and therefore will not be subject to tax when he or she dies. Although there is currently no estate tax if you die, depending on how your formula clause is worded, it is possible that all of your assets can go into a Bypass Trust. Please proceed with caution because this strategy could lead to some potentially painful scenarios. For example, if the trust is not set up to make payments for your spouse, your spouse may get nothing. Another possibility is that if your trust is not set up to benefit your spouse, all of your money could be locked up into the trust and your spouse may wind up in a very awkward situation. Once again, it is time to review your Bypass Trust (sometimes called a “Family Trust”). See if there is a formula or clause that was specifically put in place to satisfy the inheritance tax that now potentially becomes a problem because of current tax laws. This is an area you should definitely review with a knowledgeable attorney.


    Review all your
    beneficiary designation forms.

    Some of your assets will not pass through a Will or Living Trust. For example, if you have life insurance or retirement accounts you need to make sure that your beneficiary designation forms are current with the beneficiary designations that you want. Remember, a beneficiary form will always override any trust or will directive.


    Confirm that you have a current and updated Durable Power of Attorney.

    Many investors do not have this essential document. Even if you have one, it is imperative that you make sure it is current and includes language that applies to today’s rules.


    It is time to give your
    estate plan a check-up.

    As of right now, the estate tax repeal covers many issues or concerns people have about the payment of estate taxes. In 2009, primarily those with over $3,500,000 were concerned about estate taxes. Please keep in mind that regardless of your net worth you still should have an estate plan.

    Estate planning goes far beyond taxes and is essential to all investors. Whether estate taxes are a concern for you in 2011 or not, it is always helpful to give your estate plan a check-up.

    For example, you should:

    Review what state taxes, if any, exist.

    Although the federal tax is currently in a state of flux and doesn’t exist for 2010, the state in which you officially reside can have estate taxes which may affect you. Please keep in mind that most states honor a Will that was signed within that state.  You should check with a local lawyer to make sure the state you live in honors your Will if you have moved states recently.

    Use trusts as needed.

    Trusts still continue to be an important part of estate planning and can sometimes protect against financially irresponsible family members, former spouses and creditors. They are still a helpful piece of estate planning but may need to be reviewed and updated.

    Think about not just 2010,
    but the future as well.

    This is a good time to revisit your current arrangements and make sure you understand the tax consequences that will go into effect next year on funds going to your spouse and your grandchildren. You may have to amend your current trust either now or shortly after any new laws are passed.

    Last but not least, take care of yourself
    and make sure that what you have
    spent your lifetime accumulating moves
    in the direction that you’d like!

    In conclusion, estate planning is a way to take care of yourself, the people you love and the funds you spent a lifetime accumulating. Whatever happens in Congress should not postpone seeking out the advice of a qualified financial professional and attorney to make sure that your estate is properly planned on your specific terms.
    As a financial planner, we help and direct clients with their estate plans. If you have any questions about yours, please give us a call.


    About Jerry Lynch:

    Jerry Lynch is President of JFL Consulting and has over 24 years in insurance and financial planning, working with individuals in a variety of different planning areas.  He is one of the few advisors to be listed in the 2004-2010, “America’s Top Financial Planners” by Consumer Research Council of America.  In addition, Jerry is a regular contributor to the Star Ledger, WABC’s Talk Radio, and CNBC.  He has be on CNBC’s, “On the Money” as well as “The Big Idea with Donny Deutsch”. and is a regular contributor to many national and regional publications and radio stations.

    If you’d like a copy of this article sent to someone else who would benefit from this information, please contact Pam Karkenny @ 973-439-1190


    Complimentary Financial Check-up

    If you are not currently a client of JFL Consulting Inc., we would like to offer you a complimentary financial check-up.  We pride ourselves on providing prompt, personal and highly professional services. The firm is committed to meeting its clients’ financial needs now and in the future.

    JFL Consulting Inc., wants to offer you a complimentary, one-hour, private consultation with one of our professionals at absolutely no cost or obligation to you. To schedule your financial check-up, please call Pam at JFL Consulting Inc., at (973)-439-1190

    This article is for informational purposes only.  This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional.

    Jerry Lynch is a Financial Planner with JFL Consulting, Inc., and also offers Securities as a

    Registered Representative of Comprehensive Asset Management & Servicing Inc. – Member of FINRA/SIPC

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