The Big Estate Planning Question of 2011

THE BIG ESTATE PLANNING QUESTION OF 2011

Should you exploit the new $5 million lifetime gift exemption?

Presented by Kip A. Hoover

In late 2010, Congress reunified the estate tax, gift tax and generation-skipping tax (GST), giving them all top rates of 35% with $5 million lifetime individual exemptions.¹

In addition, the estate and gift tax exemptions are now portable between married couples. Upon the death of one spouse, the executor of the estate can elect to transfer any unused portion of the $5 million individual exemption to the surviving spouse.¹

At the moment, these tax rates and generous exemptions apply through 2012. In 2013, things may change. So estate planning and tax planning professionals are alerting their clients of this window of opportunity.²

The big news: the $5 million lifetime gift tax exemption. For married couples, the lifetime gift tax exemption is actually $10 million thanks to the portability factor. In 2010, the lifetime gift tax exemption was down at $1 million - and it wasn't portable.^3,4

If you used up the prior $1 million lifetime gift tax exemption before 2011, you now can gift up to $4 million more before 2013 given the new $5 million limit. (The lifetime gift tax exemption will be indexed for inflation beginning in 2012).²

So considering all this, the big question is: should you give away as much as you can to your children before 2013 with the intent of reducing inheritance taxes down the road?

After all, lifetime gifts reduce your taxable estate. Additionally, if you give your children appreciated securities, the long-term capital gains of those securities will be taxed at their capital gains rates rather than yours. If your children's income puts them in the 10% or 15% tax bracket, their capital gains tax rate is 0% through 2012.^1,4,5

Portability means great flexibility - provided you play by the rules. Let's illustrate how this works.Dad doesn't gift up to $5 million during his lifetime - he only ends up gifting $3 million. Well, Mom can subsequently gift up to $7 million after he passes thanks to the portability rules, as there would still be $7 million to go toward the $10 million lifetime gift tax exemption for a married couple.

There is an important rule you must follow to realize this portability: when the first spouse passes away, the executor of his or her estate must file an estate tax return even if no estate tax is owed. That estate tax return formally notifies the IRS that you are transferring the unused or partially used gift tax exemption.^4,6

Incidentally, this estate tax return is due nine months after the death of said spouse, with a six-month extension permissible.⁶

Do families need bypass trusts anymore? We can't say goodbye to them, because 15 states still levy their own estate taxes with exemptions commonly at $1 million or under. Moreover, who knows if portability will be permitted five or ten years from now?⁶

The potential for savings could be great. When you look at this remarkably generous lifetime gift tax exemption allowance in light of certain estate planning techniques that might leverage it - such as the grantor-retained annuity trust and the family limited partnership - the potential is intriguing.

The problem: we don't yet know what 2013 will bring. Yes, Congress could retain the $5 million lifetime individual exemption and portability for 2013 and beyond. Yet if Congress lets this sunset, we're back to a $1 million individual lifetime gift tax exemption with no portability. So, estate and tax planning professionals must again weigh the degrees of opportunity and ambiguity presented in our shifting estate tax laws.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com.

http://r20.rs6.net/tn.jsp?llr=w8loveeab&et=1104665133463&s=0&e=001G9ssiIAjOoPfb4bxpI4QW4cXHynWGE2AgNwIDRxQcth2CsWeE04DnUBKQP0EHHuYRo1q9P7uJ23yLc0BJbWl0IPdNT6fY-jmkKutDAhfb3RIc-oLlYQes-yqJJsxYIZU

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations.

