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Bandera County Courier is published weekly by Gail S. Joiner, 1210 Hackberry St., Bandera, TX 78003. Subscription price $26 per year in Bandera County, TX; $36 per year for other Texas counties; $40 per year out of Texas. POSTMASTER: send address changes to Bandera County Courier, P.O. Box 1704, Bandera, TX 78003. Periodicals Postage pending in Bandera, Texas.

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More month than money Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Oct. 11, 2007    Running out of money before running out of month is a common problem not restricted to working class people. Our national savings rate reveals that, on the whole, Americans are pretty dismal savers. Having a hefty income, more often than not, appears to mean hefty expenses as well.     For quite some time now we have been spending as much or more than we earn and consumer debt levels are at or near all time highs. Our political leaders seem to want us to both spend more to stimulate the economy and save more to fund the deficit. A neat trick, if our incomes don't go up and we're already up to our necks in debt.     I for one am a strong advocate of increased savings. Our personal balance sheets need the strong dose of equity corporate America is currently giving itself. Since we can't sell shares in ourselves, let's all resolve to save more. Saving just $25 per month, invested at 5% yields over $20,800 in 30 years. Anybody born after 1965 has at least 30 years before they turn 65.     How do we help ourselves to increase our rate of savings? First, establish a long term goal. A well established, written goal is the foundation of all financial planning. Increased savings may appear to come at the expense of one's current lifestyle, so a goal that's worth working for is essential if you want to have any hope of success.     The next rule is pay yourself first. When you sit down to pay the monthly bills, you should write the first check in the form of an investment toward a long-term goal. The use of automatic debits to the checking account and/or payroll deductions is a marvelous way to begin this program. It will also illustrate the amazing powers of compound interest and dollar-cost averaging over time.     Third, avoid the over-use of consumer debt, even if it means cutting up a credit card or two. Go ahead, you'll probably feel better and your wallet will close easier. Almost anyone with a credit card can get a 6% to 19% guaranteed return on their investment just by paying off credit card debt. As a society, we need to learn that the offer of a pre-approved credit card with a $5,000 limit does not translate into a $5,000 increase in lifestyle.     You'll notice an absence of budgeting in these suggestions. It's not that budgeting is a bad idea, in fact it's a pretty good one for some people. However, most seem to lack the discipline it takes to really make a budget work. It's far too easy to rationalize a budget-busting expenditure, as politicians in Washington are constantly proving.     Most people spend to the level of their income. Their lifestyles automatically adjust upward with every increase in salary. By paying themselves first and avoiding the credit card temptation, their lifestyles will miraculously adjust to their new level of income. After a few months, they won't even miss the money they've begun to save.

Financial columns available in the on-line edition of the Courier:

More month than money	Published Oct. 11, 2007
A leaseback transaction	Published Oct. 4, 2007
Reassessing your risk tolerance	Published Sept. 27, 2007
Your personal asset allocation	Published Sept. 20, 2007
Timing may be everything	Published Sept. 13, 2007
The road to successful investing	Published Sept. 6, 2007
Should You Fund a 529 with UGMA/UTMA Assets?	Published Aug. 30, 2007
Educating your kids can be a real education	Published Aug. 23, 2007
States may offer the key to meeting education costs	Published Aug. 16, 2007
The Pillars of Education Planning	Published Aug. 9, 2007
UGMA/UTMA Accounts	Published Aug. 2, 2007
The small business 401(k) plan: a safe harbor	Published July 26, 2007
401(k) vs. SIMPLE: Is it Really That Simple?	Published July 19, 2007
The one-person 401(k) plan	Published July 12, 2007
The SIMPLE way to save for retirement	Published July 5, 2007
Small business continuity	Published June 28, 2007
Limited Liability Companies	Published June 21, 2007
To incorporate or not to incorporate That's a question	Published June 14, 2007
Protecting your greatest asset	Published June 7, 2007
Insuring your estate plan by reviewing	Published May 31, 2007
Trustee Me	Published May 24, 2007
Living Trusts: Fact and Fiction	Published May 17, 2007
Top ten estate planning goof-ups	Published May 10, 2007
Financial record information	Published May 3, 2007
Executor Choices	Published April 26, 2007
Putting Your Final Affairs in Order	Published April 19, 2007
Tax Audit Nightmares	Published April 12, 2007
One Sale That Can Cost You	Published April 5, 2007
Home sweet home nay be sweeter yet	Published March 29, 2007
Taking Advantage of Worthless Securities	Published March 22, 2007
Make your point with the IRS	Published March 15, 2007
A tax deferred is a tax saved	Published Feb. 22, 2007
The Last Great Shelter	Published Feb. 15, 2007
Basis Basics	Published Feb. 8, 2007
Very Interesting... but complicated	Published Feb. 1, 2007
Packrats Beware	Published Jan. 18, 2007
Preparing for your tax preparer What do you really need to have?	Published Jan. 11, 2007
Know Your Tax Rates	Published Jan. 4, 2007
Go to financial columns from 2005	Go to financial columns from 2006

A leaseback transaction Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Oct. 4, 2007    Many senior citizens have grown "house rich and cash poor." As the cost of living and medical care rises, their finances are often stretched to the limit and sometimes beyond. Obviously, you can't convert a house into cash by hauling a door to the grocery store or some carpeting to the doctor's office. However, there are ways in which the equity in a home can be converted into spendable cash.     Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.     A "leaseback" transaction is one such device that, in the right circumstances, can help convert your home equity into cash. The cash can then be used to pay expenses. The technique is not without its pitfalls, however, and any leaseback transaction should be entered into only after consultation with an experienced real estate lawyer and after careful consideration of the transaction.     Leaseback transactions are fairly common in the business world. They are far less common among individuals dealing with personal use assets such as their home. In either case, the structure is the same.     A leaseback is a two step transaction. In the first step, you sell your home to a third party. In the second step, you enter into a lease agreement to rent the same house for a fixed period, typically life. Effectively you go from being an owner to being a renter without moving.     The investor in the home may be a third, unrelated party or it may be a relative. You should note that if the buyer/landlord is a relative, various tax considerations may become more important when the deal is structured. The price that is paid may have to be less than the value of your home in order to induce the buyer/landlord to give you a lifetime lease at a favorable rent. The sale of your home will trigger the recognition for income tax purposes of any gain you have in the house. The tax law may permit you to exclude up to $250,000 ($500,000 for married couples filing jointly) of the gain on the sale. The buyer might borrow the purchase price and pay you cash or you may elect to finance the transaction by accepting installment payments.     The object of a leaseback transaction is to replace your home with cash that you can spend to offset various expenses. After the transaction, the buyer/landlord is typically responsible for the maintenance, insurance and property taxes on the home.     There are, however, some disadvantages. First, finding a buyer willing to enter into such a transaction under terms that are appropriate may be difficult. Second, converting your home to cash converts an asset which is exempt from Medicaid consideration into an asset that might have to be "spent down" to qualify for Medicaid. Also, as a tenant, you will be at the mercy, to a large extent, of a landlord who may turn out to be less than desirable. Your lease will give you some protection, but suing to enforce the lease might be both expensive and time consuming. The transaction will also be more expensive in terms of legal and, perhaps, some other fees than would a typical home sale contract. Finally, the possibility that you might outlive the proceeds of the sale must be considered.

