Accounting & Taxation
Tax Haven versus Safe Haven: Where Is the U.S. Taxpayer/Investor to Go?
Thomas M. Brinker, Jr., JD, LLM, CPA
Traditionally, investors would select a particular tax haven for purposes such as low taxation; however, a host of other factors may prove far more essential: confidentiality, banking, currency control, communications, and treaty networks. Before selecting a particular tax haven, taxpayers and investors need to cautiously examine the economic and political stability of the nation, its geographic accessibility to worldwide markets, the availability of labor, the risk of nationalization of assets, and government cooperation. Planners need to keep in mind that the privacy and confidentiality once promised with these planning tools have eroded. Despite these shortcomings with offshore businesses and investing, the need for international tax planning has not diminished.
Economics & Investment Management
Gender, Wealth, and Risk: Why Are Baby Boomer Women Less Risk Tolerant Than Baby Boomer Men?
John E. Grable, PhD, CFP
While it is true that baby boomer women tend to be less risk tolerant than baby boomer men, financial advisors need to really look more deeply into the risk-gender relationship. The days of assessing risk tolerance, placing the assessment results in the client's file, and then building an asset allocation strategy around the result may lead to challenging outcomes for clients who are in the baby boom generation.
New Estate and Income Tax Rates May Change Perspective for Major Gifts
Dennis C. Reardon, JD, LLM, CLU, ChFC
Fortunately, while no one can predict the extent of asset growth and the exact mortality outcome for a given individual, we can apply a formula to calculate the risk of failure versus the benefit of success with regard to the overall tax planning result for gifts. Two major variables influence the amount of growth required to reach breakeven: the spread between income tax and estate tax rates, and the basis of the asset. However, other considerations exist.
Ethics & Regulations
Baby Boomers, Retirement, and Financial Services
Ronald Duska, PhD
Potential retirees will be facing the issue of whether retirement is a blessing or a curse, and those who choose retirement may be facing financial shortfalls. This combination poses some interesting ethical questions for financial advisors and their companies. We review six ethical issues that are likely to arise.
The Managerial Power Theory of Executive Compensation
Paul J. Schneider, JD, LLM
As a consequence of the disconnect between executive compensation and the financial meltdown that battered the economy as a whole, the academic community is developing a new theory of executive compensation, which is referred to as the managerial power theory of executive compensation. The proponents of this theory argue that the current system of corporate governance unavoidably creates incentives and psychological and social forces that distort executive compensation. These proponents make several recommendations to provide executives with well designed and cost-effective compensation programs that will generate shareholder value. Planners should be knowledgeable about these coming changes because they could very well be considered “best practices” in the near future, and as such could establish the standard by which the executive compensation programs for nonpublicly held companies will be measured.
Healthy Brains and Financial Decision Making: Is Decline Inevitable?
Sandra Timmermann, EdD
A new study by the MetLife Mature Market Institute concludes that age alone is not a factor in the lack of ability to make financial decisions. It is important to remember that the large majority of those over age 55 are cognitively healthy. Financial planners should be careful not to jump to conclusions about competence and respect people of all ages.
State Health Insurance Exchanges
Caryl E. Carpenter, MPH, PhD
Although many people view the Patient Protection and Affordable Care Act (ACA) as a radical change in the way we finance health care in the U.S., in fact it is a continuation of the multifaceted system we've had for some time. The ACA includes a mix of public and private financing, with most Americans receiving insurance through their places of employment, while others will purchase private insurance as individuals. Some of these employers and individuals will purchase insurance through health exchanges. The ACA also retains roles for both state and federal governments. States will continue to participate in the Medicaid program, some with expanded eligibility. And most states will either develop state-run exchanges or partner with the federal government to do so. The health insurance exchange concept is a crucial component of the new multifaceted approach to financing health care.
Qualified Plans & Retirement Counseling
Is a Client Ready to Retire?
Bruce A. Tannahill, JD, CPA/PFS, CLU, ChFC, AEP Many working clients view retirement as the light at the end of the tunnel—the time when they not only stop working but can pursue their dreams, which have often been deferred for many years. If clients are not properly prepared for retirement, their retirement experiences can be much different from what they envisioned. Preparation for retirement involves much more than preparing financially. It also involves assessing current and future health, considering what to do in retirement, planning for health care costs, and evaluating how the client views himself or herself.
