Transfer on Death (TOD) Registration By Tish Michelson

The Uniform TOD Security Registration Act provides non-probate transfers of specifically registered investment securities from owner to named beneficiaries at the owner’s death. The letters T.O.D. stand for “transfer on death” signaling that the investment or account is to be re-registered on request after the owner’s death in the name of the beneficiary.

State law, rather than federal law, governs the way securities may be registered in the names of their owners. Most states (48 out of 50) and the District of Columbia and US Virgin Islands, have adopted the Uniform TOD Security Registration Act, although some have modified it. In addition, brokerage firms may decide whether or not to offer TOD registration.

Transfer on Death (TOD) registration allows you to pass the securities you own directly to another person or entity (the “TOD beneficiary”) upon your death without having to go through probate. By setting up your account or having your securities registered this way, the executor or administrator of your estate will not have to take any action to ensure that your securities transfer to whomever you have designated. The TOD beneficiary will have to re-register the security or account in their own name once the owner has died. The re-registration typically involves sending a copy of the death certificate and completing an application.

The TOD registration enables avoidance of probate without the risk of problems caused by joint and survivor security titles. Control of an investment registered in TOD beneficiary form, including the right to change or cancel the death beneficiary, lies solely with the owner.

What are Ishares? by Karla Hopkins

iShares® are a brand of exchange-traded fund (ETF). iShares® are the largest ETF provider in terms of both number of products and amount of assets. Each iShares® ETF tracks a different stock market or bond index. They are designed to emulate the performance that specific index. iShares ® have existed since the 1990s; they were created by Barclay’s Global Investors and are currently owned by the BlackRock Investment Company. iShares ® are intended to be a trading option for investors interested in tracking benchmarks of a type of market as opposed to investing in an individual corporation via stock shares or group of corporations via mutual fund shares.

ETFs are funds that trade like stocks, but contain multiple assets similar to mutual funds. Unlike mutual funds which are bought and sold at a set price once per day, ETFs trade at varying prices throughout the day. Also, iShares® disclose the contents of their portfolios daily, rather than quarterly like mutual funds, which allows investors a greater degree of transparency.

The benefits of iShares® include greater diversification, greater options, lower expense ratios, tax efficiency and increased liquidity. Diversification is intrinsic to each iShare®. For example, if you buy the S&P 500 Index Fund ETF – that particular iShare® owns fractional shares of all 500 companies in the S&P 500 Index. You now have an investment whose performance mirrors that specific index – without making 500 purchases and paying 500 commissions. There are numerous categories of iShares® in which to invest such as: growth, value, industry, sector, international, real estate, fixed income and precious metals. The expense ratios of iShares® are between .09% and .75% - which are significantly lower than mutual fund ratios. There is a tax efficiency built into iShares because they are built on specific indices (such as the Dow Jones Industrial Average) and turnover of the investments comprising the iShare® is virtually non-existent – therefore there are no capital gain distributions with their corresponding taxes. Because they are ETFs, iShares® can be bought and sold throughout the day. You can place market, stop, and limit orders, purchase on margin and sell the security short. These options allow iShares® to offer even more liquidity and be even more flexible than regular index funds.

iShares® - and ETFs in general – should be considered a good supplement to mutual funds, money markets, bonds and CDs as the backbone of a diverse portfolio. While unlikely to skyrocket in value, it is also rare that their value will plummet.

After Our Fall Over the Fiscal Cliff: by Karla Hopkins

2012 was a year of negation and election. Many of us were watching with trepidation for our congressional leaders to come to agreement on the terms of our federal budget and especially changes that would impact our tax liabilities in 2012 and future. Now that we have gone over the dreaded fiscal cliff: what does the landscape look like?

Here are a few highlights on the changes which will be important for you to consider for 2013:

• A 3.8% additional tax on the lower of net investment income or the amount of modified adjusted gross income over the $250,000/$200,000 threshold. Net investment income includes, interest, dividends, rents, and gains.

• Additional .9% Medicare Tax for employees (not employers) on compensation over a $250,000/$200,000 threshold. Because the threshold amounts are based on filing status and combined wages for a joint return, not all employees will have the correct amount of withholdings.

