Monthly Archives: April 2013

“Permanent” doesn’t mean forever. It just means until congress changes it.

You thought your estate plans were set when Congress  made “permanent” the $5 million estate-tax exemption enacted earlier this year.  Well,  “permanent” just means  there’s no expiration date built into it.  And a government that is desperate for money to spend can change the estate tax at any time.  According to the Wall Street Journal:

The Obama administration proposed lowering the exclusion to $3.5 million for estate and GST taxes, and to $1 million for gift tax. Those amounts—a return to 2009 levels—would no longer be indexed for inflation….

If you feel like the estate-tax exemption limit has bounced around a lot, you’re right. It has been changing every few years since 2001. Even some lawyers who get to charge by the hour are frustrated.

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Time to review those retirement plans

With tax season behind us and spring in the air, it’s time to do more than clean the house and put the winter clothes in the back closet.  It’s also time to review your retirement portfolio.  If you use an investment manager, this is an ongoing process.  If you are a do-it-yourselfer, here are some things to consider.

  • Are you spending too much and saving too little?  If you don’t know, you should find a way to track your spending.  There are a number of computer programs that can help.
  • Is you portfolio properly balanced?
  • Is your portfolio designed for the past or the future?
  • If you had it to do over again, would you buy the same securities?
  • Are you confident of your ability to actually manage your major financial assets on your own?

If the answer to the last question is “no” it may be time to see if you can find someone who can help.

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Are You Ready for the New Investment Tax?

Via the Wall Street Journal

It’s time to grapple with the new 3.8% tax on investment income.

The ordeal of 2012 taxes is barely over. But it isn’t too early to understand and cushion the blow of the investment-income levy, which Congress passed in 2010 to help fund the health-care overhaul.

The tax, which took effect Jan. 1, applies to the “net investment income” of married joint filers who have more than $250,000 of income (or $200,000 for singles). Only investment income—such as dividends, interest and capital gains—above the thresholds is taxed. The rate is a flat 3.8% in addition to other taxes owed.

Here are steps to consider.

  • Minimize your adjusted gross income
  • Rearrange your assets
  • Time income if possible
  • Harvest losses
  • Consider Roth IRA conversions
  • Go offshore

There are other suggestions.  For details go here.

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What It Costs to Own Your Own Downton Abbey

This is Highclere Castle, the actual site of the fictional Downton Abbey. If you have watched the TV series you know that one of the underlying themes of the program is the fact that the fictional Earl of Grantham had trouble keeping the castle because of its cost. His original solution was marrying an American heiress.

If you ever wondered what it costs to buy and maintain a grand English country house, CNBC did a little digging and concluded that it’s a lot more than most people believe.

Rupert Sweeting, head of the Country Department of Knight Frank in London, said that the biggest costs of owning a country estate are the staff. He said that for a “moderate-sized” 1,500 acre spread, you’ll need a butler, cook, secretary, groundspeople and cleaning staff. (Read More: Top Towns for $10 Million Home Sales)

“And for hunts, you need gamekeepers, one or two at the very least,” he said.

Total annual cost for the staff would be anywhere between $600,000 to $1 million a year.

Then there all those leaky rooves and crumbling gargoyles. Everyday repairs on your estate or castle will set you back another $100,000 a year or so.

Renovations are the big ticket item. Sweeting said most owners do a major renovation after they’ve purchase their estates. After about 20 or 30 years, they either redo them again or sell.

He said many clients spend $6 million to $8 million on renovations, though some spend much more.

In the end, the total bill for keeping an estate is upwards of $1.5 million or more.

People with that kind of money are often Middle East oil sheiks or Russian moguls.  The current owners of Highclere are the Earl and Countess of Carnarvon whose ancesters owned the property since the 1600s and built the castle in the 1800s.  They maintain the castle by renting it out for weddings, parties and other events.

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Fixing the Obamas’ Finances

Financial Planning magazine has an interesting article by Allen Roth.  In it he examines the Obama’s finances based on the disclosures on their tax forms and makes some suggestions that can apply to others as well.

The view from 30,000 feet:

The Obamas earned $662,076 last year. Subtracting out their qualified plan deductions, itemized deductions, and exemptions, their taxable income was $335,026.

After being hit with the AMT, which is partially offset by a foreign tax credit, the Obamas paid $112,214 in Federal taxes. That equates to just over 18.4% of their adjusted gross income.

Getting into the details, he looks at their mortgage.

The Obamas paid $45,046 in mortgage interest in 2012, which appears from the disclosure statement to be at a 5.625% interest rate with Northern Trust. That suggests an outstanding principal balance of about $800,000.

On the other hand, the bulk of their investments are in Treasury notes. Based on the disclosures, I estimate they hold about $3 million in Treasury notes (also held by Northern Trust), yielding 0.71% if averaging a five-year maturity.

By selling some of those Treasuries and paying off the mortgage, they would effectively be getting five more percentage points on the amount; they would also be about $40,000 better off each year before taxes.  …

The Obamas would pay more in taxes but make much more after taxes — especially since they aren’t getting the full deduction anyway, thanks to the AMT. That’s more money going to the U.S. Treasury and more money for them; Northern Trust would be the loser.

Changing their asset allocation to better use their tax-loss carry forward.

 A good planner may also want to investigate the $115,516 tax-loss carry-forward in schedule D. While this could have come from many sources, these typically come when investors buy at the top of the market and then panic and sell after the plunge. But regardless of where it came from, it would take almost 40 years to utilize this loss carry-forward at the annual limit of $3,000 a year.

