Articles tagged with: des moines financial advisor

Pension Plans & Derisking

Corporations are transferring pension liabilities to third parties.  Where does this leave retirees?

A new phrase has made its way into the contemporary financial jargon: derisking. Anyone with assets in an old-school pension plan should know what that phrase signifies.

The derisking trend began in 2012. In that year, Ford Motor Co. made a controversial offer to its retirees and ex-employees: it asked them if they wanted to take their pensions as lump sums rather than monthly payments. Basically, Ford realized it could someday owe these former workers more than its pension plan could pay out. The move was clearly motivated by the bottom line, and other corporations quickly imitated it.1

If you work for a major employer that sponsors a pension plan, you may soon face this choice if you haven’t already. By handing over longstanding pension liabilities to a third party (i.e., a major insurance company), the pension plan sponsor unloads a risky financial obligation.

In theory, retired employees tended this kind of offer gain added flexibility when it comes to their pension: a lot of money now, or monthly payments from the insurer for years to come. Does the lump sum constitute a sweet deal for the retiree? Not necessarily.

If you are offered a lump sum pension payment, should you accept it? Making this kind of pension decision is akin to deciding when to claim Social Security – you’ve got to look at many variables beforehand. Whatever choice you make will likely be irrevocable.2

What’s the case for rejecting a lump sum offer? You can express it in three words: lifetime income stream. Do you really want to forego decades of scheduled pension payments to take (potentially) less money now? You could possibly create an income stream off of the lump sum, of course – but why go through the rigmarole of that if you’re already getting monthly checks to begin with?

As American longevity is increasing, you may spend 20, 30, or even 40 years retired. If you are risk-averse and healthy, turning down decades of consistent income may have little appeal. Moreover, if you are female you have a decent chance of living into your nineties – and an income stream intended to last as long as you do sounds pretty nice, doesn’t it? If you are single or your spouse has very little in the way of assets, this too reinforces the argument for keeping the payment stream in place.

Also, maybe you just like the way things are going. If you don’t want the responsibility that goes with reinvesting a huge sum of money, you aren’t alone.

What’s the argument for taking a lump sum? Sometimes a salaried retiree is in poor health or facing a money problem. If this is your situation, then it may make sense to claim more of your pension dollars now.

On the other hand, you may elect to take the lump sum out of opportunity. You may base your choice on timing rather than time.

If you want to build more retirement savings, taking the lump sum might be instrumental. Pension payments are rarely inflation-adjusted; maybe you would like to invest your pension money so it can potentially grow and compound for more years before being withdrawn. Maybe your spouse gets significant pension income, or you are so affluent that the pension income you get is nice but not necessary; if so, perhaps you want to redirect that lump sum toward some other financial objective. Maybe you don’t want regular income payments this year or next because that money would put you into a higher tax bracket.3

The key is to avoid taking possession of the lump sum yourself. If you do that, your former employer has to withhold 20% of the lump sum (per IRS regulations) and you risk a taxable event. Instead, you may want to arrange a direct rollover, or trustee-to-trustee transfer, of the assets to avoid withholding and a huge tax bill. Through this move, the funds can be transferred to an IRA for reinvestment. In most cases, you need to leave your job (i.e., retire) before you can roll money out of a pension plan.4

Consult a financial professional about your options. If you do feel you should take the lump sum, talk to someone before you make your move. If the move makes sense, that professional may offer to help you invest the money in a way that makes sense for your near-term and long-term objectives, your risk tolerance, your estate and your income taxes. If you feel monthly payments from the usual joint-and-survivor pension might be the better choice, ask if some model scenarios might be might presented for you.

 Mike Moffitt may be reached at ph. 641-782-5577 or email:  mikem@cgfiowa.com 

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tinyurl.com/nucxdss [11/23/14]

2 – forbes.com/sites/mikehelveston/2014/04/10/the-big-pension-decision-should-you-choose-a-lump-sum-or-monthly-annuity-payments/ [4/10/14]

3 – consumerreports.org/cro/2014/03/best-pension-payout-option/index.htm [3/14]

4 – nerdwallet.com/blog/investing/2014/rollover-ira/ [9/7/14]

 

Using CRUTs & CRATs to Sell Your Business Interest

These estate planning tools may also help in exit planning.

Discover a pair of underappreciated exit planning vehicles. Charitable remainder unit trusts (CRUTs) and charitable remainder annuity trusts (CRATs) are commonly seen as estate planning tools. What frequently goes unseen is their value in exit planning for business owners.

Does it look like you will sell your company to a third party? Do your “second act” or “third act” goals include financial independence, philanthropy and leaving significant wealth for your heirs? If you find yourself answering “yes” to these questions, a CRUT or CRAT may help you address those objectives and potentially enhance your outcome.

CRUTs & CRATs are variations of charitable remainder trusts (CRTs). A CRT is an irrevocable tax-exempt trust that you can fund with highly appreciated C corporation stock (or optionally, other types of highly appreciated assets). Since CRTs are irrevocable, they are difficult to undo.

