Alright, well let’s go ahead and get started. Welcome everybody to another of Coffee Talk call. Today’s topic is “Year-end Estate Tax Planning.” Do you need to make any moves? Do you need to update your of legal documents in light of, really, the upcoming tax law changes that are going to go into effect at the beginning of the year . And the new tax law is the old tax law. The Bush-Reagan tax cuts that were imposed 10 years ago expire this year. So, assuming nothing happens in Congress, we go back to the old tax law. So that’s really the perspective we’re going to take with today’s call is we can only deal with known facts and the facts are right now, there is no new tax law. So we’re going to, for today’s conversation, assume there’s no new tax law passed this year, which puts the old tax law back into effect beginning January 1, 2011. So good just to give your refresher, starting this year there is no estate tax. So for estate tax planning purposes were not to be surprised, quite frankly, if towards the end of the year we see some families get involved in maybe some end-of-life, quality-of-life issues. Maybe start to take things into their own hands if there’s a family member that has really just horrible health and failing health and quality of life is nonexistent. Maybe if there’s ways to speed up the process, so to speak, that make sure things happen this year instead of next year, not going to surprise me if we see a couple new stories later in the year about people families doing just that simply because people that pass away this year there is no estate tax. There is no inheritance tax. So we’ve all probably heard of George Steinbrenner, the owner of the Yankees, a billion-dollar plus is a state and his family’s going to have no estate tax. They may have some other tax issues but no estate taxes. But next year! Next year we go back to the old tax law, and just as a refresher, the old tax law is $1 million estate tax exemption. So we go from zero estate taxes this year. Next year, $1 million estate tax exemption per person. So for a married couple, if you’ve done proper estate planning, we can actually multiply those exemptions times two for a $2 million estate. Anything above that is subject to estate taxes and the estate tax rates can go as high as 55% and usually when we get involved with estate tax planning, it’s kind of a trade-off. You can either do effective estate tax planning, but it the sacrifice, if you will, of income tax, or vice versa, so the bottom line is we always just look if we’re going to have to pay some tax, what’s the lower tax rate? And in general terms, the lower tax rate is going to be the income tax rate as opposed to the federal estate tax rate. Now there’s some talk, my guess would be, that were not going to see any new tax laws put into place, certainly until after the November election. And then your guess is as good as mine as to whether or not they’re actually able to put anything through for this year before the end of the year. So for planning purposes, it’s prudent we think to plan as if nothing happens this year and we go back to this $1 million estate tax exemption. So one of the things, couple of things you want to keep in mind, and this trips a number of folks is, even with the today’s new economy the stock markets down from its all-time high, real estate values are down from their all-time highs. So we always hear well I don’t have as much as I used to. It’s not worth as much. Be that as it may, you still need to get out a calculator and add up your stuff, a net worth statement or a network summary if you will and determine whether or not you’re over that $1 million mark. And the bottom line is, if you’re over the $1 million mark in terms of asset or net worth then you need to review your current estate documents to determine whether or not, you need to make any tax changes or document changes going into the New Year.

Couple of things when it comes to value, a lot of people forget about retirement plans. You have to include your retirement plan 401(k) IRA, that’s part of your estate or your net worth. Sometimes we see folks forget about that. The other thing you have to include his life insurance, and not the cash value. The cash value goes on your net worth report sometimes, but for estate tax planning purposes of the death benefit on your life insurance. And it doesn’t matter what kind life insurance you have. So for instance, I’ve got a $2 million term life policy on myself. But no cash value. But automatically should something happen to me, I’ve got a $2 million estate plus whatever other assets that I may own. So that’s assuming that I own the policy so a tax strategy would be if you’re over million dollars of assets, including your life insurance, one easy way is to transfer ownership of your life insurance, either to another individual or 2 a special type of trust and that’ll get the insurance benefit out the calculation to determine whether or not you have a taxable estate. We see that far too often. People think they don’t have a taxable estate. They forgot about their life insurance benefits and those get added back into the estate and they end up having to pay some of those life insurance benefits back to the IRS in the form of the estate tax. So please don’t let that happen to you if that’s your situation.

Another simple planning strategy that I just want to make you aware of. Let’s say you’re over that $1 million mark. One easy step to fix the solution or fix that problem might be to use what is called a QPRT qualified personal residence trust, and that’s just a special type of trust that you put your primary residence into so your home would be owned by the special trust. It freezes the value at today’s value. So any future appreciation, increased value of your home, would occur inside the trust outside of your taxable estate. And now might just be a wonderful planning opportunity for this type of trust looking at what’s happened to real estate values. So if you had a home at the peak of the real estate market worth $600,000. Now, it’s worth $300,000. You transfer the home into the trust. It’s got a value of $300,000. If the real estate market recovers and by the time you pass on the home is now worth, let’s say, $700,000, that $400,000, and increased value occurs outside of your taxable estate. All the other aspects of home ownership remained unchanged. So there might be a quick and easy way to minimize future estate tax issues.

The other thing I’ll just caution you we see a number of folks set up revocable trust in part for estate planning purposes, but then they failed to properly re-title ownership of their holdings. The real estate, the investment accounts, updating beneficiary elections on insurance, IRAs, 401(k) s. All of that is a piece of the overall estate planning process. And then of course regardless of where your finances may stand today, everybody must have basic estate planning documents, and by basic estate planning documents I’m talking about a will, a living will, a durable power of attorney, and a health care power of attorney. The will is obvious if minor children are still involved the will is very important. You want to make sure that you name guardians for minor children. You also in a will can put in provisions for a trust a testamentary trust that would own assets that would benefit your minor children. Because minors can’t own assets. Once in a while we still see that happen where mom and dad put the kids on like a beneficiary designation and the kids are still minors. Well eventually, we can go through conservatorship, guardianship, legal proceedings in and get that money eventually to the kids. But that’s a costly lengthy process easily avoided just by making sure that there’s a trust, either now or at death, to take care of minor children and the assets that they may inherit.

The living will is kind of a misnomer. That’s really the document that you would use to convey to healthcare providers and your family a whether or not you want life support withdrawn if you’re going to be in a vegetative state and irrecoverable vegetative state. So you just want to terminate life-support and stop racking up exorbitant healthcare costs when your quality-of-life is looking like it’s not going to improve. The health care power of attorney, as the name implies, most of the healthcare providers want their own special document. It’s separate from a durable power of attorney, which is the document that gives somebody, typically a spouse or a family member, the ability to act on your behalf if you’re incapacitated. You’re in a coma or Alzheimer’s. So you haven’t passed away. Your will doesn’t kick in place. You still need to file tax returns, move money around, sign checks, pay bills; the durable power of attorney accomplishes that. So I don’t care how much money you have, everybody needs to have those basic estate documents in place.

If you have assets usually in excess of $60-$75,000, then you’re a candidate for a revocable trust. A revocable trust primary reason is to avoid the time delay and expense of probate. It’s not so much as an estate tax savings vehicle, which a lot of people mistake it to be; the primary purpose for revocable trust again is to provide for the ongoing management of your assets and to avoid the time delay and expense of probate. So, $75,000 or more of the assets makes you a candidate to at least considerable a revocable trust. The other reason to update estate documents would be, of course, if you had we call it a life event. Has anything changed in your life that would require the changing or updating of your documents? Have beneficiaries passed away? Have beneficiaries that there were minors when you set your documents up maybe restricting access to money they are now grown adults and able to make responsible financial decisions and handle money. So maybe removing restrictions or certain beneficiaries makes sense. Alternatively, sometimes we see grown children go down a path in life with the drugs, alcohol addictions, creditor issues where the last thing you want to do is give them immediate unrestricted access to funds. So those are all reasons to revisit your estate documents, and of course if you have beneficiaries that have predeceased you that would be another reason to make changes. If you’ve got a trust, you’ve named successor trustees in the event you’re unable to serve as your own trustee. You want to just periodically revisit who you chose and named as trustee. Are those people still around? Do they still have the ability and the willingness to serve as trustee if asked to do so? So all things to consider when it comes to estate planning really on an ongoing basis. But definitely going in to next year the bottom line is, if you’re over $1 million of assets, including your life insurance, you want to make sure that everything is properly structured and allocated to at least minimize if not totally avoid estate taxes. That tax rate’s going to be higher in most cases compared to an ordinary income tax rate.

Okay with that lets, Tony, open the lines if anybody has any questions or comments.

Yeah, can I ask a question?

Please, go right ahead.

Yeah, you had mentioned bringing assets into trust after you have the trust of drawn up. If you bring an insurance policy with some cash value, do you change… is it appropriate to change the beneficiaries of the life insurance policy to the trust itself or to the trustees of the trust? And why would you choose one vs. the other?

So if you’ve got an existing insurance policy, you’re going to bring it into a trust. So the owner of the policy will be the trust.

Correct.

So you want make an ownership change from whoever the policy owner is to the trust,

That’s right.

The beneficiary of the insurance policy, usually that it is the trust, and then the trust document would name the individual family members as beneficiaries.

So there’s no tax disadvantage to doing after all. When an insurance policy pays off the trust now owes some taxes or does it not on a life…

For a life insurance policy, no. That when the trust receives life insurance proceeds, that’s not a taxable event. Life insurance money goes income tax-free to the trust. The trust then owns the insurance proceeds. So let’s say it’s a $1 million life insurance policy. The benefits are paid to the trust. The trust now has a million dollars. That money gets invested, if the money stays invested at the trust, earns interest dividend, capital gains. That becomes a taxable event for the trust unless the trust distributes the income and the capital gains to trust beneficiaries.

Okay so it would be better to make the trust the beneficiaries instead of the trustee of the trust.

Yes.

Okay

Yes. And then you got trustees. Sometimes the trustees are the beneficiaries other times the trustees are different from the beneficiaries.

Okay, thanks.

My pleasure. The other thing to bear in mind with the life insurance if you change ownership to a special type of trust different than a revocable trust the life insurance has to have been owned by the trust for three years. If someone passes away during the first three years after they changed ownership over to the trust, the insurance benefit is still considered part of that individual’s estate. So just something to be aware of somebody that’s in a reasonably decent health, has a long life expectancy probably not going to be an issue as far as the insurance money getting pulled back into the estate, unless of course there’s an accident.

So this is the case, for example, for an irrevocable trust as opposed to a revocable trust?

Correct. Typically when we’re using life insurance you want to use an irrevocable trust and that’s one of the reasons why the benefits, the insurance money, stays outside of the taxable estate.

Okay, thank you.

You’re welcome! Any other questions or comments? Alright, I want to thank everybody for joining us on today’s edition of Coffee Talk. We’ll be back with you next week same time, Tuesday at 9 AM. If you’ve got questions or issues that you’d like to see us address on an upcoming call, just call the office or send us an e-mail and now that information is, for a phone call, is 800-393-1017. That’s a direct line into the office. Just let us know what you’re question or topic is and we’re happy to address that. The number, again, is 800-393-1017. If you prefer e-mail, we have just a general e-mail account. That address is info@fmcretire.com. You can leave a question or a topic and we’ll be happy to address in future call. With that, I’m going to wish everybody a great week and we’ll talk to you next week.
Bye now.

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Well good morning everyone! We’re going to get started with another edition of Coffee Talk. Today’s topic is really a common tax myth that we see people get sucked into often causing them to make financial choices that result in the loss of thousands, sometimes tens of thousands, of dollars just because of a misunderstanding of how our wonderful tax laws work. And this time of year, it’s very common for us to hear a comment or a phrase, something along the line of, “Look at all these investment losses, look at all my capital losses. They’re so huge. There’s no way I’ll ever live long enough to use up all these losses.” And those comments stem from people’s understanding of the tax code. If you lose money in an investment or a bad business venture, the IRS lets you write off investment losses but you can only claim $3,000 per year of investment losses against ordinary income. And that’s where most people understand the tax law but where they often times misunderstand a very important aspect in the tax law.

And that’s simply you can use tax losses to offset capital gains with no limitation. So I remember back in the bear market days of 2000 to 2002. Towards the end of the year, and that’s part of the reason for this call today (we’re heading into the end of the year so time to start thinking about year-end tax planning moves). So going into the end of the year we started to look at everybody’s accounts and recommended that they sell investments that were going to show a tax loss even if they didn’t need the tax loss because we could put that tax loss in the bank, so to speak, and use it in the future. And back then we got all kinds of comments and concerns, “Gee, we don’t really understand why you guys are doing this.”

