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Mentor RIA Consulting

Allowing you to focus on what you do best

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Overcoming Fears of Investing

Posted on February 6, 2020 at 10:22 AM Comments comments (0)
Educating clients on some of the basics of financial planning and investing can be both frustrating and rewarding. Many folks want to learn about these things and understand the importance of knowledge in building their financial future and protecting against mistakes and the markets. Of course, one of the first lessons they should learn is that an investor can only do so much to protect against the vicissitudes of the markets. Keeping the natural instincts of fear and greed under control can do much here, but is not always enough.
A frustrating aspect in some investors is the tendency to ignore advice and to assume greater knowledge than anyone else. For example, one family we’ve worked with follows the creed that ownership of real property is the central piece of their finances and that the equity markets should be avoided entirely. Although that might work some of the time, this family has seen significant erosion of their wealth due to ongoing property costs together with changes in demand for different types of property. In addition, they’ve missed out on some tremendous investment opportunities in the markets even avoiding lower risk plain vanilla index funds and the like. The attempts to teach this family the value of diversifying investments has not been wholly successful. 
Another example is the investor concerned about investment risk who seeks certainty at any cost. Here we see funds languishing in certificates of deposit earning interest that does not even keep up with the low inflation rates we presently enjoy. Alternatively, such an investor finds the bells and whistles of an indexed annuity’s guaranteed floor enticing, forgetting that the cap on the growth of that annuity (given in exchange for the protection against loss) means that most of the growth in the investment will redound to the benefit of the insurance company and not the investor. Once again, fear of the markets and of loss results in a different kind of loss which could be mitigated by sensibly diversifying investments.
Working with clients to show them the hidden costs of their behavior can help them to achieve much more with their finances once those constraints are reduced. A professional advisor can be a great help to such investors, but take care in making your selection of an advisor. 

Trusts as an Alternative to the Stretch IRA

Posted on January 24, 2020 at 9:28 AM Comments comments (77)
One of the biggest changes under the Secure Act was the elimination of the stretch IRA approach utilized by many high net worth clients. The new law allows a surviving spouse as well as minors and some disabled persons to take benefits over their lifetimes while all other individuals must withdraw the balance of the IRA within ten years. Many clients have expressed concern with this change and a desire for alternative approaches for their qualified plan assets.
The charitable remainder trust presents a useful way to allow a person to take distributions over their lifetime instead of the new ten year limit. The trust will need to meet the requirement that the charity will receive at least ten percent of the total trust value and, of course, the distributions to the beneficiary will be taxable income. For clients with charitable intent and beneficiaries no longer able to benefit from the stretch, the trust can make a big difference in the timing and rate of taxes while keeping the estate plan effective. Since the charitable trust rules are more complicated than we can cover here, it is important to consult with a tax and estate planning professional to make sure the trust will accomplish your goals.
A conduit trust – which must pass to its beneficiary all distributions received from an IRA – is another approach. When the beneficiary is an eligible designated beneficiary such as a surviving spouse, the distributions may be made over the beneficiary’s lifetime and won’t have to be fully distributed in ten years. However, if the only permitted distributions from the trust are RMDs from an IRA, a problem arises since the only RMD under the new law is the one occurring at the end of the ten year period. This means the trust language must not be limited to distribution of RMDs but instead should permit any distributions from that IRA.
Careful planning is essential under the SECURE Act and you should consult with a tax professional before finalizing any trust or other planning.

Year-End Gifts and Taxes

Posted on December 21, 2019 at 12:07 PM Comments comments (81)
As the end of the year approaches quickly, there is still time to make gifts to charities or family members and to not only enjoy the giving but to also reap income tax benefits from the transfers. For example, where deductible items other than charitable gifts are at all significant, then the charitable gifts will be likely to support further income tax deductions, making the gift a benefit to both donor and charity. There is no transfer tax for such gifts which makes the approach even more attractive.
Although gifts to family members do not support an income tax deduction, depending on how the gift is made, there may be some income tax benefit derived. A gift of cash only reduces the amount of funds in hand for the donor and that may mean no more than that the donor will derive no income from the gifted funds in the future and so have no tax related to what has been given.
However, a more substantial benefit – albeit only in terms of future taxable income – may arise when the donor makes a gift in kind rather than in cash. An in kind transfer of stock allows the donor to make a gift subject to the annual exclusion from any gift tax while having the capital gains tax deferred until the recipient of that stock sells it. At that point, the tax is assessed at the rate applicable to the recipient, which may well be a zero rate if the recipient has low enough income. Remember that the zero bracket for capital gains ends at $39,375 for single taxpayers and at $78,750 for married taxpayers filing jointly.
The downside, under current law, is that a gift in kind means that the step up in basis which occurs at the death of the owner will not apply. The current gift in the hands of the recipient, though, may well outweigh any potential future step up and will also reduce the donor’s estate when death finally does occur. 

