Top 5 Benefits Annuities Can Bring Except The Lifetime Income

If field goals were suddenly worth four points and touchdowns were worth five, football coaches would change their strategies. This type of scoring change has occurred in the estate planning field, but many people keep using their old playbooks.

Recent income and estate tax updates have adjusted how the planning game should be played. If your estate plan was drafted before they came into effect, reconsidering how you structure your estate could save you tens of thousands, or even millions, of dollars.

The Changing Rules

To understand these rule changes, we should rewind to the year 2000. The federal estate tax only applied to estates exceeding $675,000 and was charged at rates up to 55 percent. Long-term capital gains were taxed at 20 percent. Since then, the amount that can pass free of estate tax has drifted higher, to $5.43 million in 2015, and the top estate tax rate has dropped to 40 percent. On the other hand, the top ordinary income tax rate of 39.6 percent when coupled with the 3.8 percent Net Investment Income tax is now higher than the federal estate tax rate.

Although the top capital gains tax rate of 23.8 percent (when including the 3.8 percent Net Investment Income tax), remains less than the estate tax rate, these changes in tax rate differentials can significantly modify the best financial moves in planning an estate. While estate tax used to be the dangerous player to guard, now income taxes can be an equal or greater opponent.

Besides the tax rate changes, the biggest development that most people’s estate plans don’t address is a relatively new rule known as the portability election. Before the rule was enacted in 2011, if a spouse died without using his or her full exemption, the unused exemption was lost. This was a primary reason so many estate plans created a trust upon the first spouse’s death. Portability allows the unused portion of one spouse’s $5.43 million personal exemption to carry over to the survivor. A married couple now effectively has a joint exemption worth twice the individual exemption, which they can use in whatever way provides the best tax benefit. Portability is only available if an estate tax return is filed timely for the first spouse who dies.

From a federal tax standpoint, if a married couple expects the first spouse to die with less than $5.43 million of assets, relying on portability is a viable strategy for minimizing taxes and maximizing wealth going to the couple’s heirs. Estate planning for families with less than $10.86 million in assets is now much more about ensuring that property is distributed in accordance with the couple’s wishes and with the degree of control that they wish to maintain than it is about saving taxes. However, state estate taxes can complicate the picture because they may apply to smaller estates.

Below are a number of plays that families who will be subject to the estate tax should consider to optimize their taxes in today’s environment. Although many of the techniques are familiar, the way they are being used has changed.

The New Estate Planning Plays

Empowering Your Plan’s “Quarterback”

A successful quarterback has a solid group of coaches providing him with guidance, but is also allowed to think on his feet. Similarly, the quarterback of an estate, the executor or a trustee, needs to be given a framework in which to make his or her decisions but also flexibility regarding which play to run. Today’s estate planning documents should acknowledge that the rules or the individual’s situation may change between the time documents are signed and the death or other event that brings them into effect. Flexibility can be accomplished by expressly providing executors and trustees with the authority to make certain tax elections and the right to disclaim assets, which may allow the fiduciaries to settle the estate in a more tax-efficient manner. Empowering an executor has its risks, but building a solid support team of advisers will help ensure he or she takes the necessary steps to properly administer the estate.

Maximize the Value of Your Basis Adjustment

It’s a common misconception that lifetime gifts automatically reduce your estate tax liability. Since the two transfer tax systems are unified, lifetime gifts actually just reduce the amount that can pass tax-free at death. Lifetime gifts accomplish marginal wealth transfer only when a taxpayer makes a gift and that gift appreciates outside of the donor’s estate. In the past, people generally wanted to make gifts as early as possible, but that is no longer always the most effective strategy due to income tax benefits of bequeathing assets.

One big difference between lifetime giving and transfers upon death is the way in which capital gains are calculated when the recipient sells the assets. With gifts of appreciated assets, recipients are taxed on the difference between the transferor’s cost basis, typically the amount the donor paid for the asset, and the sales price. The cost basis of inherited assets is adjusted to the fair market value of the assets on the date of the owner’s death (or, in a few cases, six months later).

