WINTER Planning Guide. Protect what s yours with asset-protection strategies. Realize estate planning benefits while retaining control

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1 WINTER Planning Guide Protect what s yours with asset-protection strategies Realize estate planning benefits while retaining control You ve inherited a large sum of money now what? The Charitable Lead Annuity Trust

2 The Year Ahead There is nothing like the beginning of a new year to bring a sense of a fresh start. It also presents the opportunity to reflect on what it is that has gotten us to this point. The one word that I feel best represents Lenox s year in 2014 is momentum. Throughout the year and across the country we have gained tremendous momentum by enriching an increasing number of clients lives and positively impacting the communities we live. We d like to create positive momentum for you in the upcoming year by giving you some considerations for your financial plan. The enclosed, 2015 Planning Guide, describes topics ranging from strategic, like setting an annual savings goal and reviewing your investment goals, to tactical, like determining the allocation of cash bonuses and preparations for tax filings. As you review the dozen topics we ve laid out for you, I m sure you ll have some questions. Feel free to call us. Our focus is on you and creating momentum towards your goals. All the best, Michael A. Book, CLU, ChFC, CLTC Managing Partner 2 WEALTH MANAGEMENT ADVISOR

3 2015 Planning Guide No matter what the year has in store for you, there are certain financial strategies you should consider No matter what the year has in store for you, there are certain financial strategies you should consider. We could have written pages on each of the items listed below, but giving you the information to handle the issue yourself isn t our style. Instead, we wanted to prepare you and give you time to think about some of the topics we can assist you with. If you have any questions as you ve gone through this list, please contact your Lenox Advisor. YOUR PORTFOLIO Asset Allocation* At the beginning of the year, we suggest a review of your investment goals to update any changes to your investment risk tolerance, and allocation of any cash bonus. Given the strong U.S. market returns in 2014, it may make sense to recognize some gains and redeploy those funds to underperforming asset classes. And as always, you should review the tax efficiency of your current allocation particularly in light of the higher tax rates that came into effect in TAX STRATEGIES Tax Documents 1 - To prepare for your tax return filings, we suggest you start gathering your documentation now. In addition to the expense reports listed in the Expense Management section below, compile your Forms W-2, K-1 and 1099 as well as charitable contributions documentation, and any real estate and mortgage documentation. Once you ve gathered the information you should scan it, preserve digital copies, and provide it to your tax preparer. Trust Funding and Annual Exclusion Gifts - You do not need to wait until December to fund your Trusts or to make your annual gifts. The annual exclusion for 2015 remains at $14,000. The limit for exclusion gifts to a noncitizen spouse has increased from $145,000 to $147,000 for Estate Taxes The Estate, Gift, and Generation-Skipping Transfer Tax exemption has increased to $5,430,000 per person for The top Federal tax rate remains at 40%. We should discuss any potential State estate tax law changes based upon where you reside. If you have not completed an estate plan, or if your plan has not been reviewed or updated over the last five years, we strongly encourage you to make this a priority for Advanced Planning Strategies Family Limited Partnerships, Grantor Retained Annuity Trusts, and other advanced estate planning strategies remain viable. The hurdle rate on a GRAT in December 2014 was 2% - this is 20 basis points lower than this time last year, and still quite attractive for planning purposes. The Nanny Tax - A number of forces are combining to make household employment compliance a more important issue than ever before. If your family employs WEALTH MANAGEMENT ADVISOR 3

4 a Nanny, Housekeeper, Senior Caregiver / Private Nurse, or Personal Assistant for example, and you pay them $1,900 or more in a calendar year, you may have several major employment tax and employment law responsibilities. Some examples include: Withholding payroll taxes from employee s wages and paying employer portion of taxes Filing state and federal tax returns and remitting both employer and employee taxes throughout the year Providing your employee with a W-2 form and making related filings with the IRS Providing a written Wage Notice or contract at time of hire and detailed pay stubs Providing Workers Compensation and Disability insurance The good news is that tax breaks can offset at least some portion of the employer tax cost. RETIREMENT PLANNING Retirement Plans Keep in mind the following