“We’re going to have huge losses. Yeah, it’s nice to have them in the bank but you can’t eat your losses, so to speak, and I’m going to have to live forever to get to really use these losses. “

Well that was back in 2000 and 2002 and all I can tell you is that from experience, every single client that had losses and loss carry-forwards, they are now used up, gone. So we were able to maybe in a 5-year time span on average, were able to use what most folks would consider significant tax losses to offset future capital gains where no taxes were paid whatsoever. So for example, if you’ve got let’s say an investment that you trigger a loss on this year and the loss is $100,000. Well, and you’ve got no gains, so you’re going to be able to use $3,000 this year to reduce your ordinary income. So going into next year you got a $97,000 loss carried forward. Well guess what? Next year if you’ve got a capital gain, the first $97,000 of capital gain is offset by your loss carried forward. So there’s the value of capturing tax losses and banking them. And even if it seems like, at the time, you’re going to have to live forever to benefit and use those tax losses, all I can tell you is that from experience, rarely do those tax losses ever go totally unused. They end up getting put to good use sooner or later. And usually it’s much sooner than what most people realize.

The other thing that I just wanted to touch on as we head into the end of the year. This year’s been a little bit … frustrating I guess would be the best word for investors, for us, with the sideways movement of the market. So if you have money in mutual funds. You may very well find yourself in a situation where you’re mutual fund is showing flat returns, maybe even a modest loss for the year and yet, at the end of the year or next year you’re going to get a 1099 showing a capital gain. And that’s one of the disadvantages of mutual funds. They have to report and distribute capital gains by year-end and that’s the internal activity going on in the mutual fund. Even if you haven’t sold your shares, if there were capital gain activities or capital gains in the fund, you’re going to get to pay tax on gains even though your fund for you may show little or no profit. So that’s one reason, a huge reason why we think ETF’s (Exchange Traded Funds) provide a better tax planning opportunity because there you got the investment diversification similar to a mutual fund but the tax treatment is treated more like a stock. You don’t pick up a gain or a loss on your Exchange Traded Fund until you actually sell the fund. So you’re a little bit in better control of your own individual tax situation.

So just a couple of things to be aware of as we head in towards the end of the year, the year-end tax planning. One, don’t be afraid to capture losses, even if you can’t use them this year. Chances are you’ll be able to use them in future years. And also re-think your investment strategy. If you’ve got money in mutual funds know and understand what the capital gain distribution is going to be and you may find that that distribution is going to far exceed what your gains are for the year especially in a year like we’ve just gone through. And if you’re not already using Exchange Traded Funds, that’s something that you want to look in to as well. So those are my thoughts for today. I think we have time for some questions for comments. BT let everybody know how they can get their question addressed or share comment.

Here’s your chance for some frequent financial and or tax advice. I heard a lot of beeping just there. That tells me a number of people probably left our call, which is fine. We’re just here to share hopefully good useful information, challenge your thinking, making sure you’re making smart choices about your own financial situation.

Alright, last chance for a question or a comment that you may want to share with everybody.

Well BT I think we got another shy crew today so do you have any thoughts or comments to add to our discussion today?

No, I think you hit all the high points. You know certainly when you have an investment system the interesting part about having the opportunity, or not even in just an investment system, but when you invest having the opportunity to take losses and not pay taxes especially if you have better investments set or better investment choices down the road. Certainly makes tons of sense no matter what you’re investing in whether it be ETF, stocks, mutual funds, real estate for that matter, you taking a capital loss at one point to turn around and reinvest as long as it makes sense, it’s a win-win. I mean, hopefully it’s not something that falls on deaf ears. I know folks do struggle with the concept. That was it.

Alright. Well I want to thank everyone for joining us on this week’s edition of Coffee Talk. We’ll be back with you next week for another edition and in the meantime just a reminder if you got a financial question or a concern that you’d like us to take up with you privately, you can call the office or send us an email. The best number’s, the best contact information is, 1-800 393 1017. And if you want to send us an email, the general email address is info@fmcretire.com. Thanks for joining us this week and we’ll see you next week. Bye now.

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Okay, well good morning everyone. This is Brian Fricke. I want to welcome everyone to this week’s edition of Coffee Talk. Just a couple of housekeeping items, I’ve already got all the lines on mute so if you’ve got any noise in the background or whatever we’re not going to pick that up. But it also means that if you have a question and a comment, you’re not going to be able to voice that until we un-mute the lines. So with that, let’s just jump right into today’s topic, “Five Asset Allocation Myths you Need to Avoid”: mistakes that could cost you big money when it comes to your financial security and your financial success. And really, the biggest thing I want to share with you, and by the way this might be a little controversial. You may not agree with everything I’ve got to say. That’s Okay. My purpose here today is to get you thinking about your situation. Maybe challenge some thinking that you’ve taken for granted and maybe cause you to further review and evaluate your own situation.

Okay. So with that let’s jump right in. And the first thing I just want to share with you from personal experience you know this concept of “modern portfolio theory, asset allocation, spread it all around, buy and hold” seems to be a very popular philosophy or a strategy by just about everybody in the financial world and I guess consumers as well and we think that that approach has serious flaws. And you don’t have to take our word for it. Just look back to the bear market of 2000-2003 and look at what happened there. Just as a refresher, in 2000 and in 2001 the markets, the DOW or the S&P, those markets were down you know 10-15%. And I remember telling clients don’t worry, be happy, rarely does the market decline three years in a row and guess what happened in the third year of that bear market? The market went down again and the losses were the prior two years combined! So that was evidence enough for me to figure out that this theory of asset allocation, strategic allocation, always have a certain percentage in US and foreign and bonds and so forth is flawed.

And then we had another proof that the concept is flawed in 2008. There just were hardly any safe havens. So spreading your money around is supposed to smooth the ride. Well, we’ve seen recent events in history that have proven that philosophy, that concept, just doesn’t work. You can’t just fill out some risk tolerance questionnaire (which also we think is a flawed system) to figure out just how much risk you can live with and design an investment strategy that pretty much guarantees you experience that level of risk, and set it and forget it. Unfortunately it’s just not that simple.

So why is this method of investing still so popular today? Well, I’ll let you in on a dirty little secret. From a business aspect, you know, a firm like ours, it’s really easy, it makes life simple and easy you can just put everybody into a cookie-cutter pie chart, rebalance every quarter or every year and it makes managing the business side of things, whether you’re a planning firm like ours or a money manager, wealth manager, or what have you, it makes your business life a heck of a lot easier and it’s easy to package, promote, sell. But to me it just… It doesn’t work. Now I don’t have issue with the research that goes behind this strategy or philosophy other than most of the research results were based on pension fund results. And let’s face it. You and I aren’t a pension fund. So the bottom line is the “buy-and-hold, pie chart investing, spread it all around” doesn’t’ really provide, we think, the protections that most folks want and thought they were getting in a bear market. Strategic asset allocation which is the “I’m always going to have a certain percentage of my money in large cap, small cap, international, growth value, bonds and so on”, that doesn’t work because it is part of this “pie chart” business. Rebalancing doesn’t add that much value, whether you do it on a quarterly or annual basis. I don’t have time to get into the numbers here today but we’ve done studies. What if we had a portfolio and we automatically rebalanced either every calendar quarter or every year to this target allocation? And there’s really not that much added to overall investment performance. Maybe a half of a percent to one percent but it doesn’t really add that much value because rebalancing really, when you think about it, traditionally rebalancing is selling off a piece of a portfolio or a piece of an account that has been doing really well and redeploying the money in areas that have been doing poorly. Kind of like a horse race. Maybe half way through the race your horse is in the lead so rather than leave your bet on the lead horse you cancel that bet (if that were allowed) and you place your bet now on the horse at the back of the race, the back of the pack. That, when you stop and think about it, doesn’t seem too logical either.

And then, of course, I mentioned earlier the risk tolerance questionnaire. A lot of, there’s a lot of discussion about it. We, as investors, should take some kind of a questionnaire to figure out how much risk we’re able to live with and then design an investment strategy that for the most part guarantees we have and experienced that level of risk. Well we take issue with that. We don’t think that makes any sense whatsoever simply because how does that align with your own personal goals and how you want to live life? What if you only need to take half as much risk to have good odds of keeping and reaching your goals but you only needed half the risk that your risk profile indicated you’re willing to live with? Why on earth would you want to subject yourself to more risk than was necessary? And the flip side is shouldn’t you know whether or not you have to be willing to expose yourself to a higher level of risk in order to have a good chance of reaching your goals even if that risk level is higher than what some questionnaire is suggesting? And then of course you have to just question the output of the questionnaire itself. I’m a firm believer that you take the same test, the risk tolerance test or questionnaire, and if you and I took the same questionnaire and filled it out in the middle of a bull market, the results would be significantly different than if you and I filled the questionnaire out in the middle of, oh… a bear market or the middle of 2008. I just got to believe the results would be significantly different. And then, of course, periodically, you hear just crazy stuff like, “Oh, you’re perfect investment mix as far as what you should have allocated to stocks or at-risk assets would be subtract your age from either 100 or 115.” And again, how does that relate back to your own individual situation whether or not you have a significant pension or social security benefits coming in? What kind of income stream you’ll need or want from your investment accounts? None of that’s taken into account just doesn’t make sense at all.

And then once in a while we of course run across folks that mistakenly feel like they have plenty of diversification in their investment account because they’ve got 10, 15, 20, 30 different mutual funds. And then of course we drill down into the mutual fund holdings and more often than not we find that they’re concentrated in one area of the market and usually that’s large-company US. And they have little or no exposure in international or a small-company. Which, in our book, is okay if the demand for stocks is focused on large-company US but why on earth would you want to have most of your account allocated to large-company US if the demand, and therefore increasing prices and higher profit opportunities were in areas like, Oh, international or technology? And therein lies our belief in a better approach to asset allocation. You’ve heard us write about it. You’ve seen us write about it in our newsletter and on our website over and over again and that is more of a supply and demand sometimes it’s referred to as technical analysis or momentum investing. But find out where demand is in the marketplace and let’s define the marketplace as the world and let’s not limit ourselves to just stocks but also include asset categories like stocks, international stocks, foreign and US bonds, currencies, commodities, real estate. And in today’s times, you have to expand your thinking as far as what investment categories you might be willing to put money into. And that’s simply because of the economy were in and the times we’re in now because always remember this; one of our favorite economists is fond of saying this all the time, “money doesn’t evaporate money doesn’t disappear it goes to where it’s in highest demand.” And think about it. We’ll use the real estate downturn as an example, but for every person that is underwater on a piece of real estate that means whoever sold it to them made a nice profit. So while one person might be underwater another person made a handsome profit.

And the list goes on and on. So the bottom line is money doesn’t evaporate. Money doesn’t disappear. It goes to where it’s in greatest demand. Our challenge as investors, then, is to find out where that demand is and try and have money in those areas in highest demand and avoid the areas in weakest demand or take advantage of areas that have weak demand by going against the market. So something that were waiting to do, we’ve not taken action on yet, and this is not investment advice for anybody on the call, but with interest rates at an all-time low, seems like they keep going lower contrary to conventional thinking. And gold is at an all-time high. So a lot of people have flocked into bonds and bond funds in the last year, year and a half. Seems like that trend is continuing. Well bond values are going to go down probably significantly when interest rates eventually start to go up. We don’t see any indication of that near term, but you never know. So and the same with gold. Gold is at an all-time high. Could it go higher? Yeah, but the greater risk, in our opinion with gold, is that it might be more like at a top almost like a bubble compared to (think back to real estate or even the dot com bubble). So the next bubbles investment wise, we might be seeing are gold and bonds or fixed income related. There are mutual funds out there that actually short the gold market, short the bond market. So if gold or bonds start to go down in value these funds actually go up in value, and we certainly have our eye on those types of funds. Like I say we’re not ready to take action just yet, but when the market, the supply and demand forces dictate that that might be an opportunity we’ll certainly be looking to take advantage of it.