When choosing which assets to give to heirs, it is especially important to make lifetime gifts of assets with very low appreciation and to hold onto highly appreciated assets until death. If a beneficiary inherits an asset that had $100,000 of appreciation at the donor’s death, the basis adjustment can save $23,800 in federal income taxes compared to if the beneficiary had received the same property as a lifetime gift. Unfortunately, the basis adjustment upon death works both ways. If the bequeathed asset had lost $100,000 between the time it was purchased and the owner’s death, the recipient’s cost basis would be reduced to the current fair market value of the property. Therefore, it is advantageous to realize any capital losses before death if possible.

Holding onto appreciated assets until death is appealing for income tax purposes, but might not be advisable if the asset is a concentrated position or no longer fits with your overall portfolio objectives. For these types of assets, it’s worth analyzing whether the capital gains tax cost is worth incurring right away or if you should pursue another strategy, such as hedging, donating the asset to charity or contributing the property to an exchange fund.

Choosing not to fund a credit shelter trust upon the first spouse’s death is a perfect example of maximizing the value of the basis adjustment. These trusts were typically funded upon the first spouse’s death to ensure that none of the first spouse’s exemption went to waste. Since the portability rules allow the surviving spouse to use the deceased spouse’s unused exemption amount, it is no longer essential to fund a credit shelter trust. Instead, allowing all of the assets to pass to the surviving spouse directly allows you to capture a step-up in basis for assets upon the first spouse’s death, and then another after that of the second spouse. Depending on the amount of appreciation and the time between the two spouses’ deaths, the savings can be substantial.

Annual Gifting

Making annual gifts is a traditional strategy that remains attractive today. In addition to the $10.86 million that a couple can give away during their lifetime or at death, there are also some “freebie” situations where gifts don’t count towards this total. You can make gifts up to the annual exclusion amount, currently $14,000, to an unlimited number of individuals, and you can double this amount by electing to gift split on a gift tax return or by having your spouse make separate gifts to the same recipients.

Transferring $14,000 may not seem like a meaningful estate tax planning strategy for someone with more than $11 million, but the numbers can add up quickly. For example, if a married couple has three married adult children, each of whom has two children of their own, the couple could transfer $336,000 to these relatives each year using just their annual exemptions. If the recipients invest these funds, the future appreciation also accrues outside of the donors’ estates, and the income may be taxed at lower rates.

Contributing the annual exclusion gifts to 529 Plan education savings accounts for the six grandchildren can accelerate the gifting process and increase the income tax benefits. A special election allows you to front-load five years’ worth of annual exclusion gifts into a 529 Plan, which would currently allow $840,000 in total gifts to the six grandchildren. In this scenario, the grandparents would not be allowed to make any tax-free gifts to the grandchildren during the following four tax years. Since assets in a 529 Plan grow tax-deferred and withdrawals for qualified educational expenses are tax-free, you can realize substantial income tax savings here. If you assume the only growth in the accounts is 4 percent capital gains, which are realized each year, that results in about $8,000 in annual income federal tax savings per year, assuming the donor is in the top tax bracket.

You can also pay a student’s tuition directly to the college or university, since these payments are exempt from gift tax. This exception applies to medical expenses and health insurance premiums as well, as long as payments are made directly to the provider.

Given that annual exclusion gifts don’t impact the $5.43 million lifetime exemption, I recommend making these gifts early and often, but remember to give away cash or assets that have very little realized appreciation. The earlier you make a gift, the more time the assets have to appreciate and pay income to the recipient.

Lifetime Charitable Giving

Earlier I mentioned that you want to avoid giving away appreciated securities during your lifetime. The exception to that rule is a gift to charity. By donating appreciated securities that you have held for more than one year, you can get a charitable deduction for the market value of the security and also avoid paying the capital gains tax you would incur if you were to sell the asset.

If you know you have charitable intentions, it is more effective to donate appreciated securities earlier in life, rather than at death, since doing so removes future appreciation of the assets from your estate.