retirement plan deferral limits for 2015: 401(k) Plans The contribution limit has increased from $17,500 to $18,000. The catch-up contribution limit for those ages 50 and over has increased from $5,500 to $6,000. Note that with many 401(k) plans, the catch-up contribution is an active election which must be made annually. Also, if your employer matches your 401(k) contribution be sure you are maximizing the benefit. IRA Accounts (Traditional and Roth) - The contribution limit remains at $5,500. The catch-up contribution limit for those ages 50 and over remains at $1,000. Defined Contribution Plans The contribution limits have increased from $52,000 to $53,000 or 100% of compensation, whichever is smaller. Roth Plans You can still convert any Traditional IRA to a Roth IRA with no limits on income. Many 401(k) Plans also now offer the ability to convert Traditional 401(k) Plans to Roth 401(k) Plans during continued employment. When it comes to Roth conversions, please note: Converted assets are taxed as ordinary income in the year the conversion is completed. In exchange for paying taxes today, you create an asset which will provide tax-free retirement income; avoid Required Minimum Distribution rules; and provide an income tax free legacy to heirs who can stretch the account out over their longer life expectancies. If a conversion makes sense for you, consider doing it early in the tax year, thereby allowing for a prolonged free look period to see if you would have been better off not converting at all. Individuals can re-characterize a Roth IRA conversion as late as the extension deadline for filing form 1040 on October 15 of the year following the year of conversion. Important to note this re-characterization is not available for Roth 401(k) conversions. Retirement Plan Distributions Review any required 2015 distributions on IRA or Inherited IRA accounts to ensure your tax withholding is appropriate. Also important to note the Qualified Charitable Distribution rule, a tax-free direct distribution from your IRA to a charity, was extended through December OTHER PLANNING CONSIDERATIONS Expense Management In January, you should start receiving year-end statements from your banks and credit cards. These statements provide valuable insights. With this information, you should review the living expense numbers factored into your retirement plan model. This will be helpful in managing and evaluating your expenses. Annual Savings While it is important to understand your expense structure, it is equally as important to set and track savings goals for the year. Once we have an understanding of those goals, we can discuss creating a savings strategy across your portfolio. Credit Report - We encourage you to review your credit report and that of your children s, annually, to catch any reporting errors or fraudulent activities. For your free annual credit report, go to or call A more comprehensive report (as well as your credit score) is available for a fee at You should also review your children s credit reports. The process is straightforward for children age 18 and over, and somewhat more complicated for minors. Your children s credit history will be very important to them as they become independent. Working with them now to establish good credit could go a long way towards their future financial success. *Asset allocation does not guarantee a profit or protect against loss in declining markets. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk. 1 The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel. MML Investors Services, LLC does not provide tax or legal services. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC Fifth Avenue, 14th Floor, New York, NY 10036, Fee based financial planning services are offered through Lenox Advisors, Inc. a registered investment advisory firm, and are not offered or sponsored by MML Investors Services, LLC. Lenox Advisors, Inc. is not a subsidiary or affiliate of MML Investors Services, LLC. Lenox Advisors, Inc., is a wholly owned subsidiary of National Financial Partners Corp. (NFP). NFP is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. CRN WEALTH MANAGEMENT ADVISOR

5 Protect what s yours with asset-protection strategies A wealth plan and asset protection should go hand in hand. To put it bluntly, if you lose your assets, you won t need your wealth plan. Therefore, incorporating assetprotection measures into your wealth plan is important. Let s take a look at a few of the primary strategies to consider. KEEPING INSURANCE COVERAGE UP TO DATE The first line of defense in your assetprotection strategy is having complete insurance coverage. Liability insurance is a critical front-line protection for your assets. You certainly already have such coverage as part of your homeowners and auto policies. But is your coverage sufficient? When determining how much coverage you need, consider the property s or vehicle s value and the likelihood of a liability-generating event. Consider purchasing an umbrella