Comprehensive Financial Services, LLC

Which way from here?

2009-10-26T10:49:00.000-07:00

As I sit putting the finishing touches on my 2008 personal income tax return (yes, I filed a timely extension), all the forms and figures cast my thoughts in several directions. Is the economy on the mend? Or is it, like Apollo Creed at the of Rocky II, just acting like it's going to get off the mat, only to slump again and be counted out? What about the stock market? I hear all sorts of chatter about bears becoming bulls and bulls turning to bears. What about skyrocketing federal budget deficits and Obamacare looming on the horizon? How will government action affect the economy and the markets? What is really going to happen? Well, my favorite answer to most questions is... it depends.

Our massive economy, more than four times larger than the second largest (Japan), truly makes the world go round. It is so involved and complex that it becomes nearly impossible for the common man to even begin to understand all things that can have an impact on it. The Conference Board recently released its monthly update on leading and coincident economic indicators. These two measurements attempt to reflect how the economy is doing now (coincident) and how it may perform in the future (leading). In summary, the LEIs had fallen for twenty straight months, but have been rebounding strongly for the past five. The CEIs have now leveled out. Taken together, these two indicators strongly suggest a near-term recovery for the economy. However, jobless rates continue to increase, with the unemployment rate nationally exceeding 10% for the first time in 25 years. Are we in store for a "jobless" recovery, where companies become profitable and expand without rehiring workers? Will the recovery materialize at all? Time will tell.

There's no doubt that there exists within the recent market recovery a not-so-subtle psychological lift for all those who suffered great losses over the past year. But many still remain very leery of the markets. Some, including many elderly investors, have sworn off the markets entirely (and, in most cases, rightly so). Still others, who have seen the markets rise a full 50% from the March 2009 lows are reticent to get in now, fearing they may suffer another pullback. As the economy begins to break into positive territory, the markets will continue to move higher based on the prospects of more consumer spending, especially seeing the recovery in their 401(k) and other retirement accounts. The unemployment rate may turn out to be the great Achilles' heel of the markets. If unemployment remains high, even in the face of other "recovery" indicators, the markets will remain spooked about another dip into recession. Consumer spending accounts for 70% of all economic activity. When consumers don't have jobs, they don't spend.

Finally, looming on the horizon like a big black storm cloud, is the government. Will tax rates go up? If they do, will they wreck the recovery? How will we pay for nationalized healthcare? How will we pay for the debt we already have? How much is the interest cost on the national debt annually anyway? If we have too many people unemployed, will tax revenues continue to go down as deficits rise to unheard of levels? Why do 10% of Americans pay 40% of the taxes and 40% of Americans pay no taxes? What if the guys who pay the most stop spending and investing? Well, I don't have a crystal ball, but if you look closely and follow the signs, you won't be surprised by what comes around the next bend.

The Anniversary of the Crisis

2009-09-16T15:08:00.000-07:00

Many financial columnists are beginning to write about the one year anniversary of the loosely-termed "financial crisis". So, I thought I'd jump on the bandwagon and add a few thoughts of my own. First, I think the word "crisis" is used with far too much frequency these days. I try to be exact in my use of language. I don't always get my words just right. However, I'm pretty picky about other people's use of terms. If anything bad that happens is termed a "crisis", what do you call something that is really bad? Is a "catastrophe" worse than a "crisis"? How about a "calamity"? All these descriptors and their use in our lives often depend on how we perceive the world. For example, if someone loses a job, is it a "calamity", a "crisis" or a "catastrophe"? I guess it all depends. If the person who lost his job was financially prudent, saving money regularly, keeping a financial reserve of six months to a year of expenses and keeping personal spending within his budget, then a job loss would just be an obstacle or a setback to overcome. It wouldn't rise to the level of any of the "c" words above. However, if the person was awash in debt, had no savings and always spent more than he earned, a job loss might well be a "catastrophe" or worse.

Sound financial principles have stood the test of time because they are sound and tested by time. Pay yourself first and build up a reserve of cash for unexpected events. Make and keep a budget. Invest your capital in low-risk, diversified asset classes. If we can take a lesson from the past year, it's that risk and leverage have a way of turning on us just when we don't expect it. As soon as you're sure that your prospects can go nowhere but up, let me know. I'd like to borrow the crystal ball you're using.