So the bottom line today that that I really wanted to share is we think that the commonly accepted strategic asset allocation; always have a fixed percentage of your money in certain investment categories; rebalance periodically; and just stay invested at all times. We think that model is flawed is broken. The bear market of 2000 through 2002, the market meltdown of 2008 is evidence enough for us that that method and that style of investing has serious flaws. You need something better, a little bit more dynamic. We think it’s supply and demand and pushing money in areas that do that are in highest demand, avoiding areas that are in weakest demand. And I’ll be the first to tell you that no system is perfect including this. We’ve been flat, performance-wise, this year. And that’s typical when you’re stuck in a ranged bound or a narrow trading range. You know one day the market’s up. One day the market’s down. But nonetheless we know that once the market figures out what direction it wants to head and establishes more of longer-term trend our system will pick that up and we’ll be in a position to take advantage of that.

So with that I’m going let everybody I get on with the rest of their week. I apologize we don’t have the time or resources today to take your questions or comments. I’m a little short-handed here at the office. I’ve got to Tony and BT out of town getting trained on some systems for the firm. So I’m the running of the control board and handling our comments here today as well. So I appreciate your patience with that. So with that, I just want to remind everybody if you do have a question or comment on this topic or any other financial issue, you’re always welcome to call the office or send us an e-mail and that contact information is 800-393-1017. The number again 800-393-1017. Or if you want to send us an e-mail, the general e-mail address is info@fmcretire.com. So we look forward to any questions or comments you may have and we’ll see you next week for another edition of Coffee Talk. Bye now

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Okay, well good morning everybody! Welcome back from Labor Day. Around here that marks the official end of summer. The kids are back in school and we’re back at work on our regular hours. Everybody’s just so excited about that around here today, but today I just wanted to talk with you in share with you, a number folks are aware of our discount auto purchase program.

Years ago we put into effect a car buying program for our clients, their friends and family. Really out of my desire, or I should say my dislike, for the car buying experience. Whether it’s a new car or a used-car I just hate going through the drill if you know what I mean and we’re often challenging our clients with do only those things in life that bring immense joy and satisfaction into your life. So if haggling with car dealers, new or used, is your idea of fun, more power to you but if that’s not how you want to spend a day out of your life then what I have to share with you might be of interest or benefit to you. What you may not be aware of is there are businesses in the community that are oh, I’ll call them automobile brokers, they can find for you really either a new or used vehicle and for the most part you pay what they pay plus a service fee, though it’s an opportunity for you to buy an automobile at the dealer wholesale cost if you will, pay a little bit of the service fee and save yourself, we’ve been using this program for our clients for several years now and an informal survey would suggest that most folks are saving anywhere from $3-$5000 on a vehicle that they purchased and most of the time it doesn’t matter whether it’s new or used. One situation comes to mind, years ago a friend had picked out their car, I forget exactly the brand it was an American made car they had negotiated what they thought was pretty good deal at one of the local auto dealers, and then we had our broker intervene if you will and ended up buying the same car, same vin number, same everything for $3000 less dollars than what they had been able to negotiate. So that’s just an example of the savings that can be had. Recently my youngest son Adam purchased his first car ever, used our program and the services of our auto guru if you will and I think the car was actually located in Texas and then shipped to Florida, so we’re not limited to a particular geographic area. Automobile searches can be done literally on a nationwide basis and if the numbers make sense a vehicle can be shipped or delivered and still end up costing you less money.

Questions, over the years that have come up, we always encourage folks to consider look into a slightly used vehicle. Pickup something that two or three years old with average to below average mileage. Let the original buyer take a hit on depreciation and end up with an almost new vehicle. I saw something in the media within the last week or two that would suggest maybe buying a new car is the way to go in today’s marketplace and economy just because the demand is greater for used cars compared to new cars and maybe it’s a new car buying opportunity and I suspect if this is the case it will be in temporary not a permanent change in direction and we would encourage folks, anybody that’s going to buy a new vehicle, make sure that you negotiate the absolutely best price and also that you own the vehicle long enough to recover and recoup the depreciation hit that any new vehicle will have to some degree. So if you are going to trade cars every two or three years, then I think you are going to be better off in a slightly used vehicle. On the other hand, if you’re going to buy a new car and hang onto to it until you run into the ground then possibly that’s an option or an alternative.

So some other questions that we get asked once in awhile was while buying this nearly new vehicle make sense and I understand not taking the depreciation hit let somebody else do that, but you know with the new vehicle, I’ve got the warranty, I’ve got a dealership for repairs and that just makes me feel more comfortable, and often times folks are a little misinformed, perhaps of how the vehicle warranties work so typically with any vehicle the factory warranty stays with the vehicle. Whether you’re the original purchaser or not, the vehicle still has that factory warranty. My experience has been and over the years we’ve bought many many nearly new vehicles personally. My experience has always been any of the dealership service mechanics are more than happy to work on your vehicle, whether you bought it from that particular dealership or not, they’re all looking for the service and repair work. We’ve seen no difference in that respect at all. The other question of course is, what about the history and is a certified used vehicle or car facts and all that kind of stuff. So I can only speak to our program. The expert we use is a 20+ year former mechanic and now exclusively finding vehicles for people. So he is the kind of person that can pretty much just look at a car and know whether or not it’s got issues. Yes, a Carfax is generated in and can be helpful, but also a word of caution with Carfax. It doesn’t pick up everything. Our auto expert was telling me several years ago he had purchased a car for a friend who is I think a Highway Patrol trooper and the car was nothing but problems almost from day one and yet the Carfax report came back crystal clear; clean as a whistle. No issues no problems. Well, what happened and what they found out after some investigative work is the car had actually had I think water damage. It was a Hurricane Katrina car, so it had a little bit of water damage, and the damage was repaired, but it didn’t pick up on Carfax because an insurance claim was never filed. So it’s my understanding with Carfax the information is good as the insurance claim information that’s available so if somebody does something for cash, and it doesn’t show up in the insurance claims system, then it’s not going to show up on a Carfax so don’t get lulled into an over overly false sense of security with a Carfax report.

So the bottom line is our program is available, we make it available for our clients and friends of the firm, so if you’re listening we consider you a friend of the firm. There is a complete write up in the September newsletter which has not been set yet. It’s at the printer as we speak with all the contact information and how to participate in the program so if you’re not receiving our newsletter give the office a call or send us an e-mail and we’ll get a copy of the newsletter to you, but the bottom line is take advantage of some sort of a car buying program or discount purchase program, whether you buy a new or used, and odds are you are going to save yourself thousands of dollars every time you buy a vehicle and I mark that up to the average person who doesn’t buy a car every day, while a car dealer is buy and sell selling several cars a day. So who has the upper hand and who’s got more experience in the negotiating process. Better to have an expert as part of your team when it comes time to purchase a vehicle.

And the other thing I just wanted to share with you is kind of in the message we sent out about today’s call, is a little personality change all for the better that we’ve seen come over really both the boys, but the most recent one is our youngest son. He’d been driving a family car and my rule is in my house when you turn 18 and after you graduate high school, the family vehicle gets sold and if you want a car you need to buy one with your own money. And mom and dad aren’t going to sign or cosign a loan, we’ll match whatever you’ve managed to save on your own to go towards a car. And the only catch to it is it’s got to be a used car and you got to pay cash, no financing. So that’s what Adam has done. He’s purchased his first new vehicle, and we’ve immediately noticed that he is much more aware of his driving at least from a parent’s perspective, doesn’t seem to be quite as aggressive on the road once. He’s particular about how he parks the car and doesn’t want to scratch his new baby of course and actually is concerned about gas mileage of all things. I had the opportunity to share with him how to calculate gas mileage and using a pen and paper of all things instead of a computer or cell phone app or an iPhone app. So he’s tracking his gas mileage and has taken just an immense step in terms of pride of ownership and you can see the self-confidence that comes from knowing that he’s accomplished, for him right now, a long-term goal he set out to buy his first car and started saving his money probably started the process a couple years ago. So he’s feeling good about himself he’s accomplished a significant milestone in his life so far and his sense of independence and self-esteem has been boosted because of that.
So some to think about, if you know folks with teenagers that are going to be driving in the future and how you would handle that as opposed to perhaps just giving somebody a car.

Anyway those are my thoughts for today. Hopefully this will help you and your friends and family save thousands of dollars every time you buy a car. BT, we’ve got time for some questions or comments, let folks know how they can get online here.

(BT gives phone instructions)

While everyone is getting ready, just to let you know I have used our car service as well and have been extremely pleased with the results that I got out of it as well.

(Brian Fricke) And I can’t remember if I mentioned this or not, we of course add this service as an added service for clients and friends. We’re talking about it today, simply because we want you to save money. There’s no profit or financial incentive for us at all we don’t get a kickback or a new car for every 10 cars we help somebody else sell or any of those funny games that go along. We just want you to save as much money as possible and not be taken advantage of when it comes to buying a car. Often times a week later, a month later, you scratch your head and wonder if you really got the best deal possible when buying a car so hopefully this removes that as well.

One last chance, if you have a question or comment, now is your time.

Well I think we have another shy group today BT.

Everybody I want to thank you for joining us today on today’s coffee talk call. We will be back with you we know we do have a number of people that actually do tune in and listen, even if we’ve got a shy group, as far as the questions or concerns, so not to worry. We will be back with you next week with another edition of coffee talk. If you have questions, comments about this issue or any other financial issue, feel free to contact the office. The number is 800-393-1017. If you prefer e-mail the best e-mail address is the info@fmcretire.com. And if you’re not receiving our monthly newsletter and want to make sure you get future newsletters, just call or e-mail the numbers and e-mail address I just gave you and will make sure you get the September newsletter for sure with the discount auto purchase program the details.

Everybody have a great week and we’ll see next week. By now

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So let’s just get started. My watch says it’s nine o’clock with the start with the call today. I want to thank everybody for joining us. Today’s topic you, “A tax mistake a lot of surviving spouses make and causing them to pay way too many taxes unnecessarily so. And it really just blows down to not knowing or understanding of tax law, just basic tax law. And really what we’re talking is this concept of what’s called stepped up basis. I think most everybody knows is that if you inherit an asset and then turn around and sell it your your tax liability is only on the increased value from the date that you inherited the assets. So for instance, if you’ve got a family member, maybe a parent or a sibling that paid $10 for a stock and that stock is now worth $100 and you inherit the stock when its value is $100. You can turn around and sell the stocks at $100, and that you pay zero tax on the $90 profit that your family member had accumulated while they owned the assets. So I think everybody knows and understands that and there is no tax liability.

Here’s where we see mistakes being made by surviving spouses. And this comes into play when maybe a couple buys an asset whether its real estate or a stock and they own it jointly. And then one of the spouses passes away. Well, let’s use the same $100 stock example. So you and your spouse buy stock in a joint account for $10. Now it’s worth $100. Your spouse passes away and you want to sell the stock. What are your profits for tax purposes? Well, instinctively we immediately remember what we paid for the stock; that was$10. And oftentimes we see people report a $90 profit using this example. If they sell the asset, and really what they’re doing is over reporting taxable income because they haven’t adjusted their tax basis as a surviving spouse. Because when you stop and think about it you inherited this. You owned 50% of the stock. Your spouse owned 50% of the stock. They passed away. So you get a stepped-up basis on your spouse’s interest in the property or in the asset. So in this example your cost on the stock is then adjusted or you should adjust it to $55. And now, you would only pay tax on a $45 profit. So there is a common mistake we see too many surviving spouses make when it comes time to selling assets that were accumulated during one marriage. And just be aware of that and remember that if you have a friend or family member is recently widowed or a widower. Just make sure that they’re aware of this provision and that they don’t unintentionally overpay on their taxes. Because I can tell you this; the IRS is going to call you up and say, “Hey wait a minute, you paid too much. Here’s the correct number.” I have yet to see that happen. All though they’ll be more than happy to contact you and let you know if they think you underreported or under-paid. So this is where an example comes in, where it’s very important to make sure that that you’ve done proper estate planning that you’ve got proper estate planning documents in place.

And today I just want to touch on the basics and make sure everybody’s got the basics covered and I say that because studies suggest and research shows that well over 70% of adults still don’t have basic state documents in place. And I guess that’s understandable. Who wakes up in the morning eager in anticipation, “Yeah? today let’s go talk about my estate documents.” So put those documents in place. But regardless of how old you are, if you’re an adult we think every one of legal age should have these basic documents; a will, a durable power of attorney, a health care power of attorney and a living will.