1 online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]

2 blogs.forbes.com/hanisarji/2010/12/29/gift-tax-under-the-2010-tax-relief-act-p-l-111-312 [12/29/10]

3 blogs.forbes.com/hanisarji/2011/01/02/new-year-different-rules-2011-estate-tax-gift-tax-gst-tax-rules/ [1/2/11]

4 fa-mag.com/online-extras/6827-new-estate-tax-law-poses-dilemma-for-the-rich.html [2/14/10]

4 fa-mag.com/online-extras/6827-new-estate-tax-law-poses-dilemma-for-the-rich.html [2/14/10]

5 hrblock.com/taxes/tax_tips/deductions_credits/gifts.html#3 [2/18/11]

6 forbes.com/2010/12/23/married-couples-guide-new-estate-tax-personal-finance-deborah-jacobs.html [12/23/10]

6 forbes.com/2010/12/23/married-couples-guide-new-estate-tax-personal-finance-deborah-jacobs.html [12/23/10]

WHITE HOUSE PLANS TO WIND DOWN FANNIE AND FREDDIE

WHITE HOUSE PLANS TO WIND DOWN FANNIE AND FREDDIE

Congress will consider three suggestions.

Provided by Kip A. Hoover

A fundamental reform for the housing market. For two-and-a-half years, economists and housing industry analysts have wondered what would happen with Fannie Mae and Freddie Mac. On February 11, they got an answer: the Obama administration announced plans to shut down both of the troubled mortgage giants by 2018 or sooner.¹

As he met with the press, Treasury Secretary Timothy Geithner cited the “very broad consensus” that the government should play “a much smaller role” in the housing market. Capitol Hill Republicans would agree, pointing to the $154 billion price tag for the 2008 bailout of both firms. (That is the Treasury’s estimate.)^2,3

The choices on the table. The Obama administration’s white paper offers three proposals to Congress, with the hope of legislation emerging by 2014.^1,2,4,5

• Option 1. The government walks away from the mortgage market except for the FHA, VHA and a few other programs designed to help low-income and moderate-income homebuyers.
• Option 2. The government offers a kind of downside protection. In addition to backing home loans via the entities mentioned in Option 1, it would also provide “reinsurance” to guarantee private mortgages in the event of a real estate downturn and/or recession. But the guarantee would only apply in a crisis.
• Option 3. A variation of Option 2 that would provide a “reinsurance” backstop for a range of mortgage investments already guaranteed by private insurers. The “reinsurance” would take effect if a private insurer couldn't pay (i.e., if its shareholders were wiped out).

The timeline. The Obama administration may be long gone by the time all this plays out, but here is the three-stage conception of how it will wind down both agencies.^2,6

• Stage 1. Between now and 2014, the government gradually reduces its subsidy for the housing market. The conforming loan limit for Fannie and Freddie – now $729,000 in some metro areas – is scheduled to shrink to $625,000 in October. In addition, Fannie and Freddie would start to require 10% down for all loans and fees would rise for the government guarantee.
• Stage 2. Starting around 2013-2014, the federal government will “accelerate the pace of transition” (in Geithner’s words) to a mortgage market based in private capital with government intervention occurring only as needed.
• Stage 3. This stage depends on Congress. The idea is that by the middle of this decade, legislation emerges spelling out Option 1, Option 2 or Option 3 above in detail and a new law is passed.

The big picture. By the end of this decade, it could be considerably harder to buy a home. If the government gets out of the mortgage market (or at least drastically reduces its role), a major influx of private capital needs to flow into the housing system to replace the federal subsidy, with the following possible effects:

• A 30-year fixed rate mortgage could become significantly more expensive. How much more expensive? In early February, Credit Suisse projected that interest rates on a basic 30-year FRM could rise by up to 2% if Fannie and Freddie disappeared.⁷
• If the Option 1 scenario occurs, you could see considerably fewer FRMs and more ARMs. In fact, you would likely see fewer fixed-rate mortgages if Options 2 or 3 were chosen by Congress.
• Big banks could grab a bigger chunk of the mortgage market.
• Higher mortgage rates could negatively impact home sales - and in turn, home prices.