Reassessing your risk tolerance Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Sept. 27, 2007    The potential return from any investment can generally be linked to the amount of risk the investor is willing to assume.  Finding that balance between the return you desire and the risk you can handle has never been easy.  What makes this problem even trickier is that your financial goals - and thus your risk tolerance - inevitably change throughout your life.  Therefore, the investment that was right for your goals of yesterday may not be so appropriate today.     It is a good idea to review your investments periodically with risk tolerance in mind.  If you heed the advice of your financial advisor, you probably already review your account statements on a regular basis to monitor performance and change any investments whose time has passed.  Take some extra time when doing this to screen your investments for inappropriate levels of risk.     Most people identify risk management with safety of principal.  This is true to an extent - a dollar locked in a safety deposit box for 10 years will most likely be worth a dollar when it is taken out.     Of course, that dollar is not likely to have as much purchasing power in 10 years as it does today.  In other words, locking your money away exposes it to inflation risk.  What you gained in stability, you lost in buying power.     Like that dollar in the box, some investments are also exposed to inflation risk.  There are many other types of risk as well, which apply to different securities.  The following are some of the types of investment risk you should keep in mind. Market risk - the possibility that an investment may lose its value when traded in the financial markets. Credit risk - the possibility that the issuer of an investment (a corporate bond, for example) may not live up to its financial obligations and cause you to lose your invested capital or not receive expected interest payments. Interest rate risk - the risk that, if interest rates rise, the price (value) of an investor’s bond holdings and certain stocks will decline. Reinvestment risk - the possibility that interest rates will fall as a fixed-income investment matures and cause you to be unable to reinvest matured assets at an attractive rate of return. Liquidity risk - the risk that you will be unable to liquidate an asset (such as real estate, collectibles or thinly traded stocks) when you want and at the price you want.     While the variety of risks is substantial, you should not let risk management intimidate you.  People participate in the financial markets because the rewards have often enough outweighed the risks.  By carefully assessing all the risks an investment offers and periodically reviewing the holdings in your portfolio with us in consideration with your risk tolerance, you should be able to find a level of risk that is appropriate for meeting your investment goals.

Your personal asset allocation Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Sept. 20, 2007    Too many individual investors blur the distinction between "saving" and "investing."  "Saving" is setting money aside in a secure location for a certain need or desire.  "Investing" entails putting money to work towards achieving a financial goal with the possibility of generating return.  As an investor, it is of utmost importance to be able to answer certain fundamental questions:  Will your current investment portfolio be able to meet both short- and long-term investment objectives?  Is your current portfolio correctly geared to your individual level of tolerance for risk?     One sound way to answer  these questions is by utilizing asset allocation -- a disciplined, objective investment game plan that will help you meet your financial goals.  Many financial professionals believe the asset allocation decision is the most important step in the investment process.  To be most effective, a personal asset allocation model should be tailored to your particular goals and needs.     A simple asset allocation model for an individual investor generally requires a portfolio of assets divided into three categories -- stocks, bonds and cash.  Each is assigned a fixed percentage.  Based on this strategy, a conservative portfolio would generally contain more bonds and cash than stocks.  A more aggressive portfolio might contain a higher percentage of stocks.  Since diversification of assets is generally recognized as a reliable way to reduce and manage risk in a portfolio, the mix of assets in your allocation model should reflect your preferred level of risk.  Considerations such as current spending requirements, tax implications and inflation-adjusted return may also be addressed through the asset allocation process.     Asset allocation is flexible and revolves around personal needs.  However, professional financial advisors have generally found that investors at various age levels tend to be best served by adopting allocation models that address the needs of their "life-cycle phase".  In most cases, the longer your investment time horizon, the more aggressive your investment strategy might be.     For example, investors in their 30s and 40s tend to have several needs and concerns in common (e.g., children, new home, college education, retirement planning).  To address these concerns, an asset allocation plan that emphasizes stocks is often recommended because they historically have provided superior returns over time. Even though past performance may not be indicative of future results.   At the other end of the spectrum are investors who are close to or who have entered into retirement.  Their goal might include providing enough income to maintain a lifestyle, or growth of their capital to ensure that they do not outlive their assets.  For these investors an above-average holding in bonds may be recommended.     Obviously, these are guidelines.  When implementing as asset allocation strategy, the various percentages allocated to stocks, bonds and cash should be assessed on a personal basis and reassessed annually.  Be sure to check with us regularly on your asset allocation strategy.

Timing may be everything Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Sept. 13, 2007    Mutual funds provide an attractive investment vehicle for nearly all types of investors by offering diversification, flexible investment choice, and professional management.  These attributes make mutual funds appropriate for many financial plans.  Consequently, the volume of investment in these companies has skyrocketed.  However, mutual fund investors should consider the timing of their purchases to avoid a possible tax trap.     Any ordinary income and capital gains that mutual funds may accumulate are reflected in the fund's net asset value.  Generally, net asset value refers to the dollar value of one share of the fund.  The funds eventually distribute any of these accumulated capital gains and income in the form of dividends on a yearly basis.  These dividends can be reinvested automatically to purchase more shares or they can be paid directly to the shareholder.  The net asset value drops correspondingly to reflect these distributions.     The problem of timing occurs for those investors who make purchases right before a distribution.  These purchasers may end up paying tax on money they just put into the fund, a painful tax bite especially for first-time shareholders.     Consider a first-time investor who purchases $20,000 worth of mutual fund shares at $10 per share the day before the "record date."  The fund has accumulated undistributed long-term capital gains of $2 per share and declares a $2 distribution per share to holders of record on the record date.  The investor may receive a check for $4,000 or may reinvest these dividends.  Either way, the investor must report this distribution as a long-term capital gain on his or her tax return.  Were the investor in a higher tax bracket and the distribution was short-term gain or an ordinary dividend, the taxes would be even higher.  If the investor is in the 25% tax bracket, he or she is now on the hook for $1000 in taxes on shares that may have been held for one day.     Avoiding this tax hit depends upon the timing of your purchases.  Find out when your respective fund makes its yearly distribution.  For most funds, it is in December.   Consider waiting beyond "record date" until the "ex-dividend date."  As the net asset value drops to reflect the distribution, the shares will also be cheaper.     This tax bite doesn't apply to investors buying fund shares for a tax-deferred retirement plan.  Further, you should never delay your investment decisions solely because of the tax considerations.  For assistance, consult with us and ask for a prospectus, which provides complete details, including fees and charges.