So a will: everybody’s familiar with wills that directs, who gets what property upon your passing or upon your death. But what happens if you’re incapacitated either physically or mentally whether it’s temporary or more permanent? Well, you haven’t passed away, so the terms of your will don’t kick in. That’s where you really need to have what’s called a durable power of attorney. You’re giving somebody power of attorney to act on your behalf, make decisions on your behalf from a financial legal respect if you are unable to do so. And then the health care power of attorney or health-care surrogate as the name suggests: that’s where you give permission for a person to tell the doctors whether you want a procedure done, what kind of care you want to have provided for you if you’re unable to communicate your wishes yourself.

And then finally the living will, which is kind of the misnamed I think, that’s really the document where you’re giving permission to the medical providers to withdraw life support if it appears you’re going to be in a continual vegetative state and you would just prefer to minimize the accumulation of medical expenses, if you’re future prognosis is one of no recovery. Kind of like the, if you remember, Terri Schiavo case years ago. Had she had a living will in place than any of the legal wrangling and all the media turmoil would have been eliminated. So those are the basic of the documents that really everybody ought to have in place. I will caution you to not attempt to do this on your own. There are numerous websites and books and fill in the blank forms available all over the place. You might be tempted to up to save a little bit on an attorney or a legal fee. I would just encourage you to think of legal fee not as expensive paperwork or expensive documents, but rather as what I would consider to be cheap insurance. Because you see if you or I as lay people make a mistake on these documents, which is quite often or quite common, we probably aren’t going to realize it and then we’re going to leave a mess for our heirs to clean up. And usually these messes can be taken care of. But when you look at the cost, your heirs end up paying legal fees and court costs that far exceed what you would have paid just to have an attorney create proper documents and do it right first time, so to speak, so avoid the temptation to take the shortcut. Use an attorney. Most attorneys, I think, should be in a position of quoting a fixed fee or a flat fee. So you get that up front even in writing. So you know what you’re looking at. And I think a ballpark figure probably would be somewhere in the $300-$500 range is numbers we’re hearing from client feedback.

Then the next document, not everybody needs but a lot of people should consider or at least be aware of. And that’s a document called a trust. Oftentimes it’s a revocable living trust. So it’s a document you can revoke. You can amend or change or modify as your situation and circumstances change now going forward. A lot of people have the misunderstanding that a trust reduces or eliminates the estate tax or inheritance tax and that simply isn’t true in most cases. The primary purpose of a revocable trust is to avoid the time delay and cost of probate. If you have assets that are subject to probate, and I’ll cover that in a minute. So if you have assets are subject to probate. The average probate trying to go through the probate process is about nine months, and the expense can be as high as 3% of the value of the probate assets. So probate fees can be quite expensive compared to when you look at the cost of setting up just a basic a revocable trust. So how to tell if you need a revocable trust; so a revocable trust, again, is to minimize the time delay and expense of probate. Our experience has been if you have “probatable” assets that exceed $75,000 to $100,000, then you should consider taking advantage of, or looking into using, a revocable trust. So it’s not just for people that have a taxable estate. And then I understand if there is no estate tax this year, but probably there should be one coming back into play next year it at some level. So don’t think just because you may or may not have a taxable state that you can’t take advantage of or benefit from a revocable trust. And bear in mind; when you set up the trust or if you’re using a will, those documents list who your heirs of your beneficiaries are. Well there are certain assets that are not controlled by your will or your trust and that trip that people sometimes unknowingly and sometimes can cause horrific mistakes. So what kind of accounts or what kind of assets aren’t controlled by your will or aren’t controlled by your trust. Well, in the account you owned jointly with somebody, whether it’s a spouse or even a third-party, if it’s a jointly owned account then that asset may not be controlled by your will or trust. Life insurance, retirement account, 401(k)s; Those all have beneficiary designations, and of those benefits are paid to whoever you’ve named as beneficiaries even if it’s not in line with who your heirs are or your trust beneficiaries are. And sometimes we see people get out of sorts in that regard. One situation comes to mind. We had a client years ago, he since passed away. He was an executive chef. He moved to Europe with his girlfriend to go study and work in Europe for about five years and then came back to the states. When he got back together face-to-face, he brought his wife with and here’s the interesting thing. The girlfriend that went to Europe with him is not the wife he brought home to the states. And part of the reasons they came back to the states is he had been diagnosed with terminal brain cancer and had less than I think it was less a month to live. So we started making sure he had all his proper estate documents in place for obvious reasons. And guess what we found? He had interest policies, retirement accounts all listing beneficiaries (that’s a good thing) but the beneficiary was guess who? The girlfriend that was no longer in the picture and the current wife was listed nowhere on any of his retirement benefits or insurance benefits. So we have barely got those documents updated and changed before he passed away. And we’ve seen instances where some of these accounts or documents get forgotten or neglected and assets end up transferring to people that the account longer wants to have received the assets and they’ve updated the will, they’ve updated the trust. Again the will and the trust doesn’t control accounts with beneficiaries designations like life insurance or retirement plans. And the and the other mistake we see being made really falls into more of a family planning situation and I just want to encourage everyone to the extent possible, the more you can share your basic or general estate planning strategy with your family the better off everyone’s going to be. And here’s what I mean about that. Years ago, one of our clients contacted us. They had a parent in failing health. Going to pass away in a short period of time. Racking up all kinds of medical expenses and they were just concerned that they were going to be burdened with their parents’ healthcare medical expenses once they passed on. So before we could meet to just review and let them know where they would stand financially and also from an asset protection point of view, they parent passed away. So after they made final arrangements and taking care of the arrangements and the funeral and so forth. We ended up getting together to updating and make plans going forward. And lo and behold dad, the parent dad, had left an estate in excess of $2 million to the kids. And I say kids, there was just one child. So, and this came as a total surprise to the child, because dad had always talked about being proper. Always the buying things that the discount store, the dollar store. Just living a very frugal way of life. And that’s being generous. So here we just have a frugal man. Allowing his family to think that he, he had little if any financial means behind him. And in reality, that was not the picture. And because being too, in my opinion, being too secretive. Really hadn’t done proper estate planning, and this was back when the estate tax laws were a $600,000 state tax exemption. So this gentleman left a taxable estate in excess of $1.4 million, and I think the first check that the daughter wrote was in excess of $700,000 to the IRS to pay the inheritance of or the estate tax.

And I sit back and look at this and I got to believe proper estate planning coordinated with the daughter another friends and family members that estate tax could have been significantly reduced if not totally eliminated. But you have got to involve family to a certain extent, whenever possible. And that can be tricky and we know and understand that it’s ,you know, if you got heirs that have issues that maybe they’re not fiscally financially responsible, you need to take that into account as well, but at the same time you got to take a hard look and be brutally honest. Most of our clients tell us their family members their heirs are a capable of making prudent decisions and choices using common sense and then if so, I would suggest the more you can involve your family members in at least your general strategy and decisions the better off everyone’s going to be. So just some food for thought as we look at the year’s all over, half over. We’ve got what, four months left in the year? That’s hard to believe. Just some things to be thinking about in your own personal estate planning situation.

So with that, Tony let me know if I’ve left anything out or if you’ve got comments to add and then let folks know how they can jump on the line and ask a question or share a comment.

Another shy crowd.

Indeed

Since you since you mentioned the primary s, I’ll share my two cents. I think most people on this call probably are of a similar mindset. If you don’t vote then you don’t have a right to complain, so please if you haven’t voted, please vote and make your voice heard. And then the other thing that I’ve been ranting and raving mostly to my wife she gets the brunt of this is I’ve been thinking the politics and the craziness going on in Washington now more than ever. It seems like certainly and term limits. So are most people I talked to were in favor of term limits would get frustrated that our politicians don’t mandate your or make a law for term limits, and then the thought struck me. We really don’t need to wait on them to pass a law to create term limits. If we as a society want term limits, we can force that just via how we choose to vote. So just food for thought. Not telling you what to do, but that probably would tell you what I’ve done and I still remember Shaquille O’Neal as he was heading out of town when he decided not to renew its contract with the Magic. One of his quotes was that, “Change is good.” I think that quote holds true with the political offices as well. So anyway were going to let everybody go. One last chance if you have a question or comment. Pop in now or were going to let everybody move on with the rest of their day.

Okay, well everybody thanks for joining us on the call. We will have another edition of Coffee Talk next week (next Tuesday at nine o’clock, just like today). We want to thank you for joining us and as always, if you have a question or comment you want us to address privately were happy to do that. You got an idea for a topic that you’d like to see on a future Coffee Talk, were always open to those suggestions and ideas as well. To do that, just call the office. The number is 800-393-1017 or if you want to shoot us an e-mail, the best way is the info@fmcretire.com. Bye everybody. Have a great week. We’ll see you next week. Bye now.

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… sounds great. All right, well, this is Bryan Terry from Financial Management Concepts. And we are going to just go ahead and start rolling. Last week and yesterday you got an e-mail that said “Do you really think your broker works free?” And the reason why we sent this out is I can’t tell you, honestly, how many times we’ve talked to folks over the years. We’ve set down and done an account review for someone. And they’ve said, “You know I’m not happy with my broker but you know I don’t really pay them so, you know, if I don’t pay them I can’t really be that upset about how poorly their doing. It doesn’t always go like that but that’s one example. And we’ve have always had to tell them, “You do pay them. You may not see it coming out of your account but you’re paying them.”

“Oh no, I don’t. I don’t pay them anything.”

And when we show them their accounts and their account statement, and we look at all the different mutual funds that they hold, we point out that those mutual funds are paying the brokerage firm. Fees that the broker shares them. All the time. All the time. And folks just don’t understand and it’s not disclosed that the broker they are working with is getting paid by brokerage firm for selling them these mutual funds. And it just blows them away that they and they never thought that they were paying their broker. They just figured, “I’m just in mutual funds, and that’s I’m not I’m not paying any fees and expenses to work with this broker.

Now on the other side of the coin when that same person sits down and says “how do I work with someone like ya’ll?” Now, we’re an investment advisor and wealth manager. We do financial planning and when we get into fees and expenses we charge folks a fee. And it’s disclosed we’re up front about it. And they know exactly it’s going to be. And folks end up making a comparison, you know, and it’s an apples-and-orange comparison because we don’t have mutual funds that pay us. We work for clients. We work for folks. We work for people. And what we do is we’re a fiduciary. We make decisions that are in folk’s best interest first. And we can do that because we’re not being paid by anybody else. We get paid by you if you are our client. So there’s a difference in how the two work and inevitably, you know someone who sells mutual funds tends to not have all the different services other than just investing some of your money. And we, an investment advisor/ wealth manager more often than not has a complete list of services that they provide. Things that they help you with that more than makes up for the minute difference that we always show folks. The difference between mutual fund investing and the way we invest and add up all the different services, different things we do for folks, if you were to pay for everything a la carte, you would actually end up paying more for than what you invest with your mutual fund broker for. And how can I say that? Well, if you have $100,000 invested with your broker and you are in mutual funds. Now I am using an example of the US mid-small-cap group of mutual funds. And I’m going to compare it to something called an exchange-traded fund, an ETF. And it’s a fund as well. But it’s a completely different animal than a mutual fund. The major difference really is the cost. Now the mutual funds set of US mid-small cap funds, the average cost that you don’t see (and it’s disclosed, but it’s not easy to find). It is 1.43%. So if you have $100,000 invested you’re actually paying this 1.43%. Now contrast that with an exchange traded fund ETF. The average cost for this same group of funds in the US mid-small cap arena is .51%, so half a percent.