We’ll have to wait and see how this all plays out, all while hoping it won’t lead to a decline in home ownership.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com.

www.teichmanfinancial.com

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – money.cnn.com/2011/02/11/news/companies/fannie_mae_freddie_mac_white_house_proposal/ [2/11/11]

2 – usatoday.com/money/economy/housing/2010-10-21-fannie-mae-freddie-mac-bailout_N.htm [10/22/10]

3 - cnbc.com/id/41529671 [2/11/11]

4 –blogs.abcnews.com/george/2011/02/the-end-of-fannie-mae-and-freddie-mac.html [2/11/11]

5 –nytimes.com/2011/02/12/business/12housing.html [2/11/11]

6 –finance.fortune.cnn.com/2011/02/11/fannie-mae-the-long-goodbye/ [2/11/11]

7 – cnbc.com/id/41533702 [2/11/11]

8 – http://montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [2/13/11]

THE 2% opportunity - February 12, 2011

THE 2% opportunity

The 2011 payroll tax holiday may give you a chance to boost your 401(k).

Provided by Kip A. Hoover

What would you do with an extra $1,000 or $2,000? The Tax Relief Act of 2010 will give many of us the equivalent of a 2% raise in 2011. Employee payroll taxes have been cut from 6.2% to 4.2% this year.¹ So if you pay into Social Security, you are looking at a rise in your take-home pay.

What are your plans for that extra money?

How about directing it into your 401(k) or IRA? That 2% “raise” will show up in your paychecks throughout the course of the year – it will come to you incrementally rather than as a lump sum. Still, 2% is nothing to scoff at – if you make $50,000 in 2011, you’re looking at $1,000 of found money.

What could $1,000 do for you over 20 or 30 years? Well, let’s see. If you invest $1,000 today into a hypothetical portfolio and simply let it sit there for two decades with a 6% annual return, you could end up with $3,207.14 in principal and interest.  If the initial grand just sits there for 30 years at 6% interest, it turns into $5,743.49. (That’s using annual compounding – if you plug in 30 years of daily compounding, it becomes $6,048.75.)²

Let’s say you take this one step further and direct an extra $1,000 into your 401(k) for 30 straight years beginning in 2011. Let’s be reasonably optimistic and assume an 8% annual rate of return across that time. Under those conditions, your $30,000 aggregate contribution would turn into about $125,000 with compounding – and that’s not even considering the possibility of an employer match to your 401(k) during some or all of those years.³

The money is significant for a couple. If you and your spouse each make $70,000, that’s an extra $2,800 coming to the two of you in 2011 (assuming you and your spouse don’t work for the government, the railroads or in some capacity where you don’t pay into Social Security). Everyone wants a little more retirement income, and directing 2% into your retirement plan for one year or multiple years could help.

While we’re on the subject of retirement income, the White House says that the payroll tax cut will have no effect on a worker’s future Social Security benefits.⁴

Other options for the 2% tax break. Most Americans will simply spend the money resulting from this tax break. That’s not exactly a negative: the Obama administration visualized this as a way to pump up consumer spending.

Yet if you don’t devote the money to your 401(k), you have a number of alternatives besides spending it.

• You could open a Roth IRA with the money.
• You could create a rainy-day fund. Set up an auto-transfer of the money from your checking account to your savings account. Let that $800 or $1,000 or $1,600 or whatever accumulate during the course of the year.
• If you have a rainy-day fund, you could put the money auto-transferred to your savings account across 2011 into a CD at the start of 2012 (when interest rates just might be higher).
• You could use the found money to pay off credit card debt or other consumer debts.
• You could even make an extra home loan payment at the end of 2011 (should it make financial sense to do so).

Don’t underestimate the potential of this tax cut. If you and your spouse each make $80,000, that’s an extra $3,200 between you in 2011 (assuming you and your spouse don’t work for the government, the railroads or in some capacity in which you don’t pay into Social Security).

