WEALTH MANAGEMENT ADVISOR

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1 WEALTH MANAGEMENT ADVISOR september / october 2016 ABLE accounts Families of disabled children have another estate planning option 6 classic techniques for protecting your assets Plan now to reduce your NIIT exposure Buy low, sell high A primer on value investing Sullivan Bille Group SULLIVAN BILLE, P.C. WEALTH MANAGEMENT ADVISORS, LLC 600 Clark Road, 4th Floor, Tewksbury, MA Franklin Street, 26th Floor, Boston, MA Main Street, Salem, NH Call us at or visit us at Member of: American Institute of Certified Public Accountants Massachusetts & New Hampshire Society of Certified Public Accountants National Association of Personal Financial Advisors Financial Planning Association

2 6 classic techniques for protecting your assets If your professional, business or other activities expose you to potential financial liability, asset protection should be a key component of your wealth-planning efforts. After all, no matter how successful you are at building wealth, if you don t protect your assets a large portion could be lost to a lawsuit or an unreasonable creditor s claim. 2 Good defense Everyone s situation is different, but the following are six asset protection techniques that have benefited many higher-net-worth individuals: 1. Outright gifts. Giving assets to your spouse, children or other family members is one of the simplest and most effective ways to protect those assets from your creditors. The downside is that you ll lose control over the assets and any economic benefits associated with them. 2. Tenancy by the entirety. If it s authorized in your state, you and your spouse should hold title to your principal residence or other eligible property as tenants by the entirety (a special type of joint tenancy). This form of ownership insulates assets against your or your spouse s individual creditors. It doesn t, however, protect you from joint liabilities. 3. Retirement plans. Qualified retirement plans such as pension, profit-sharing or 401(k) plans are surprisingly effective asset protection vehicles. Qualified plans generally are protected against creditors claims, both inside and outside bankruptcy. IRAs offer more limited protection. In bankruptcy, they re exempt from creditors claims up to a specified threshold: currently, $1,283,025. (However, this limit doesn t apply to rollovers from qualified plans to an IRA.) Outside bankruptcy, the level of creditor protection varies from state to state. 4. Irrevocable trusts. By including spendthrift provisions in a trust, you can protect the assets against claims by your beneficiaries creditors. These provisions prohibit beneficiaries from selling or assigning their interests in the trust (either voluntarily or involuntarily). You can also place the trust beyond the reach of your creditors, so long as you relinquish any interest in the assets. If, on the other hand, the trust is self-settled that is, if you name yourself as a beneficiary then the assets generally aren t protected against your creditors, except as described below. 5. Domestic asset protection trusts (DAPTs). Permitted in several states, these are self-settled, irrevocable spendthrift trusts that provide

3 protection against your creditors even if you re a discretionary beneficiary. To use a DAPT, you don t necessarily have to live in a state with a DAPT law. But you ll need to locate some or all of the trust assets in one of those states and use a local financial institution to administer the trust. The level of creditor protection varies by state. The main disadvantage of DAPTs is uncertainty over whether they re enforceable in court, particularly when the grantor is a nonresident. A potentially less risky option is a hybrid DAPT, which is initially established for the benefit of your children or other third parties. Hybrid DAPTs enable your trustee to add you as a discretionary beneficiary later. 6. Offshore trusts. If you want an even higher level of protection, consider offshore trusts, which are similar to DAPTs but are established in foreign countries with favorable asset protection laws. Typically, they re irrevocable for a specified term, enabling you to retrieve the assets down the road when your risk may be lower. An ideal jurisdiction for an offshore trust is one that doesn t recognize judgments from U.S. courts and whose laws place various administrative obstacles in the way of U.S. creditors attempting to collect debts there. Offshore trusts have a shady reputation as vehicles designed to hide assets or evade taxes. But when used correctly, they offer legitimate protection against unreasonable or excessive claims. If you establish an offshore trust or foreign account, you ll need to file information returns. (See Don t overlook reporting requirements at the top of the page.) Don t overlook reporting requirements If you set up an offshore asset protection trust, you must file information returns for foreign assets. Failure to comply can result in severe monetary and even criminal penalties. Compliance includes filing the Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network if the aggregate value of your foreign accounts, including trusts, exceeds $10,000 at any time during the year. You ll also need to file Form 8938 with the IRS if your aggregate balance of certain foreign assets exceeds a specified threshold. For 2016, the threshold is $50,000 on the last day of the year or $75,000 at any time during the year ($100,000 or $150,000, respectively, for joint filers). Higher thresholds apply if you live abroad. Legitimate tool It s important to note that asset protection planning is meant to protect you against unanticipated future claims. It provides you with legitimate methods of setting aside wealth for your heirs, deterring litigants and providing creditors with an incentive to settle. Asset protection planning is not a tool for evading taxes or other obligations, hiding assets, or defrauding creditors. Indeed, fraudulent conveyance laws prohibit you from transferring assets with the intent to hinder, delay or defraud existing creditors or foreseeable future creditors. To ensure you don t step over any lines, always work with reputable financial and legal advisors. The sooner the better These six tips are only a few of the techniques available to protect and preserve wealth. Whichever strategies you choose, it s critical to implement them as early as possible. If you wait until creditor claims are imminent, it ll likely be too late. n 3

