By Rob Shevlin

            Let’s assume you have a significant amount of money in an IRA or Other Qualified Plan Retirement Accounts.  You are taking RMD’s, but you don’t need them for income.  You would like to leave the IRA to your beneficiaries, but want to make sure you’re maximizing the potential payout not only your children receive, but also your grandchildren.  In this concept you will do a Stretch IRA and use the unwanted RMD’s to fund a survivorship life insurance policy, naming your children as the beneficiaries.

            Here is the way most IRA distribution plans work.  The spouse is designated as the primary beneficiary.  So when the IRA owner dies the spouse does an IRA rollover into his or her own account, continuing the tax deferral and taking the RMD’s.  Typically, the children then become the beneficiaries.  This can also be accomplished with a Special Retirement Benefit Trust, which ought to be considered if you don’t have one and have significant Retirement Plan assets.

            When the children eventually inherit the IRA, the number of years they can defer the taxes is based on their age at the time.  If you have multiple children and have not split the Retirement account into separate accounts for each potential beneficiary, the age of the oldest beneficiary will determine the amount of payout.  If the children pass away before the end of their maximum deferral period, their beneficiaries—typically the grandchildren of the original IRA owner—inherit the balance of the funds and the balance of the deceased child’s deferral period.

            For example, if the child had a maximum deferral period of 25 years and they die 20 years in, their beneficiary will only be able to defer taxes for the remaining five years.

            By making some simple changes to your IRA beneficiary designations, you would be able to base the maximum deferral period on your grandchildren's life expectancy, rather than your children’s, dramatically increasing the years of tax deferral and the total benefit.

Step 1: Determine the projected value of the IRA at a point in the future when the surviving spouse expects to transfer the IRA to his or her grandchildren.

• There are varying degrees of detail you can go into here.  You can purchase a life expectancy calculator that will take into account a variety of criteria to give the most accurate prediction.  You can use a free calculator like the one at www.livingto100.com, which takes into account lifestyle factors, nutrition, body type and medical factors to give a life expectancy.  Or you and Camarda can just select an age like 80, 85 or 90 for illustrative purposes.
• In this case, let's say the client's life expectancy is 85.  We will illustrate the IRA value at age 85 (taking into account an agreed upon growth rate and the RMD’s).

Step 2: Purchase a life insurance policy

• As a client you will use all or part of your RMD’s to purchase a survivorship or "second-to-die" life insurance policy, naming a loved one as beneficiary with a face amount equal to the projected value of the IRA at age 85.
• Now, instead of an IRA they would have had to pay income taxes on, they receive a death benefit that is income-tax free.

Step 3: Change the designated beneficiary on the IRA from the children to the grandchildren

• Remember, while both spouses are still alive, the beneficiary remains the spouse.  It is only after the IRA has transferred from the IRA owner to the surviving spouse that the grandchildren become the beneficiaries.  Depending on your estate size, talk with your tax advisor about the impact of generation skipping taxes.

Results:

            By doing the Stretch IRA distribution in conjunction with the Life Insurance Acquisition, you may actually increase the projected distribution on your IRA or Qualified Retirement Plan Assets, potentially pretty significantly.

Options:

            Estimate the income tax the beneficiary will owe if the IRA is inherited as a lump sum when you reach the age of projected asset transfer.

            If your beneficiary inherits the IRA as a lump sum, income taxes will be assessed on the entire amount. To figure out the taxes you will owe, just take the estimated value of the account at the time of transfer and multiply it by the beneficiary’s income tax rate.  Or you may consider converting an IRA into a Roth IRA account at the first spouse’s death.  The surviving spouse rolls the IRA into their name, then converts to a Roth IRA. Estimate the surviving spouses income tax rate and multiply by the estimated account value to project estimated Roth Conversion taxes.

            Purchase life insurance. Use a portion your unwanted RMD’s to fund a life insurance policy with a face amount equal to the beneficiary’s expected tax liability or the spouses Roth Conversion Income tax liability.

            As indicated above if you’re single you might want to go with a policy which offers the performance and flexibility of universal life insurance combined with the solid guarantees associated with whole life. This is commonly referred to as a Guaranteed Universal Life Policy.

            And if you are a married couple you might opt for A Second to Die or Survivorship Life policy, which would pay the death benefit to the designated beneficiary upon the second insured's death.

