Why is this Topic Important to Wealth Managers? Discusses the repeal of the health care legislation. Also, presents discussion about budgetary concerns regarding repeal.

One of the most exciting aspects of working in the wealth management industry is the need to adapt to constant change.  Over the past 12 months, the Legislator has created a fair amount of change that has been the topic of many discussions here at Advanced Markets FX and FYI.  Amusingly enough, we now examine how some of that could change yet again, starting with the Health Care Repeal.

Recently the House of Representatives passed the Repealing the Job-Killing Health Care Law Act, as introduced on January 5, 2011, which is now up for a Senate vote. That bill would repeal the Patient Protection and Affordable Care Act (PPACA) [1] and the provisions of the Health Care and Education Reconciliation Act of 2010 [2] that are related to health care.  Both of those laws were enacted in March 2010, and have been discussed in depth throughout the past year.

Among other things, PPACA and the provisions of the Reconciliation Act that are related to health care will do the following: establish a mandate for most legal residents of the United States to obtain health insurance; create insurance exchanges through which certain individuals and families will receive federal subsidies to substantially reduce the cost of purchasing health insurance coverage; expand eligibility for Medicaid; reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under prior law); impose an excise tax on certain health insurance plans with relatively high premiums; impose certain taxes on individuals and families with relatively high incomes; and make various other changes to the federal tax code, Medicare, Medicaid, and other programs.

The Congressional Budget Office (CBO) has reviewed H.R. 2, and the financial affects its passage could have. [3] Although the findings are initial, the CBO first noted that the health care legislation contained a set of provisions designed to expand health insurance coverage, which CBO and Joint Committee on Taxation estimated would have a gross cost of about $930 billion and a net cost (after accounting for certain related changes in outlays and revenues) of about $780 billion over the 2012–2019 period. Repealing that legislation would eliminate such costs.

Secondly, the PPACA and the Reconciliation Act also included a number of provisions to reduce federal outlays and to increase federal revenues (mostly by increasing the Hospital Insurance payroll tax and imposing fees on certain manufacturers and insurers); in March, CBO and JCT estimated that those provisions unrelated to insurance coverage would, on balance, reduce direct spending by about $500 billion and increase revenues by about $410 billion over the

2012–2019 period.  The main variance the CBO estimates for the 2012-2019 period is $130 billion which is a result of projected increases of about $520 billion in revenues and about $390 billion in outlays.

Further, CBO’s estimates project repeal of the health care legislation would probably reduce the appropriations needed by the Internal Revenue Service by between $5 billion and $10 billion over 10 years. Similar savings would accrue to the Department of Health and Human Services.

Tomorrow’s blogticle will discuss 2011 market opportunities for wealth managers.

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

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[1] Public Law 111-148.

[2] Public Law 111-152.

[3] Douglas W. Elmendor, Director.  Congressional Budget Office.  Letter to the House Majority Leader.   http://www.cbo.gov/ftpdocs/120xx/doc12040/01-06-PPACA_Repeal.pdf.  January 6, 2011.  Last accessed January 22, 2010.

A recent Tax Court case demonstrates the severe tax consequences for an employee when a welfare-benefit plan ceases to qualify under section 419A of the Tax Code.  Section 419A governs “qualified asset accounts,” which are employer provided welfare-benefits plans that set aside funds for (1) disability benefits, (2) medical benefits, (3) severance benefits, or (4) life insurance benefits. In general, contributions by an employer to a welfare-benefit plan are tax deductible by the employer if they are ordinary and necessary business expenses. In the case, part of the funds contributed to the plan were used to buy life insurance coverage for the principal and other employees, with the rest of the funds constituting excess contributions. 

Read this complete analysis of the impact 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? Discusses opportunity presented by the looming muni bond market.  Offers an alternative investment to muni bonds that contains similar tax benefits.

The Wall Street Journal has recently noted that significant withdrawal of funds from municipal bonds throughout the country totaled over $4 billion in a one week period. [1] According to some estimates, the withdrawal accounts for only one tenth of one percent of the overall muni bond market.  [2] Yet, the numbers are record breaking.  The withdrawal is the largest from the muni bond market since last November, reports the Wall Street Journal.

However, the trouble seems to have started well before Meredith Whitney appeared on “60 Minutes”  in late December of last year when she call for the future “collapse” of the muni bond market.  In her opinion, the state and local governments will be forced to default on obligations made to bond holders because the governmental entities are quickly running out of liquidity.  Nevertheless, the muni bond numbers reflect the ”10th straight week of outflows, which total roughly $20.6 billion.” [3]

Whitney though may have created in the muni bond market what is now known as Gladwell’s “Tipping Point”.  It reasonably appears that she has influenced an overall decline in the faith and credibility of the muni bond market.  “The four-week moving average, a more meaningful number because of the longer time span it measures, was an outflow of $2.2 billion versus an outflow of $1.9 billion in the previous four-week period.” [4]

Many individuals are aware of the bad financial positions of more than a few states.  In California alone, the budget deficit is over $25 billion.  Some are even speculating about another “bail-out” for state and local governments who can’t meet their obligations.

