An employer who does not want to, or cannot, institute a qualified pension or profit-sharing plan, or who does not want to extend benefits to all of its full-time employees, can use a “Section 162 plan” to meet its executive compensation needs.   A Section 162 plan leverages life insurance to provide supplemental compensation to select employees while also allowing the employer to take an income tax deduction for the premium payments.

In a Section 162 plan, an employer applies for, and pays premiums on, a life insurance policy on its employee’s life. The employee, however, owns the policy and has the right to appoint beneficiaries; the employer does not take an interest in the policy’s death benefit.

As an example of Section 162 plan and its tax advantages, … read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of Section 162 plans, see Advisor’s Main Library: Section 15 C—Executive Bonus – I.R.C. �162 Plan

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Presents discussion on a common financial product that investor clients can incorporate into planning strategies, if not already.

Today’s blogticle takes a look at one topic of international intrigue and high finance—debt issued by the United States Federal Government.  Generally United States “securities are debt instruments issued by the U.S. Treasury to raise money needed to operate the federal government and to pay off maturing obligations.” [1] The “paper” is backed by the “full faith and credit of the United States government guarantees that interest and principal payments will be paid on time, and thus, these securities are considered very safe investments.” [2]

Treasury bills, or T-bills, “are short-term government securities with maturities ranging from a few days to 52 weeks.” [3] The Bills are generally sold at a discount from the par value or face amount of the bill.  An example, an investor may pay $990 for a $1,000 bill.  When the bill matures, the investor is paid the full $1,000.  The discount or difference between the purchase price and the redemption price is interest.   T-Bills are sold direct by the Treasury department, or can be purchased through banks and brokers.

Treasury notes, or T-notes, are “issued in terms of 2, 3, 5, 7, and 10 years, and pay interest every six months until they mature.”  [4] Further, the notes may be sold at a discount (for less than face value), at a premium (for more than face value) or for face value.  When the note matures, the investor is paid full face value, in addition to the interest payments received.

A few of the key features of T-notes include:

• The yield on a note is determined at auction.
  • Notes are sold in increments of $100. The minimum purchase is $100.
  • Notes are issued in electronic form.
  • An Investor can hold a note until it matures or sell it before it matures. [5]

Treasury bonds are issued for terms of 30 years and pay interest every six months until maturity. When a Treasury bond matures, the investor is paid its face value.

“The price and yield of a Treasury bond are determined at auction.” [6] Like a T-note, a T-bond, may be issued at a discount, premium or face value.  T-bonds “exist in either of two formats: as paper certificates (these are older bonds) or as electronic entries in accounts.”   Today, Treasury bonds are issued exclusively in electronic form.

Total current outstanding debt issued by the Treasury in bills, notes, bonds and other evidence of indebtedness is approximately 13.8 Trillion dollars, as of the end of November 2010. [7]

For more in-depth discussion on T-bills, notes and bonds, see AdvisorFX: U.S. Treasury and Government Agency Securities.

Clients can purchase T-bills, notes, and bonds from the Treasury Department at the following link: http://www.treasurydirect.gov/indiv/products/products.htm. 

Tomorrow’s blogticle will present some interesting new topics.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] AdvisorFX.  AUS Main Libraries ,  Section 22.2  Investment Vehicles, B—U.S. Treasury and Government Agency Securities. http://www.advisorfx.com/articles/f22-2_1_13_3760.aspx?action=13.  Last Accessed 11/29/2010.

[2] AdvisorFX. U.S. Treasury and Government Agency Securities.

[3] Untied States Department of the Treasury.  Treasury Direct-Treasury Bills.  http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm.  Last Accessed 11/29/2010.

[4] Untied States Department of the Treasury.  Treasury Direct-Treasury Notes.  http://www.treasurydirect.gov/indiv/research/indepth/tnotes/res_tnote.htm.  Last Accessed 11/29/2010.

[5] Untied States Department of the Treasury.  Treasury Direct-Treasury Notes.

[6] Untied States Department of the Treasury.  Treasury Direct-Treasury Bonds.  http://www.treasurydirect.gov/indiv/products/prod_tbonds_glance.htm.  Last Accessed 11/29/2010.

[7] Damian Paletta.  The Wall Street Journal.

Debt-Panel Chairmen Work to Gain Support.  November 29, 2010.  http://online.wsj.com/article/SB10001424052748703785704575643111128016590.html.  Last accessed 11/29/2010.; see also Untied States Department of the Treasury.  Treasury Direct.    http://www.treasurydirect.gov/NP/BPDLogin?application=np.  Last Accessed 11/29/2010.