The road to successful investing Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Sept. 6, 2007    The road to successful investing is paved differently for each investor.  One investor’s road to success may be the high road while another’s may be the low road.  But common to both investors is basic principles that are true to form no matter which road an investor finds himself taking.   Below is a listing of some of these basic principles that may lead an individual along the road to successful investing.     · Formalize your goals. As with the achievement of any goal, commitment to the goal is half the battle.  Formalize your commitment to attaining your goals by writing them down, both short-term and long-term.  Follow your progress by updating them at least annually.  How else will you know if you are actually going to attain your goals?     · Invest early as possible. Procrastination is an investor’s worst enemy.  Though there is no perfect or ideal time to start investing now may be the best time of all.     · Invest in what you understand. If you do not understand how an investment works you will not fully understand the risks associated with that investment.  Is it really worth it placing your hard-earned money in this type of investment? No.     · Consider the impact of inflation and taxes. Inflation and taxes erode an investor’s purchasing power.  The consideration of investments that minimize the impact of these two forces may be key in meeting your goals.     · Your portfolio is for you and you alone. The design and formulation of your portfolio is based on your goals, time horizon and risk tolerance.  Understand that what may work for your friend, cousin, or co-worker may not work for you because one size does not fit all.     · A basket of eggs is better than just one. Diversification of your investment assets may bring the positive benefits of reduced risk and stable returns to your investment portfolio basket.  Mutual funds are a cost efficient way to invest while at the same time reaping the benefits of diversification.     · Use time, not timing when investing. Trying to correctly time the ups and downs of the market is a risky, if not impossible, task.  Most investors will fare far better by keeping their investment assets in the market the entire time.  It is time in the market, not timing the market.     · The old team player may be better than a young hotshot. Try to avoid the temptation of investing in the new “hotshot” investment that may lose its luster quickly.  Seek investments with solid track records that will benefit you more over the long run.     · Know when to cut your losses. Many investors do not know when to get out of an investment.  If your investment selection is heading south and most likely won’t return to previous form, face the music and consider getting out before your lumps get too big.

Should You Fund a 529 with UGMA/UTMA Assets? Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Aug. 30, 2007    If you’re using an UGMA or UTMA account to save for a child’s college education, you may consider transferring all or part of those assets to a 529 plan. Converting a taxable account (UGMA/UTMA) to a tax-deferred and potentially tax-free investment vehicle (529) may expedite asset growth and help meet the ever-increasing cost of a child’s higher education.     An UGMA/UTMA does not involve the same tax benefits as 529 plans. In an UGMA/UTMA, earnings above $850 are taxed at the child’s rate when the child is 18 or older (the first $850 is exempt). Prior to that age, the “Kiddie Tax” rules apply. These rules allow the first $850 of earnings to be exempt. The next $850 is taxed at the child’s rate, and earnings in excess of $1,700 are taxed at the parent’s rate. Once an UGMA/UTMA is converted to a 529 plan, earnings grow tax-deferred and distributions are tax-free* from federal and most state income tax if used for qualified higher education expenses. Some states also offer state tax deductions for contributions to in-state 529 plans.     Besides the tax benefits, it is important to consider several other implications of an UGMA/UTMA-to-529 transfer. First, assets in the original UGMA/UTMA account must be liquidated before contributing to a 529 plan. This could trigger capital gains or other tax consequences. Also, 529 plans funded by UGMA/UTMA accounts retain certain characteristics of an UGMA/UTMA while foregoing some benefits of 529 plans. For example, a regular 529 account allows the account owner to:     * Control assets no matter the beneficiary’s age     * Consider plan assets as his or her own for financial aid purposes     * Change the beneficiary at any time     * Withdraw plan assets for any reason     However, with a “529-UGMA/UTMA” account,     * The beneficiary gains control of the assets at age of majority     * The account is still considered the beneficiary’s asset for financial aid     * The account owner cannot change the beneficiary     * Withdrawals can only be used for the beneficiary as specified under the UGMA/UTMA statute.     Therefore, the tax advantages of a 529 plan should be the main reason for moving UGMA/UTMA assets.     Another thing to keep in mind is that the purpose of 529 plans is to provide a savings place for higher education. Expenses such as the cost of braces, high-school supplies or any other pre-college expense will not be paid for by the 529 without taxation and a 10% penalty on earnings. As such, the custodian may want to leave the portion of UGMA/UTMA assets meant for pre-college expenses in the account and only transfer the amount meant for college costs to a 529 plan. If the custodian plans on making additional contributions in the future (contributions intended for college expenses), a new account separate from the “529-UGMA/UTMA” should be opened in order to take advantage of all the benefits that a 529 offers.     Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal situation. Before implementing any significant tax or financial planning strategy, consult with us, an attorney or tax advisor as appropriate.     * Withdrawals for qualified education expenses became federally tax-free effective January 1, 2002.

Educating your kids can be a real education Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Aug. 23, 2007    Many alternatives exist today to fund college education for your children.     Among the options are to:     1. Pay as You Go. This might have worked when college students were wearing tie-dyed T-shirts the first time they were popular. Now the cost of four years of education at some private schools approaches the cost of a home. Only the very wealthy can pay tuition bills as they arrive.     2. Let the Kid Pay for It. Well, it will help them learn self-reliance, but what lawful part-time job pays enough to offset the $10,000 to $20,000 it now costs to go to school?     3. Get a Scholarship. This plan works well if you qualify for aid or your child is a great athlete or student. What do you do if your child is none of these or if he/she is too young to display their talents? While scholarships, grants and the like may not be a viable solution for everyone, do not discount them entirely. Many scholarships and awards are available and some go unclaimed because eligible students do not seek them out. Several states offer scholarship plans to eligible graduating seniors. Be sure to keep updated on eligibility requirements and coverage for these state plans.     4. Borrow It. This worked really well when the government was happily making below market loans not based on financial need. Rules have tightened considerably, although loans may be a viable option for those who refuse to plan. However, remember that Baby Boomers had children later in life. If Mom and Dad are going to borrow the money, do they really want a new long-term debt obligation when they may be in their 50s?     5. Get the Money From Grandpa and Grandma. Works well if grandpa (or grandma) has the money, doesn't need it to live and is willing to give it to your kids. Otherwise, it's best to plan.     6. Pay Now, Learn Later. Several states have adopted programs under which parents can make lump sum payments to a trust fund and guarantee that tuition, and sometimes other costs, will be paid at an in-state school for four years. On the surface it sounds great. But what if the kid wants to go to school out of state or you move or he/she just doesn't want to go to college? These and other drawbacks need to be examined.     7. Save Now, Pay Later. A systematic program of savings and investment may be old fashioned, but it works. Yes, you have to decide if the savings will be in the parents` name or the child's. There are numerous tax and non-tax ramifications to that decision. Once that is settled, the risk management aspects can be addressed (i.e. what if you die before junior goes off to college?). Next, consider tax-deferred saving vehicles that will help minimize the impact of income taxation during the savings period, for example, 529 savings plans and Coverdell education savings accounts. Lastly, utilize investment alternatives that suit your style and risk profile.     No one solution will work for everyone. Consult with us to find the solution that fits your situation.