How do you sell your ownership interest through a CRUT or CRAT? As the trust creator (or grantor), you donate said C corp stock to the CRUT or CRAT. Because the trust is tax-exempt, it can sell those highly appreciated C corp shares without triggering immediate capital gains tax.1

The CRUT or CRAT sells your ownership shares to the outside buyer of your company, and it becomes your tax-exempt retirement fund. It invests the cash realized from the sale of your ownership shares in either fixed-income or growth securities; it provides you with recurring payments out of the trust principal, which occur for X number of years or for the duration of your life (or even longer). Payout is mostly fixed – once determined, the percentage of the trust which the annuity is tied cannot be changed and you cannot access the principal. The payments can even go to people other than yourself – they can optionally go to your parents, they could go to your grandkids.1,2

You are offered another tax break as well. You can take a one-time charitable income tax deduction for the value of the donation used to fund the trust (i.e., a tax deduction applicable in the current tax year). This demands an appraisal of the highly appreciated assets being donated to the CRUT or CRAT, obviously. The deduction amount also depends on calculations using IRS life expectancy tables, the term of the trust, interest rates, and payout schedules and amounts.1,3

On one level, a CRUT or CRAT is an agreement you make with the IRS. In exchange for all these tax perks, you agree to give 10% or more of the initial value of the CRUT or CRAT to a qualified charity or non-profit organization. Many CRUT or CRAT grantors intend to leave no more than that to charity.2

When the grantor passes away, a last tax break occurs. While 100% of the trust assets now become part of his or her taxable estate, the estate may take a deduction for the remainder interest that goes to the qualified charity or non-profit.3

Some CRUT and CRAT grantors strategize to offset the eventual gifting of 10% (or more) of trust assets. They have the beneficiaries of the CRUT or CRAT fund an irrevocable life insurance trust (ILIT). When the grantor passes away, they receive insurance proceeds sufficient to replace the “lost” wealth. Since the ILIT owns the life insurance policy, the life insurance payout isn’t included in the taxable estate of the deceased and it isn’t subject to transfer taxes.3

What’s the fundamental difference between a CRUT & a CRAT? The difference concerns the recurring payments out of the trust to the grantor. In a CRUT, those payments represent a percentage of the fair market value of the principal of the trust (and that principal is revalued annually). There is investment risk involved in CRUTs. Should the value of the underlying investment go down significantly, your annuity income can go down as well. In a CRAT, they represent a fixed percentage of the initial value of the principal.1

Older business owners may find the CRAT is a more appealing choice, while younger business owners may be more attracted to the CRUT. Yearly distributions from a CRUT must amount to at least 5% and no more than 50% of the trust principal revalued annually. Yearly distributions from a CRAT must come to at least 5% but no more than 50% of the initial value of the donated assets.1,3

Can an owner fund a CRUT or CRAT with S corp shares? No. A charitable remainder trust can’t serve as a shareholder in an S corp, so if you donate S corp stock to a CRT, there goes your S corp status. It should also be noted that C corp stock subject to recourse debt can’t go into a CRT.1

Are you interested in learning more? Establishing a trust can be complicated. It is important to talk to a legal, financial, or tax professional about the potential of CRUTs and CRATs. What you learn may lead you toward a better outcome for your business.

Mike Moffitt may be reached at ph. 641-782-5577 or email: mikem@cfgiowa.com.

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – arne-co.com/selling-business-using-crt/ [11/18/14]

2 – forbes.com/sites/ashleaebeling/2013/08/14/charitable-shelter-how-cruts-cut-capital-gains-tax/ [8/14/13]

3 – bbt.com/bbtdotcom/wealth/retirement-and-planning/trusts-and-estates/charitable-remainder-trusts.page [11/18/14]

 

 

 

Irrationality Abounds – A Special Post From Mike Moffitt

I noticed an economist I follow had a conference for those number-crunching geeks interested in the big picture on the U.S. and world economies.  He called it the Irrational Economic Summit.  At first, I thought that was a harsh title but upon further review, maybe not.

So much of what’s going on in our world is right in front of our eyes but we often miss what’s important because there’s so much information overload out there.  Here are a couple of examples:

I received an email from a national non-profit organization in Washington, DC that promotes the establishment of bike trails.  They want me to donate and tell my congressman to vote to maintain government funding of trails.  Totally within their right to make this request.  But out of curiosity I checked the annual report and tax filings on their web site, and here’s what I found:

  1. They spend about $800,000 a year in lobbying Congress to get $1.1 million in funding.  They took in another $5.3 million in memberships and contributions. Their top 4 staffers bring home over $600,000 and their headquarters is in Washington – one of the most expensive real estate markets in the U.S. Most of the rest went to expenses but they have over $3 million squirreled away in cash and investments.   They only gave out $1.8 million in grants for trails – supposedly their reason for existence.
  2. There are probably thousands of non-profits like this in America that want money from the U.S. government.

Now let’s look at our federal government’s situation (courtesy of www.usdebtclock.org).  Our CURRENT U.S. debt is about $17 trillion dollars.  Our infinite horizon future debt, according to the Federal Reserve –based on the projected costs of Medicare and Social Security alone– is $125 trillion dollars.  That figures out nearly $400,000 PER CITIZEN and over $1 million PER TAXPAYER (only about 1/3 of the citizens are taxpayers…another issue for another day).  The average assets PER CITIZEN are over $320,000, but of course that’s the average.  Many citizens have far less than that.  So the government’s future unfunded liabilities are more per citizen than each citizen is worth.  You would think this fiasco will end badly someday.

Your financial health is up to YOU! Don’t expect Uncle Sam to be the answer.  The antidote to this spending sickness should be personal saving, investing and living within your means.  Personal responsibility and having a viable plan in case the economy turns sour again just makes sense.  And that’s something we can help with.

Our federal government’s spending should scare us, but most citizens aren’t paying attention or they would not stand for this.  It’s, well, irrational.

If you’d like some help working through some of these issues, or if you have questions, please don’t hesitate to reach out to us. We look forward to hearing from you!

HAPPY NEW YEAR!

Mike Moffit