News & Media•
on October 18th, 2010•
Marriage is all about togetherness. Yet when it comes to owning assets, too much togetherness may not be financially healthy.
Owning assets jointly is more convenient than individual ownership, and it’s the simplest way to avoid probate after a spouse’s death. But couples often should consider separating their assets. Here’s why:
Estate tax implications. Estate rules let spouses leave unlimited property to each other tax free. That’s okay when the first spouse to die leaves everything to the second, but the second death could result in a whopping tax bill. Couples likely to have estate tax issues could acquire property individually to help maximize the value of each other’s estate tax exclusion. While owning a house jointly is important for giving both spouses equal claim if they divorce, other assets can and should be held separately in roughly equal shares.
Dividing jointly owned property. How you take title also affects who can inherit your property. If you own it individually or jointly as “tenants in common,” each of you may specify in your will that you want a particular asset or share of an asset to go to a designated heir. However, if you take title as “joint tenants” (with rights of survivorship) or “tenants by the entirety”—the most common form of ownership for married couples—you won’t be able to say how assets are split. That may work if you and your spouse share the same beneficiaries. But it could be a problem if, for example, you’re in a second marriage and want to divide assets among children from different marriages.
Consider John and Mary. Because they own their property as tenants in common, each holds 50%, and John can bequeath his share to children from a prior marriage. Mary won’t automatically inherit John’s interest.
But if they hold their assets as joint tenants or tenants by the entirety, the surviving spouse becomes the sole owner of everything the couple owned together. It won’t matter that John’s will names his children as beneficiaries; if he dies first, the title documents will govern, and Mary will decide how assets are divided when she dies.
Other considerations. Owning assets separately is especially important if your combined net worth is at or above the IRS estate tax exemption. The exemption was $3.5 million in 2009 but is set to drop to $1 million in 2011 if Congress doesn’t change the law. Once you approach those levels, it pays to consider ways to separate assets. Also, since joint-tenancy assets can be taken by creditors or lost in lawsuits once an individual’s assets are exhausted, doctors or others who can be sued easily will want at least half of their assets in their spouse’s name.
Deciding how to hold title to your assets is not a simple decision, as state laws differ and each situation is unique. We can work with your attorney to help decide what’s best for you and your spouse.
News & Media•
on October 18th, 2010•
Stock markets around the world improved in 2009, but the spectacular growth came in emerging markets, which gained more than 75%, according to Barron’s. Foreign stocks and bonds swept up a record $64 billion of American investor assets, with just more than half going into emerging market equities, $2.7 billion into emerging bonds, and the rest into developed market bonds. Meanwhile, U.S. equity mutual funds lost $40.3 billion in assets in 2009.
While the money flowing into emerging market bonds represented a small proportion of foreign investment, it was nevertheless a remarkable development. U.S. investors had paid little attention to those fixed-income securities until the global financial crisis reduced yields on U.S. government bonds to next to nothing. Because bonds of developing countries are considered riskier than U.S. Treasuries, they pay more—and recently, a lot more. Some emerging market debt now pays more than U.S. corporate high-yield bonds.
Emerging market bonds provide a good example of the trade-off between risk and return. U.S. Treasuries have historically been considered “risk-less” and pay little. Emerging bonds, which pay plenty, may bring considerable risks. The Dubai scare, when Dubai World announced in December 2009 that it had to renegotiate at least some of its $59 billion in debt, reminded investors of the 1998 crisis, when Russia defaulted on its bonds. Back then, some emerging market bond funds sported yields well into the double digits, as they did again in 2008, according to The Wall Street Journal.
Yet despite their volatility, emerging market bonds can serve as an effective tool for managing risk. They can squeeze a little extra yield out of the income portion of a portfolio while also decreasing risk, thanks to their diversification value, and may provide a hedge against the fluctuating value of the U.S. dollar, as long as the currency of the country issuing the bonds isn’t pegged to the dollar.
The governments of many developing countries have received high marks for their handling of the global financial crisis, and if they can follow up with sensible policies as economic growth returns, investors may be more willing to hold their bonds. At the end of 2009, the “risk premium”—the additional return investors receive for putting money into less stable holdings—on developing world bonds, as measured by JPMorgan’s Emerging Markets Bond Index Global, had fallen to just under 3 percentage points above Treasuries.
Many investment experts believe U.S. holdings should account for a smaller proportion of investors’ assets than they have in the past, and increasing exposure to international markets could include buying debt in developing countries. We can talk to you about the risks and rewards of such investments and help you review your portfolio mix.
News & Media•
on October 18th, 2010•
If you think conditions are ripe for higher inflation, you might invest in Treasury Inflation Protected Securities, or TIPS. But keep in mind that these investments can be more complicated than they seem.
TIPS are popular now in part because of the steps the Federal Reserve has taken to pull the economy out of its deep recession. By increasing the money supply and pushing down interest rates, the Fed has helped banks and the rest of corporate America begin to recover. But those policies could have the unintended effect of spurring rapid price increases.