States may offer the key to meeting education costs Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Aug. 16, 2007    There is a new option available for families when saving for the expenses of a college education. This new option is called the Qualified Tuition Program (QTP) or more commonly known as a 529 savings plan. As a result of legislation, individual states are able to set up their own tuition programs and, to date; almost all states have adopted some type of program. These programs may aid numerous families in their attempts to provide the opportunity of a college education for their children.     Generally speaking, there are two main types of programs a state may adopt: a credit program (529 prepaid tuition program) or a 529 savings program. The credit programs enable a family to purchase tuition credits or certificates from the state that will cover certain education costs upon a child’s acceptance to a covered, in-state college or university. Depending on the state, the parent may purchase prepaid credit units at their discretion or may be required to purchase prepaid two or four-year plans. The benefits of this type of program is the establishment of a disciplined payment schedule along with the guarantee that certain future education costs will be met for the child.     In contrast, the savings program allows families the flexibility to randomly contribute funds to a special account that has the benefit of tax-deferral. The growth of the earnings is not taxed while the funds are held in the savings program and this is the central benefit of the savings program: it permits tax-deferred growth on the funds set aside for future education costs. Upon a child’s acceptance into a college or university, the funds in this account may be used to meet the qualified higher education costs of the child at any eligible education institution in the U.S. and some foreign.     As funds are withdrawn to meet qualified higher education expenses, the distribution is 100% tax-free* federally. If an individual contributed $30,000 to a savings program and $40,000 is taken out for qualified higher education expenses, no federal taxes are due on the $10,000 in earnings. Earnings are tax-free* (state taxes may apply).     If the assets in the program are refunded to the parent and are not used for a child’s education, the earnings in excess of the contributions is income taxable to the recipient. Additionally, a 10% early withdrawal penalty on the earnings portion of the refund is included in taxable income. This penalty does not apply if the refund is made on amount equal to a scholarship received by the child or death or disability of the child.     Qualified higher education expenses include tuition, fees, books, supplies, equipment, and room and board according to limits set by the education institution. These state programs allow transferability of benefits from one family member to another. Keep in mind that a contribution to a qualified tuition program is subject to the gift tax, but contributions are eligible for the $12,000 annual gift tax exclusion. Also, a special election allows the gift to be treated as if it were made over a five-year period. This means that $60,000 can be contributed to an account gift-tax free, assuming that no other gifts are made during the following five-year period.     Since these programs do differ, consult with us for additional information before implementing a college-funding plan.     * Withdrawals for qualified education expenses became federally tax-free effective January 1, 2002.

The Pillars of Education Planning Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Aug. 9, 2007    An ever-stressful topic among parents is how to accumulate sufficient resources to meet their children’s education funding needs. Ideally, the accumulation of resources for education costs should be based on an investment strategy that incorporates fundamental investment planning principles. Before an investment strategy is formulated a parent may wish to address four basic issues that may be critical to successful planning:     1. control of investment assets,     2. investment flexibility,     3. investment taxation,     4. financial aid concerns.     A sound first step is to address the question of who wants control of the assets. If the parent is not comfortable with giving up control of the investment assets that are going to be put aside for their child’s education, investments where the parent retains ownership should be explored. A 529 college savings plan may be a consideration since the account owner of a 529 plan, which is usually a parent, is in control for the life of the account. While the child benefits from the account, the child never gets control of the account, even at age of majority. A regular investment account owned by the parents could also be used to save for education. The parent keeps control of the assets and this may be what is most important.     If, on the other hand, the parent has no reservations transferring assets into their child’s name, then this can be easily accomplished by utilizing an UGMA/UTMA account. This, of course, comes with the understanding that if their child fails to go to college and instead wishes to become an avid European back-packer, it is the child’s money and he/she can do with it as he/she wishes upon reaching the age of majority. Remember that all transfers (gifts) to a child via an UGMA/UTMA account are irrevocable and the parent needs to be aware that this really does mean non-changeable.     While control may be an important factor, other aspects such as investment flexibility and the taxation of those investments should also be considered. For example, in a regular investment account which the parent completely controls, there is great flexibility in what the account can be invested in, but those investments will be taxed at the parent’s higher tax rate. Like the regular investment account, a 529 plan offers control but also offers additional tax advantages, such as tax-deferred earnings within the account with the possibility of federally tax-free* withdrawals for qualified higher education expenses. However, there aren’t as many choices when it comes to selecting investments.     With UTMAs/UGMAs, the child may obtain control of the account at age of majority, unlike a regular investment account. However, the way the account is taxed is more advantageous. UTMAs/UGMAs are taxed according to the “kiddie tax” rules. For children under age 18, the first $850 of unearned income is tax-free, and the next $850 is taxed at the child’s rate which is most often 10%. All investment income over $1,700 is taxed at the parent’s tax rate which could be as high as 35%.     Beginning in the year the child turns 18, however, the child's unearned income is taxed at the child's rate. Thus, UTMAs/UGMAs can be used as part of a strategy to shift unearned income to the child beginning in the year the child turns 18 in order to take advantage of what might be as much as a 25% tax bracket differential (35% vs. 10%). From a practical standpoint, with the child reaching the age of 18, the parents may start to get a good indication of what type of child they have, studious or European back-packer, and may be more comfortable in making the decision to transfer assets at this point.     Finally, weighing education savings options is beneficial to determine whether a parent with a college bound child intends to apply for financial aid, and if so, how assets owned by the child will be treated by colleges and universities during the financial aid needs review. Typically, 35% of assets held in the child's name may be deemed available to meet education expenses while 5% to 6% of the same assets may be deemed available if owned by the parent. The net effect may be potentially less financial aid for the child if assets are held in the child’s name. While UTMAs/UGMAs are considered assets of the child for financial aid purposes, 529 college savings plans and regular investment accounts are more advantageously counted as an asset of the parent if the parent is named as owner on the account.     Having an understanding of the “pillars of education planning” provides for a solid foundation from which to analyze education-funding decisions. Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this goal in light of your unique personal circumstance. Before implementing an education planning strategy, contact and consult with us.     * Withdrawals for qualified education expenses became federally tax-free effective January 1, 2002.

UGMA/UTMA Accounts Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published Aug. 2, 2007    Traditionally, it has been difficult and cumbersome for children to own property as a minor. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) were created to streamline the process and permit children to own financial assets without the need for a special guardian or trust. As originally conceived, the UGMA applied only to certain intangible, financial assets. The UTMA expanded the types of property to include virtually any type of property, tangible or intangible, real or personal. Most states now have either the UTMA or an expanded version of the UGMA.     Under these laws, assets placed in the child's account belong irrevocably to the child. If Mom and Dad think they can get at the assets for their own purposes or to redistribute the assets to their other children, they are wrong. That's stealing from a child--not a nice thought. There may be only one child and only one custodian per account. The custodian controls the investment decisions and the distributions from the account until the child reaches the age of majority.     In most states, the age of majority is 21. A few states cling to 18 as the age of majority. Still fewer states may allow a custodian to continue to control the account until the child turns 21 even though 18 is the age of majority. Once the child reaches the age of majority, he or she controls the account. If the child wants to spend the assets foolishly, Mom and Dad generally have little or no legal recourse.     When the assets are transferred to the account, the donor makes a gift of a present interest that qualifies for the $12,000 per year, per donee gift tax exclusion. For income tax purposes, the income generated in the account is taxed to the child. If the child is under age 18, the "kiddie tax" rules apply. Those rules tax the unearned income of a young child in excess of $1,700 at the higher of the parent's or the child's marginal rate.     If the custodian dies before the child reaches majority, a successor guardian must be appointed. Generally, this is the child's legal guardian, although some states may permit the custodian to name his or her own successor. If the donor and the custodian of the gift are the same individual, the value of the account for estate tax purposes is included in the estate of the donor/custodian. This is very important to note especially if grandparents want to make gifts to their grandchildren in order to achieve estate tax savings. These grandparents should name one of the child's parents or some other adult, other than themselves, as the custodian. If the child dies before reaching majority, the account is included in his or her estate and will pass according to state law, typically to the parents.     UGMA and UTMA accounts are extraordinarily useful tools for estate, college and general financial planning. They are simple to establish and inexpensive to administer. The many benefits and wide usage of these accounts makes it important to understand both their advantages and disadvantages in light of your personal circumstances. Before implementing any significant tax or financial planning strategy, contact us, an attorney or tax advisor as appropriate.

