Ten Tips to Lower Your Taxes and grow your wealth!
Today’s ObjectivesIntroduce you to Sucré‐Vail Wealth AdvisorsDiscuss 10 Tax Wise Tips1. Advisor vs. Adviser 6. Insurance Options2. Tax Managed Investing 7. Foundations, Charitable Planning3. Retirement Planning 8. Efficient Will and Trust Planning 4. Available Deductions 9. Pros and Cons of Annuities5. Education planning 10. Gifting and Estate PlanningConclusion
Sucré-Vail Wealth AdvisorsExperts with over 50 years of combined experienceAn RIA since 1997 based in the State of TexasSVWA makes available to our clients • Premier wealth management services • Fiduciary retirement plan management
Tip #1: Advisor vs. AdviserFees on investments are deductible while commissions are not…….In the world of investment professionals, it’s often difficult for clients to pick out the advisors from the advisers, an advisor is a fiduciary and can only act in the best interests of the client. Anyone not acting as a fiduciary, well, it’s less clear whose interests they’re acting in‐ more importantly fees charged by advisors are deductible and commissions charged by advisers are not.
Broker & RIA Key Distinctions Broker Registered Investment AdvisorA Broker is not a fiduciary. A broker, or An RIA, subject to the Investment registered representative, is required Advisors Act of 1940 and has a only to recommend investments that fiduciary duty to place a client’s are “suitable.” interests ahead of his own. Lack of requirement to provide full Fees tend to be less with an RIA.. disclosure – possibility of multiple layers of fees. An RIA gets paid for advice rather than A broker is essentially a sales agent of for trades, thus no incentive to do his/her firm trading in client accountsBrokers are often tied to specific An RIA cannot sell commission products because of negotiated deals products nor are they allowed between vendors and their parent proprietary products.company. An RIA provide a level of independence An investor should consider the parent unavailable with traditional Brokers.firm of the broker and the stability of Assets are typically held with qualified the custodian among many other third‐party custody firm.factors.
Tip # 2: Tax Managed Investing Taxes can reduce your portfolio return Ways to mitigate: Portfolio Structure Tax aware trading Transition of low basis stock Tax Lot Accounting Loss Harvesting Wider Rebalancing Ranges Gain – Loss Offset Highly efficient tax overlay for separate accounts AMT tax neutral Muni bonds Source: Parametric Portfolio Associates: 60% Russell 3000; 40% Barclays Capital Aggregate; No Liquidation. Interest income and dividends are taxed annually at historical top marginal tax rates; capital gains are realized at 50% per year and are taxed at the historical long-term capital gains tax rate at the time. Past performance is no guarantee of future results. *A hypothetical tax-free $100,000 portfolio (invested 60% in stocks and 40% in bonds) held for 30 years would have grown to about $2.8million. If the portfolio was taxed like an average mutual fund, it would have lost 52% of its value, due to taxes paid and earnings lost on that money. Tax-managed investment strategies are designed to minimize capital gains distributions and maximize after-tax returns.
Tax loss Harvesting Defined The benefits• Selling securities at a loss to • Loss harvesting is an offset realized capital important tool for reducing gains. Harvesting current and future income. losses helps to limit the • It can save you taxes and recognition of short‐ help you diversify your term capital gains, which are portfolio. normally taxed at higher • Taxpayers can take up to rates than long‐term gains. $3,000 of excess losses against ordinary income.
Tax Managed Investing -Results Quantified:After‐Tax Return Client Name Account# Annualized Since Cumulative Since YTD 2009 Inception InceptionPortfolio Pre Tax Return 28.98% 3.29% 19.29%Benchmark Pre Tax Returns 29.44% 3.05% 17.81%Difference ‐0.46% 0.24% 1.47%Portfolio Post Tax Return 37.74% 5.41% 33.22%Benchmark Post Tax Return 34.77% 3.22% 18.87%Difference 2.97% 2.18% 14.35%Parametrics Alpha 3.43% 1.94% 12.88%Tax Savings $128,632 $73,125 $483,708 Inception Date Tax Savings Based on Account Value of $3,757,236 Value as of 12/31/2009 7/20/2004
Year End Tax PlanningConsider the year‐to‐date realized gains & losses. If in a gain position, consider harvesting unrealized losses to zero out the gains.A taxpayer can take $3,000 of losses in excess of gains against ordinary income. If you want to stay in the market, pick a suitable surrogate to avoid the wash sale rulesBe careful to not let the tax tail wag the dog. Risk still needs to be managed.