How does all this affect wealth managers?

What exactly will happen is yet to be decided.  However, what is currently known is many individual investors recently liquidated tax favored investments.  Furthermore, it has created a perfect opportunity to promote other tax favorable investments such as life insurance and annuity products.  Because many investors in the muni bond market are accustomed to tax free interest on their investment, and further since life insurance and annuity products offer similar tax treatment, the switch is an appealing conversion.

In fact, lately some insurance companies have repositioned their annuity products to be presented in a light that provides a safe guaranteed source of income.  Many investors who were seeking the “safety” offered by instruments backed by state and local governments are likely to be more amenable now to funding investments offered by private institutions.  Annuities specifically fit the bill, and since most companies offer a line of annuity products from fixed rate to variable and indexed, there is certainly a product out there to fit most investor’s needs.

Next week’s blogs will be discussing more market opportunities for wealth managers.

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

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[1] Kelly Nolan.  Wall Street Journal. “UPDATE:Muni Mutual Funds See $4B Outflow In Latest Week—Lipper”. http://online.wsj.com/article/BT-CO-20110120-717343.html.  January 20,1011.  Last Accessed January 20, 2011.

[2] .  Nicole Bullock.  Financial Times. “Record amounts withdrawn from US muni funds.” http://www.ft.com/cms/s/0/0aae4f6a-24ff-11e0-895d-00144feab49a.html#axzz1BdnfaiYw. January 21, 2011.  Last Accessed January 20, 2010 (PST).

[3] Kelly Nolan.  Wall Street Journal “UPDATE:Muni Mutual Funds See $4B Outflow In Latest Week—Lipper”.

[4] Id.

A recent Delaware Court of Chancery decision illustrates the severe consequences that can befall an insurance agent trustee who violates his or her duties to the trust’s beneficiaries. The agent in the case agreed to serve as trustee of a client’s life insurance trust.  

The client, a Father, had a falling out with his son over the Father’s marriage to a woman 17 years his junior. Nevertheless, the Father and his second wife formed a trust for the benefit of the son. The couple asked their family insurance agent to serve as trustee of the trust. The trust purchased a second-to-die life insurance policy on their lives.  Although the trust was irrevocable, the Father ad young wife asked the trustee to revoke the trust only three years after it was formed. The trustee intelligently refused to revoke the trust, but did agree to loan the policy’s cash value to the couple. 

Read this complete analysis of the impact 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).

We’re just two weeks into the new Congress and the Republican majority is already causing controversy as it tries to live up to what it perceives as its deficit reduction, tax cut mandate. Republicans promised to cut spending by $100 billion by the end of 2011, but critics say that recent Republican maneuvers will do just the opposite by reducing revenue through new tax cuts and a repeal of the health care reform law.  

The so-called “cut as you go” rules require that every new mandatory spending measure be offset by an equivalent spending cut. Tax cut legislation is exempt from the cut-go rules.  Read this complete analysis of the impact 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? Discusses the new income reporting threshold for non-profit organizations.  Provides details on the new level of reporting required on Form 990 for 501(c) organizations.  

Generally the Internal Revenue Code requires the filing of an annual return by exempt organizations. [1]  However, there are certain mandatory exceptions to the annual filing requirement for exempt organizations provided by the Code.  [2] 

Further, the tax law provides that the Secretary of the Treasury, through the Commissioner of the Internal Revenue Service may relieve exempt organizations from the annual filing requirement if the Secretary determines that such filings are not necessary to the efficient administration of the internal revenue laws. [3]

Before this week, exempt organizations were relieved from the Form 990 (Return of Organization Exempt from Income Tax) filing requirement for organizations described in § 501(c) (other than private foundations) whose annual gross receipts are normally not more than $25,000. [4]

However, the Internal Revenue Service recently released a Revenue Procedure stating that an organization exempt from federal income tax under § 501(a) because it is described in § 501(c) (other than a private foundation) that normally has annual gross receipts of not more than $50,000 is not required to file an annual return under IRC §6033(a). [5]

Generally, a private foundation in this context means, any Section 501(c)(3) organization that is not mentioned in Section 509(a)(1)-(4). 

For purposes of determining whether the annual gross receipts of an organization are normally not more than $50,000, for application of the new non-reporting threshold, the level is met if:

(1) in the case of an organization that has been in existence for one year or less, the organization’s gross receipts, including amounts pledged by donors, are $75,000 or less during its first taxable year;

(2) in the case of an organization that has been in existence for more than one year, but less than three years, the organization’s average annual gross receipts for its first two taxable years is $60,000 or less; and,

(3) in the case of an organization that has been in existence for three years or more, the organization’s average annual gross receipts for the immediately preceding three taxable years, including the taxable year for which the return is filed, is $50,000 or less. [6]

The new Revenue Procedure is effective beginning January 17, 2011 and is applicable to annual returns filed for tax years beginning on or after January 1, 2010.

In summary, the Internal Revenue Service has relieved certain organizations from the requirement to file an annual return on Form 990, Return of Organization Exempt from Income Tax.  These organizations (other than private foundations) are exempt from federal income tax and therefore reporting when its annual gross receipts are normally not more than $50,000.