To increase the value from this loss by creating more taxable capital gains, the Obamas need to reverse their asset location. They currently own Treasuries in their taxable account and Vanguard S&P 500 index funds in their retirement accounts. By reversing the location, they continue to invest in U.S. capitalism, but get a much better chance of gains.

I would also suggest that rather than only invest in the large-cap companies of the S&P 500, they should consider a total U.S. stock index fund that would also invest in mid and small-cap companies — a move that, additionally, would provide some political benefit by showing the Obamas’ support for small businesses. (While I also believe in international investing, this might not sit as well politically.)

Their overall asset allocation also seems a bit skewed. While holding about $3 million in Treasuries, they have only about $400,000 in the stock index funds. Treasuries are unlikely to keep up with inflation, so taking a bit more risk is in order. With markets near an all-time high, perhaps they should consider dollar cost averaging.

Some of the Obama’s investment choices may be based on the political optics.  Presidential pensions and speaking fees after leaving office will insure that no President will have much to worry about financially.  However, the two issues addressed by Roth can well apply to millions of other people who make investment decisions that are not in their best interest.  Professional advice can help most people manage their finances better than they can on their own.

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How Currency Exposure Affects Returns

There is an ever increasing amount of interest by Americans in investing overseas.  When doing so it must be kept in mind that the return that one receives from overseas investments depends not just on the performance of the stocks or bonds of the firms in other countries, but also on the change in exchange rates between foreign currencies and the US dollar.

The following is an example from Monevater:

A simple example shows how currency risk affects your returns.

Let’s suppose you’re an American investor and you put $10,000 into a European stock market tracker.

Your investment is not hedged, and so you’re exposed to changes in the exchange rate between the dollar and the euro. That is, you’re exposed to currency risk.

Suppose over 12 months the European market and therefore your tracker goes up 20% in local euro terms:

  • If the dollar and the euro is at the same exchange rate after 12 months as when you made your investment, your holding is now worth $12,000. (i.e. $10,000 increased by 20%).
  • Say the dollar appreciated by 25% versus the euro over 12 months. Your holding would be worth $9,600 (12,000 / 1.25). i.e. Your euro position now buys fewer dollars.
  • Say the dollar depreciated by 25% versus the euro over 12 months. Your holding would be worth $16,000 (12,000 / 0.75). i.e. Your euro position now buys more dollars.

As you can see, currency risk can dramatically affect your returns, ranging from magnifying your gains to turning gains into losses in your own currency. The basic rule is:

  • When the foreign currency strengthens versus your own currency, your overall return goes up

  • When the foreign currency weakens versus your own currency, your overall return goes down

The bottom line is this: foreign investing is popular and can be profitable, but when doing so there is an added element of risk that investing in US securities does not have.  Leave it to the professionals.

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The Ultimate Trip?

Want an intimate dinner party for 100 in Giza, Egypt overlooking the pyramids?  And since you’ll be dining late, do you want the pyramids to be lighted until 2 a.m., three hours later than normal?   Join the club, the Abercrombie & Kent Lifestyle Club that is.

Abercrombie & Kent is known for luxurious travel.  For example we took the Orient Express – the same train that Agatha Christie made famous in her book “Murder on the Orient Express” – from Vienna to London.  The train cars had been painstakingly restored to their 1920s glory; the only thing missing was Hercule Poirot and a body.

It seems that the wealthy are looking for luxury travel experiences like New Year’s Eve helicopter excursion to behold the Northern Lights in Iceland and  a New Zealand golfing excursion that involved flying around on a private jet.

The cost for arranging trips like this ranges from alow of $325 to over $22,000.  That’s just for the planner, the trip is extra.  So if you have just inherited a fortune, sold your interest in a Silicon Valley start-up, or won the lottery and are interested, check it out here.  And if you can afford that kind of private planning, don’t overlook the opportunity to have your investments managed by our private boutique  investment firm: Korving & Company at 757-638-5490.

 

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When should I contribute to an IRA?

I realize that you have until April 15th (Tax Day) of the following year to make an IRA contribution, but why wait that long?  Paying yourself should be one of your first goals when planning your financial future.  That means the time to begin putting money aside is now … that is, if you don’t have a “Wayback Machine” and do it yesterday.  Waiting until the last minute means that you are wasting time, and time is the most critical factor in wealth accumulation for most people.  Why do you think that the average senior citizen has more money than the young person?   They have been accumulating it longer!

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How advisors get paid

Among Registered Investment Advisors (RIA) a shift is taking place.  An increasing number of RIA firms are beginning to charge on an hourly basis.

Why is this good for some investors?  Because it allows smaller clients to get the kind of professional investment advice that was once reserved for those with larger portfolios.  Most RIAs charge fees based on a percentage of client assets under management.  On that basis, the RIA could not afford to give the small client or the individual with only a 401(k) the kind of attention he or she deserved.  By charging hourly fees the RIA can afford to provide personal service and advice on a discreet basis.

Because of this flexibility, the RIA will become increasingly important to the small and/or beginning investor, helping build their portfolios until they grow enough to join the “big leagues.”

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“The Great Secret.”

Here’s a worthwhile article that combines some prfound philosophy with history.  Enjoy.

“The Great Secret” is how you have lived your life, how you have raised your family, how you have treated other people, what you gave back to society. In other words, you don’t have to wait until death to learn “The Great Secret.” If you did well by your fellow man, you don’t have to worry about the hereafter; it is already taken care of. But, it’s not the end, it’s just the beginning … for you see my friend lived “The Great Secret.”

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