policy that can provide supplemental coverage at a smaller cost than purchasing additional coverage for each property or vehicle. Because a serious accident or illness can quickly deplete your assets, adequate health insurance is key to any asset-protection plan. Disability Income insurance, while frequently overlooked, can help protect a portion of your income in the event of extended health challenges. Life insurance proceeds can help preserve wealth for your heirs if estate taxes are due at your death. If you re a business owner, life insurance can also supply working capital for the continuation of your business and provide wealth equalization for heirs who aren t involved in your company. USING RETIREMENT ACCOUNTS TO SHIELD ASSETS With proper planning, Employee Retirement Income Security Act (ERISA) provisions can be implemented to keep creditors from delving into your retirement fund. Examples of plans covered by ERISA include qualified profit-sharing plans, defined benefit plans and 401(k)s. Contributing to such plans may be done primarily to fund your retirement in a tax-efficient manner, but asset protection is an important added benefit. If yours is a non-erisa plan, creditors can access plan assets unless a state law prevents them from doing so. IRAs and qualified plans in which the only participant is the owner (or also the owner s spouse) are examples of non-erisa plans. Check if your state provides IRAs with asset-protection capabilities. REDUCING RISK BY DIVIDING BUSINESS INTERESTS INTO ENTITIES If you own a business, consider dividing it into separate entities to reduce risk. However, be sure to balance the benefits of forming separate entities with the complexity of setting up each entity, the costs involved and the burden of ongoing administration. How far you should go in segregating your business s assets depends on the level of your litigation risk and the value of the assets you could lose in a lawsuit. Owners who have strong family relationships should consider divvying up ownership among various family members. If your company is structured as a corporation, whoever holds more than 50% of the voting stock has control. So, transferring voting stock to family members through direct gifts may be a viable asset-protection strategy. In addition to preventing a creditor from taking control of the corporation, dividing corporate stock in this way can provide substantial income and estate tax savings. Limited liability companies (LLCs) and limited partnerships (LPs) also provide valuable asset-protection opportunities. Although LLCs and LPs are similar, they have distinct differences. In an LLC, all owners receive the benefit of liability protection from business debts and claims, and none are excluded from management functions. In an LP, on the other hand, the general partners are personally liable for business debts and the limited partners are excluded from managing the business. DRAFTING TRUSTS Certain trusts can provide another line of defense in asset protection. Although revocable grantor trusts (often referred to as living trusts ) provide no legal protection from creditors, irrevocable trusts generally offer some protection. WEALTH MANAGEMENT ADVISOR 5

6 When you place property in an irrevocable trust for the benefit of your spouse, children, grandchildren or other heirs, future creditors generally can reach the assets only by convincing a court that the transfer was made to intentionally hinder, delay or defraud current or potential creditors of the grantor, and that you became insolvent as a result of the transfers to the trust. The downside of such trusts is that you no longer have access to the assets in the trust. If you ll need access to the trust assets, an alternative is to set up an asset-protection trust. This is typically established in an offshore jurisdiction (or one of the handful of states that allow such a trust) to insulate assets against creditor attack. IS YOUR WEALTH PLAN COMPLETE? Bottom line: Unless your wealth plan includes asset-protection measures, it s incomplete. Discuss your situation with your Lenox Advisor to help determine which strategies are best. Realize estate planning benefits while retaining control After working hard your entire life to build your net worth, it s normal to not want to give up control of your property, as is required for certain estate and asset protection strategies. A relatively new trust the beneficiary defective inheritor s trust (BDIT) provides powerful estate tax planning benefits while allowing you to retain control of your property. ABCS OF A BDIT The BDIT strategy is based on the principle that, unlike the person who establishes a trust (the grantor), a trust beneficiary can receive substantial rights in a trust without causing the assets to be included in his or her taxable estate. A BDIT is set up by a third party typically, a parent or grandparent who names you as beneficiary and trustee. As trustee, you manage the trust assets and exercise certain