So that’s almost a 1% difference in cost 92 basis points, and in its… So how much is that? Well, over let’s say a ten-year period, how much is that can cost you with $100,000 account? Well, if we were to take that $100,000, and we say that it’s for 10 years you’re going to get about at 8% return. And we’ll invest in either mutual funds or ETF’s. We’ll pick those areas. If you invest $100,000 for 10 years in the ETF portfolio and this is kind of a goofy number, but this is simple math just so we show you the difference. If you if you invest in the exchange traded fund portfolio you would end up with $235,000 after 10 years. And after 10 years of a mutual fund portfolio, getting the same return, you’d end up with turned $215,900. So you’re actually, over a ten year period would have, for the same exact return, …you’d have $19,100 more in your account if you were to invest in an exchange traded fund portfolio. That’s the difference in the fees and costs that you don’t see any in these investments. Almost $20,000 difference over 10 years and yet that’s not disclosed anywhere. They don’t show you, “hey here’s how much more you’re going to pay.” And you wonder where the money comes from to pay their broker if it’s not coming out of your account. Holy cow! $20,000 over 10 years and you can’t figure out where that money comes from. I am not being fair, not being kind. Folks just don’t think about it. It’s not there is not presented it’s not in-your-face. So you’d just think… I understand why folks say things are for free. They’re not paying for it upfront. In the light of it’s a big difference.

So if you are a do-it-yourself investor and you are using mutual funds, how could you do it better? How could you do it better if you’re even if you’re using a broker, how could you do it better if you are using mutual funds? Look at exchange traded funds. Look at look at lower-cost alternatives to using mutual funds if you want to save that money; you don’t want to spend that money. So what could you do? Well, number one, you could go from trading mutual funds to investing in a stock portfolio. You could be a stock picker and I’ve known folks that have done just fine getting in and out of stocks over time and taking a long-term view of the market. Lots of different things. But, I will I’ll also say I’ve seen probably more folks be less successful in trading stocks and have failed. Because if you were to use just index (we’ll just say, you know, the S&P 500, the NASDAQ the Dow). Pick an index for a benchmark for one of these stock traders and their either way above it or way below it. And most of them are way below. I’ve got a ton of background and we could talk about this some other time with highly active investors and stock traders. And I’ve seen most of those guys fail at doing that.

So expertise that’s the first that’s the first roadblock to trading stocks. Do you have the expertise to do it? It takes a ton of time. Second roadblock. Tons of time. You’ve got to stay on top of the research. You’ve got to stay on top of the trends. There’s lots of work to be done in trading a stock portfolio actively. Now, if you are going to buy-and-hold, you could argue that there’s no time involved in that. But I would also say that it if you want to eject the risk canister from your brain and you don’t mind being on a roller coaster ride once in a while, then yeah, you could sit there and not worry about, “Hey I bought this blue chip, and it’s going to do fine in the long-haul.” I’m pretty sure Enron was a blue chip at one pointing time. It would have been considered that. It’s time intensive to stay on top of those things.
And then I just touched on the last roadblock to the trading stocks as opposed to mutual funds and it’s more volatility. One stock versus a basket of stocks, a basket of companies, is going to be much more volatile in the short term, in the long term, it doesn’t really matter. It’s gong to be higher and higher likely than not more volatile. So that means roller coaster ride. And again, you’ve got to eject that risk canister out of your brain so you cannot worry about it. And for the most part, I don’t know a whole lot of folks that are comfortable with not paying attention to how much money they have or how much risk is involved. That’s really what it comes down to. It’s just, “How much money do I have? What’s there, what’s in my account?” Folks check. And that’s the risk factor. I don’t see anybody with the ability that could just ignore that unless they are 25 and have a lifetime ahead of them to invest and to not worry it.

What’s another alternative to that? Hire a professional delegated it. One that uses low costs investments. Not somebody that uses high cost mutual funds because that’s how they want to get paid or that’s what their business model is for getting paid. Not saying that’s the wrong thing, I don’t necessarily agree it’s the best way to do business, but it is, unfortunately, one way of doing business today. The SEC, today, is (and we’ve got some new legislation out for the financial markets) and the SEC is looking at how to make funds disclose fees and expenses and costs to investors. And it’s interesting. All the things that I’ve read about how they’re looking at the fees and costs and how it’s presented to folks. For some reason it just doesn’t seem like those folks are paying real close attention to how investors understand money and how things work. Because it’s just real confusing and I’m confused when I read about what the folks at the SEC are discussing. And I understand this stuff really well.

So, I guess, a last thing I would say on this is you know, when you have hidden costs in your investments in your account and you’ve got someone who put them there, you really need to understand why they are there and how those folks are getting paid. Your broker does not work for free. And if you have an investment advisor who you think works for free, whether they call themselves a broker, an advisor, a financial advisor, whatever it is, if they’re seeming to be working with you out of the goodness of their heart, just know they’re not, they maybe have a good heart, I’m not saying that, but they’re getting compensated to put those investments in your account. And all I’m saying is there’s always a better way. Tony, that’s about all I had for a commentary on that. Did I miss anything? Can you think of anything to add to that?

Not really other than to say that when it comes the disclosure of fees and things like that and you know, like Brian’s saying, I mean it’s a complex topic and it’s a complex industry. I mean we would certainly love to see it simplified and then not be… with the new legislation that will eventually change so that people are … You know you can read on one piece of paper, you know, what you’re being charged as far as fees and compensation rather than have to go through a 100 page prospectus for each investment you hold trying to figure it out. So hopefully we will get to that point, but until then, you know, I think of a lot of what we’re talking about today is that you know you have a decision you know, if your do-it-yourselfer that’s great. If your do-it-yourselfer then you should be as educated as you possibly can about the method of your investing whatever system that happens to be. You know, become expert at it. If you don’t want to spend the time, which it does take a lot of time to do, if you want to spend the time or you don’t want to have to worry about stuff like that and you want to delegate it to somebody else, make sure that you understand, you know, what your investment advisor is doing for you. You know, we like Brian was saying earlier, we are crystal clear about what we charge our clients and we’re an open book as far as explaining our investment system and things like that. So you just want to make sure that you know and understand, you know, how things are working. Because after all, it is your money. So why not take an interest in what’s going on with your money rather than just, you know, blindly, you know following the herd or listening to somebody that called you on the phone out of the blue or something like that on a cold call? You want to use caution. It’s just like if your sink was to spring a leak or something and you have a plumbing problem, you know, well if you happen to be an expert plumber, you could probably fix it yourself. However if you’re not, do you really want to trust your neighbor, who’s a car mechanic to do your plumbing? I don’t know, but those are things you should be thinking about because once again, this is your money and it’s your future. So, with that being said, BT, did you have anything you wanted to tack on, or we’ll open up the line for questions and comments?

One of the things that you did touch on is interesting, you know, the coming witch-hunt it seems like, almost from a government standpoint. Things are going to be changing evidently, and they’re pushing to change how things are disclosed. And I keep thinking that you know the fat lady hasn’t sung yet and there’s an awful lot of lobby groups that don’t want investors, or it…Were it appears, I’m not saying they necessarily don’t want this but there are groups out there lobbying for things to stay the same or things to stay relatively the same, because there’s this perception that folks don’t understand. Wouldn’t understand if they were told how this works. Haven’t been interested in finding out how works because they continue to invest the same way. So we’ll see how this new legislation and new direction of disclosure plays out. But we’ve always been completely transparent with how things work with us. And we can look ourselves in the mirror at the end of the day and be happy with how we do things for her folks. And with that said, if there’s somebody listening to this call and wants to find out they’re fees and expenses and what their costs are in their brokerage account, feel free to fax us a statement or email it to us. And if you want to give a call and say, “Hey, how would I get you to review my statement, review my account and let me know what my costs are?”

Give us a call. 407-647-7006. Ask for BT and say you’d like your account reviewed. I’ll take a look at it for you and let you know what you’re paying if you don’t know what you’re paying. That’s it. That’s the only thing I wanted to offer. So, Tony do you want to open it up for Q&A?

Okay the lines are open, so feel free to speak up if you have a question or comment.

I think I heard a pin drop. Not unusual for folks to be shy. For those of you who are shy you can always email your questions. So, second call, any comments or questions?

if you want to shoot us a question or comment just send that to info@fmcretire.com. And we’ll either make it a call topic or we’ll definitely get back to you but perhaps we’ll make it a call topic. We get some interesting questions from folks from time to time. And frequently they wind up a topic of one of these calls.
If there is nobody else that that wants to ask a question or make a comment today than will let everybody get on with their week. Anybody else? Anybody, any takers? Going once, going twice. Thanks for coming along this morning everybody. It’s been enjoyable discussing things with you all. And we’ll talk to you next week. Thanks very much.

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Hey good morning Tony, Brian Fricke dear everybody. My watch says nine o’clock. Do I got the right time?

Yes you do. You are ready to go.

Well here we go then. Hey welcome everybody to today’s Coffee Talk call. The general topic is “Three Retirement Lessons from the Smartest People I Know.” And that would be a multitude of clients and friends that we’ve had the opportunity and privilege to work with over the years, and that’s really one of the unspoken benefits, I think, of doing what we do. We get to watch and observe you know a hundred and thirty to a hundred and fifty families and witness the decisions they make and the choices they make and some are good and others are bad and some are just downright ugly. And we get to benefit from that kinda’ like a college education ongoing. Not just personally, but then we can learn and benefit from that and share those experiences. Of course without violating any confidences with everybody that we work with. So that’s kinda’ the gist of the today’s call. So I got three broad areas that I just want to touch on and I think really the best way to illustrate that one of the key lessons that we’ve learned over the years is just a story about a friend of mine at the beach.

He’s known by hundreds, probably thousands of people, as Jimbo the hotdog guy. Jimbo has got a job that most people would find at least on the surface very appealing. I mean who wouldn’t want to work six months on the beach in the summertime, and then go to Mexico for six months in the winter on vacation? So Jimbo’s figured out how to work six months and be on vacation six months. And his job is literally selling Cokes and hot dogs on the beach to people that are visiting the beach usually during the summer months. And his uniform of course is a T-shirt and a swimsuit. And literally he’s, I think, the happiest guy on the face the earth that I have come across. Regardless of what’s going on, regardless of how he feels he is always got a smile. Always talking with people his customers. People drop by just to visit with him. In fact this weekend there’s a bunch of people gonna’ have kind of an end of the summer beach party in his honor with a live band on the beach and there’ll be several hundred people there no doubt. I’m assuming the weather will hold.

Now a little bit more about Jimbo. He lives in a manufactured home. He owns it free and clear. Some people would call it a double-wide. His cars are ancient. I think the most he’s paid for a car recently is maybe a couple thousand dollars. He pays cash for everything. He’s a, I think, a throwback hippy from the 70s. He’s, I think he’s 65 now. Still has a ponytail down to his rear-end. Has a colorful language, if you will, that buddies, if he’s careful about…, anyway. He just, a couple years ago, got air conditioning. And he’s been doing this for I think 14 years now.

So can you imagine living in Florida in the summer without air conditioning? So and when he goes to Mexico he drives. He doesn’t fly because the lifestyle he’s chosen doesn’t generate a huge six-figure income. It’s probably barely a five-123figure income, and yet somehow he’s managed to be, I think, the happiest guy that I’ve met on the face of the earth so far. And why is this? Well he’s figured out what he needs to be happy. And he’s content with that. And that’s the one of the biggest lessons that we’ve learned from working with so many people over the years is happiness really is more a function of your mindset. Being very honest with yourself. What is it that you really truly need, not want but need, to be happy? And oftentimes in the case of my friend Jimbo it doesn’t take a million-dollar or a multimillion dollar bank account. So often times we see folks mistakenly delegate or relegate happiness to the size of their bank account without connecting it to what’s important to them and what brings them joy and satisfaction into their life? Now, you know, what brings you joy and satisfaction may be is different than Jimbo’s you know. Summertime in Florida without air conditioning and driving to Mexico, but he’s happy with that. So that would be the first big lesson that we’ve witnessed over the years is no one understands what brings you joy and satisfaction and be content with that. In other words, play by your own rules. You get, in the game of life; you get to write your own rules, but don’t let somebody else create the rules for you.