Tax Tip #3: Retirement Planning Contributions to a retirement plan reduces your taxable income Take home pay Retirement contributions $1.00 of taxable income $1.00 of salary deferral– $0.35 Federal Tax – $0.00 Federal Tax= $0.65 of net income = $1.00 of retirement savings Withdrawals from retirement plans will be taxed …RMDs
Tax Management Tools Maximize contributions to your DC qualified plans Limitation 2010 (and 2011)Maximum annual contribution to qualified plan $49,000401(k), 403(b), 457 maximum elective deferral limit $16,500SIMPLE plan elective deferral limit $11,500Traditional IRA / Roth IRA contribution limit $5,000Catch-up contribution limit – (401(k), 403(b), 457 $5,500(over age 50)Catch-up contribution limit – SIMPLE (over age 50) $2,500Catch-up contribution limit – traditional/Roth IRA $1,000(over age 50)
As a Plan Sponsor – Be aware you are a Fiduciary It is critical for tax efficiency to create a plan that is effective given your goals…. Maximizing your retirement savings or creating a golden hand cuff for employees. Get an analysis to determine which type of plan best accomplishes your goals – DC or DB Understand your fiduciary responsibility Mitigate risks associated with being a plan sponsor
Tax Tip #4: Exclusions, Exemptions, Deductions and Credits• Two Types of Tax Payers – Informed – Uninformed• Your goal should be to maximize the use of exclusions, exemptions, deductions and credits as it relates to your unique situation Let’s ensure that you are informed, here is an example of some exemptions not commonly used
The following lifetime transfers are exempt from both gift and estate tax Political contributions Payments made directly and exclusively to the provider of medical care for another person Payments made directly and exclusively to the provider of educational services for another person for tuition expenses only
Tax Tip #5: Education Planning2503 Trust for minors‐ Parent can lose control529 Education Plans – 5 year forward giftingCoverdell ESA ‐ can be used for high school cost‐220K phases out, limit $2K annual contributionCustodian Account – can be converted to a 529 since they do not grow tax free, limit for use to owner/beneficiaryRoth IRAs –Grandparents being creative Beware the 529/ESAs can reduce a students financial aid
Tax Tip #6: Insurance OptionsInsurance companies never pay income taxes therefore these benefits can be yours – Use life insurance to replace wealth in an ILIT often used to pay taxes due 9 months after death – Purchasing life insurance in a qualified plan can be tricky, the death benefit becomes taxable if left in the plan and not administered correctlyDeductibility of LTC and DI insurance premiums at the corporate level
Tax Tip #7: Foundations & Charitable Planning Donor Advised Fund Charitable gift Annuities Chartable Remainder Trust Charitable incentives ‐ including tax‐free distribution from IRAs
Advantages of Donor Advised FundOne key element of a donor advised fund is the ability of the donor and/or his designees to name family members and friends as “account advisors”, thereby promoting family philanthropy.The names of individual donors/advisers can be kept confidential, if desired, and grants can be made anonymously.A donor advised fund also offers flexibility in the amount, frequency and timing of donations to programs and charities of special interest.Donor advised funds can be an excellent alternative to private foundations because of the ease of administration.
Mechanics of Donor Advised fundsA lifetime transfer to a donor advised fund is treated, for both property law and tax purposes, as a direct transfer to the sponsoring public charityTypically, donations to a donor advised fund are tax deductible up to 50% of adjusted gross income for cash and up to 30% of AGI for appreciated securities held more than one year with a five‐year carryover. Gifts of appreciated publicly traded stock are generally deductible at fair market value, but gifts of non‐marketable property are limited to tax costThe sponsoring charity may be a community foundation, another type of large public charity, such as a hospital or educational institution, or a public charity created by and associated with a major financial institution. Because the sponsoring organization owns the donor advised fund account, all earnings of the account appear on the tax return of the sponsoring organization. So there’s no need to file a separate tax return for the new entity. Upon the death of the donor, successor advisors may continue to make grants to charities
Benefits of a Charitable Gift AnnuitySimple to implementNo trust is needed, just a simple contractDonor receives a partial income tax deductionSteady payments are paid to donor for life Donor can never outlive the payments steamThe asset is removed from the donor’s taxable estate*The charitable organization receives the asset immediately
Charitable Remainder Trusts (CRT) Defined The BenefitsThe CRT is a tax‐efficient vehicle that Funding the trust with appreciated provides the donor with a steady assets allows the donor to sell the income stream, a tax assets without incurring a capital deduction, deferral of capital gains, gain. and a gift to one or more charities. Efficient way to transfer appreciated property, benefit from charitable income tax deduction and reduce estate taxes. Donor retains the benefits of underlying assets for income purposes
Tax Tip #8: Estate Planning Efficient Will and Trust planning = Efficient estate planning Who gets your wealth? – IRS – Heirs – CharitiesProper legal planning may take advantage of unified credit/ bypass trust and maritial trust (Qtip)– be aware of special limitations for non‐citizens.
Methods of Estate TransferDuring Life (inter‐vivos) At Death(testamentary) Gift Probate o Outright o Wills o Custodial o Laws of interstate succession o Trust Sale Will substitutes o installment sale o Property ownership forms o Private annuity with right of survivorship o Beneficiary designations
Tax Tip #9: Annuities Pros ConsGrows taxed deferred Growth taxed FILODownside protection Surrender chargesNo probate No step‐up in bases Risk transferred to Withdrawals taxed as Insurance Company ordinary income Many of these restrictions are the same with retirement dollars These items vary based on if fixed or variable annuities
Tax Tip #10: Gifting & Leveraging FLP Shares to reduce Estate TaxesThe annual exclusion ‐ $13K (Gift Splitting X2) Gifts to noncitizen spouse‐ $136KGST tax exemption – 1.36 MLSince valuation of FLP & LP shares are typically discounted you may leverage your gifting by using sharesAnnual exclusion gifts are typically used for funding ILIT Transfers/gifts to a spouse and qualified Charities are generally wholly deductible
Tax Clarity Estate and gift taxesEstate Taxes Gift taxesMaximum estate tax rate Top tax rate on gifts 35%of 35% Maximum applicable Tax free amount of $5 exclusion of $5 millionmillion and $10 million for married couples. Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting Today, Dec. 17, 2010
In ClosingTimes have changed, we hope we have challenged you to evolve your thinking about your wealth and legacy….. Wealth is measured by dollars… Legacies, by generations….Give us the opportunity to show you how to grow yourwealth by controlling taxes, since it is impossible to controlor predict the markets It’s not the money you earn …it is what you keep that matters!
We are all things to some people – our clients! 16862 Royal Crest Drive Houston TX, 77058 Phone: 888.286.9991 www.sucrevailwa.com