Author: William H. Byrnes & Benjamin S. Terner                 

Why is this Topic Important to Wealth Managers? Discusses charitable contributions for individuals.  May assist wealth managers plan client contributions made to charities this year.    

Generally a deduction is allowed to “individuals, corporations and certain trusts for charitable contributions made to qualified organizations, subject to percentage limitations and substantiation requirements.” [1]

The law allows for such charitable contributions as itemized deductions, as “an incentive to encourage charitable contributions”, to certain charitable organizations.  [2]

Assuming all other factors equal, “it is usually better for the donor to make a charitable gift during life than at death, because the gift can generate an income tax charitable deduction for the donor.” [3]

How much is the deduction?

The charitable contribution income tax deduction for an individual taxpayer can be classified as not to exceed 50 percent or not to exceed 30 percent of the taxpayer’s adjusted gross income (AGI), depending on the donee charity. [4]

For a discussion of Adjusted Gross Income or AGI, see AdvisorFX—Deductions in Determining Adjusted Gross Income and Taxable Income.

In addition, “[a]fter application of these limits, the charitable contribution deduction is also subject to the overall phase-out of itemized deductions.” [5]

Other additional factors which may limit the deduction include, but are not limited to,

• The amount of the donor’s contribution base, or the adjusted gross income, without regard to any net operating loss carryback to the year.
• Whether the contributed property is ordinary income property, capital gain property, or neither;
• Whether the property will be used to further the charity’s exempt purpose; [6]

Some of the common donees under the 50% category, include but are not limited to,

• churches
• educational organizations
• organizations providing medical or hospital care or medical education or research
• certain governmental units
• certain private foundations [7]

The two charts presented below are adopted from “Estate Planning & Wealth Preservation: Strategies & Solutions” [8] and can be used to determine the above limitations on the deductibility of outright gifts to charities. The lowest amount deductible applies.
_____________________________________________________
Type of Gift                                         Percentage of Contribution
                                                                 Base Deductible
_____________________________________________________
Gift to 50 percent charity (except long-term         50 percent
  capital gain property)

Gift of long-term capital gain property to 50        30 percent, or 50 percent
  percent charity                                                              if deduction is limited to basis *

Gift to 30 percent charity (except long-term         30 percent
  capital gain property)

Gift of long-term capital gain property to 30        20 percent
  percent charity
______________________________________________________

* see below

• Property for Which Deduction Is Limited to Basis
• Gift to 50 percent charity, if the donor has elected to limit the deduction of long term capital gain property to basis, as a tradeoff for the 50 percent-of-contribution-base limit.
• Property which would generate short-term capital gain or ordinary income if it were sold.
• Gift of tangible personal property to 50 percent charity, if the charity will
    not use the property in its exempt purpose.

For additional discussion on charitable contributions see AdvisorFX—The Income Tax Charitable Deduction—I.R.C. §170

Tomorrow’s blogticle will continue to discuss relevant topics to wealth managers. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 34 Am. Jur. 2d Federal Taxation ¶ 18950.

[2]AdvisorFX.  AUS Main Libraries, Section 19. Income Taxes, B6—The Income Tax Charitable Deduction—I.R.C. §170, Citing, 26 U.S.C. §170.  http://www.advisorfx.com/articles/default.aspx?action=35&filename=f19_1_8_3280.htm.  Last Accessed 11/25/2010. 

[3] Kathryn G. Henkel.  Estate Planning & Wealth Preservation: Strategies & Solutions

P 32.02 INCOME TAX DEDUCTION FOR CHARITABLE GIFTS-GENER AL  1999 WL 1017736, 1 (W.G.&.L.). 2010. 

[4] See 26 U.S.C. 170(b)(1)(A); 26 U.S.C. 170(b)(1)(B).

[5] AdvisorFX. B6—The Income Tax Charitable Deduction—I.R.C. §170.

[6] Kathryn G. Henkel.  Estate Planning & Wealth Preservation: Strategies & Solutions

[7] 26 U.S.C. 170(b)(1)(A).

[8] Kathryn G. Henkel. P 32.02 INCOME TAX DEDUCTION FOR CHARITABLE GIFTS-GENER AL  1999 WL 1017736, 1 (W.G.&.L.).

For as long as life insurance has existed, con artists and murderers have sought payouts from policies on the lives of their victims. Tomisue Hilbert, wife of insurance giant Conseco, Inc.’s founder Stephen Hilbert, suspects that her mother, Suzy Tomlinson, was a victim of one such schemer.