So and that kind of dovetails into the second area I wanted to touch base on and that’s really with the choices. True success really in life, not just in retirement, I think can be boiled down to the choices people make. You can choose the friends you associate with. Kinda’ the if you want to have a negative outlook on life just hang around people that are negative I with their attitude and sooner or later, I don’t care how positive of a thinker you are, you are gonna’ have a negative outlook on life. Well the same can be made when it comes to choices about things that are important to you. So, for instance, let’s imagine… Well I’ll tell you another story. One of our client’s friends. He’s also our long-term care specialist. Walt, he loves boating. And had always dreamt of owning a big boat. We’re talking yacht-type of boat and yachts run $1 million dollars to $5 million. Well Walt and knows and understands probably he’s not in a situation or position (unless his lotto tickets came in yesterday) he’s not in a situation where he’s going to be able to justify buying million, multimillion, dollar yacht and paying for the expenses. But that did not stop him from achieving his goal. He just figured out another way to get there. So what he did is he ended up getting his captain’s license. And now he’s been hired as the captain of a seventy-six foot yacht. So he’s actually getting paid to do something that he, that brings him immense joy and satisfaction into his life. So he accomplished his goal. He couldn’t do it one way, buying and paying for it himself. So he accomplished it a different way (I think a better way) he figured out how to get somebody else to pay for it and to pay for him. I mean how cool is that?

We’ve had a couple of conversations, you know, with the economy. People maybe aren’t able to do the extensive traveling that they had envisioned or hoped for. Well, maybe in the traditional sense, but there’s, you do have choices there are ways to accomplish what you want to accomplish. In today’s economy maybe we have to think in different ways. For instance, if you want to take a, oh I don’t know, an extended trip to Europe that’s going to run $20,000 and the funds just aren’t there or you run the risk of jeopardizing and running out of money later in life if you take the trip, does that meeting have to not take the trip or cancel the trip or deny yourself of that? Not necessarily. There are other ways for instance; you’ve probably heard of, I’ve met a few people that serve as tour guides. So be a tour guide for a travel group in, I am making this up, in Europe and now you get to go on the trip, have your expenses paid for maybe even get paid yourself and you still accomplish your original goal. Maybe not the ideal circumstances that you had envisioned, but nonetheless, you could end up accomplishing your goal. So, again, choices. We all have choices to make and it’s up to us to be responsible and proactive in making smart choices so we can enjoy life how we envision it for ourselves.

And so that’s the second big lesson and then the third big lesson that we’ve witnessed over and over again is waiting. And what I mean by waiting is, well couple of stories. One was a client, I don’t know, fifteen – twenty years ago, they’ve passed away since, but this couple had just retired he was with a large company in the aero defense industry. He was on the manufacturing side of things so he was getting towards the bottom-end of the pay scale in terms of the company. He was not a corporate executive by any stretch. He and his wife put four kids through college. Got them through college. Got them decent careers. The kids were independent, self-sufficient. They ended up owning their home free and clear. They did it the hard way. Thirty years of mortgage payments. They just stayed put in the same house. And while he was working and while they were raising a family his wife stayed home to look after the kids, they told themselves we’re not going to do much for ourselves. We’ll deny ourselves and then our time is when he retires. So that’s about the time I met them and they really hadn’t done much for themselves focusing all their time, energy, monies on raising the kids and getting the home paid off. And they were so excited. They had a brand-new future in store for them and they had all these great plans for travel and relaxing and just enjoying time with each other until, six months after he retired, she was diagnosed with ALS, Lou Gehrig’s disease. And 12 months after that, 18 months after he retired, she passed away. And they never took a single trip. Never got to do a single thing that they had the dreamt about and planned for all these years. And I often think back, and you can tell this kind of stuck with me over the years, I often think back. I wonder if they would have made different choices, different decisions if they would have had the benefit of a crystal ball knowing what the future had in store. Not that they could change the final outcome, but just knowing what the future had in store. Would they have done things differently? Would they have taken a couple of trips? Would they, what would they have done differently if anything?

And then a different scenario. For years we had been encouraging (begging would be the word) one of our clients to start spending some of their money. They had more than enough money to last in their lifetime with a big cushion, safety cushion in reserve (contingency fund if you will) and then finally one day, they both just looked up, and, “yeah we get it.”

“We now know and understand we’ve got enough money we could pretty much do what we would want to do within reason, but the problem is our health won’t allow us to do most of the things that we would like to do.”

So again I can’t tell you how many times we’ve had similar conversations with witnessed similar of stories about people that put off thinking they were doing the right thing. Put off doing something that was, I guess that movie ‘The Bucket List’, things you want to do before you pass on. And they deferred delayed doing some of those things, or all of those things, until one day they end up looking up and realize now it’s too late to go after some if not all of the things that are on that list. Therein lies the challenge when it comes to this issue of financial planning. I think financial planning can be best summed up as living a life not just in the future, but in the present that brings joy and satisfaction into your life and into the people that you touch; with balance. Because nobody knows what the future has in store. How many days we have left, so to speak. So to push everything out to some indefinite point in the future is maybe not the wisest thing to do either. But at the same time, we want to make sure that we’re not shortchanging ourselves or leaving ourselves with financial difficulties down the future if we should take advantage and pursue some of our life experiences, if you will, today rather than delaying them. So therein is the challenge the balancing act. I wish I could tell you that there was a magic wand and an easy simple solution for all of that, but there isn’t and I guess that’s part of what, for us anyway, it makes life so interesting is the kind of the desires and challenges that we all live with and face. So anyway, those are just some thoughts. Nothing to do directly with money and the market and whether were in a recession, depression, in double-dip this that or the other, but the bigger more important issues at hand is really mindset. We all have choices. We can let the current economy economic issues bring us down or we can choose to do something positive about it. The choice really is ours. So I would encourage you to perhaps think a little bit more like my friend Jimbo the hotdog man selling hot dogs on the beach. Be brutally honest with yourself. What brings joy and satisfaction into your life? Focus your energies in those directions and realize that, like it or not, nobody, us included, (and don’t let anybody else suggested to you differently) nobody’s got the world financial markets figured out including all the experts and gurus. That will take care of itself and sort itself out over time. But you and I just need to focus our time and energies on those areas and those issues that we do have some control some choices over. I hope you found these comments helpful. I’d be curious if you have questions or comments of your own. Tony, you got anything you want to share and let folks know how they can join in the conversation this morning?

Actually I don’t really have anything to add except for the fact that the last few statements that you made are probably sum it up great as far as financial planning; it’s a dynamic type of a process. Things change, life happens some of it’s by choice and some of it’s not, but there are some things that you can do proactively that can help you through those times of change. And that is the constant, is change. It’s going to happen. Sometimes you know how, sometimes you don’t. But by getting involved in the planning process and then having a relationship with somebody like us, you can help make those transitions smoother for yourself. So that’s about all I have to add.

Anybody have a comment or a question to share with the group this morning? I think we got another shy group. I think everybody’s still got summer on their minds. I know I do.

I prefer to think of it that you answered everybody’s questions just through the talking points so …

One last chance if you got a question or comment. Now’s your chance otherwise we’re going to let everybody move along with the rest of their day.

Brian, how about telling us about your Costa Rica trip a little bit. This is Steve Hunt.

Oh, hey Steve! Costa Rica, yes. Well since you asked. I had a wonderful trip to Costa Rica. It was a father-son guy’s only kind of a surf trip. Most women probably would not have been comfortable in the accommodations where we were at. And the boys I surfed everyday that that we were there pretty much from morning to evening. Didn’t really do a whole lot in the evening nightlife and all that kind of stuff. Most days the waves were too big for me to even get out. The boys were on smaller surfboards and they could actually dock under the waves. I ride a, when I get on when I get up on a surf board I’m on a fairly big one. It’s like 9 1/2 feet and so that thing doesn’t dive under the waves so you gotta’ plow through the waves. And these things were so big that that was tough to get through. But we’ve got a website (I should call a website yet). If you’re on Facebook, there’s a Facebook page (I think I’m using right Facebook terminology) there is a Facebook page called Winter Springs Surf Team. Just search for Winter Springs Surf Team. Go there. There is a probably 100 different of photos all of which the boys did or were responsible for putting up. But we had such a fun time that we’re probably going to make this perhaps an annual event. There was another a father-son that went with us another family we’ll probably open it up more father-son families and we’re just debating now if, I know my guys would be happy just making it a surf only trip. So there’ll be more follow and come from that. And for me just as the father yeah I had a kind of a secondary ulterior motive with my sons. My oldest son, Justin, on his own decided to sit down one night and type out lessons learned from the Costa Rica trip. And it was quite insightful and I’ll actually be publishing that and put it up on the website. I’m going to edit some of it. He’s mentioning friends and stuff but anyway after I get his permission I’ve got his preliminary permission. I’ll publish what he put up. But it was, if you read that you’ll we’ll see why that was worth the trip in itself. And also in September’s newsletter, I got a little bit more on the to Costa Rica trip. But, so anyway, I think you can tell I can to go on and on about Costa.

I’m glad to hear you had a good time.

Yeah we did. Thanks for asking, thanks for asking. Alright, any other questions or comments? Alright everybody with that I want to thank you for joining us this week on Coffee Talk. We’ll be back with you next week for another edition, another topic for our Coffee Talk call. And again, just a reminder, if you got a topic or a subject that you’d like to see or a question that you’d like to see us cover in a future call, just call the office or send us an e-mail with your topic or your question and we’ll address it in the future and I do want to remind the folks that send us questions, we will be covering those. I know we haven’t yet, but we will cover those in future calls. I’m just trying to time things to make your question and your topic perhaps tie in with the different timelines during a year, if you will, when it will be germane to a lot of folks. So we haven’t forgotten you. We’re not ignoring you and keep sending in your questions and comments. The e-mail address again is info@fmcretire.com. info@fmcretired.com or if you want to call the office that’s fine too. Toll free is 800-393-1017.
Alright, everybody have a great week. We’ll see you next week. Bye now.

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Good Morning everyone. Welcome to today’s call. The topic is “How to Handle an inherited IRA.” What you need to know whether you’re inheriting an IRA yourself or trying to protect your heirs. And these comments in most cases apply to not just IRA’s but also company retirement plans like 401(k)s and 403(b)’s. So just in things that you need to be aware of the rules are a little bit different compared to a traditional IRA if you will. If you are inheriting an IRA or let’s just say anybody that inherits IRA, the rules are a little different depending on your relationship to the IRA account holder or the original owner of the account. If you’re a spouse then you can, if you choose, you can have your inherited IRA if it’s from your deceased spouse his or her IRA can be rolled over into your own IRA account. But that may not always be the ideal choice, and here’s why.

Years ago we had a situation. Somebody came to us. Their husband had passed away. They had gotten what turned out to be poor advice. They had transferred their husband’s IRA to her individual IRA and the problem with that is she wanted money from the IRA to pay some living expenses and generating an income. But she had not yet turned age 59 1/2. So she was younger than age 59 1/2 and because she transferred that money to her own IRA account, she was going to be subject to the 10% early distribution or early withdrawal penalty. If on the other hand, she is simply left the money in her husband’s IRA account, she could’ve pulled the money out free of the 10% early withdrawal penalty. So that one little mistake ended up costing her of thousands of dollars in totally unnecessary penalty taxes just by not getting the proper advice.

The same holds true on if it’s a non-spouse. You’re not able to roll over and inherited IRA to your own IRA if it’s a non-spouse type of account. Then you have the choice you can either terminate the IRA account, and then you pay ordinary income tax on the entire amount. But the good news is you don’t have to pay the 10% penalty tax even if you’re not yet 59 1/2 years of age yourself. Your other option is you can leave the inherited IRA money in the IRA and you just need to re-title the IRA and we call it an inherited IRA, but usually the re-titling would look like something along the lines of John Doe deceased inherited IRA FBO (For Benefit Of) John Doe Junior, beneficiary. And now you’ve got an inherited IRA. The advantage is you can leave the money in. It can continue to grow tax-deferred. You can withdraw money at any time you pay ordinary income tax. But you avoid the 10% early withdrawal penalty tax even if you’re not yet 59 1/2. The one little catch to an inherited IRA is you have to take a minimum distribution even if you have not turned age 70 1/2 yourself. The year after you inherit an IRA you have to start taking distributions. That’s assuming that it’s an inherited IRA but if you’re a spouse and your roll money over to your own IRA you don’t have to take minimum distributions until you have turned age 70 ½.

Starting to get a little confusing here, I know. But bear with me. So the bottom line is if you inherit an IRA or anybody that inherits an IRA the money can stay in the IRA account. You’ve got access to the money without having to trigger the 10% early withdrawal penalty. You have to, for non-spouse beneficiaries, take minimum distributions based on your life expectancy.