This tax holiday could even be prolonged. In recent decades, we have seen some “temporary” tax cuts stick around. If the jobless rate stays above 8% through 2011 (and it might), voices in Congress might push to extend the payroll tax cut for another year. It could happen, provided the federal government finds a way to direct more money into Social Security.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com and http://www.teichmanfinancial.com/

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – content.usatoday.com/communities/theoval/post/2011/01/obama-team-touts-payroll-tax-cuts/1 [1/14/11]

2 – ehow.com/how_5936795_manage-finances_-earned-interest.html [2/4/11]

3 – money.cnn.com/retirement/guide/investing_basics.moneymag/index.htm [2/4/11]

4 – whitehouse.gov/sites/default/files/social_security_payroll_taxes.pdf [12/10/10]

5 – http://montoyaregistry.com/Financial-Market.aspx?financial-market=why-arent-you-maxing-out-your-401k&category=2 [2/6/11]

UNREST IN EGYPT – JANUARY 28, 2011

UNREST IN EGYPT – JANUARY 28, 2011

What does it mean for the markets?

Provided by Kip A. Hoover

Will the Mubarak government be toppled? Egyptians took to the streets in Cairo and other major cities Friday, facing riot squads and armored personnel carriers as they demanded political reforms and an end to the 30-year rule of the country’s president, Hosni Mubarak.

The Mubarak government shut down the nation’s internet providers and mobile phone network and imposed a nationwide nightly curfew within a 36-hour period Thursday and Friday. In response, a huge crowd surrounded the Cairo headquarters of Mubarak’s National Democratic Party (which was set on fire) and the nation’s key radio and television headquarters. Great Britain’s Telegraph reported that 870 in the crowd suffered injuries, with some protestors being shot.¹

How did the markets interpret the turmoil? The reaction was as expected: stocks dived, oil and gold prices immediately climbed and there was renewed interest in the dollar and U.S. government bonds.

Gold gained $22.30 (1.69%) on the COMEX, while oil rose $3.70 (4.32%) on the NYMEX. At the end of the U.S. trading day, gold settled at $1,340.70 per ounce and oil had topped $89 per barrel ($89.34). The U.S. Dollar Index moved north 0.55% on the day.^2,3

The Dow, NASDAQ and S&P 500 all tumbled Friday, though the descent also reflected disappointment over earnings reports from Ford and Amazon. On the day, the Dow fell 166.13, the S&P slipped 23.20 and the NASDAQ dropped 68.39.⁴

Basically, this is putting Europe on the back burner. For about a year, Wall Street has been watching the sovereign debt crisis in the EU. Now the focus shifts, or at least is split.

What if the Suez Canal is shut down? The possibility has come up given the level of Egypt’s unrest. It wouldn’t be just oil prices that would suddenly spike. Prices of other hard assets could rise as well, because the canal is a vital shipping channel for many other raw materials. Fear was back Friday: the CBOE VIX, the so-called “fear index”, was up 23.30 and hit an intraday high unseen since December 2.⁴

Was this simply the cue Wall Street had been looking for? There was the sense recently that stocks had been overbought, that some kind of selloff was coming. (After all, the Dow had been on an eight-week winning streak.) Friday’s events may have given institutional investors the sell signal they were waiting on – volume was considerable on Wall Street during the trading day.

Is this an isolated geopolitical event, or a spark? That, perhaps, is Wall Street’s biggest worry. Many observers think the demonstrations and unrest in Egypt were directly inspired by earlier protests in Tunisia and Lebanon. The big question is whether that inspiration will now spread to other Middle East nations with authoritarian governments, such as Yemen and Saudi Arabia. Monday promises to be a very interesting day on Wall Street.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com

http://www.teichmanfinancial.com/

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

Citations

1 – online.wsj.com/article/SB10001424052748703296604576005430598327972.html [1/28/11]

2 –blogs.wsj.com/marketbeat/2011/01/28/data-points-energy-metals-449/ [1/28/11]

3 –cnbc.com/id/41314224 [1/28/11]

4 –marketwatch.com/story/us-stocks-waver-ge-microsoft-tug-at-dow-2011-01-28?dist=afterbell [1/28/11]

5 –montoyaregistry.com/Financial-Market.aspx?financial-market=the-financial-security-rulebook-5-crucial-steps&category=3 [1/28/11]