Free Dinner Seminars?

Posted on December 19, 2019 at 9:29 AM Comments comments (28)
On a regular basis, invitations to seminars with an accompanying free dinner fall through the mail slot. Naming popular restaurants and offering various dates, these seminars propose to inform the attendees all about a variety of topics. Most often they focus on retirement finances but can also address subjects such as Medicare and other health related issues. Sounds appealing, doesn’t it? You get to enjoy a free dinner at a nice restaurant and listen to experts tell you about things that you are not sure about as well as are important to you and your family.
Of course, when you read the flyer carefully – if you bother to look past the dinner choices and dates – you will see the disclosures and disclaimers about financial products (or other services). This will allow you to understand that you will not only receive educational information but an opportunity to purchase products and services to address the issues covered in the seminar program.
How can these experts afford to provide groups of folks with free meals while providing education on relevant topics? One attorney put this best when he said (and I paraphrase) “if you sign up for the services offered by the expert speakers, you will be paying for everyone’s dinner that night.” This opinion is not far from the truth as the financial products and services will always involve a cost to the purchaser. The question, of course, is whether the offerings are the best course for you to take and whether the seminar experts are the best sources of products and services you may need.
Best bet, if you want to enjoy the dinner, go ahead and make sure to pay attention to the presentation and retain any materials offered. Don’t make a decision on the spot. Then, get a second opinion or at least do your own online research. If the offering appears to be something you want to pursue, then ask for a meeting and ask questions about the experts’ proposals. That should give you some confidence that you are making the right choice.

Test Post

Posted on November 22, 2019 at 9:40 AM Comments comments (0)
Because Vistaprint can't seem to consistently process posts and so very often fails. 

Wealth Tax Effect

Posted on November 15, 2019 at 10:13 AM Comments comments (0)
Something we have heard a great deal about in the past several months is the interest of some presidential candidates in imposing a wealth tax on individuals who have substantial wealth. This proposed tax is not a substitute for the income tax or other taxes but is an additional tax intended to help fund a variety of planned spending programs.
From the standpoint of a politician, the proposed tax has a great deal of attraction since it not only brings more revenue to the government but appeals to both a desire to reduce inequality of resources among people and the very human feeling of envy. Of course, the reduction in inequality is one-sided since the wealthy will have less after the tax is exacted but the money won’t directly benefit those who are far less wealthy. Instead, the revenue will go to fund a variety of government programs and the primary benefit will be to those who are hired by the government to administer those programs.
More disturbing is the potential of such a tax to fail in two respects. The first is one we have all seen in action and that is the tendency of individuals to respond to a new tax with a change in behavior which will lessen the blow. Divesting oneself of a portion of wealth will reduce the exposure to the tax while at the same time the tax will discourage individuals from striving to create and build wealth going forward. The second aspect is the undeniable fact that the reduction in wealth due to exaction of this tax will inevitably mean less revenue in future years as the tax continues to shrink the pot.
The logical final step – and the one that is probably the best reason to oppose such a tax – is that the insatiable desire of the government for revenue will mean the tax will in the end apply to almost everyone with any type of wealth. The burden will fall on the middle class – upper and lower – and the only real equality will be in the lack of opportunity and similarly reduced circumstances for all. What fun. 

Increasing Regulatory Burdens

Posted on October 30, 2019 at 11:42 AM Comments comments (24)
When we speak of the costs of government, the first topic usually is taxes, fees, and charges that appear in a myriad of forms and circumstances. We often don’t get past this aspect of governmental burdens and that means some other direct costs are not fully exposed or understood. One that is often mentioned but rarely discussed in detail is the cost to us all of regulations.
Examples of how regulations can cost a great deal can easily be found – here’s one I ran into recently. As almost everyone knows, the pervasive use of the internet, the cloud and their extended family has resulted (naturally) in some folks using the technology in nefarious ways. This in turn has raised substantial interest in what is often called cybersecurity and that of course means regulations to ensure that folks are not harmed. In the financial industry, for example, firms are required to implement measures and processes to provide cybersecurity to their customers. That makes sense.
However, it is easy for regulators to get carried away. The example we will note here is the recent release by a national association which identifies no fewer than 89 assessment areas for member firms to examine for purposes of addressing cybersecurity needs. I haven’t had either the time or the heart to plow my way through all of them yet, but I can assure you that simply reading them all, let alone comparing them to the programs a firm may already have in place, takes time which costs money which in turn will be a charge passed on customers who may or may not benefit from this level of detail. It almost seems like the regulators had a contest to see who could come up with the most items with the most minor distinctions or lack of real life application.
A straightforward, plain language regulation covering the topic would make more sense and be understandable and usable by firms and their customers. Given that all the regulation in the world will not guarantee protection for customers makes it even more problematic that firms will be burdened by the excessive detail and overlap. Of course, this does ensure paying jobs for additional regulators and the lawyers. 