If inflation spikes during the next few years, TIPS could minimize the impact on your portfolio. Like other Treasury bonds, TIPS pay interest at a fixed rate until the bond matures. But there’s a bonus: a TIPS’ principal adjusts up or down each month to keep pace with changes in the Consumer Price Index. When TIPS mature, the government returns either your original principal or the adjusted amount, whichever is greater.
However, like other bonds, TIPS sold before maturity may gain or lose value based on changes in bond yields and inflation. And TIPS’ yields tend to be lower than those of comparable Treasuries without inflation protection. Recently, a 10-year TIPS was yielding less than half of what a 10-year Treasury note provided. So, if inflation rises less than the breakeven level reflected in TIP yields, this investment may not pay off.
News & Media•
on October 18th, 2010•
One major threat to fixed-income investments—and to the retirees who depend on various kinds of bonds to deliver cash to pay their bills and support their lifestyle—is inflation. When the cost of living rises, a dollar doesn’t go as far as it did before, and your savings may not last as long as you’d hoped. A special kind of investment—Treasury Inflation-Protected Securities, or TIPS—addresses that risk directly, by adjusting bond principal to keep pace with changes in the Consumer Price Index (CPI). Yet while TIPS may have a place in many portfolios, they’re not a cure-all. TIPS are still bonds, and they’re still subject to non-inflation risks that can hurt their value.
TIPS were created in 1997 as a variation on garden-variety U.S. government bonds. Like regular Treasuries, TIPS have a fixed interest rate or coupon that determines how much income they’ll provide until they mature. But the principal of TIPS adjusts up or down every month as the CPI rises or falls. If inflation rises, so does the principal, and the fixed return on that larger amount means additional income for the bondholder. When TIPS mature, the government pays you the adjusted principal (or the original amount, in the unlikely event that the CPI has fallen during the bond’s term).
These bonds’ prices and yields factor in an expectation that inflation will rise. That’s why, recently, the yield on a 10-year Treasury was about two and a half times the yield on a 10-year TIPS. The only reason to accept the much lower current return on the TIPS is if you expect its principal, and thus its effective yield and its total return, to rise significantly during the time you own the inflation-protected bond. If consumer prices rise less than expected, that 10-yearTreasury may turn out to have been a better deal.
But mild inflation isn’t the only risk that these bonds bring. Because TIPS are bonds, interest rates are also part of the equation. When real interest rates rise, newly issued bonds will offer higher yields. That reduces demand for existing bonds’ below-marketyields, and lower demand translates into lower prices. That’s why it’s often said that bond prices and yields move in opposite directions.
It’s not clear when, and how quickly, inflation may accelerate. But almost everyone believes interest rates are on their way upfrom what have been very low levels. That means the prices of bonds—including TIPS—will suffer. And while TIPS can help diversify a bond portfolio, and could serve as a hedge against inflation, deciding whether to add them to your investment mix is complicated. We can help you consider your options in light of your financial situation and goals.
News & Media•
on October 18th, 2010•
Can your business use a few extra hands to help pull it out of the economic tailspin? A new law—the Hiring Incentives to Restore Employment (HIRE) Act of 2010—provides double-barreled tax relief for plucking workers from the ranks of the unemployed. Your business can benefit from a payroll tax exemption when it hires qualified individuals and a special business tax credit for keeping them on board. Here are the key tax rules.
1. Payroll tax forgiveness. Normally, an employer must pay the 6.2% OASDI portion of Social Security tax on wages of up to $106,800 for 2010. The 1.45% Medicare portion of the tax applies to all wages. However, under the HIRE Act, the employer’s share of the 6.2% OASDI tax is waived for wages paid to qualified employees from March 19, 2010 through December 31, 2010.
A qualified employee? Someone who meets the following characteristics:
- Begins working for your business after February 3, 2010 and before January 1, 2011
- Was previously unemployed, which is defined as someone who has not been employed for more than 40 hours during the previous 60 days
- Was not hired to replace another employee (unless the former worker left voluntarily or for cause)
Note that this tax break applies to part-timers as well as full-time employees. But the new hire can’t be a relative or own more than 50% of the business.
The payroll tax forgiveness officially takes effect during the second calendar quarter of 2010. If a business qualified in the first quarter, it will get a credit to offset payroll tax deposits for the second quarter. Employees must continue to pay their full share of the Social Security taxes.
2. Worker retention credits. Your business may also claim a tax credit for keeping these new hires employed for at least 52 consecutive weeks. The credit is $1,000 or 6.2% of the worker’s wages paid during the 52-week period, whichever is less.
Suppose your company pays a qualified unemployed worker an annual salary of $50,000. You can claim the maximum $1,000 credit. However, if you pay a part-time worker $10,000 over 52 consecutive weeks, the credit is limited to $620 (6.2% of $10,000). To keep businesses from gaming the system, there’s a requirement that a new hire receive at least 80% as much in wages during the second 26 weeks as was paid during the first 26.
On top of the aforementioned hiring incentives, the HIRE Act also extends for another year the maximum Section 179 deduction of $250,000, allowing you to write off the cost of new equipment up to that amount in a single tax year. Without the new law, the maximum deduction was set to drop to $134,000 for assets that you place in service during 2010.
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on November 16th, 2001•