other rights over the trust. To ensure the desired tax treatment, however, the trust should also name an independent trustee to make decisions regarding discretionary distributions, tax issues and trust-owned insurance on your life. Usually, BDITs EXERCISE YOUR RIGHTS OVER BDIT ASSETS Like other third-party trusts, a properly structured beneficiary defective inheritor s trust (BDIT) will shield assets against claims by your creditors. In addition, you can exercise a variety of rights over the trust assets without triggering estate taxes. These include the right to: Manage trust assets, Receive trust income, Withdraw assets from the trust (limited to an ascertainable standard, such as amounts needed for your health, education, maintenance or support ), Receive discretionary distributions, in any amount, as determined by an independent trustee, Remove and replace the independent trustee, Use trust assets (such as a home) rent-free, and Rewrite certain provisions of the trust by exercising a special power of appointment to distribute the trust assets to anyone other than yourself, your estate or your creditors. are structured as dynasty trusts, so the trust can continue to benefit your children, grandchildren and future generations without triggering gift, estate or generation-skipping transfer tax liability. For this strategy to work, the BDIT must have economic substance. So it s critical for the third-party grantor to seed the trust with his or her own funds. If you give the funds to the third party, the IRS likely will treat you as the trust s creator and the BDIT s benefits will be lost. If you sell assets to the BDIT in exchange for a note, an oft-cited rule of thumb says that the seed money should be at least 10% of the purchase price. If the grantor lacks the resources to contribute that much, many experts believe that having a creditworthy third party (such as your spouse) personally guarantee the note is sufficient to lend the transaction economic substance. CREATING THE DEFECT A BDIT is structured to be intentionally income tax defective. (The preferred method of creating the 6 WEALTH MANAGEMENT ADVISOR

7 defect is to grant you, as beneficiary, carefully designed lapsing Crummey withdrawal rights with respect to the entire trust contribution.) This accomplishes two important objectives: 1. It ensures that you re treated as grantor for income tax purposes. By paying the trust s income taxes, you enable the trust to grow taxfree and you reduce the size of your estate. 2. It allows you to enter into tax-free transactions with the trust. The second item makes it possible to leverage the BDIT to produce significant estate planning benefits. It allows you to sell appreciating, discountable assets to the trust taxfree, thus removing those assets from your estate and allowing you and your heirs to enjoy all future growth transfer-tax-free. To ensure the transaction isn t treated as a disguised gift, it s critical to sell the assets for fair market value and to ensure that the interest rate and other terms of the note are comparable to those in arm s-length transactions. PROFESSIONAL HELP REQUIRED As with all sophisticated estate planning strategies, the devil is in the details of the planning and execution. If your BDIT is incorrectly set up, you could be in for a surprise from the IRS. An estate planning attorney should be the person who drafts the trust. You ve inherited a large sum of money now what? Consider this fact: Nearly $30 trillion will pass from one generation to the next during the next 30 years, according to a recent study by Accenture. Could you be one of those coming into a significant inheritance? And, if so, do you know how best to handle the wealth? If a family member bequeaths a large sum to you, consider depositing it in a liquid account while you mull your options. Because FDIC insurance limits for interest-bearing bank accounts are $250,000 per depositor at each financial institution, you may need to spread the money among multiple banks to protect yourself. As you consider ways to spend and invest your inheritance, consult your Lenox Advisor. Why? A large influx of cash can greatly alter your financial situation and thus the strategies that are appropriate for you. For example, you and your Advisor may decide to change your focus from capital appreciation to capital preservation and income. Before getting too excited about the size of your inheritance, don t forget about Uncle Sam. If you re inheriting a large estate, federal and state estate taxes might take a big bite. But the tax news isn t all bad. If you re inheriting securities, you can benefit from the step up in basis rule: Your tax basis in the shares will be based on their value on the day you inherit them. So if you then sell the shares, you won t owe income tax on any capital gains earned while your loved one held them. Finally, if you have minor children, consider creating trusts to provide for them in the event of your untimely death. You ll potentially gain more peace of mind that their finances will be managed by a competent financial professional or trusted family friend. The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel. MML Investors Services, LLC does not provide tax or legal services. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC, 530 Fifth Avenue, 14th Floor, New York, NY 10036, Fee based financial planning services are offered through Lenox Advisors, Inc., a registered Investment Advisory Firm, and are not offered or sponsored by MML Investors Services, LLC. Lenox Advisors, Inc. is not a subsidiary of or affiliated with MML Investors Services, LLC. Lenox Advisors, Inc. is a wholly owned subsidiary of National Financial Partners Corp. (NFP). NFP is not an affiliate of subsidiary of MML Investors Services, LLC. The views and opinions expressed are those of the author and may not accurately reflect those of MML Investors Services, or its affiliated companies. CM93 CRN WEALTH MANAGEMENT ADVISOR 7

8 The Charitable Lead Annuity Trust By: Amy K. Wilfert, Partner, Day Pitney LLP A Charitable Lead Annuity Trust ( CLAT ) is an advantageous way for a donor to satisfy his or her philanthropic goals while preserving wealth for non-charitable beneficiaries. THE STRUCTURE: A donor irrevocably transfers property to a CLAT for a particular term. During the term, the lead interest is paid to one or more charities annually. At the end of the term, any remaining property passes to noncharitable beneficiaries free of transfer tax. CREATION OF A CLAT: The annual payments to charity are based on the IRS s assumed rate of return for the month when the CLAT is funded (or either of the two prior months) and the length of the term. The initial funding can be structured to provide annual payments to charity equal to what the donor normally contributes to charity each year. Alternatively, the payments can be backloaded over the term (each year s payment increases by 120%). Backloading leaves more property in the trust over the term to generate appreciation, which is better for the noncharitable beneficiaries, but does not create a constant stream of payments for the charity. The following chart illustrates a CLAT that is initially funded with $10,000,000 for a 20-year lead term, using a rate of 1.2%, backloading of 20%, and a remainder with an actuarial value of zero: In this scenario, the charity receives $64,400 in the first year and $77,280 (i.e., 120% of the first year s payment) in the second year. The payments increase annually through year twenty when the charity receives its last annuity in the amount of $2,057,464. AT THE END OF THE TERM Any appreciation in excess of the required payments to charity passes tax-free to non-charitable beneficiaries. The amount passing to noncharitable beneficiaries will depend on actual investment returns generated by the CLAT over the term. 1 This chart illustrates the amount passing to non-charitable beneficiaries at the end of the term assuming various rates of return, on the above assumptions but reflecting annuity payments both with and without backloading: TAX CHARACTERISTICS If the CLAT is zeroed-out (meaning that the actuarial value of the payments to charity creates a remainder interest with a value of zero) there is no taxable gift on property passing to non-charitable beneficiaries 2 at the end of the term. The property contributed to the trust and appreciation on that property are not subject to estate tax in the donor s estate. For income taxes, if the trust is a grantor trust, the donor may take an immediate income tax charitable deduction for the entire amount contributed to the trust (subject to certain limitations). Over the term, the donor will pay the income tax on all trust income (with no deduction for amounts paid to charity each year). If the donor does not survive the trust term, there is recapture of a portion of the income tax deduction. For more information, please visit tax-exempt-organizations-andcharitable-giving/. We are required under IRS Circular 230 to include the following: Any tax advice provided herein (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on any taxpayer. This communication is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This communication may be deemed advertising under applicable state laws. Prior results do not guarantee a similar outcome. 1 Market volatility can significantly affect the actual returns generated, and hence the amounts passing to remaindermen, especially over a long lead term. 2 Including grandchildren or more remote descendants among the remaindermen requires careful analysis, because special rules applicable only to CLATs restrict the leveraging of the exemption from generation-skipping transfer tax. The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. We are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. The views expressed are those of Day Pitney LLP and are not necessarily those of Lenox Advisors or MML Investors Services, LLC. 8 WEALTH MANAGEMENT ADVISOR