She looks to hold AIG responsible for her mother’s untimely death, believing that a high-value policy issued by American General (an AIG subsidiary) on her mother’s life was the impetus behind a scheme that ended with her mother’s death.  The life insurance policy at issue in the case is a $15 million policy on Tomlinson’s life naming Indiana businessman J.B. Carlson as its beneficiary. Policy premiums were paid with premium financing.

On September 29, 2008, Suzy Tomlinson drowned in her bathtub, fully clothed, after a night of drinking. Tomlinson’s death occurred right before a $1.27 million payment was due on the premium finance loan. Tomisue Hilbert’s lawsuit notes the fortuitous timing—for Carlson—of her mother’s death, Carlson’s debts of $5.9 million and the fact that Carlson may have been the last person to see her mother alive.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Record numbers of taxpayers will be subject to the 2010 alternative minimum tax (AMT) if Congress does not act by the end of the year. Congress has considered a number of possible AMT “patches” that would reduce the number of taxpayers subject to the AMT but has been unable to agree on the right approach.  Although Congress passes an AMT patch annually, this year’s patch is coming later than usual.

In a November 9, 2010, letter to the IRS’s Douglas Shulman, House Ways and Means and Senate Finance committee members said that the IRS should expect Congress to pass 2010 alternative minimum tax relief by the end of this year. The joint letter was signed by Finance Committee Chair Max Baucus (D-Mont.), Finance Committee ranking minority member Chuck Grassley (R-Iowa), acting Ways and Means Committee Chair Sander M. Levin, (D-Mich.), and Ways and Means Committee ranking minority member Dave Camp (R-Mich.).   Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of the AMT, see Advisor’s Main Library: Section 19.D—Additional Taxes; Credits For Prepayments.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Provides wealth managers with update on industry statistics.  Discusses areas where wealth managers are needed now and in the future.

According to a recent report by Javelin Strategy and Research (California); “[a]lthough the recent ‘Great Recession’ has caused millions of Americans to tighten their belts financially, nearly one out of five consumers are financial sleepwalkers”—those who do not manage their personal finances. [1] That’s right; at least 20% of Americans are not currently using wealth managers to manage their personal finances. The report states that the rate is more than double that of 2009. [2] This presents a vast opportunity for wealth managers to expand their market share.

The United States Department of Labor project that personal financial advisors are estimated to grow by 30 percent over the 2008–18 period.  “Growing numbers of advisors will be needed to assist the millions of workers expected to retire in the next 10 years.” [3] Further, “[a]s more members of the large baby boom generation reach their peak years of retirement savings, personal investments are expected to increase and more people will seek the help of experts.” [4]

Moreover, there is a trend in corporate America to replace “traditional pension plans with retirement savings programs, so more individuals are managing their own retirements than in the past,” creating additional opportunity for wealth managers. [5] In addition, as medical technology continues to advance and people on average, live longer, the need for additional financial planning arises.

The average compensation for wealth managers is around $89,920 to $110,130 for those marketing insurance products and services as well as other financial investments. [6] New York has the most wealth managers in terms of total numbers. [7] In addition, New York wealth managers made on average $146,460, the most from any state. [8]

A significant number of wealth managers are located in New York, California, and Florida mostly. [9] Vero Beach Florida had the highest concentration of wealth managers per capita earning around $84,430. [10] Approximately, 63 percent work in the finance and insurance industries, and approximately 29 percent of “personal financial advisors are self-employed, operating small investment advisory firms.” [11]

For previous blogticles covering the wealth management industry, see the series beginning The Future of Wealth Management

Next week’s blogticles will discuss insurance and tax related issues.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Personal Finance Management (Part 1): What Consumers Really Want from PFM.  Javelin Strategy & Research.  https://www.javelinstrategy.com/research/Brochure-199.  Last Accessed 11/24/2010.

[2] Personal Finance Management (Part 1): What Consumers Really Want from PFM.  Javelin Strategy & Research

[3] Occupational Outlook Handbook, 2010-11 Edition.  United States Department of Labor.  Bureau of Labor Statistics.  Personal Financial Advisors.  http://www.bls.gov/oco/ocos302.htm.  Last Accessed 11/24/2010.

[4] Occupational Outlook Handbook, 2010-11 Edition.  United States Department of Labor.

[5] Id.

[6] Occupational Employment Statistics. U.S. Department of Labor.  Bureau of Labor Stastics.  Personal Financial Advisors. May 2009.  http://www.bls.gov/oes/current/oes132052.htm. Last Modified Date: May 14, 2010. Last Accessed 11/24/2010.