Now a common mistake is what happens if you inherit an IRA from somebody who’s already turned 70 1/2 and they’ve already begun taking minimum distributions. While you want to make sure that the year they pass away that they in fact did take their required minimum distribution. And that’s going to be reported on their final income tax return, not yours. And then every year thereafter, for an inherited IRA, you take your required minimum distributions, if done properly, based on your age and your life expectancy tables. So if you’re an heir to an IRA and you’re younger than the person you inherited the IRA from the minimum distribution requirements is going to be lower (sometimes significantly lower) compared to what the original IRA owner was required to take.

Just a couple mistakes. Common mistakes we see people make. With an inherited IRA you do not have the ability to implement the so-called 60 day rollover rule. You know, if you’re an IRA if you got your own IRA and you want to move it to another IRA you can actually cash in your IRA account. Put the money in your pocket and as long as you redeposit into another IRA account within 60 days you don’t pick it up as a taxable transaction. That ability does not exist with an inherited IRA. You must do what is called a trustee to trustee transfer again from the original IRA to an inherited IRA or if you’re a surviving spouse to your own IRA account if that make sense for you.

The other mistake we see folks make it quite often is on beneficiary designations. Just remember, whether you have a will or trust it really doesn’t matter. Your IRA account is going to go to whoever is designated as the beneficiary on that IRA account and if there is no designated beneficiary, then it becomes part of the estate and then things can get ugly quick. If you name your estate as an IRA beneficiary or you have no IRA beneficiary then the IRA usually is deemed to be inherited by your estate and when you name an estate, the IRA account typically has to be liquidated within five years. So he your heirs lose the ability to have an inherited IRA and keep the IRA in their name their account really for the rest of their life. If the IRA beneficiary is an estate and the owner was over 70 1/2 then the required distribution schedule of the original owner has to be adhered to. Let’s see what else am I missing here, so the bottom-line is make sure your beneficiary designations are up-to-date on your IRA accounts, You want to periodically review and confirm that your beneficiary designations match your current thinking and wishes.

And here’s where things can get a little bit interesting if you will. The question we always ask clients to ask themselves when it comes to beneficiary designations. Commonly, the common strategy would be you name your spouse, if you’re married as primary beneficiary. And then if you have children, you name your children as contingent beneficiaries. Well sometimes we see folks have set up a trust, and they will name their trust as a contingent beneficiary.

A problem that could come up with that is if you have multiple trust beneficiaries. Let’s say multiple children, two, three, four kids. If the IRA beneficiary is your trust then the kids, if they want to access IRA money, they’re going to have to agree on when money is withdrawn. We’re assuming they meet the minimum withdrawal schedule or the minimum distribution schedule, but if they want to take more money out of that, they have to all agree on that and obviously more beneficiaries you have, the less likelihood they’re all going to agree on the same thing at the same time. So what we prefer to see is rather than name the trust, and here’s a question you want to ask when it comes to children or grandchildren, are they capable now if they were to inherit the IRA or their share of the IRA account today, are they able to make good common sense business decisions. They don’t necessarily need to know how to manage and invest investment monies or investment accounts, but do they have enough common sense and business sense about them that they can hire good advisors, and they wouldn’t be frivolous with their use of the IRA money? So if you’re comfortable that your IRA beneficiaries are responsible and capable of making wise choices, then we say name IRA beneficiaries individually or contingent beneficiaries in this case, you’d name them individually as opposed to naming a trust.

So that begs the question, “What happens if you got up at an IRA beneficiary or contingent beneficiary that either has a disability issues, drug / alcohol issues?” So for their own sake you don’t want to give them a lump sum access and control to their share of the IRA that they may inherit. But you still wanted to give them the use and access to those funds. Well in that case it does make sense to use a trusted beneficiary, but we would suggest in general terms that you think about just having a trust as beneficiary for that one particular beneficiary, and then you name any other family members individually if they’re able to deal with and handle money in a responsible manner. And then we’ll put handcuffs on the. You just put safeguards in place for those family members that need those safeguards for their own good for their own benefit. And again, I just can’t overstate how important it is to make sure your beneficiary designations are up-to-date and current.
I’ll share a little story with you. Years ago one of our clients was a master chef. He had an opportunity to go to Europe and train in Europe with some of the top European chefs really in the world so he left the US for about five years with his girlfriend. So before he left we made sure that all of his insurance and investments beneficiary designations were in place. And and his girlfriend was listed as primary beneficiary on his retirement money and life insurance all this good stuff. So he returns to the states about five years later. He’s now married, but to a different lady. So not the original girlfriend that he left to go to Europe with. He came back home with a different person and had already married her. And the sad part of the story is he had a severe form of brain cancer and really didn’t have a whole lot of time left. And he since passed away. So when we are updating everything, guess what we found out? The original girlfriend was still the beneficiary on all of his life insurance on all of his IRA accounts. Fortunately we were able to get all that changed and get his wife listed so she ended up receiving and inheriting his money his assets. But for a while there an old girlfriend was in line to quite a sizable inheritance that she really had no idea about it and he had totally forgotten about. So it’s just the simple things. It’s kind of like we’ve all heard this before, the Devils in the details. So, again, make sure you’ve got proper beneficiary designations on your IRAs and your 401(k)s.

The other thing you need to be aware of with 401(k)s, most retirement plans do not allow an option for an inherited or sometimes it’s called a stretch IRA. So once you’re… if you’re inheriting a company retirement plan, there typically going to want you to move the money outside of the company retirement plan. The good news is that a lot of these companies now or at least letting us move the money to inherited IRA accounts which can be done. But if left unattended, company retirement plan beneficiaries could be faced with having to deal with the so-called five-year rule and having to liquidate the account within five years after her of the account’s inherited. So what we encourage folks to do is once you’ve left the company from an estate planning point of view, there’s really not a compelling reason to leave your money in a company 401(k) account, your better bet is to transfer, which is a tax-free direct transfer, transfer those monies to an IRA account and then down the road at IRA account can be turned into an inherited IRA account. And that’s a much easier simpler process for your heirs to deal with than trying to have to maneuver the paperwork and the requirements for most company retirement plans.

Okay, so I’ve covered to some of the highlights that I wanted to go over Tony let folks know what they can do to ask questions or share a comment.

Alright, anybody have a question or a comment?

Brian I’ve actually had just a comment in regards to the inherited IRA and I don’t know if this would even be a part of a different call or something, but maybe slightly off topic, but we talked about the rules for the inherited IRA but a consideration that may even come before that would be whether or not you, as a beneficiary, if your inheriting an IRA whether or not it even make sense to do so because depending on what your own set of facts and circumstances may be in depending on who the contingents are it may be a very effective way to pass assets on by disclaiming your inheritance basically and allowing that those funds to pass to another beneficiary that you wouldn’t want to see the funds go to.

Good point. Thanks for bringing that up. And that’s why typically if it’s a couple, a married couple, will a standard recommendation would be spouses are primary beneficiaries of each others’ accounts and then contingent beneficiaries would be other family members, kids or other relatives. So a surviving spouse, then is not required to accept their inherited IRA’s interest to speak that you could, as Tony mentioned, disclaim a portion of it or all of it and basically are just telling the IRS that while you’re due this sum of money, you’re gonna reject it or turn down the gift. And in that case, the portion that you turn down would revert to whoever is listed as a contingent beneficiary. So in a family situation you know, maybe a surviving spouse has sufficient assets and monies and other accounts their own retirement plans, and so on, that it makes sense just to bypass the surviving spouse altogether and get that money into other family members. And that can be a very effective estate planning, tax planning type strategy. And again that just stresses is the importance of listing not only a primary beneficiary but also a contingent beneficiary so that you give your family as much planning flexibility as possible.

Any other questions or comments?

One other thought that popped into my mind I’ve mentioned before this lady we worked with years ago that that got poor advice transferring her husband’s IRA over to her IRA when she had not yet reached 59 1/2 and then wanting to, not just wanted, she needed to pull money out of the IRA to cover her monthly living expenses when we look at the situation he only explanation I could come up with is the person that helped her make this transfer sold her another annuity or a mutual fund, I can’t remember which, but I do recall vividly that there was an upfront commission involved that put money in their pocket. Had the money just stayed in the husband’s IRA there would not have been a commissionable event or transaction and this lady would have been able to withdraw money without any kind of a penalty tax for early withdrawals. Sometimes in the, the agent’s eagerness to affect the transaction sometimes some advice is compromised, whether it’s intentional or not. So just something to be aware of as well.

Okay, we’re almost out of time. One last chance, if anybody has a question or a comment tell us your first name and ask your question.

Okay well I guess we got another shy group and maybe folks still on summer vacation so I want to thank everybody for joining us on today’s edition of Coffee Talk. We’ll be with you next Tuesday same time, different topic which reminds me and if you’ve got a particular question or topic that you’d like to see us cover in a future call , call the office or send us an e-mail and let us know what you’d like to see us cover in a future talk. We’ll do our best to accommodate you and if you have questions about your own individual situation that you want to address with us privately were happy to help his as well just call the office or send us an e-mail, were happy to help any way we can. And with that I want to wish everybody a fantastic rest of the week and we’ll see you next week. Bye now.

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Good morning everyone. Welcome to the call. This week’s topic is maybe a little bit out of the ordinary but for us, not so out of the ordinary. One of things we encourage our clients to do is to call us or e-mail us or contact us anytime you have a question in any time you were thinking about doing something to get our input perspective so that you make the best choice for your situation. What we really want to avoid is and what we hate to hear is guess what I just did comments. So years ago, this will date me, years ago when almost no one had a cell phone there were payphones. And there were small-business opportunities where you could invest money in the payphones kind of like a vending machine route if you will. And I remember one of our clients ended up investing in a payphone company and they made all kinds of claims and guarantees that sounded too good to be true and unfortunately he ended up losing virtually all of his investments and had he contacted us first, we probably with the information that we became aware of after the fact, we most definitely would’ve done everything we could to encourage him to not put his money in that opportunity. At least he was honest. He was telling me after the fact “Well I didn’t call you because I knew if I did you would’ve told me not to do it and I really wanted to do it anyway.

Anyway in the last couple weeks, we’ve got a couple of e-mails from folks and the tone of the e-mail really can be summed up in a comment and I think we put into the e-mail announcing this call and the gist of it is “Hey Brian is this really true?” One of e-mails, and this is one of the things that have the tendency to grow legs in the e-mail chain forwarded and it just never seems to go away, but one of the questions was there’s an e-mail going around where it’s warning alarming people that I can’t remember if it’s starting next year or in 2012, companies are going to have to start including the cost of employer paid health insurance on your W-2’s, if you’re working and if you’re get a pension it will be included in the W-2 you get from your pension. And the alarm bell going off of course is wait a minute, that can increase my income that shows on my W-2 and therefore can increase my taxable income and depending on the company, some companies still pay 100% of employee medical insurance, that could add up to $5,000 – $10,000 of extra income that folks in theory would be paying income tax on. Well in this example, this is just really a half-truth. Whoever sent the e-mail out, if their purpose was to get everybody stirred up and riled up then they accomplished their goal. But the half-truth is yes, companies will have to start showing on W-2s for employees and pensioners they’ll have to start showing the medical premium health insurance premium on the W-2. However, it will not be included in taxable income. So you don’t pick it up as an increase in your income. It’s not some clandestine strategy by the government to raise more tax money. So if you have seen any e-mail order or it comes to you down the road, rest assured and this is stuff we’ve researched and checked out and all that good stuff, the bottom line is yes, If a company is paying part of your medical insurance whether you’re an employee or a pensioner or retiree eventually that’s going to make its way to a future W-2, but you’re not going to pay tax on it and it’s not going to be included in your taxable income.