The small business 401(k) plan: a safe harbor Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published July 26, 2007    Over the last few years, many small businesses owners have implemented SIMPLE IRA plans because they didn’t want to pay the various expenses associated with traditional 401(k) plan’s reporting and non-discrimination test requirements. But, there is another alternative that allows for greater tax-deferred savings than the SIMPLE IRA and still avoids the bulk of the administrative expenses of the traditional 401(k). This alternative is the Safe Harbor 401(k) (“SH”) plan. The SH plan combines the best features of the SIMPLE IRA plan and the traditional 401(k) plan. This article explores some of the details of the SH plan, along with some attractive planning strategies.     Advantages of Safe Harbor 401(k) plans. The primary reason any small business considers the SH plan is a desire to avoid the expensive non-discrimination tests and IRS filing requirements associated with the traditional 401(k) plan. Although the SIMPLE IRA plan eliminates these expenses, there is a trade off. Participants in a SIMPLE IRA plan are only permitted to salary defer up to $10,500, for 2007, with an additional $2,500 catch-up is available to participants age 50 and over.     Traditional 401(k) participants, on the other hand, are permitted to defer up to $15,500, for 2007, with an additional $5,000 catch-up available to participants age 50 and over. Additionally, a SIMPLE IRA plan does not permit the small business to make a discretionary profit sharing contribution.      The Safe Harbor options. Small businesses establishing the SH plan have two options for making contributions to employee accounts. Both of these options require the contributions to be fully vested.     1. Matching contribution: The employer matches 100% of non-highly compensated employees (NHCE) salary deferral up to 3% of the employee’s compensation, plus 50% of the NHCE’s deferral between 3 to 5% of compensation. This translates into a 4% matching contribution for employees deferring 5% of compensation or more. Employees making no deferral would receive no match.      2. Non-elective contribution: The business contributes 3% of pay to all eligible NHCEs whether or not they elect to make a salary deferral contribution.     The matching contribution option. Most small business owners who make the decision to implement a SH plan are likely to choose the matching option. It is very likely that the SIMPLE IRA plan will also have been considered, and the value the higher deferral limit ($15,500 for 2007), plus the future tax-deferred growth on the additional contribution, outweighed any additional administrative expense. The SH plan is usually a good fit where a low participation, or salary deferral rate, by the NHCEs causes the traditional 401(k) plan’s ADP test to severely limit salary deferral contributions by the business owners and other highly compensated employees.     The SH match does not cost the employer much, because only those who make salary deferrals will receive any of the company match. In other words, employees must “pay to play.” Additionally, the SH plan’s match satisfies the 401(k) “top-heavy” minimum requirement. All 401(k) plans are considered top-heavy when more than 60% of the plan assets are in the accounts of the key employees. The majority od small business 401(k) plans are top-heavy by the end of the first plan year, especially where a high percentage of employees are family members or key employees.     The non-elective option. This option works just like a profit sharing contribution – any employee who meets the SH plan’s eligibility requirements receives a 3% of pay contribution. As with the match option, this 3% non-elective option will also satisfy the top-heavy requirement. The non-elective option does provide an advantage over the matching option. Non-elective contributions may also be applied toward satisfying another type of non-discrimination test: the plan coverage tests. This is significant for small businesses that may be able to take advantage of a cross-tested, or comparability, allocation formula as discussed below.     Combining the Safe Harbor plan with a cross-tested plan. A cross-tested plan contains an allocation formula that favors a certain class of employees if, collectively, that group is older than the non-favored group. The plan could define the business owners as one group and the remaining work force as another group. If the average age of the owners is 48, and the average age of the employees is 35, the cross-tested rules allocate more of the dollars going into the plan into the accounts of the business owners. The cross-tested allocation formula could not provide for larger proportionate contributions to those closer to retirement if there were no age difference between the two groups.     Summary. When the features of the SIMPLE IRA plan and the traditional 401(k) plan are combined into one plan, there are considerable advantages for both employees and business owners. The employees have the opportunity to make elective contributions on a pre-tax basis (salary deferral) and receive a fully vested 4% employer matching contribution. The employees and the business owners may make an elective salary deferral contribution of up to $15,500, for 2007, plus an additional $5,000 catch-up if they are age 50 or over.     The SH plan’s matching contribution can be used to satisfy the top-heavy nondiscrimination requirement and the non-elective contribution may be used to satisfy both the top-heavy and the coverage non-discrimination requirements. Finally, if sufficient age disparity exists between the owners and the non-owner employees, the owners may be able to maximize the contributions made on their behalf.     Conclusion. The Safe Harbor 401(k) plan does offer some unique planning opportunities in the right setting. Variables such as the number of employees, their ages, and the business objectives and resources play a large part in determining whether the Safe Harbor 401(k) is an attractive retirement plan option for a small business. For assistance in identifying these and other variable which may impact whether the Safe Harbor 401(k) is the best retirement plan option for your small business, please contact your tax advisor or us.