Using Trusts to Increase the Effectiveness of Transfers

Lifetime transfers to standard irrevocable trusts are no longer as appealing as they used to be, now that the estate tax rate is closer to the capital gains rate. Assets transferred to irrevocable trusts during the grantor’s lifetime typically do not receive a basis step-up upon the grantor’s death. Therefore, determining whether it is more appealing to make lifetime transfers or bequests in a specific circumstance requires making assumptions and analyzing probable outcomes.

Nonetheless, funding certain trusts in conjunction with other planning techniques can increase the planning’s effectiveness. An intentionally defective grantor trust (IDGT) is one of the most appealing types of trusts for wealth transfer purposes, because the donor is treated as owner of the trust assets for income tax purposes but not for estate and gift tax purposes. A defective grantor trust is a disregarded entity for tax purposes, so any income that the trust earns is taxable to the grantor. By paying the tax on trust income, the grantor effectively transfers additional wealth to the beneficiary.

Another popular strategy is for a grantor to make a low interest rate loan to a defective grantor trust. The trust then invests the funds. So long as the trust’s portfolio outperforms the interest rate charged on the loan, the excess growth is shifted to the trust with no transfer tax consequence.

One of the common ways to cause a trust to be intentionally defective is for the trust document to allow the grantor to retain the power to substitute assets held by the trust for other assets. Assuming a trust has this provision, it is very powerful to routinely swap highly appreciated assets held by the trust that would not be eligible for a basis step-up with assets of equal value held by the grantor that have little to no appreciation, such as cash.

Rather than funding a credit shelter trust upon the first spouse’s death, a surviving spouse might choose to receive all of the assets outright and then immediately fund an IDGT that includes the power to substitute assets. The trust’s income would be taxed to the surviving spouse, allowing for additional wealth transfer, and the grantor could use the swapping power to minimize the income tax cost of the lost basis adjustment.

Any transfer technique, such as a grantor retained annuity trust (GRAT), that allows a donor to transfer assets without generating a gift is also valuable, since it helps preserve the lifetime exemption amount as long as possible, thus maximizing the assets that can benefit from adjusted basis.

Finally, trusts can be useful for keeping assets out of your estate that never should have been included in it. For example, wealthy individuals should generally purchase life insurance through an irrevocable trust, rather than directly in the insured individual’s name. Life insurance owned by decedents is includible in their taxable estates. By creating a trust funded through annual exclusion gifts and having the trust purchase the policy, you can ensure that the estate tax does not take 40 percent of the policy’s proceeds.

Top 6 Advantages Of Student Loans

Student loan has become a ‘necessary evil’ for most of the students, which help them to complete their education. In the present social and economic scenario, the education is a costly affair, of which financial expenses cannot be managed without a financial aid in the form of a scholarship or educational loan. Scholarship is reserved for exceptional students and educational loans will be the only resort for an average student to pursue his student loan. The student loan has the advantage of several relaxations in the terms and conditions than a standard loan. However it is essential that the student loan amount including the prescribed interest have to be repaid. The top 5 ways to help the repayment of the student loans are comprehended from the testimonials of the students, who are successful in student loan repayment.

It is a fact the student loan repayment will not be practically easy in the beginning years of ‘struggle of existence’. The student will get a grace period of 6 months to 9 months for the start of the loan repayment after the course completion, which varies according to the nature of the loan. But in the entry level jobs, it will be pretty hard to find the amount for the loan repayment. Proper financial management is the only possible solution to handle the crisis successfully. But it may not be easy to restrict the expenses in the early days, even though you are aware about the student loan and other liabilities. A budgeting will certainly help you to plan the situation well and it can be a winning strategy, if you have the necessary will power to act accordingly.

The negotiation with your debtors can be the next step. You can contact them directly to avail any adjustments in the repayment schedule or can switch on to a more convenient repayment plan. The repayment period has to be selected according to your capability to spare for the monthly installments. The lenders benefits and offers can be another helping hand to pay off the student loans. Now most of the lenders have put forwarded certain benefits and incentives for the loan repayments. The utilization of the relaxations in the interest rates and total debt is certainly advantageous to pay off the student debts.