4 ABLE accounts Families of disabled children have another estate planning option For many years, the most effective financial planning tool for parents of disabled children was the special needs trust (SNT). This type of trust provides resources for the care of disabled children while preserving their eligibility for means-tested government benefits, such as Medicaid and Supplemental Security Income (SSI). Recently, however, a new option was made available to families: the ABLE account. The Achieving a Better Life Experience (ABLE) Act was signed into law in It created Internal Revenue Code Section 529A, authorizing states to offer tax-advantaged savings accounts for the blind and severely disabled. How do ABLE accounts compare with SNTs? It depends on what you and your child need. Tax-free earnings and withdrawals ABLE accounts are generally similar to 529 plans. Family members and others can make nondeductible cash contributions to a qualified beneficiary s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount ($14,000 in 2016). To qualify, a beneficiary must have become blind or disabled before age 26. The account grows tax-free, and earnings may be withdrawn tax-free to pay qualified disability expenses. These include: n Health care, n Education and employment training, n Housing, n Transportation, n Assistive technology, n Personal support services, n Financial management, and n Legal expenses. ABLE accounts typically don t affect a beneficiary s eligibility for Medicaid and SSI which limit a recipient s countable assets to $2,000 with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account s balance grows beyond $102,000, the beneficiary s eligibility for SSI is suspended until the balance is brought below that threshold. Be aware that, unlike SNTs, ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Pros and cons Both ABLE accounts and SNTs have advantages and disadvantages, so you ll want to carefully review the features of each option with your tax or accounting professional. For example, an ABLE account s earnings and qualified distributions from the account are tax-free, while an SNT s earnings are taxable. On the other hand, ABLE accounts may be used to pay only specified types of expenses, and otherwise may be subject to income tax and a 10% penalty. SNTs may be used for any expenses the government doesn t pay for, including travel, recreation and entertainment costs. 4

5 Here are other ways they differ: Contributions. Annual contributions to ABLE accounts currently are limited to $14,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions in excess of $14,000 per year may be subject to gift tax. Flexibility. Contributions to ABLE accounts are limited to cash, and beneficiaries (or their representatives) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee preferably an experienced professional fiduciary has complete flexibility to direct the trust s investments. Benefit reimbursement. If an ABLE account beneficiary dies before the account assets have been depleted, the balance must be used to reimburse the government for any Medicaid benefits the beneficiary received after the account was established. There s also a reimbursement requirement for SNTs. With either an ABLE account or an SNT, any remaining assets are distributed according to the terms of the specific account or the SNT. One or both Of course, you don t have to choose just one tool. To cover all the bases and provide the most financial security, many families set up both an ABLE account and an SNT. Talk with your estate planning professional or legal advisor about specific planning options for your special needs child. n Plan now to reduce your NIIT exposure Are you potentially subject to the 3.8% Medicare surtax on net investment income (NII)? If so, there may be strategies available to you to reduce or eliminate the tax. They take time to implement, though, so it s best to start planning now. Does it apply to me? You may be liable for net investment income tax (NIIT) if your modified adjusted gross income (MAGI) exceeds a certain threshold. Currently, that threshold is $200,000 for single filers and heads of household, $250,000 for joint filers, and $125,000 for married taxpayers filing separately. In most cases, MAGI is the same as adjusted gross income (AGI). For trusts and estates, the thresholds are much lower. NIIT kicks in when undistributed AGI exceeds $12,400. The 3.8% tax applies to the lesser of your NII or the amount by which your MAGI exceeds the applicable threshold. Let s say you re married filing jointly, your MAGI is $275,000 and you have $100,000 in investment income. Because 5