[7] Id.

[8] Id.

[9] Occupational Outlook Handbook, 2010-11 Edition.  United States Department of Labor.

[10] Occupational Employment Statistics. U.S. Department of Labor

[11] Occupational Outlook Handbook, 2010-11 Edition.  United States Department of Labor.

Buzz about the Financial Industry Regulatory Authority, Inc. (FINRA) taking responsibility for regulation of investment advisers has been circulating for a couple of years now—but the talk is suddenly sounding less like gossip and a lot more like a plan. Last week, FINRA’s chief executive, Richard Ketchum, sent a letter to the SEC touting the benefits of appointing a self-regulatory organization (SRO) to oversee advisors. Although Ketchum’s letter does not directly ask the SEC to cede some of its regulatory authority over advisers to FINRA, hints abound.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed earlier this year, mandates an SEC study of its investment advisor examinations and whether delegation of advisor regulation to an SRO would improve examinations.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA in Advisor’s Journal, see FINRA Proposes Eliminating Industry Insiders from Arbitration Panels (CC 10-80).

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Author: William H. Byrnes & Benjamin S. Terner

Why is this Topic Important to Wealth Managers? Provides wealth managers with information relating to client transactions and reporting to the Internal Revenue Service beginning next year.

The Energy Improvement and Extension Act of 2008 created new laws requiring most regulated securities transactions occurring after December 31, 2010 to be subject to cost basis reporting by securities brokers to the IRS. [1] Currently, brokers are required to report the gross proceeds from the sale of a security on Form 1099. [2] The new law will add reporting of client’s adjusted basis of the security, and whether the gain is a short or long-term.  [3] Mutual fund cost basis reporting is to start a year after regulated securities reporting, and options and debt contracts are to follow a year after mutual funds.  The reports are to be filed on a Form 1099-B, Proceeds from Broker and Barter Exchange. [4]

Why is it important to know that the IRS will be receiving information about the values of securities of clients?

Generally, gain determination for the sale or exchange of a capital asset is the sales price minus what the asset was acquired for, or the cost basis. [5]

Until now, gain determination, which directly effects tax liability, has largely been a task for accountants.  The new law fundamentally changes how gains will be calculated by the Treasury;  going forward, it will have all the information it needs to calculate tax liabilities for taxpayers from transactions occurring on capital markets. [6]

Now, under Form 1099 reporting by brokers—“basis, sales price, and type of gain, the IRS can track” what was paid for the stock, what the stock was sold for, and whether the gain is short term or long term. [7] There is now little room for error for individuals purchasing securities to correctly report gains from transactions on stocks.  If the IRS receives information from the broker that does not match information on the client’s tax return, “the mismatch should trigger an IRS inquiry.” [8]

The effort is part of the Federal initiative of finding “innovative ways to reduce the tax gap and improve compliance.” [9] Internal Revenue Service Commissioner Shulman states the new law “will go a long way to reducing [miscalculated gains] and making things easier for investors.” [10]

Also, the requirements for reporting continue—a broker who transfers custody of a security to another broker must include an accompanying written statement with information to determine basis. [11] Moreover, once an issuer of stock takes an organizational action such as a stock split, merger, or acquisition that affects basis, an issuer must report to the Service and to each stockholder or nominee a description of any such action and the quantitative effect of that action on basis. [12]

The Commissioner relates to the issue personally, “I don’t know about you, but I have spent far too much time digging through old records, trying to find the basis for securities I sold.  I think investors…and I count myself one …will welcome getting this new, easy-to-understand information from their brokers.” [13] Others may disagree with the Commissioner but, time should tell.

Our Blogticles will continue Friday.  From the staff and experts at National Underwriters – we wish you a Happy Thanksgiving!

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Section 403 of the Energy Improvement and Extension Act of 2008, Div. B of

Pub. L. No. 110-343, 122 Stat. 3765, enacted on October 3, 2008, added sections

6045(g), 6045A, and 6045B to the Code. Section 6045(g) 6045(a); Notice 2010-67.  http://www.irs.gov/pub/irs-drop/n-10-67.pdf.  Last Accessed 11/7/2010.

[2] 26 U.S.C. § 6045.

[3] Id.

[4] See  26 U.S.C. § 6045; 26 CFR § 1.6045-1.

[5] See generally, 26 U.S.C. §§ 1001, 1011, 1012.