Results:

• Beneficiary receives inheritance from the IRA.
• Beneficiary receives life insurance death benefit, which is used to pay the tax liability owed on the IRA or Roth IRA Conversion.  Future income taxes then are paid on the growth or income and dividends generated from the account.
• The asset transfers, essentially, with no tax liability for the beneficiary.
• And the life insurance didn’t cost you anything “out-of-pocket” because you simply leveraged the RMD’S you were taking anyway. Rather than putting them in the bank, you simply committed a portion of them to paying the life insurance premiums.

To learn more about these concepts, some idea variations or how they might work in your situation contact Rob Shevlin at 904-278-1177 ext. 229.

Since the current bull market began in early 2009, we've seen repeated, frightening Spring plunges, followed by strong gains later in the year and beyond into the following year. Despite the roller coaster scares, the market has been a good place to be the past three years, for those with the fortitude to stick with it. The big question as we begin to flirt with the summer season is whether the patterns of the past two years will be repeated – should one "sell in May and go away?" Note that this would have worked in 2010 and 2011 – IF you had the wisdom to get back in before the big runs up – but would have been the absolute worst thing to do in 2009, as the graph shows.

So what may happen this year? While it is inevitable we will see some continued market instability – with the continuing (though abating) Euro-crisis, slowing China, tepid U.S. recovery, and election year pot-stirring – I think it will be much milder than in past years. The world economies are normalizing – though painfully slowly by some measures – and investors seem to have begun to appreciate this, and become more comfortable with stocks for the longer term. This, coupled with the inevitability of inflation and interest rate hikes, should help to accelerate a shift from fixed income to stocks on a wholesale basis in the months and years to come. And with higher demand, well, you know what should happen to prices. It is interesting to note that despite the market's strong Q1 performance this year, stock mutual funds had net outflows during the period, and bond funds net inflows. This means that retail investors on the whole pulled money out of stocks, and parked it in (even more) bonds. But the markets still went up strongly. This tells me that once the "average" investor finally gets it that interest rates will go up (crushing bond prices) and that a recovering world economic picture will rocket-fuel corporate profits and stock prices, the stock markets should soar.

I remain, as I've been since late 2008, a long-term bull, and expect stock prices to rise strongly for many years. I expect some bumps this year – not as bad as in 2010 or 2011, and not a good reason for longer term investors to get out or stay away – but expect the markets to end the year meaningfully higher.

(Guest post by By Rob Shevlin)

Just like there is a secondary market for mortgages, a secondary market for Life Insurance Policies has developed over the last several years. If you are age 65-95 (age 75 or older is more desirable) and you are still paying on or have a paid up policy, but no longer have a need for that insurance, what are your options? Most folks don’t think of their Life Insurance Policy as an Asset.

Life insurance helps provide you and your dependents the comfort of knowing that if something unexpected happens to you, your financial obligations can still be met. The most common of these include: earning the family income, paying the home mortgage, paying for college tuition, buying out your share of a small business, or transferring wealth for those with estate values that exceed estate tax exemption levels.

For most people, many of these obligations have been met by the time they reach 65 and the original risks, for which the insurance was purchased, no longer exist. To some extent this explains why the majority of life insurance policies never pay a death benefit – most people lapse or surrender policies once they no longer need them. Alternatively, you may be able to sell your policy in the secondary market for more than its cash value with the right fact pattern.

If your health has changed since you took out the life insurance policy (health is not as good today as it was at policy issue), and you are not terminally or chronically ill, there are third parties that actively seek to purchase policies in what is commonly referred to as the secondary market for life insurance. They will consider buying your policy and depending on their determination of your remaining life expectancy (180 months or less ), you may be able to get an offer on your unwanted or no longer needed life insurance policy.

If you’re a retiree and are thinking about lapsing, surrendering or replacing your existing policy, you should consider the possible benefit of selling it. By doing so, you’ll better ensure that you’re maximizing the value of your life insurance during retirement.

Types of eligible insurance policies that can be considered: Convertible Term Life, Universal Life (preferable), Survivorship Universal Life, Survivor Variable Universal Life, Variable Universal Life and Whole Life.

People typically use the proceeds from a policy in the following ways:

• Income. Increase their current income, either with a lump sum payment or by purchasing an annuity that will guarantee a steady stream of income for the rest of their retirement.
• Insurance. Improve their life insurance coverage by purchasing another insurance policy with a lower premium and/or coverage that better meets their current needs.
• Long Term Care. Improve their insurance coverage by purchasing a long term care policy or, if ineligible, using the proceeds to improve the current or future quality of long term care.
• Investment. Fund alternative investments that offer greater or more immediate returns for them and their family.
• Gifts. Provide support for family members to help them fund various expenses such as grandchildren’s education or starting a family business.
• Donations. Provide support for charitable organizations, either through one-time donations or by establishing recurring gifts through the purchase of an annuity.