If you have multiple debts, the best strategy is to consolidate the different loans to a single consolidation loan. Now, Federal consolidation loan is available, which will help to consolidate all federal loans, with certain pronounced advantages in the rates and terms of the loans. However, it will not consolidate the private loans. You have to seek any of the private consolidation loans to mange the private loans. If the multiple debts cannot be consolidated, then you have to pay off the loan with the higher interest rate. The regular follow up of such a strategy will certainly help to pay off the student loan easily.

In case of defaults in the repayment of the student loan, the rehabilitation programs of the lenders can be utilized as the way, which help to pay the student loan. In brief student loans can be compared to the common saying “slow and steady wins the race”. If you are able to start the repayment during the study using money from the vacation jobs or part time jobs, it will certainly help to pay the student loan early. Also, keep in mind that the extended repayment schedule is not advised in all cases as it will levy more money as interest. Hence a planned and intelligent strategy will be the best way to pay the student loan easily.

sip calculator magnetizing the investors towards online investing

Many novice investors seek information regarding online investment opportunities. Of course, we all want an expert at our disposal. However, most of us cannot afford an expert. A wealth of knowledge is available on the internet for those of us who need the basics to get started. For many novice investors, it may be difficult to discern which sites offer credible information regarding investing. Our guide will discuss the information available for online investors.

Insider Trade Tips

Investors will research and find numerous sources of information regarding online investment opportunities. Investors may receive insider trader tips on a daily basis. This will help them determine which stocks are expected to perform well. Novice investors appreciate this type of advice. Often novice investors are not aware of how to predict which stocks will perform well based only upon news information or information about the business. These tips are especially useful when trading online without the direct help of an experienced investor. Trading software is also available to assist novice investors in making sound business decisions.

Investment Strategy Tips

Many websites offer individuals investment strategy tips on their website. The tips may be regarding stocks, bonds, Exchange Traded Funds (ETFs), commodities or other types of investments. Investors are given advice on how to invest in both a bull market and a bear market. The strategies are remarkably different. In a bear market, investors may tend toward safe investments with moderate growth. In bull markets, volatile investments may yield the most return on investment (ROI).

Online websites will also teach investors how to select sound investment opportunities. Market trends will be revealed to help investors make sound decisions regarding investing. Search for companies that offer investors free seminars and online forums. These webinars will teach investors the basics of investing.

Portfolio Diversification

Portfolio diversification strategies are also discussed online. Investors will be informed of the percentages that they should invest in various investments. For instance, experts recommend that approximately 35% of an investor’s portfolio be in precious metals. Precious metals are safe during a declining economy. The price of gold, for instance, rises when the economy is in decline. Investors should be aware of how to structure their portfolio to avoid catastrophic losses.

Investors will learn the difference between safe investments versus volatile investments. Mutual funds are an example of a safe investment. Stocks are a more volatile investment. The more volatile the stock, the more investors must watch the market to avoid losses. Recommended percentages of investments will be revealed through tips offered online. The information provided will be based on historical data, as well as, the current market state. Investors will learn how to identify opportunities, analyze investments, purchase investments and monitor investments.

Daily News and Streaming Quotes

Much of investing requires monitoring the daily news and predicting how political movements, business deals and the economy will affect a particular security. The financial status of a company and its leadership will also affect the stock prices. Acquisition of a new Chief Financial Officer, for instance, may signify growth and change within a company. This indicates that stock prices may increase. Therefore, investors could conclude to enter the market while the price is still low.

News sources that are offered real time are the best types of news sources. Investors will learn how various news releases will affect stocks. Investors should check new sources daily to determine how the news will affect their securities. Many websites offer DVDs to teach investors how to interpret news releases. Investors will find a wealth of knowledge that will move them forward in their investing career.

Market Analysis

Many online websites will analyze stocks and investments for investors. Websites are also available to select the top performers daily. These watch lists will help individuals make decisions with the help of experts who have knowledge of market trends. Other websites will offer daily stock picks to consumers. These individuals invest as a group, which seem to offer more security than investing alone.