The other question, we got last week was again part of the new laws that went into effect and in the new healthcare, it’s amazing what got buried into the health-care reform law. So apparently there’s now a provision that is going to require buildings, homes, office buildings and so forth to comply with a new energy and water efficiency standard. And the e-mail circulating apparently is suggesting that in the future if you want to sell your home, you are going to have to bring your home up to compliance to meet the new energy and water efficiency standards and cost estimates depending on how old your home is and what you already have or don’t have a place to bring it up to standard if your home hasn’t been built within the last couple years, it’s going to take you anywhere from $6800-$50,000 to bring your home up to this new energy and water standards. Well again, here’s where the information is almost correct. Yes, there are new energy and water efficiency standards, but they will only apply to new construction. So builders and architects don’t have to be aware of the rules make sure any new construction complies with the standards, but it doesn’t affect existing buildings so no, if you’re looking to sell a home or building you’re not going to have to retrofit and upgrade to meet these new standards. And as I got to thinking about these two e-mails and listening to last week’s news and the week before about Shirley Sherrod and she’s the lady that was forced to resigned or was fired from the USDA because of the speech or a piece of the speech that she gave showed up on YouTube. And that got me to think about just the power of technology, the power of media today and really the lesson learned and we need to continually remind ourselves 15-20 years ago, the challenge when it came to investing in financial planning was just getting your hands on good reliable, timely information. Well that no longer is the challenge today. We’re bombarded with information 24/7 365. In any form, shape or variety we want to get it. Now we can get the news on our phones of all things. So now going forward it appears to me that what we are going to have to be diligent about is half of the information that we receive we can’t just perhaps like we did 20 years ago, we can’t take it at face value and assume it’s 100% accurate even when it comes from the news media. Because the news media yes they are going to try and do the best job possible, but they’re working on limited budgets, reduced budgets, tighter time pressures they don’t always have the time to do the fact checking that what they would like to do and if we can just look at this Shirley Sherrod. I mean good grief, it made national TV, and she was depending on the report forced to resign or was fired because of this thing on YouTube. Then it comes out a day or two later, if anybody in the media would have bothered to check things out, they would have found it was taken out of context and she wasn’t the ogre that she was originally thought to be and that resulted of course and her boss and the president having to issue an apology to her. So I just want you to remind everyone and us included that we have to be vigilant in today, the information that we get and make sure that it’s from a reliable, credible source, but then not be afraid to check it out and investigate it for ourselves even further because you can’t take things unfortunately these days you can’t take things at face value. Certainly with a lot of the e-mail chains that seem to be going around and thanks to the internet along with that going on the Internet. Yes the benefit is a lot of good useful information so assess to information is certainly not a issue or problem today like it was 20 years ago, but with that comes a whole new set of the issues or problems that we have to be aware of and deal with.

So the bottom line is don’t be afraid to ask questions check things out and don’t just react to everything that comes across in the media or on the internet and sometimes there’s more behind the scenes than what meets the eye.

So those were comments and thoughts I wanted to share with you today just some stuff we saw going on in the last week or so. And now BT anything you want to add or anything I’ve left out?
BT: no it’s funny I’ve said the same thing many times to folks about an e-mail that the things that they bring to my attention is this true, take a look at this, and a lot of the things that do come across the desk today in e-mail especially the e-mail chains. There is some inkling of truth to it, but many times it’s blown out of proportion and I always find myself checking it out before I reply, before I forward, or make any comment about what I see. You know that is part of being responsible in your communications with other folks. You either know what you’re doing and talking about or you’re just throwing nonsense around and you have to make the choice to know what you are doing with it because there is a lot of it out there.

Brian Fricke: Which is why if you get our monthly newsletter, that’s why we’re always every month reminding everyone if you have questions or concerns, call us if we don’t have answers we’ve got resources that can lead you to the right answer or the right information so that you make the smartest choices possible about your situation. So you can have as close to a worry free retirement and worry free way of life as possible, and that’s one of the reasons we do these calls. We just want to be available. We want to be a resource of either directly or to be able to guide you to resources that can be of some help to you.

BT let’s go ahead and open the line to see if anybody has a question or comment they care to make and we’ll go from there. (Instructions given)

Brian Fricke: If you have any questions go right ahead. I think we may have another shy group today. Lots of people still on vacation.

BT: Did you know that we’re exactly 2 years away from the Summer Olympic Games in London today. Little tidbit there.

Brian Fricke: Okay folks, last chance, if you’ve got a question or comment to share with us then ask away.

Okay well I guess we’ve taken care of business today so we thank everybody for being on today’s call just a reminder we’re here to be the resource for you to you so during the week if you have questions or concerns about your own individual situation, please don’t hesitate to give us a call and let us be a resource for you and help you make smart choices about your money so you can accomplish what’s really important in life for you and with that we’re going to get on with the rest of our day and week and wish everyone on the a call have a great week and we’ll see you next week. Bye now!

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So it’s 9 o’clock so we’ll get started. Like I was saying just a moment ago, I am flying solo this morning so I’m running the switchboard and doing the commentary so I’ll try not to press any of the wrong buttons during the call. All the lines are on mute for the first part and we’ll open it up for questions and comments at the end.

So what we’re going to talk about today is 401K’s. Most people think that there are no costs associated to their 401K as employees being participants in their company plans and a lot of people don’t realize that there are costs associated with that. Some of which are born by the employer and some of which are, as participants, absorbed by you guys. So that’s really kinda’ what we wanted to do is bring some of that to light because really some of it’s kind of well shocking. And for those of you participate in some of those plans you may want to do your own due diligence and make sure that you’re up to speed on what’s going on in your own plan.

And kind of what I’m talking about is simply that there are many different kinds of 401K plans available, retirement plans. They’re offered by different types of vendors, if you will, whether it’s even though you may be the employee of a company, that company uses a 401K product, if you will, that’s provided by somebody else. And sometimes that’s an insurance company. Sometimes that’s a brokerage house. And typically, the larger the plan, the more economies of scale you’ll get which usually means to you that if you’re in a, you know, a company that has thousands of employees, there’s a chance that on a per-person basis your costs are going to be lower than, say, somebody that works for a company that has 5 people. So that’s kind of the difference that we are talking about is a lot of times these small business owners get involved with offering their clients these benefits and sometimes they don’t really realize the costs that are involved. It’s notorious that the more expensive ones are the insurance companies. And the insurance companies have, in the past, been the ones to be most predominant in the small business community simply because a lot of the larger plans, sponsors and what not, you know, they felt it wasn’t cost effective for them to participate in the small business community. So small businesses typically had really not very much to choose from.

The good news is that’s changing but the bad news is there’s a lot of small business that have, you know, products they bought years ago that may or may not be the most cost effective solution today. And you, as an employee, or you, as an employer, you always have to try to take a look at what’s going on in your plans just to make sure that you are getting the most bang for your buck, if you will. So, when I mention insurance companies, what we typically see is that insurance companies will wrap this retirement plan up in an annuity type of product. Annuities, when it comes to, you know, an investment type of perspective, annuities are expensive because there is an insurance element to it and insurance costs money. So typically those costs can, you know, run somewhere between 2 and 3% of plan assets. Now it used to be, years ago, that those plan charges, the plan-level charges, were basically covered by the company. So the company was paying the fee, okay, and the participants were basically paying a portion of that fee through the expenses that are passed on through the investments themselves because most 401K’s as you can probably imagine there’s a selection of mutual funds and it’s usually set Some plans have a lot of choices and some plans have just a few. But if you take a closer look at those mutual funds within your plan, sometimes, depending on the plan you are involved with, you can be surprised by what you find because what we’ve seen is that over time you know, employers are being sold these 401K solutions and they’re being told that there’s not contract charges and they’ll be able to show that there are, in fact, no contract charges and fee expenses at the plan level are relatively small. What they’re a little bit hesitant to tell you is that those fees are then being pushed out to the investments themselves and you can see those expenses on the individual investment shooting with the 2%. We’ve seen them as high as 2 ½ – 3%. And a lot of times it’s not very, it’s not like it’s listed there in black and white in big print for everyone to see. Sometimes you’ve got to do the math, add up the numbers and get the true cost of the plan so as a result, a lot of employers thinking they’re getting a low cost plan don’t really realize that that cost is merely just being shifted to the individual participants which they, as employers, are participants as well. And especially in the smalls businesses, the owners typically tend to be the largest participant in the plan just because they own the business. So as a result the problem is they don’t know what they don’t know and sometimes it’s not readily apparent. So that’s kind of what we are talking about today is just that you want to keep an eye out for things like that. And you, as employees, can really; you should take an interest in what’s going on in your own plan and take a look at those fees and expenses that are being passed on to you as a participant. And it’s usually hidden in the fine print of the prospectuses of the mutual funds. You may find it in your employee plan document. Just to give you an idea of the math that we’re talking about; you know if you assume that you have a 2 ½ or a 3 % plan, and you have $100,000 in your own particular 401K, you’re coming up to you could be paying anywhere up to $2500 to $3000 a year in plan expenses. And you don’t even see it because it’s not like its being pulled out of your account as a fee and it’s labeled a fee. It’s coming out of the mutual funds and it drops to the bottom line of the performance of those mutual funds. So you never ever see it on a statement. It just shows up in the fact that your performance is going to be that much lower because of that higher fee. So what does that mean to you over time? Well, you know, if you’re paying $3,000 a year on a plan, do the math. And you know over 10, 15, 20 years you’re talking about a substantial amount of money.

Well what would you do with that extra money? Well you probably wouldn’t want to just give it away unless it was to a charity of your choice. So these are the hidden things that we want to get across to folks and for you to be aware of so obviously if you can save $30,000, $40,000, $50,000 dollars over the lifetime of your plan, you know, that’s a new car or something; or a nice vacation. So food for thought.

So as an employee, or an employer for that matter, what’s available to you? What can you do? Well, obviously regardless of what role you’re in, you want to take an active role in what’s going on. That may be for an employee of a small business. That may be you stopping in and talking to the owner and saying, “Hey I was looking at the 401K plan.” And, you know, making your voice heard; simple as that. Because a lot of the times it may trigger something in the employer, “Oh, okay maybe it is time to look at things” There are a lot of low-cost alternatives that are available out there now because the 401K business is really starting to evolve. There are plans out there that provide a lot more flexibility. You can house them at a Fidelity or TD Ameritrade where you got low cost alternatives investment-wise so rather than investing in high expense mutual funds, you have the ability to invest in lower expense exchange traded funds. So it kinda’ depends on what kind of plan you have; how it was structured and simply bring that to the attention of your employer. It’s a good way for them to really understand that, “Hey, I’m a participant too as the owner of this business and I need to take a close look at what’s going on.” And everybody can benefit as a result.

And then, obviously, if you work for a larger plan, the odds of that happening probably aren’t as strong simply because larger company plans tend to have a much more formal process. They have investment committees, advisors, and things like that they have for the plan to keep an eye on just that kind of stuff. So they’re constantly evaluating on an on-going basis whether or not it makes sense to move the plan to another provider. And really as a small business person or participant there’s economies that can be had simply by having an advisor to the plan. Somebody that’s independent of the company and the participants to be able to take a look at that plan and from an un-biased perspective and knowledgeable about the business and be able to be educated and be able to pass that education along onto the owners and the participants. So it may be even worth it as a small business to invest in having an advisor for the plan if, of course, you can reap the rewards and the savings by doing something like that.

So, that basically covers it. I didn’t want to take up too much of everyone’s time. I was trying to keep it short. But I can see we are already at the half-way point. But we did budget 30 minutes for the call today so I’m going to go ahead and open it up to questions and comments.

Ok, the lines are open so if you have a question or a comment feel free to just speak up. State your first name if you will and go ahead with your question or comment.

Okay, it sounds like we have another shy crowd which is not unusual. So certainly don’t have to feel bad. Just a reminder, these Coffee Talk calls are for informational purposes. It may not be specific to your particular situation. We try to do it in a generalized format so that it’s informational to everyone. And just to add another side-note, the Federal government and the Department of Labor recently issued new rules when it comes to fee disclosures for providers of plans. So it will be interesting, those actually came out last month but they don’t take effect for another year. So it will be interesting to see the positioning that goes on between now and when the rules actually come into effect. Because as you can imagine if you’re in a high-cost plan and that’s made plainly aware to you then the companies that are providing those plans are running a much greater risk of losing you. So it will be interesting to see what format that disclosure takes because technically the companies today are actually disclosing their fees, they just don’t make it plainly apparent. So how those new Department of Labor rules get implemented will be interesting to watch.

DO we have any questions or comments?

Okay, well I’m going to let everyone go so they can get on with their day. Thank you once again for joining us and if you do have any questions or comments that you would like to send to us via email feel free to send them to us and we’ll be happy to address them to you. So we look forward to seeing you guys in the future and we will see you next week. Thank you.

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