• The top federal tax rate will return to 39.6% for a married couple with in excess of $450,000 of income and a single taxpayer with $400,000 of income.

• Capital gain rates will return to 20% based on a threshold again of $450,000/$400,000.

• Phase outs of personal exemptions and itemized deductions will return for taxpayers over a threshold of $300,000/$250,000 in income.

• The payroll tax holiday has ended. Employees' FICA withholdings will return to a 6.2% rate from the reduced 2012 rate of 4.2%.

• Personal tax credits including the $1,000 child tax credit and advanced opportunity college tax credit are extended.

• The elective contribution to a 401(K) plan has been increased to $17,500.

• The elective contribution to an IRA account has been increased to $5,500.

Because many of these changes came so late in the year (and are still being worked out in Washington), it will be critical in 2013 for all taxpayers to play an active role in their tax planning during the year. Follow our newsletters and blogs for the most up-to-date information and as always, contact our office with questions and we will gladly assist you with your tax planning.

Social Security Ideas for Married Couples

The decision regarding what age to begin receiving Social Security benefits can be complicated. The decision is further complicated if you are married, because spouses’ ages, estimated benefit entitlements, and life expectancies should factor into the decision. As each individual approaches retirement age, they as a couple have a unique set of fiscal needs and goals. There are several different scenarios that should be considered before a decision is made. Below are examples of two possible courses of action.

File and suspend
Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker's benefit) or as much as 50% of what his or her spouse is entitled to receive at full retirement age (a spousal benefit). But, according to Social Security rules, a husband or wife who is eligible to file for spousal benefits based on his or her spouse's record cannot do so until his or her spouse begins collecting retirement benefits. There is an exception--someone who has reached full retirement age but who does not want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

The file-and-suspend strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse's earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways: 1) the spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing his or her retirement benefit by as much as 32%; 2) the spouse with lower earnings can immediately claim a higher (spousal) benefit; and 3) any survivor's benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death.

File for one benefit, then the other
Another strategy that can be used to increase household income for retirees is to have one spouse file for spousal benefits first, and then switch to his or her own higher retirement benefit later.

Once a spouse reaches full retirement age and is eligible for a spousal benefit based on his or her spouse's earnings record and a retirement benefit based on his or her own earnings record, he or she can choose to file a restricted application for spousal benefits, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits. This may help to maximize survivor's income as well as retirement income, because the surviving spouse will be eligible for the greater of his or her own benefit or 100% of the spouse's benefit.

This strategy might be used when both spouses have substantial earnings but do not want to postpone applying for benefits altogether. Louis files for his Social Security retirement benefit of $2,400 per month at age 66 (based on his own earnings record), but his wife Sue wants to wait until age 70 to file. At age 66 (her full retirement age) Sue applies for spousal benefits based on Louis's earnings record (Louis has already filed for benefits) and receives 50% of Louis's benefit amount ($1,200 per month). She then delays applying for benefits based on her own earnings record ($2,100 per month at full retirement age) so that she can earn delayed retirement credits. At age 70, Sue switches from collecting a spousal benefit to her own larger worker's retirement benefit of $2,772 per month (32% higher than at age 66). This not only increases Louis and Sue household income but also enables Louis to receive a larger survivor's benefit in the event of Sue's death.

Every couple’s situation is unique and various scenarios should be considered before the decision to begin receiving Social Security benefits is made. Contacting the Social Security Administration during your decision process may be beneficial. The website is www.socialsecurity.gov.

Applying the Tax Basis and At Risk Rules to Partners by Karla Hopkins

Individuals who invest in partnerships need to be aware of rules that limit the ability of the partner to deduct losses. Individual partners who have been allocated a loss must satisfy three separate loss limitations before the loss can be used. The loss limitations, in the order in which they apply are, Tax Basis limitations, At Risk limitations, and Passive Loss limitations. Here we will address the first two.