[6] Arden Dale.  The Wall Street Journal.

Cost Basis to Come on 1099B’s.  http://online.wsj.com/article/SB10001424052748704763904575550461405074090.html.  October 14, 2010.  Last Accessed 11/22/2010.

[7] Robert W. Wood.  “Forms 1099 For Cost Basis: What, Me Worry?”.  Forbes-The Tax Lawyer.  Oct. 20 2010.  http://blogs.forbes.com/robertwood/2010/10/20/forms-1099-for-cost-basis-what-me-worry/.  Last Accessed 11/22/2010.

[8] Robert W. Wood. Forbes-The Tax Lawyer.

[9] Internal Revenue Service Commissioner Douglas Shulman.   Prepared Address to The American Payroll Association’s and American Accounts Payable Association’s 28th Annual Congress. IR-2010-68.  May 27, 2010, Washington, D.C.

[10] Douglas Shulman.  IR-2010-68.

[11] 26 U.S.C. § 6045(g).

[12] 26 U.S.C. §  6045B.

[13] Douglas Shulman.  IR-2010-68.

Although IRS-approved retirement plans are intended to allow plan participants to sock away cash for retirement, some emergencies will permit a participant to withdraw plan funds prior to retirement—and there may be options to reduce or eliminate any tax due on the withdrawal.

Serving as a great reminder of the general principals of emergency distributions, the IRS recently ruled whether a qualified plan was permitted to make “unforeseeable emergency distributions” in three fact scenarios.  In the first, the plan participant wanted to take an emergency distribution to repair water damage to his home. In the second situation, the participant requested an emergency distribution to pay his nondependent son’s funeral expenses. In the third situation, the participant requested an emergency distribution to pay “accumulated credit card debt.”  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Why is this Topic Important to Wealth Managers? Serves as a reminder to wealth managers who may already have, or are currently, considering any alternative risk transfer products for their clients.  Discusses basics applied to captive insurance companies in consideration with traditional prepaid expenses. 

As we have discussed in previous blogticles, captive insurance can be a viable method to more efficiently protect against certain risks under various circumstances.  For discussion on these topics please see our blogticles on AdvisorFYI from the week of August 30^th, Monday through Wednesday, Alternative Risk Transfer Basics, Risk and Self-Insurance, and Captive Insurance Company Introduction.  

In addition, we have discussed in previous blogticles the ability to deduct prepaid expenses for certain items, both from an accrual basis and cash receipts and disbursements method taxpayer approach.  One such class of deductions that is generally allowable is, “insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.” [1]

See generally our blogticles from November entitled, Year End Tax Planning: Pre-Paid Insurance Expense For Accrual Accounting Taxpayers, and Year End Tax Planning: Pre-Paid Expenses For Cash Accounting Taxpayers.

A discussion of the deductibility of insurance premiums paid to a captive insurance company is complex.  It is recommended that wealth managers work with knowledgeable attorneys and other experts who specialize in the field of alternative risk transfer taxation.  Nevertheless, there are a number of captive insurance options that “fit” the many rules required for the deduction of premiums as an insurance expense. 

Moreover, as the year draws closer to an end, some of those options have become infeasible due to time constraints.  Other options, however, still may be available to clients’ businesses that have insurable interests that are currently being uninsured or insured through some other less effective means. 

One such example could be the class of captives that is generally known as the group, association or rent-a-captive model.  These captive insurance models provide for some of the very same benefits as ownership of an insurance company, which include, but are not limited to: 

• individualized underwriting and premium allocations
• retained underwriting profits depending on claims experience
• access to insurance products currently unavailable or too costly to insure

These models can also offer a lower price point for businesses who may be considering using alternative risk transfer products for the first time. 

Some considerations wealth managers should account for include, but are not limited to: 

• upfront and annual cost to insureds
• jurisdiction and regulatory oversight of insurance company
• officers, directors, and management of company, products and programs

Lastly, there are a number of promoters, companies, individuals and professionals who promote captive insurance products.  It is important to realize not everyone knows what they’re talking about.  In fact, some are even outright crooks.  When consulting with individuals who are “qualified” ask lots of questions and try to verify the information shared with you.  Remember a little extra due diligence now can save you a lot in the long run.

Tomorrow’s blogticle will continue to discuss additional resources available to wealth managers.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 26 C.F.R. § 1.162-1; U.S. v. Weber Paper Co., 320 F.2d 199, 63-2 U.S. Tax Case. (CCH) P 9630, 12 A.F.T.R.2d 5256 (8th Cir. 1963).