6 the amount by which your MAGI exceeds the threshold ($25,000) is less than your NII, the NIIT is 3.8% $25,000, or $950. If your MAGI were $400,000, however, your NII would be the lesser amount and the NIIT would be 3.8% $100,000, or $3, Generally, NII includes gross income, less allocable expenses, from taxable interest, dividends, capital gains, rents and royalties, nonqualified annuities, businesses involved in trading financial instruments or commodities, and businesses that are passive activities. It doesn t include wages, nonpassive business income, tax-exempt interest, self-employment income, distributions from certain qualified retirement plans, life insurance proceeds, nontaxable gain on the sale of a principal residence, alimony, unemployment compensation or Social Security benefits. You may be liable for net investment income tax if your modified adjusted gross income exceeds a certain threshold. How can I minimize it? Depending on your situation, you can generally lessen NIIT exposure in two ways: by reducing your MAGI or your NII. There are many ways to do this. For example, you might: n Harvest losses by selling underperforming securities at a loss to offset capital gains, n Increase contributions to IRAs and qualified plans, n Shift investments into tax-exempt municipal bonds, n Move investments into growth stocks that pay low or no dividends, n Transfer assets that produce investment income to family members in lower tax brackets, and n Donate assets that produce investment income to charity. For trusts, you can reduce NIIT by distributing the trust s income to beneficiaries. (The tax only applies to undistributed income.) Or you can structure the trust as a grantor trust, whose income is taxed to you, as grantor, rather than at the trust level. Be aware that this strategy may increase your individual NIIT. Finally, if your trust owns business interests, you might increase the trustee s level of involvement. If the trustee is deemed to materially participate in the businesses, it may be possible to convert the income from passive to nonpassive, reducing your trust s investment income. Are there other considerations? As you consider strategies for reducing NIIT, be sure to evaluate the potential impact on your overall financial plan. For example, shifting investments into tax-exempt bonds can lower your NIIT, but it may also lower returns. As your advisor can tell you, reducing taxes is a fine goal, but not if it comes at the expense of sound financial decisions. n

7 Buy low, sell high A primer on value investing Value investing can be an integral component of a well-balanced portfolio. Unfortunately, the concept of value investing is widely misunderstood. Here s a basic primer. Hunting for bargains The goal of value investing is to identify companies whose stock prices don t reflect what the investor considers their value. These companies are fundamentally sound, but undervalued by the market. Securities may trade at a relatively low price for many reasons. But usually these stocks are cheap because investors have reacted negatively to bad news, such as poor quarterly earnings or legal problems, or because the general market has declined and punished stocks across the board. Investors use a variety of metrics to identify underperforming stocks. These include price-to-earnings, price-to-sales and price-to-book ratios. A low ratio relative to comparable stocks in the same industry may indicate that a stock is undervalued. It s important to understand, however, that a low price isn t necessarily a bargain price. Sometimes a company s stock price declines because investors have correctly discerned real problems. Long-term outlook Value investors look for stocks that they believe offer strong future growth and earnings potential that has been overlooked by the market. Successful investors typically research companies thoroughly to evaluate their management, market, competitive environment, cash flow, growth and dividend history. Patience and a long-term perspective are critical. There s a common misconception that buying bargain-priced stocks leads to immediate returns. In fact, it can take years before a value stock becomes what its investors consider fully valued. The performance of value stocks tends to be cyclical, alternately outperforming and underperforming other types of investments. Also, some value stocks never realize their investors upside expectations. Like all stocks, value stocks can be risky, and you can lose money investing in them. Place in your portfolio How might value stocks fit into your overall investment strategy? According to modern portfolio theory, the most effective way to reduce risk and maximize returns is to adopt a longterm investment horizon and to diversify investments among different asset classes, sectors, geographical areas and investment approaches. Diversification reduces risk because different types of assets such as value and growth stocks or mutual funds tend to move up and down in different cycles, so losses in some investments may be offset by gains in others. However, it s important to note that diversification doesn t guarantee against losing money and it doesn t ensure profits. Talk to your financial advisor about whether your portfolio might benefit from adding value investments or other types of assets. n This publication was developed by a third-party publisher and distributed with the understanding that the publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and recommend you consult with a professional attorney, accountant, tax professional, financial advisor or other appropriate industry professional. The hypothetical examples used are for illustrative purposes only and not intended to represent the value or performance of any specific product or to predict or guarantee actual results, which will vary WMAso16 7

8 Sullivan Bille Group Since 1972 Sullivan Bille Group has been a key component in the growth of some of the region s most successful companies and entrepreneurs. The reason is clear: we are committed to creating and fostering long-term relationships with our clients. Our method? We roll up our sleeves and go to work with you. Our team of CPAs, business consultants, tax and financial advisors work closely with our clients to refine business processes and identify the potential for growth. Together we create a strategy that will build on your strengths. Our goal is to build a partnership with you based on a common objective we want to give you the peace of mind that your business and personal assets are on the path to successfully achieving your goals. Our Practice Leaders: Arthur V. Ford, CPA/PFS, CFP, Taxation Charles H. Comtois, CPA, Accounting & Auditing Stephen P. Ahern, CPA/PFS, CFP, Tax & Wealth Management Barbara J. Rowell, CPA, Non-Profit & Business Accounting & Auditing Richard Hart Harrington, CPA, Audit, Tax & Business Consulting John B. M c Namara, CPA, Accounting & Auditing Thomas P. Kirwin, CPA, Peer Review Business Auditing & Accounting Tax Compliance and Planning Operations and Financial Consulting Financial/Accounting Systems Computer Assistance Personal Financial Planning Objective Investment Advice Estate and Wealth Transfer Planning Tax Compliance and Planning Family Office Services Sullivan Bille, P.C. Certified Public Accountants Wealth Management Advisors, LLC Registered Investment Advisor Boston, Tewksbury, MA - Salem, NH