Kitces.com - Advancing Knowledge in Financial Planning

MailBag: Hostess Pension Shortfall And The PBGC, And The Cost Basis And Tax Treatment Of MLPs

December 20, 2012 12:06 pm 0 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's mailbag, we look at two recent inquiries: 1) was there anything illegal in what Hostess did in stopping its pension plan contributions and leaving a huge shortfall, and how shaky is the PBGC; and 2) how do you calculate cost basis for a Master Limited Partnership (MLP) as distributions are received, and what is the tax treatment of gains when the MLP is later sold?

IRS Issues Guidance For New 3.8% Medicare Tax On Net Investment Income

December 19, 2012 12:01 pm 16 Comments CATEGORY: Taxes

In early December, the IRS and Treasury issued a series of Proposed Regulations for the two new Medicare taxes scheduled to begin on January 1, 2013 - the 3.8% Medicare tax on unearned income (generally, a 3.8% surtax on net investment income), and the 0.9% Medicare tax on earned income (i.e., wages and self-employment income), applied to "high income" individuals above certain thresholds. Although the new rules are still proposed and may ultimately be amended or changed, the Treasury and IRS nonetheless indicated that they can be relied upon by taxpayers. However, given the limited time to cultivate these regulations - including addressing potential loopholes - the rules did indicate that taxpayers should not try to read between the lines to find loopholes in the proposed regulations, and that the IRS will closely review transactions that manipulate net investment income to eliminate Medicare tax exposure.

While there were no huge surprises in the guidance, it does provide important clarification on a wide range of issues that planners and their clients must contend with heading into 2013, including how the Medicare tax rules interact with other parts of the tax code, and serves as a reminder to complete any last minute capital gains harvesting that high-income clients may wish to engage in before 2013 begins (including a special opportunity for Charitable Remainder Trusts!)!

Why Every Financial Planner With A Blog Needs A Google+ Page, Now

December 17, 2012 12:03 pm 12 Comments CATEGORY: Marketing

As consumers increasingly turn to the internet for information about potential products, the ability of a company and its products to turn up at the top of search engine results is increasingly crucial for success and growth - leading to an explosion of consultants that will help companies with their "Search Engine Optimization" (SEO) to ensure that their products and services come up first. A similar process occurs when consumers search for information about services and people to work with, although the process is more complicated due to the fact that many experts may appear prominently on lots of sites, not all of which are necessarily tied to their business.

To better understand not just where influential content is, but the influential people who create it, Google has begun to develop a new system for its search engines to track authors and determine who's influential, called "AuthorRank", which is intended to supplement the "PageRank" algorithms it uses to identify and rank influential websites and content. The upshot of this change is that for the first time ever, financial planners and other service professionals will be able to start establishing their own online "webutation" as they tie content they have produced to their personal profile and business, regardless of where it is published. The caveat, though, is that Google accomplishes "Google Authorship" tracking by having authors tie their content and websites to a specific Google+ profile - which means any financial planners that produce a blog or other content who hadn't already established a Google+ profile need to go create one, now!

Weekend Reading for Financial Planners (Dec 15-16)

December 14, 2012 07:02 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition is a technology extravaganza! We start off with a writeup of Financial Planning magazine's 2012 Tech Survey, and Bill Winterberg's picks for 2012's "Best Tech for Advisors" from Morningstar Advisor. From there, we look to a number of recent technology developments, including whether advisors should jump on board with Windows 8, how advisors can get their own privately branded "app" for mobile devices, a new online site for advisors to search for new jobs and contact prospective firms privately and anonymous, how investment custodians are evolving to meet rising technology demands from RIAs, and a discussion of why more advisors should look to conduct online meetings with clients. We also have a look at the rising trend of email fraud (where thieves pretend to be clients to convince the advisor to transfer money), and an interview with David Drucker and Joel Bruckenstein regarding their upcoming new book about technology tools for advisors. We wrap up with two interesting articles: one that looks at the only 5 things you need on your website to communicate with clients (and a suggestion that you should trim the fat off your website to focus on those items), and the other providing a neat list of statistics for financial advisors about use and adoption of social media by both advisors and their clients. Enjoy the reading!

MailBag: Solo 401(k) Contributions For S Corps And End-Of-Year Rebalancing To Harvest Capital Gains

December 13, 2012 07:34 pm 0 Comments CATEGORY: MailBag

In this week's mailbag, we look at two recent inquiries: 1) when do employee "salary deferral" contributions have to be made for a solo 401(k) where the business is an S corporation; and 2) is it a good idea to split end-of-year rebalancing trades to trigger the gains this year but the losses next year (even if it means you're out of the markets for a few days).

The Emerging Next Generation Of Investment-Only Variable Annuities (IOVA) – An Asset Location Tool?

December 12, 2012 12:06 pm 13 Comments CATEGORY: Annuities

For the past 40 years, variable annuities have been on a rollercoaster, where the popularity of various features and benefits rise and fall as the contracts shift and adapt to the then-current environment. In the early years, variable annuities were popular for tax-deferred investing as top tax rates of the time were 70%, and remained popular in subsequent years as the burgeoning bull market made equity investing more appealing overall, even as tax rates declined. As the 2000s approached, variable annuity companies innovated, creating a wave of so-called "living benefit" riders that included GMIBs and GMWBs, to make variable annuities appealing to the coming onslaught of baby boomer retirees. Unfortunately, though, with the financial crisis, living benefit riders became far less appealing - old contracts forced annuity companies to raise reserves, and new contracts experienced a significant cost increase as annuity companies struggled to hedge and manage risk in a more volatile post-crisis environment.

As a result, annuity companies are now entering a new wave of innovation - where variable annuities are bolstered by more innovate active management and alternative investment strategies, and the annuity itself is used as a tax shelter for these rather tax-inefficient investments, at a drastically lower cost than the annuities of recent years. Whether this new line of investment-only variable annuity (IOVA) contracts will catch on remains to be seen, but the potential is for variable annuities to become a major part of portfolio design in the future - where the variable annuity becomes an asset location tool and clients can voluntarily choose how much of their most tax-inefficient investments will be sheltered by tax deferral.