Urban Myths, Baby Boomers, and the Effective Financial Professional
John N. Migliaccio, PhD, RFG
As thousands of baby boomers cross the age 65 and retirement threshold every day, and typically comprise a significant portion of a financial professional's book of business, it's especially important for financial advisors to understand the many demographic and personal dynamics of this huge client base. Despite decades of scrutiny, many myths, stereotypes, and misperceptions remain about baby boomers. The financial professional who understands and appreciates the differing characteristics within this cohort, as well as how individuals can differ in their approaches to the planning process, can create a more satisfying and successful client relationship.
Will Baby Boomers Phase into Retirement?
Julie I. Tacchino, MSTFP
Baby boomers have modified every institution they have touched and changed the landscapes of education, housing, investing, and many social establishments. Why would retirement be any different? After all, employees face a well documented shortfall of the funds needed for retirement. Employers are confronted with a brain drain and the loss of skilled labor when the boomer cohort adds candles to its annual cake. There is a need for adaptive retirement strategies–on the parts of both employees and employers. There is no longer one standard retirement approach, and given the ever-changing employment environment, it is crucial for both employees and employers to stay innovative when it comes to retirement solutions. One such innovation is phased retirement. Phased retirement can be thought of as a broad variety of employment arrangements allowing retirees to continue working at reduced workloads while gradually shifting from full-time work to full-time retirement. This article looks at the characteristics of phased retirement, different approaches to phased retirement, and why it can be beneficial for both employees and employers, as well as the challenges phased retirement presents. It is concluded that the baby boom generation will make retirement phasing the next step in its game-changing march through time.
Advising Couples: More Art Than Science
Kathleen Burns Kingsbury
Due to the rise in women's economic power and their increasingly present roles in managing family finances and investments, a successful couples advisor needs to learn how to balance the needs of both members of a couple. This requires a different skill set and knowledge base than working with an individual client, or catering to only one member of the partnership. To effectively counsel couples, an advisor needs a solid understanding of couple dynamics and key gender differences relative to communication, interpersonal preferences, and wealth. The professional needs to be part mediator, part facilitator, and part objective observer—making advising couples more art than science. To date, there is very little written for financial service professionals on how to effectively advise couples. This is surprising given the reality that most of the clients seen by financial advisors and planners are couples. This article discusses how couple dynamics play out in advising meetings and offers five strategies for maximizing the advisor's effectiveness in working with couples.
Electronic Participant Fee Disclosures: A Review of Electronic Disclosures as a Cost-Efficient Delivery Alternative
Jill M. Fridley, JD
In an effort to improve the transparency of fees and expenses associated with retirement plans, the U.S. Department of Labor (DOL) has increased fee disclosure regulations during the past year. While this goal is a noble one, it ignores the significant costs of distribution, which are often passed on to participants. Electronic delivery could significantly reduce such costs, but the DOL's current interim requirements for electronic delivery are extremely burdensome, with the greatest barrier being the default opt-in rule. This article discusses strategies for satisfying the current requirements, while arguing that the DOL should adopt a default opt-out rule when implementing its final rule on electronic delivery. Beyond cost savings, electronic disclosures provide many benefits that increase access to and improve participants' understanding of the disclosures. This article discusses those benefits and argues that electronic disclosures may better serve the DOL's goal of greater transparency. The focus is on electronic 404a-5 disclosures, but many of these requirements and benefits are applicable to other disclosures, as well.
Business Use of the Personal Residence: Everyman's Tax Shelter
Tom Colaiezzi, MS
Peter Oehlers, DBA, CPA, CMA
A.J. Cataldo II, PhD, CPA, CMA
Legitimate use of the home office deduction continues to provide taxpayers with a powerful, broadly applicable tax shelter. Depreciation recapture is insignificant and/or not relevant. The financial planner should focus on (1) tax deferral, (2) permanent Self-Employment Contributions Act (SECA) tax savings, (3) legitimate shifting of personal expenses from the taxpayer's Schedule A to the Schedule C—beneficial to both itemizers and marginal or nonitemizers, and the generation of additional, legitimate above-the-line deductions for (4) mileage (converted from commuting to business), (5) home office furniture (retained in service for its entire statutorily depreciable life), and (6) otherwise nondeductible utilities.