5. Tip #1: Advisor vs. Adviser
Fees 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.
6. Broker & RIA Key Distinctions
Broker Registered Investment Advisor
A 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 accounts
Brokers 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.
7. 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.
8. 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.
9. Tax Managed Investing -Results Quantified:
After‐Tax Return Client Name Account#
Annualized Since Cumulative Since
YTD 2009 Inception Inception
Portfolio 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%
Parametric's 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
10. Year End Tax Planning
Consider 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 rules
Be careful to not let the tax tail wag the dog. Risk still needs to be
managed.
11. 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
12. Tax Management Tools
Maximize contributions to your DC qualified plans
Limitation 2010
(and 2011)
Maximum annual contribution to qualified plan $49,000
401(k), 403(b), 457 maximum elective deferral limit $16,500
SIMPLE plan elective deferral limit $11,500
Traditional IRA / Roth IRA contribution limit $5,000
Catch-up contribution limit – (401(k), 403(b), 457 $5,500
(over age 50)
Catch-up contribution limit – SIMPLE (over age 50) $2,500
Catch-up contribution limit – traditional/Roth IRA $1,000
(over age 50)
13. 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
14. 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
15. 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
16. Tax Tip #5: Education Planning
2503 Trust for minors‐ Parent can lose control
529 Education Plans – 5 year forward gifting
Coverdell ESA ‐ can be used for high school cost‐
220K phases out, limit $2K annual contribution
Custodian Account – can be converted to a 529
since they do not grow tax free, limit for use to
owner/beneficiary
Roth IRAs –Grandparents being creative
Beware the 529/ESAs can reduce a students financial aid
17. Tax Tip #6: Insurance Options
Insurance 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 correctly
Deductibility of LTC and DI insurance premiums at
the corporate level
18. Tax Tip #7: Foundations & Charitable Planning
Donor Advised Fund
Charitable gift Annuities
Chartable Remainder Trust
Charitable incentives ‐ including tax‐free distribution from IRAs
20. Advantages of Donor Advised Fund
One 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.
21. Mechanics of Donor Advised funds
A lifetime transfer to a donor advised fund is treated, for both property law
and tax purposes, as a direct transfer to the sponsoring public charity
Typically, 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 cost
The 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
22. Benefits of a Charitable Gift Annuity
Simple to implement
No trust is needed, just a simple contract
Donor receives a partial income tax deduction
Steady payments are paid to donor for life
Donor can never outlive the payments steam
The asset is removed from the donor’s taxable
estate*
The charitable organization receives the asset
immediately
23. Charitable Remainder Trusts (CRT)
Defined The Benefits
The 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
24. Tax Tip #8: Estate Planning
Efficient Will and Trust planning = Efficient estate planning
Who gets your wealth?
– IRS
– Heirs
– Charities
Proper legal planning may take advantage of unified credit/ bypass
trust and maritial trust (Qtip)– be aware of special limitations for
non‐citizens.
25. Methods of Estate Transfer
During 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
26. Tax Tip #9: Annuities
Pros Cons
Grows taxed deferred Growth taxed FILO
Downside protection Surrender charges
No 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
27. Tax Tip #10: Gifting & Leveraging FLP
Shares to reduce Estate Taxes
The annual exclusion ‐ $13K (Gift Splitting X2)
Gifts to noncitizen spouse‐ $136K
GST tax exemption – 1.36 ML
Since valuation of FLP & LP shares are typically discounted you
may leverage your gifting by using shares
Annual exclusion gifts are typically used for funding ILIT
Transfers/gifts to a spouse and qualified Charities are
generally wholly deductible
28. Tax Clarity
Estate and gift taxes
Estate Taxes Gift taxes
Maximum estate tax rate Top tax rate on gifts 35%
of 35% Maximum applicable
Tax free amount of $5 exclusion of $5 million
million and $10 million for
married couples.
Source: “Tax Cut Extension Bill Wends Its Way to White House,” Accounting
Today, Dec. 17, 2010