401(k) vs. SIMPLE: Is it Really That Simple? Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published July 19, 2007    The Savings and Incentive Match Plan for Employers, or “SIMPLE” plan, is similar to a standard 401(k) plan in that it allows for the deposit of employee elective salary deferrals and employer contributions into an account that grows on a tax deferred basis until withdrawn; but, the SIMPLE has fewer administrative requirements than the 401(k) plan.     This article will focus on two important topics relative to SIMPLE plans; the mechanics of how the plans are established and a few of the many considerations involved in comparing the SIMPLE to a standard 401(k) plan.     With regard to the mechanics of the plan, an employer has two options for implementing a SIMPLE plan. SIMPLE contributions may be deposited into either a SIMPLE (k) trust, one pooled account, or into SIMPLE IRA accounts, where one account is established for each participating employee. While the two types of plan arrangements are similar with regard to contributions, deferrals and the absence of non-discrimination tests and top-heavy requirements, there are substantial differences that make the SIMPLE IRA format a more favorable alternative.     The SIMPLE(k) places considerably more burden for record-keeping and disclosure on both the employer and the custodian of the plan assets. The SIMPLE IRA is more consistent with the original Congressional intent of a low cost retirement savings plan for small businesses and will likely be used for most SIMPLE plans. References in the examples below are to the SIMPLE IRA.     Comparison of the SIMPLE and the standard 401(k) retirement plan generally focuses on the employer’s position on several plan related issues: 1. deferral limits, 2. flexibility of employer contributions, and 3. plan administration expenses.  The following examples illustrate how these issues impact a small business considering whether to adopt either a SIMPLE plan or a standard 401(k) plan.     Example 1: Euro-Car, Inc. is a small auto repair shop with 14 employees. Hans and Franz are in their 40’s, each own 50% of the business, and their annual earned income is between $125,000 and $150,000. Hans and Franz want to establish a retirement plan that is beneficial to them personally, allows both employee and employer contributions, and is inexpensive to maintain. Some of the employees indicated an interest in a retirement savings plan; but when surveyed, only 4 of the employees confirmed that they would actually make salary deferral contributions to the plan.     A SIMPLE plan is likely the better alternative in this situation. The SIMPLE salary deferral limit of $10,500 being less than the 401(k) salary deferral limit of $15,500 is not an issue because of restrictions imposed by 401(k) non-discrimination requirements. Due to the small number of eligible employees electing to make a salary deferral contribution, the 401(k) plan non-discrimination testing would limit Hans and Franz to less than $10,500 in salary deferral anyway. In addition, despite a mandatory SIMPLE matching contribution, the limited number of employees participating would require a minimal employer matching contribution for the non-owner employees. Finally, the low employee participation would cause the 401(k) to be top-heavy, which requires a mandatory employer contribution to all eligible employees of 3% of compensation.     Example 2: Computer Consultants, Inc. specializes in helping small business utilize technology. The average compensation for their 15 employees is over $30,000. The owners, Tom and Jerry, are in their 30’s and have indicated that all employees would elect to participate in some type of savings plan. Tom and Jerry want the flexibility of making a discretionary profit sharing contribution when the company does well, but they also want to maximize what they can do for themselves.     Here, the 401(k) plan is likely more attractive than the SIMPLE plan because of the higher deferral limits and the flexibility of making both a match and an additional profit sharing contribution with the 401(k) plan. With a high level of employee participation, non-discrimination tests pose no problem. So both Tom and Jerry could be able to defer up to the $15,500 salary deferral limit in a 401(k). The high level of participation and recognition of the plan by employees would mitigate the significance of plan administration costs.     Summary: In comparing the SIMPLE to the standard 401(k) alternative, the level of employee participation is an important factor – the higher the participation level, both as a percentage of eligible employees and as a percentage of their compensation, the more attractive the 401(k) alternative becomes. The SIMPLE plan is an attractive alternative for small businesses where: 1) plan administration costs are a major obstacle to doing a 401(k); 2) where the difference in the deferral limits between the two plans is not an issue; or 3) the flexibility to make a much larger or no employer contribution is not important.     Of course, there are other issues to consider when evaluating the SIMPLE and the standard 401(k) plans. Please, consult with your tax advisor or us prior to adopting either plan.

The one-person 401(k) plan Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published July 12, 2007    Did you know that a firm as small as one-person can establish a 401(k)?  This is not a new phenomenon.  It just never made sense under the old tax law.  However, recent changes have made the 401(k) much more attractive for small employers.      How attractive?  Consider a sole proprietor at age 50, with Schedule C income of $40,000.  Assume this business owner would like to contribute as much as possible to a tax-deferred retirement plan during 2007.  By adopting a SEP IRA plan or a Profit Sharing Plan, the owner may contribute a maximum of $7,434.  By adopting a Simple IRA plan, the owner may contribute a maximum of $14,108.  However, by adopting a 401(k) plan, the owner may contribute up to $27,934 for 2007.      As you can see, the one-person 401(k) plan offers you, the small business owner, the opportunity to make a much larger contribution to your tax-deferred retirement plan.  This strategy even works well for small businesses with certain non-owner employees.  Since the contribution amount is entirely discretionary each year this savings strategy is very flexible.  Furthermore, contributions are tax-deductible and grow tax-deferred to make this savings strategy very effective.     Additional incentives found in the new tax relief act add to the attractiveness of the one-person 401(k) plan.  For example, the new tax relief act permits you, the business owner, with the ability to take a loan from your one-person 401(k) plan.  Loans are now available to shareholders, partners, and sole-proprietors on a tax and penalty-free basis as long as the loan amount does not exceed the lesser of 50 percent of the account balance or $50,000.     Finally, there is no IRS Form 5500 filing expense associated with the initial years of your one-person 401(k) plan.  You may not be required to file an IRS Form 5500 for your one-person 401(k) plan until the assets in your plan exceed $250,000 or a non-owner employee qualifies for the plan.  So, any initial administrative expenses will be minimal.      The one-person 401(k) plan savings strategy is most suitable for firms employing only owners (shareholders, partners, and sole-proprietors) and their spouses.  An experienced financial advisor, an ERISA attorney, or a retirement plan administration firm can analyze the suitability of this strategy for your firm.

The SIMPLE way to save for retirement Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published July 5, 2007    A relative newcomer to the retirement plan market, the SIMPLE IRA can be a cost-effective retirement planning alternative for small employers and their employees.       A SIMPLE IRA plan consists of a deferral program for eligible employees, along with mandatory contributions by employers. An eligible employer is defined as an employer who has no more than 100 employees that received at least $5,000 in compensation from the employer in the preceding calendar year. An employer maintaining a SIMPLE plan may not maintain any other qualified retirement plan in which employees currently receive benefits.     What makes the SIMPLE IRA so attractive to business owners is their ability to defer the maximum ($10,500 for 2007) without regard to employee participation.  There is no ADP test, which limits how much an employer may defer based on average deferrals of non-highly compensated employees.  Also, there is no top heavy testing which in other plans requires contributions to all eligible employees when the plan is deemed top heavy.     Employees are eligible to make deferrals if they receive at least $5,000 in compensation from their employer during any two preceding years and they are reasonably expected to receive at least $5,000 in compensation for the current year. Participants can defer up to $10,500 for 2007 with no set maximum percentage of compensation and elect to defer a specified percentage of compensation as opposed to a dollar amount. In addition, for tax year 2007, individuals born prior to 1958 will be allowed to contribute an additional $2,500.      There is a trade off for allowing flexible deferrals. The employer is required to make a fully vested contribution by either:     · Matching elective deferrals dollar-for-dollar up to three percent or     · Contributing two-percent of compensation to all eligible employees, regardless of elective salary deferral (limited to the current compensation cap for the year - $225,000 for 2007).     Employees are allowed to terminate deferrals at any time during the year and depending on the plan provisions, may or may not be able to re-initiate deferrals again that same year.     Be mindful that participants who take withdrawals from a SIMPLE IRA prior to age 59½ are generally subject to the same 10% early withdrawal penalty applicable to IRAs. However, participants who withdraw SIMPLE IRA contributions during the two-year period beginning with their initial participation date will be assessed a 25% penalty tax.     A SIMPLE IRA plan distribution may be rolled over to a regular IRA account, but only after the employee has participated in the SIMPLE IRA for at least two years.  Keep in mind neither IRA assets nor any other retirement plan assets may ever be rolled into a SIMPLE IRA.     This article is meant to provide an overview of the basic provisions of the SIMPLE IRA plan. For a more complete understanding of this plan and opportunities for your business, speak with us.