Whatever option you choose, the money is yours to spend as you like. Of course, you should consult with a tax advisor regarding the ramifications of your income and investment decisions.

This article’s intent is to make you aware of an asset repositioning concept that you might not be familiar with. If you want to know more about this topic contact Rob Shevlin at 904 278-1177 ext 229.

In 2004, a new rule became effective requiring Insurance Companies to assign an “”Actuarial Present Value” to annuities that have “any additional benefits”.  So what does this mean?  According to Reg. Section 1.401 (a) (9)-6, Q&A-12 additional benefits might be Income Riders, Death Benefit Riders, or Minimum Contract Guarantees.  If these benefits meet certain standards, your Required Minimum Distributions (“RMD’s”) could be higher than you originally may have thought.

Basically, if qualified funds are in an annuity that has not been annuitized, the RMD is based on the entire interest of the annuity.

    So if you have a qualified annuity IRA, 401k or other qualified plan, 403B and whether it is a Variable Annuity, Fixed Indexed Annuity, or Fixed Annuity with one or more of these riders, there could be some additional calculation your insurance carrier should have provided for you when it comes time to take your Required Minimum Distribution.

    Normally we take the December 31, year ending account value and apply a percentage against it based on looking at a divisor/life expectancy factor in a table, depending on whether we are single, married or if married have a spouse more than 10 years younger to select the appropriate life expectancy factor in determining the calculation.

    So whether you have been taking RMD’s for years, or you are coming up on your first one, you should know about this potential increase in RMD you may be obligated to take.  If you take an RMD that is smaller than required, you could be subject to a penalty of 50% of the amount not taken that should have been taken.

    There are exceptions.  There is the 120% exclusion and the return of purchase payments.  If the “entire interest” under the annuity contract is no more than 120% of the dollar amount credited to the contract and additional benefits are reduced pro-rata in the event of distribution and/or a return of premium feature, the provision will not apply.

    We don’t have the space to get into detail but just know if you have had annuities for years or recently acquired one, as you reach the point of having to take RMD”s, your annuity provider should be providing you additional information in case you need to take a bigger RMD.

    Do you truly know all the details of the income or guaranteed withdrawal living benefit rider in your annuity?  They can be confusing and the fine points and contract language in your annuity policy or the annuity disclosure statements you were asked to sign, don’t feel bad if you find them confusing, your agent or advisor probably did too, assuming they read them. Riders to annuities can be great risk management tools, but often have “gotchas”.  If you are not sure what’s in your annuity rider(s) and want some input call Rob Shevlin, and he can help you make sense of it and how it is benefiting you or not.  Call 904 278-1177 ext 229.

     As I write this – the veritable Vernal Equinox – the bull market that began last fall shows no lasting signs of the pullback I predicted when I wrote for this column in late February, as investor optimism appears to continue to build, and risk, in the modern vernacular, stays “on”.  Except for a brief dip in early March – right by the red and green arrows on the very right of the Investools® chart below – the bull has rolled pretty straight up since early December. And while I am still expecting a pullback at some point this spring – they are inevitable in all markets, even major bull markets, like I think we are in – let’s not lose sight of what I feel is the big picture here, that we are likely in the midst of the beginnings of what could be a once-in-a-lifetime opportunity for stocks.

     While the market has about doubled since I started talking this way in early 2009, that does not mean the easy money has gone or the party’s over for stocks.  Far from it, I think.  For one thing, there’s tremendous buying power on the sidelines, as individual investors, still smarting from the 2008 meltdown, are just beginning to wonder if they should switch from the “safe”  investments to which they fled, like cash, annuities, bonds, and the like.  As these folks begin to feel the pain of dramatic underperformance, this latent buying power should translate into potent price increases. For another, the world economies are clearly healing, and this fact is becoming obvious to even the most intrinsic pessimists. Surely we have a long, long way to go – as I also suggested back in early 2009, the economic devastation would take many years to recover – but this is actually good news:  the higher the economy can climb as it rebuilds and evolves, the higher still can the market go.  Finally, companies are still enormously profitable, even in what are still pretty crappy economic times.  If they’re making good money now, imagine how the cash register will ring when more people actually have money they feel good about spending.

     So let’s not read too much into Jeff’s “gloom and doom” expectations of a pullback. As mentioned last month, we should view these more as buying opportunities than disasters – and not let such expectations paralyze us into sitting on the sidelines, watching the market go up, without being invested in it. In my view, this market still has a long, long way to go, over many years.  But if I put a number to how much higher I am expecting  it to go, you probably would think me as crazy as you probably did back in March of 2009 (at the very bottom), when I related, “In the words of a retired client who came in for an annual review today:  “Why am I buying stocks now?  In a few months, I may look like an idiot.  But in a few years I’ll be brilliant!”.