Tomorrow’s blogticle discusses additional changes wealth managers can expect in 2011.

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

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[1] IRC § 6033(a)(1). 

[2] IRC § 6033(a)(3)(A). 

[3] IRC § 6033(a)(3)(B); Treas. Reg. § 1.6033-2(g)(6). 

[4] IRC §  6033(a)(3)(B); Rev. Proc. 83-23, 1983-1 C.B. 687. 

[5] Rev. Proc. 2011-15.

[6] See Generally, Treas. Reg. § 1.6033-2(g)(4); Rev. Proc. 2011-15. 

Why is this Topic Important to Wealth Managers? Discusses retirement plan investments with regards to client retirement planning.  Provides types of investments retirement plans can and cannot make.

What types of investments can a retirement plan make?

Although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments.

In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement.[1]

In addition, certain rules apply to specific plan types.  For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan. [2]

Nevertheless, certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors. [3]

As many wealth managers already know, however, individual retirement accounts are not permitted to invest in life insurance. [4]

Moreover, under the Code, both participant-directed accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements. [5]

Are there other transactions that are prohibited?

A prohibited transaction is a transaction between a plan and a disqualified person.  Prohibited transactions generally include the following transactions:

• a transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person;
• any act of a fiduciary by which plan income or assets are used for his or her own interest;
• the receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets;
• the sale, exchange, or lease of property between a plan and a disqualified person;
• lending money or extending credit between a plan and a disqualified person; and
• furnishing goods, services, or facilities between a plan and a disqualified person.

How do prohibited transactions affect IRAs?

A prohibited transaction with respect to an IRA occurs if the owner or beneficiary of the IRA engages in any of the transactions prohibited transactions described above.  In the case of an individual retirement account the Code provides that the account is no longer an individual retirement account, and it is treated as if the assets were distributed on the first day of the taxable year in which the prohibited transaction occurred.[6] Of course, this may trigger an early withdrawal penalty.

Tomorrow’s blogticle discusses additional changes wealth managers can expect in 2011.

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

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[1] ERISA § 404.

[2] ERISA § 407.

[3] See generally, Labor Reg. §2550.404c-1.

[4] IRC §408(a)(3).

[5] IRC §408(m).

[6] IRC §408(e)(2).

Cost competitiveness of life insurance policies is an obvious determinant of suitability.  Keeping costs low is critical because every dollar spent on expenses is one less dollar available to purchase more death benefit.  In fact, a recent study by Morningstar revealed that “Low fees are likely to be the best predictor of a mutual fund’s future success,” and the same certainly holds true for life insurance products. 

While different insurers refer to different policy expenses in different ways, all policy expenses in all life insurance policies fall into the following four categories: 1) cost of insurance charges (COIs), 2) fixed administration expenses (FAEs), 3) cash-value-based “wrap fees” (e.g., M&Es), and 4) premium loads.   Each type of policy expense and its role and relevance in pricing and suitability is discussed in the complete analysis 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 life insurance product suitability in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90) and Financial Strength and Claims-Paying Ability (CC 10-115).

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

Written by the foremost experts in the field - Professor William H. Byrnes, Esq., LL.M, and Robert Bloink, Esq., LL.M

Understand the Act’s Implications for You and Your Clients

• Analyzes important insurance, estate, gift, and other elements of the Act
• Provides pertinent information on other important 2010 tax developments
• Convenient Q&A format speeds you to the information you need – with answers to over 100 important questions

Summary Table of Contents

• Analysis of the Tax Relief Act of 2010
  • Income Tax Provisions
  • Estate Tax Provisions
  • Generation Skipping Transfer Tax
  • Deduction for State and Local Sales Taxes
  • Alternative Minimum Tax
  • Tax Credits
  • Payroll Tax Holiday
  • Wage Credit for Employees who are Active Duty Members of the Military
  • Charitable Distributions from Retirement Accounts
  • Bonus Depreciation and Section 179 Expensing
  • Basis Reporting Requirements for Brokers and Mutual Funds
  • Regulated Investment Company Modernization Act of 2010
  • Health Care Act
  • Form 1099 Reporting Requirement for Businesses
  • American Jobs and Closing Tax Loopholes Act of 2010
  • Requirements for Tax Return Preparers

Product Information:

Softcover/64 pages total;  42 pages of questions and answers

Publication Date: January 2011

Publication Number: 1350011

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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) extended the income tax deduction for state and local sales taxes through December 31, 2011.  The deduction expired on January 1, 2009, but Congress amended the provision retroactively, which will allow taxpayers to take the deduction on their 2010 taxes.  The deduction, which has been slated to expire a number of times, has been revived by Congress repeatedly since it was introduced but has not yet been made a permanent part of the Code.   Read this complete analysis of the impact 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 the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), & 2010 Estates: To Elect or Not to Elect (CC 10-124).

For in-depth analysis of income tax deductions, see Advisor’s Main Library: B4—Business Income and Deductions.

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