Small business continuity Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published June 28, 2007    Much of the wealth in this country has been created through the efforts of small business owners.  Small business owners are an incredibly hard working group.  Often, virtually every waking hour is spent helping the business grow.  The family may be involved in the business.  No one deserves their wealth more than someone who has overcome the odds and created a successful business.     But these entrepreneurs can be a difficult group.  They are so tied up in their businesses that they often don't take time to plan.  They can be secretive about their affairs and unwilling to trust the fate of their business to "outsiders."  And yet, if a business owner fails to plan for his/her eventual death or retirement, or the possibility that they may become disabled, the business owner is literally risking that which he/she holds so dear...the business itself.  Buy/sell agreements can help.     Simply stated, a buy/sell agreement obligates one party to sell and another to buy some or all of a business interest upon the occurrence of some designated event, typically death, disability and/or retirement.  To be most effective, buy/sell agreements should be accompanied by some type of a funding mechanism to provide the buyer with the cash needed to meet the obligation.     Life insurance and disability insurance are most often used to fund buy/sell agreements in the event of death and disability, respectively.  A cash value life insurance policy can also be used to provide cash to the buyer in the event of retirement.  A buy/sell agreement may also be structured to provide for installment payments from the buyer to the seller.  A buy/sell agreement can be created for both incorporated and unincorporated businesses.      For federal estate tax purposes, the buy/sell agreement must be structured as an arm's length agreement providing for a fair price to be paid.  This allows the owners to plan their estates and can reduce the risk of costly valuation disputes among business owners or upon estate tax audit.     There are two basic forms for the buy/sell agreement.  The first is the cross purchase agreement.  Under a cross purchase agreement, the owners of the business enter into the buy/sell agreement among themselves obligating each other.  For example, Winken and Blinken are equal shareholders of X Inc.  Under the cross purchase agreement Winken and Blinken each agree to buy the other's half of the business in the event of the other's death, disability or retirement.  To fund the agreement, each buys a cash value life insurance policy on the life of the other.   Upon one of the triggering events, the remaining shareholder will use the proceeds of the policy to carry out their obligation to purchase the business.     The cross purchase agreement is very popular with companies having few owners.  The surviving owners benefit from an increase in their cost basis when the purchase is ultimately made.  The cross purchase agreement becomes more difficult to fund when there are more than two owners.  For example, if Winken and Blinken were joined by Nod, a total of six life insurance policies would be required.  Also, the premiums on the policy may vary based on the ages and health of the owners.     With an entity purchase agreement (also called a redemption agreement), the owners of the business contract with the company itself.  The company is then obligated to buy the share of the owner who has died, retired or become disabled.  If the agreement is funded, the policies are owned by the company.  Redemption agreements can be structured to take advantage of special estate tax rules (Sec. 303) and they may reduce the number of policies required.     By utilizing some form of a buy/sell agreement, the small business owner insures the continuance of the business he/she has worked so hard to create.  This makes life much easier for the remaining partner(s) in the business as well as the family members.     Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances.  Before implementing any significant tax or financial planning strategy, contact us, an attorney or tax advisor as appropriate.

Limited Liability Companies Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published June 21, 2007    One of the primary financial planning decisions facing small business owners is what form of organization should their enterprise take.  The form a business takes impacts various tax, liability, control and transfer of ownership aspects of the business, all of which affect the owner’s individual financial plan.  Wouldn't it be great if business owners could combine the benefits of an S corporation with those of a partnership?  Surprise.  It may be possible to get the best of both entities through the use of a limited liability company or corporation (LLC).  A majority of the states currently permit the establishment of LLCs and most of the others have statutes in the works to address these entities.     The LLC is a hybrid of a corporation and a partnership allowing for limited liability and  pass-through tax treatment for its “members.”  Therefore, owners are not personally liable for LLC debts and avoid the double taxation penalty of regular corporations.  This limited liability makes them attractive for many family enterprises as wealth transfer and asset protection vehicles.     Further, LLCs have few of the statutory restrictions with respect to management, operations and capital that corporations face.  Rather, LLCs allow management flexibility to create an organizational structure which can accommodate the particular needs of their members.  For example, members can either have total management control, delegate to hired managers, or use a hybrid system where day-to-day functions would be handled by hired managers while key decisions would be made by votes of the members.     The pass-through tax treatment granted by the IRS depends upon the LLC not possessing three or more of the following "corporate characteristics":     • limited liability, i.e. no owner/manager has personal liability for the debts of the entity     • centralized management, i.e. controlled by a non-owner/manager     • continuity of life, i.e. death, bankruptcy, retirement etc. does not cause dissolution     • free transferability of ownership, i.e. owners can transfer attributes of ownership interests without consent of other members     If three or more of these characteristics are found, it will be taxed as a corporation.  However, the IRS has recognized acceptable methods to avoid these characteristics.     Conversion to this form of business entity may have significant tax consequences.   Large acceptance by the states and the IRS is relatively new and raises issues of uncertainty over various applications of state and federal laws.  Further, their treatment under the states without LLC statutes raises some concern.  However, their obvious advantages and flexibility may be too good for many businesses to pass up.  Before serious consideration of using this form of business organization, discuss the issue with us and then be sure to consult your CPA, attorney and tax professional.

To incorporate or not to incorporate That's a question Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published June 14, 2007    One of the side effects of the various corporate restructuring and early retirement programs in abundance today is an increase in new small businesses.  Many newly laid-off or retired executives open their own businesses.  Among the first questions a new business owner must ask is, "How will I do business, as a corporation, proprietor, or partnership?"     There are generally five major concerns when choosing the form of a new business; liability, financing, management, continuity and taxes.  Too many budding entrepreneurs focus only on the tax aspects.      The question of liability is very important in today's litigious society.  Generally, a corporation affords the shareholders protection from the creditors of the company.  The shareholder’s liability is limited to his/her investment in the corporation.  To achieve this limited liability status, various legal requirements must be followed.      Ignoring the "technicalities" can result in a corporate creditor being able to "pierce the corporate veil" and go after the shareholder’s personal assets.  Also, professionals can't use corporations to shield themselves from malpractice liability.  General partnerships and sole proprietorships do not offer limited liability to owner/managers.  However, partnerships and sole proprietorships are often easier to establish and often have less "red tape" associated with them.     All businesses need to raise money for operations.  The use of the corporate form allows the company to sell shares of stock to new investors to raise money.  Corporate ownership may also make it easier to recruit, retain and reward key employees through awards of common stock.  Some have argued that corporations may find it easier to borrow than an unincorporated business.  However, shareholders are often asked to personally guarantee corporate debt.     The management of the business is also a concern.  Theoretically, a corporation is run by its board of directors.  As a practical matter it may make little difference if the business is controlled by a single individual.  However, if more than one person will be an owner of the business, the dynamics of controlling a business through a consensus of partners versus the use of a board of directors must be carefully reviewed.     Continuity is also an issue.  A corporation may have a perpetual existence.  Sole proprietorships die with the owner.  Depending on state law and the planning that's been done, the death of a partner may result in the dissolution of the partnership.     There are basically two types of corporations for tax purposes; “C” corporations and S corporations.  A "C" corporation is a separate tax paying entity.  C Corporations have graduated federal tax rates from 15% to over 35% (although professional corporations pay a flat 35%).  C Corporations are subject to the corporate Alternative Minimum Tax.  C Corporations are subject to the accumulated earnings tax.      Under S Corporations, any income or loss flows through to the personal returns of the shareholders.  In effect, regular corporate income is taxed twice, once to the corporation and again to the shareholders.  S Corporations are not taxed twice or subject to the corporate Alternative Minimum Tax; however, the individual shareholders are subject to the individual AMT and corporate items may have an impact.  S corporations are also not subject to the accumulated earnings tax.     Finally, new forms of business organization are being developed in various states including the limited liability company, corporation and partnership.  These new developments and issues discussed should be fully explored before deciding on the proper form for a new business.     Of course, this brief article is no substitute for a careful consideration of all the advantages and disadvantages of this matter in light of your unique personal circumstances.  Before implementing any significant tax or financial planning strategy, contact us, an attorney or tax advisor as appropriate.