          Folks, please sit down, stay calm, and be prepared to save this newsletter for posterity as it is likely to become quite rare and collectible. Ready? I am expecting stocks to go down. Not because I fear the U.S. economic recovery will derail (I think things are progressing nicely, all things considered), or that that modern U.S. political dysfunction will reach a fatal crescendo this election year (I think things will continue to improve whomever’s elected – though at different paces and in different directions), nor because I predict European disunion and massive disruption (quite the opposite, despite the looming endgame for the world’s greatest welfare state, and the likely Greece spot). Generally, I remain quite optimistic about economic progress around the world (though I suspect I am one of the few who expect a significant slowdown to begin in China, which will have a meaningful effect in years to come.) 

          All in all, I remain very optimistic that the world will continue to “normalize” economically, and that the stock markets will continue to improve and develop very robust, long-term bull conditions.  

          So what’s up with the “bear alert?” Mostly, I think the market’s gotten ahead of itself in 2012, and will go down before continuing to go up. At its core, market pricing is determined by supply and demand, which in turn is driven by fear and greed. Last year, stock prices tanked undeservedly on overblown fears of European contagion, as mindless fear trumped reason and the perception of value. So far this year greed’s outpaced fear, and while conditions are in my view lots rosier than many pundits admit, investors will soon remember how afraid they think they should be, and the pendulum will swing back a bit. Where the spark for such memory – war with Iran, a bad economic report, riots in Sparta – comes from hardly matters, and is almost always disconnected from quantitative financial reality. But something – inevitably – will happen to spook the herd, and prices, for a time, will drop. We expect this will happen quite soon, but also are happy to report that this would be a buying-opportunity dip in what we believe to otherwise be a long term bull market. Those so inclined, keep some powder dry, and be ready to buy. For those in technically-driven portfolios, such a posture should be automatic, or at least second nature.

Is running out of money in retirement the greatest fear of today’s retiree? What is Social Security’s greatest benefit that it can offer? Regular income that is guaranteed to increase over time, continue as long as you live. Not many vehicles offer the combination of inflation protection, investment risk elimination, longevity protection, and spouse coverage that Social Security can, making it one of the more valuable sources of retirement income, particularly for those without great liquid net worth.

We often see and hear many retirees today don’t understand how Social Security benefits really work, and what’s more sad is that most never focus on how to help maximize the very benefits that may help sustain them through retirement. If you have not already started collecting benefits, do you know how to best utilize Social Security to help generate optimal retirement in-come and risk protection?

Maximizing Social Security benefits is more critical than ever – now that the majority of post retirement risk has shifted from the employer to the individual. Social Security planning deserves to be considered a valuable resource worthy of careful stewardship, how seniors can best maximize their benefits, while helping minimize the taxes on their retirement income in general.

One of the biggest decisions a couple can make is when to start taking their Social Security payments. Generally, the government tries to make the decision and the amount of money you receive depending on when you start taking payment, seems to be actuarially fair.

Eligibility to start taking distributions is as early as age 62 and many people, especially those who retire early, start taking distributions at age 62. When you do this you are taking a reduction in income as compared to taking distributions at FRA (“Full Retirement Amount”), whether that is age 66 or 67 depending on the year of your birth.

• Single Person: Essentially the economic decision is actuarially fair depending on if you take benefits at 62, at FRA, or defer and take at a later age (up to age 70), assuming there is no impact from working and losing benefits due to earnings generated prior to reaching FRA. If working prior to FRA, you lose $1 for every $2 of social security benefit if your income exceeds $14,160/yr. In the year you reach FRA, you lose $1 for every $3 of benefit if your income exceeds $3,140/month. A single person with a short life expectancy should begin benefits early. Those with longer life expectancy should delay.

• Married Couple: Decisions for couples revolve around spousal and survivors benefits. For an average couple the present value is usually maximized when the lower earning spouse begins benefits as soon as possible (as long as those benefits would not be lost due to the earnings test) while the higher earning spouse delays benefits until age 70.

Try to make decisions that both maximize the present value of the income stream derived for both people, while minimizing longevity risk. In this short space we can only scratch the surface of some of the scenarios to consider and the nu-ances of the Social Security system as it presently exists.

What we have seen is that by running the numbers and making smart choices you can opti-mize Social Security benefits. If you want to know more information about this subject matter contact Rob at 904-278-1177 or email him at rob.shevlin@camarda.com.