A partner’s share of losses is limited to his Adjusted Tax Basis at the end of the year. In general terms, Basis includes money contributed, the adjusted basis of property contributed plus taxable income and tax exempt income allocated to him. These amounts are reduced by losses, nondeductible expenses and distributions allocated to him. A partner’s Basis is further adjusted by liabilities of the partnership that he is liable for. Losses that exceed the partner’s basis are suspended to a future year when Basis may be restored by future income or contributions to the partnership.

The second limitation is called At Risk. The amount At Risk includes the amount of money and adjusted basis of property contributed, amounts borrowed with respect to the activity to the extent the partner is personally liable or has pledged property as security for the debt and amounts borrowed by the partnership for holding real property for which no person is personally liable for repayment. The amount At Risk is also increased and decreased by the income and deductions of the partnership each year. Unlike basis, At Risk can go negative from items other than losses. The consequences of a negative At Risk amount are potential for recapture of previously deducted losses as income in the year the amount At Risk is negative.

When a partnership is initially funded with debt and incurs losses; the debt, while providing Tax Basis for deducting the losses, may limit the losses due to the At Risk rules. Losses suspended due to the At Risk rules may later become deductible in the year under the At Risk rules even when the Tax Basis has already been reduced.

When a partner’s Tax and At Risk Basis have been substantially diminished, losses allocated to the partner may not be deductible, and distributions to the partner may result in income recognition. These limitations are calculated each year and it is important for a shareholder to understand them and to maintain accurate and current records of their Basis. The partnership does not always provide the information to its shareholders. The calculation is especially important in the year that the partnership interest is terminated or sold.

A partner may avoid the Tax Basis and At Risk consequences by being aware of his tax basis and amount at risk and by taking measures to increase these amounts prior to the anticipated event.

The above is meant to be only a brief and general overview of the Tax Basis and AT Risk rules of partnerships. To calculate your basis requires a detailed evaluation of the partnership agreement and other relevant partnership elections.

Did you ever wonder what the total federal and state taxes you pay are?

The Total Tax Insights calculator using this link to an AICPA tool can make it easier to learn what you should know about what you’re paying in taxes. The result while approximate may surprise you. It might make you reconsider where to live and what kind of car to drive or whether you should change jobs or shop differently. Information is knowledge and knowledge is key for everyone's financial planning. It can help you work toward better tax and financial planning and decision-making. Follow this link to get started.
http://www.totaltaxinsights.org/Calculator

Thanksgiving: A truly American Holiday by Carolyn Flaherty

Thanksgiving resonates as a truly American holiday. Although not officially a holiday until President Lincoln declared it so in 1863, the tradition of Thanksgiving dates all the way back to 1621 when the Mayflower Pilgrims held a three day harvest festival to celebrate that year’s bountiful crops. After a truly devastating winter when the settlers lost nearly half their population, they had great reason to celebrate their survival, their plentiful crops and the help they garnered from Native Americans.

The Pilgrim settlers came to America seeking freedom and a better way of life. Indeed, historically immigrants to America come seeking freedom and prosperity. Imagine leaving everything you know, your family and friends and setting out to unknown, undeveloped lands. To embark on such a journey requires a great deal of courage, strength, faith, and confidence:  an overall quality I refer to as “true grit.”

To American stereotypes that label us loud, large and abrasive: I say,” Yes, we are gritty.” We are a nation built by those who were told they couldn't but knew they could. We are a nation of survivors. When I contemplate early Americans, those who built this great nation: I am proud of the entrepreneurial spirit upon which America evolved from the belief of freedom and prosperity to the reality of both.

The economy may be difficult when compared to recent decades. However, when you compare our economy and average wealth to that of the world, we have much to be thankful for. Times may feel uncertain or even volatile. You may be under great personal or professional stress. Yet, even on the worst day in the United States of America, there is still freedom and the potential for future prosperity. Therefore, today I am thankful for potential and for the inspiring people who have fought for, built and defended that potential and this great nation.

We wish you a very Happy Thanksgiving from Pavento, Ratcliffe, Renzi & Company. As you take pause today to share a meal with family and friends, we hope you will also reflect on and celebrate the things you are thankful for.