IRA: Retirement or Succession?

Posted on October 16, 2019 at 10:15 AM Comments comments (145)
There is much ado in the financial world concerning various proposals to curb the use of the stretch IRA approach and otherwise change the current rules. Pundits decry the “devastating consequences” to some IRA owners if the changes are approved by Congress. Specifically, the Secure Act proposal would require complete distribution from many IRAs within ten years of the IRA owner’s death.
While this might seem hard for a person who planned to leave their IRAs to younger generations, letting them face the income taxes as and when they took distributions, a closer look suggests otherwise. First and foremost, the IRA has not been around all that long and, as its name indicates, was intended to facilitate saving for retirement by allowing workers to defer taxes on their contributions to qualified plans such as the individual IRA. This primary goal of the IRA is not affected by the proposed legislation which will continue to encourage workers to save money in an IRA while benefitting from tax deferral until such time as they take distributions.  The IRA during the contributing owner’s lifetime remains unaffected.
Another aspect of the IRA was the use of a stretch IRA which allowed the inheritor(s) of the remaining funds in the tax deferred account to continue deferral over their lifetimes while taking required minimum distributions which, of course, were subject to income taxation. This clearly has little to do with retirement and so we now see the proposals to limit the use of this technique.
The commonly heard argument that enactment of the proposals will wreak devastating damage to the plans of account owners seems very weak. The proposals would exempt account values below $450,000 as well as providing other exemptions for certain individuals and situations. This means the impact of the earlier taxation/limitation on the stretch would fall primarily on the wealthy who have accumulated large sums in their accounts while not paying taxes and then would wish to continue to defer taxes after their deaths. Why endorse a rule which benefits only the wealthy and abuses the intent of the IRA to fund retirement and not future generations?

Negative Interest Rate Fun

Posted on October 11, 2019 at 11:10 AM Comments comments (0)
Negative interest rates, could there be anything more unappealing? Banks don’t like it because they have to pay the government interest on the reserves they hold and have not made available to lend. The government believes that the negative rates will lead banks to loan out the money instead of holding it and that as a result the economy will improve due to the added funds out there working.  The idea is also to boost inflation, a bit, also to help the economy. Of course, the government also requires the banks to hold substantial reserves in case there is a liquidity crisis (such as a run on banks).
The European multi-year experience with negative rates, which is continuing, has not proved to be the panacea the governments felt it would be and the expected boost to the economy has not materialized. How does this affect the rest of us? Well, for starters it does not mean that the banks will charge their customers to put money into savings at the bank but also means that the interest rates customers receive are paltry at best. More worrying is the fact that despite these efforts by the central banks/governments to boost the economy, the desired results have not been achieved. As always, your personal situation may vary but there is so much that is out of your control that the best one can do is hope that the government is doing the right thing. Hope is not a plan, they say, but there is little else we can do with regard to the actions of the central banks and the governments they serve.

Withdrawals from a Minor's UTMA Account

Posted on September 20, 2019 at 12:31 PM Comments comments (117)
Gifts to minors range from cash in a birthday card to very substantial gifts to accounts established to receive those gifts and hold them until the minor attains their majority and can access the funds. It is not unusual, however, for a parent to wish to disburse some of those funds on behalf of that minor at some point before the minor is able to access the funds.
Whether it is to purchase a car or perhaps pay for a trip, the amount may be substantial and it is important for all to keep in mind the applicable rules. First is the need for the use of the funds to be for the benefit of the minor beneficiary. As the parents (or guardians) are responsible to provide for the minor’s basic needs, the expense to be funded by the minor’s account generally should not fall within the categories of food, shelter, clothing, and other such needs. Naturally, the beneficiary should be on board with the idea of withdrawing funds for the intended purpose and it is also a good idea for the donor(s) of the funds being expended to be in agreement.
The custodian of the account, often a parent, will need to handle the actual disbursement and should keep copies of receipts, checks and other pertinent information. These will show the intent and purpose of the transaction and protect all the participants and particularly the custodian of the account from a claim that the withdrawal was improper.  When one is working with funds belonging to someone else, they need to take care to handle them appropriately and to be able to show that is what they did.


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