Asset protection usually refers to protection from attacks by lawsuits, creditors, and ex-spouses – our own, and those of our children. The art of asset protection really boils down to building barriers, and making it almost too much trouble to go after your assets. Since Camarda Consultants does a good bit of work in this area (as well as tax, estate planning, and business planning), here’s a few tidbits to get possibly-important items on your radar:

·         Family trusts & trust protectors. Trusts can add levels of asset protection, particularly when childrens’ inheritances are left in trust, to stay in the child’s name, with the child as the trustee. The child is named trustee of their portion in trust and coached to keep funds in the trust’s name instead of putting in joint names with the spouse, because "you know I love you but that’s what Daddy wanted… Then a trust protector – like a sibling – is named to take temporary control as trustee in case a threat emerges, so the child can’t be compelled to write a check out of the trust until the threat passes.

·         Family holding companies. LLC’s – limited li-ability companies – and LLP’s – limited liability partnerships – are superb firewalls against asset attack. Encapsulating assets and putting liquid assets like bank and brokerage accounts into structures like this – in turn owned by living trusts – can really build a moat around your treasure.

·         Family limited partnerships and their variants can make poison pills out of your assets, sig-nificantly reduce estate taxes, all without giv-ing up income or control.

·         REMEMBER! The "$10 Million Estate Tax Free" window is closing in the months to come, and those who expect to be exposed to estate tax should dust off their estate plans and make sure they’re taking advantage of every opportunity under the current – but soon to be changed – law. Call Rob at 904-278-1177, ext. 229 to set up a free review.

     Many investors these days would just throw up their hands, and stick their money in the bank, or in guaranteed government bonds. The danger, of course, is that even before taxes they don’t yield much, and can actually lose you money after inflation.  Many feel that inflation will be fierce in the twenty-teens, and “money in the bank” could be a recipe for steep, guaranteed losses. This is also true for interest-paying “fixed annuities,” and other products of this ilk.

   The lure of “equity index” annuities is that they promise a guaranteed return of principal, some guaranteed minimum interest rate, as well as the chance for even better returns if the stock market goes up.  The marketing material and the salespeople sometimes paint an even rosier picture, sometimes even spinning these products as if they offered all the guarantees of FDIC CD’s and all the upside of unbridled bull markets. Again, of course, there is no free lunch. The reality is that these life insurance products restrict your access to principal with penalties and other costs – sometimes colossal penalties and very long lock-up periods – and usually offer only mediocre interest rates and very limited participation in stock market gains.  The basic process is this: they take your investment, and put it into something safe like interest-paying bonds, give you a part of this interest, keep part of it as their profit, and use the other part of your interest to buy call options on stock market indexes, a way to bet on market increases. If the call options “hit” you get a piece of the profit, and they get some, except that your profit is limited by complicated measures like “participation” and “cap” rates, “asset fees,” and surrender charges, but their profit – which is created by the options bought with your interest on your money – is unlimited. The annuity contract smoke and mirrors are quite a bit more complicated than this, especially when we consider how the sales commissions (sometimes unconscionably high) and surrender charges, all manner of riders, and the rest of the jumble fits in, but this is the basic premise.

      If the concept of “in the bank” guarantees and a shot at stock market upside appeals to you, you can easily cut out the middleman and buy index calls yourself or with an advisor. If interested in annuities, take the time to really study these enormously complicated products before committing money – don’t be fooled by “rate’s going down in a few days” or other sales-hype malarkey. Read the prospectus (if applicable), sample contract, and other “fine print” disclosure material.

Last month, the WSJ reported that, finally something I’ve been urging and predicting since 2008 – the Federal government ought to do something to encourage investors to soak up all the distressed housing inventory out there. In a study sent to Congress and the Administration, the Federal Reserve encourages that bank-owned homes be sold to investors. Similar programs, particularly the VA’s – where excess inventory was marketed with financing assistance to investors willing to patch them up and rent them out helped to stem the last real estate crisis stemming from the 1980’s S&L meltdown. The formula is simple – reduce supply by converting “for sales” to “for rents,” and prices will rise given a demand for “for sales.” Pity the crisis is now six years old – housing prices peaked in early 2006 and they’re just starting to talk about this solution. Still, better late than never, and serious consideration of serious medicine – expanding the lending facility for investors and lifting the ten mortgage minimum – is finally dawning on the bureaucrats. Sadly, given the election year and the current, popular “eat the Wall Streeters” ethos, I don’t expect quick, if any real, action. But my fingers are definitely crossed!