Protecting your greatest asset Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published June 7, 2007    When most people are asked what their most valuable asset is, they respond that their house, car, retirement plan or business is most valuable.  I disagree.  I believe that your most valuable asset is your ability to earn a living.  I believe this is true for just about anyone who is not already retired. Most people protect their car, house, and other possessions, but neglect to protect the most valuable asset they own: their power to generate income.     The extent of the risk of a serious injury or illness affecting your ability to earn a living is startling.  The probability of a 35 year old being disabled for more than three months before age 65 is over 50%.  People in their 40s are three times more likely to be disabled than die before age 65.  And the numbers get worse as you get older for remaining disabled for 5 years or more.  Yet a great majority of the population has no disability coverage beyond Social Security and worker's compensation.     To evaluate your disability income needs, begin with an estimate of the income that will be needed during disability.  Once the income need has been established, the resources available should be deducted.  The first deduction should be from any employer paid short-term disability or group insurance benefits.  Next, you may wish to consider social security disability benefits.      However, the social security system rejects most of the claims made for disability benefits.  Finally, reduce the monthly income need by earnings from other sources such as interest and dividends on investments.  The remaining balance is the disability insurance need.  You should note that insurance companies limit the amount of income they will replace through a disability benefit, so you may not be able to insure the entire need.     As you might expect, the key to any disability insurance policy is its definition of the term "disabled."  There are four key definitions of disability:  "any occupation," "own occupation," "reduction in income," and "residual."  You are disabled under an "any occupation" definition when your condition prevents you from doing anything for anybody that will bring home a paycheck.  It is the most restrictive definition.      The "own occupation" definition is far more favorable.  Under this definition you are disabled if your condition prevents you from performing the major duties of your occupation.  For example, under an "own occupation" policy, a heart surgeon is still disabled even if he could work as a professor of medicine.  The precise language of "own occupation" policies varies from insurer to insurer, so it pays to read these policies carefully.     "Income reduction" is a relatively recent innovation.  Under these policies, you are disabled as long as your condition forces you to earn less than you were earning before you were sick or injured.  How much less you have to earn depends on the policy.      "Residual disability" is also a recent innovation.  This definition is an enhancement of an "own occupation" policy.  Frequently, a person's disability may permit them to return to their own occupation, but only at "half speed."  In other words, it may take a considerable period of time after they return to work to get back to their former level of earnings.  The "residual disability" provision is designed to provide benefits to bridge that gap.     Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances.  Before implementing any significant tax or financial planning strategy, contact us, an attorney or tax advisor as appropriate.

Insuring your estate plan by reviewing Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published May 31, 2007    The Tax Relief Act of 2001 brought forth diverse and complex tax law changes that may impact a number of areas within a person’s financial plan.  One such area is estate planning.  Although estate planning is fundamentally about controlling personal assets while passing them to heirs in the most efficient manner possible, most individuals would associate this with not paying or minimizing the estate tax.  For this very reason, it may be beneficial for an individual to review their estate plan currently in place to insure they are able to fully take advantage of the tax law changes.     One of the most significant changes within the tax law was the increase in the amount of assets each person can transfer free of estate and gift tax and the ultimate repeal of the estate tax for one year in 2010.  This exemption is currently $2,000,000 and will increase to $3.5 million in 2009.  This will effectively increase the amount of assets an individual can pass on to his/her family or others without exposing assets to an estate or gift tax.       Given these changes, there are several areas within your current estate plan that may be reviewed in order to take full advantage.  One such area involves the area of gifting.  By utilizing both the gift and estate tax lifetime “applicable exclusion amount” and the $12,000 per recipient annual gift tax exclusion, an individual may sharply reduce any potential estate tax liability.      Also, for those individuals that have authorized a trusted individual to carry out their gifting program, the documents in place should be reviewed in light of the new law.  An example would be a power of attorney.  If you have a power of attorney in place that authorizes a trusted agent to continue your gifting program, make sure it allows the agent to take full advantage of the changes within the new tax law.      Gifting allows an individual to transfer assets from their estate to their heirs while they are still alive.  For most individuals, however, the transfer of assets to their heirs will take place at their death.  The document that facilitates this transfer is a will and, thus, another area that should be reviewed.      Wills are commonly used to direct an estate plan.  The will is the document that determines what amount of assets are exposed to an estate tax to fully take advantage of the applicable exclusion amount.      For example, Mr. Jones’ will may read that, upon his death sufficient assets will be exposed to estate taxes covered by the exclusion without incurring an estate tax due while the extra assets will be left to his wife.  This is possible by exposing $2,000,000 worth of assets to the estate tax and, therefore, fully utilizing the exemption afforded each individual upon their death.      A problem may arise if the will specifically quantifies the amount of assets as $2,000,000.  This amount may be wrong in future years because the exemption is going to increase from $2 to $3.5 million in 2009. If this individual dies next year, his estate may miss out on up to $1,500,000 of tax protection.  Instead of quantifying a specific dollar amount in your will, it could be changed to incorporate formula language.  Formula language will allow an individual, upon their death, to fully take advantage of the applicable exclusion amount no matter when they die.     A common substitute for a will that many people opt for is the living trust.  The living trust not only serves the same function as the will but may provide additional benefits such as professional management of assets along with circumvention of the probate process upon death.  But keep in mind that assets held in a revocable living trust remain subject to estate tax just like assets that pass by will.  Therefore, a living trust should be reviewed in the same manner as a will.     Of course, this brief article is no substitute for a careful examination of all of the advantages and disadvantages of this matter in light of your unique personal financial circumstances.  Before implementing any estate planning strategy, contact and consult with us, an estate planning attorney or tax professional.

Trustee Me Daniel R. Anderson, Jr., LUTCF Financial Advisor 796-3331 Published May 24, 2007    People of all shapes and sizes are establishing trusts.  Credit shelter trusts, marital trusts, generation skipping trusts, life insurance trusts, charitable remainder trusts and living trusts, are just a few examples of the types of trusts that are in use today.  All of these trusts have at least one thing in common--you need a trustee for all of them.  The trustee plays an absolutely critical role in whether the trust will be successful.  The question is, who should be the trustee?     Before answering this question, let's take a quick look at trusts.  A trust is a written agreement between the grantor (sometimes called a settlor or trustor) and the trustee.  Under a trust agreement, the grantor transfers cash and/or assets to the trustee and gives the trustee instructions regarding the distribution of the income and principal of the trust to the beneficiaries.  The trustee is a fiduciary who must follow the instructions of the grantor with respect to the investment of trust assets and all distributions.      There are three types of trustees; professional, semi-professional, and amateur.   Professional trustees are usually corporations who are engaged in the business of acting as a trustee for hire.  Bank trust departments and independent trust companies are the most common examples of professional trustees.  Semi-professional trustees are typically professional advisers like attorneys and accountants.  These individuals have some, but perhaps not all, of the technical knowledge of a full-time professional trustee.  However, they may have a long-standing relationship with the grantor and his/her family.      Amateur trustees i