Give Now or Give Later - The CLT and CRT of Charitable Giving

2009-08-31T13:54:00.000-07:00

Even in times of economic uncertainty, many individuals are looking for the best way to support their favorite public charities. For some it's the local women's shelter. For others it's their Alma Mater. Yet others wish to donate to their church or favorite social cause. Either way, there are two very tax efficient ways to donate that should appeal to the benefactor in all of us. These two methods are represented by their abbreviations: CLT and CRT. The CLT is a Charitable Lead Trust. The CRT is the Charitable Remainder Trust. Let's look at each individually. There are several variations of each. We'll just be going over the basics here.

You can give now to your favorite charity by using a CLT. This type of trust allows the donor to transfer an asset to the trust while retaining ownership of the asset. The charity receives the income from the trust for a certain fixed period of time or based on the remaining life of the grantor (gift giver). An analogy would be that you keep the peach tree but you agree to give away the fruit. The charity enjoys the "fruit" for the term of the trust, then the asset passes back to the donor (if a grantor trust) or to the donor's heirs (non-grantor or irrevocable trust). The grantor gets a healthy current tax deduction for the discounted value of the gift. In the case of a non-grantor trust, the "tree" can pass to the heirs without being subject to estate taxes. This type of charitable giving makes even more sense in times of depressed asset prices and low interest rates.

You can give later by using a CRT. In this type of trust, the grantor irrevocably gives assets to the trust for the benefit of the charity. However, the grantor retains the right to the income from the assets, usually for the rest of their life. Once the grantor has passed, the charity gets the remaining trust assets without restriction. This type of trust generates a tax deduction now for the grantor (based on a formula). It also reduces the grantor's overall estate value, reducing future estate taxes. In this case, the grantor gives away the peach tree, but retains the right to keep the fruit until they pass away. This type of gift is usually irrevocable and cannot be changed. Proper advice and planning are required to make sure this strategy fits in with the overall estate plan.

Americans are the most generous people in the world. We consistently lead all other countries in charitable giving. If charitable giving is part of your future estate plan, contact CFS to receive a free estate planning consultation.

2009 Mid-Year Review

2009-07-31T09:03:00.000-07:00

With the first half of 2009 behind us, I'd like to take a look at what has happened and speculate about what we might expect for the second half of the year.

First, looking at the financial markets, we can take stock in the fact that the markets are still way off their October 2007 highs. The DOW industrials remain down over 40%, the S&P 500 is off by 42% and the NASDAQ composite down 36%. Virtually no sector was spared in the Stock Market Carnage of 2008. How has the markets fared year-to-date through the end of June? The DOW is down 3.75% but the S&P 500 and the NASDAQ are up 1.1% and 16.3%, respectively. Some say they are sniffing the beginnings of a bull market these days. Which way will the markets go? Honestly, I've never been more uncertain about the direction of the markets than I am right now. Clearly, at these price levels, there are strong arguments to start accumulating shares in solid, reliable companies. On the other hand, there are great arguments that say the worst is yet to come. Job losses could lead to more mortgage defaults. Credit is hard to come by. Businesses are not growing and they are not hiring. The macro economy remains fraught with uncertainty. From an investment standpoint, the financial markets hate uncertainty.

Where does all this leave the average investor? I believe there are opportunities in ANY market, as long as you know where to find them. I also strongly believe that buy-and-hold investing is dead for the foreseeable future. If your stock broker was unable to tell you that October 2007 was the top of the market and you should sell to lock in your gains, how do they know that this is the bottom? If you are worried about the volatility in the markets, or you just can't afford to lose any more money, there are safe places of refuge you can run to in troubled times. At CFS, we specialize in safe investment strategies. We have access to asset classes that don't derive their values from the gyrations of a fickle stock market. We can safely craft a portfolio which can deliver needed cash flow with double-digit returns outside of the stock market. Call CFS today so we can honestly and objectively evaluate your holdings and get you in a position to succeed.

Found Money - Sell Your Life Insurance Policy?

2009-06-30T08:44:00.000-07:00

Many of you who are at or near retirement have not fared well during the past six months. Many market-based portfolios have dipped by as much as 50% or more since this last year. Retirees who were counting on those portfolios to provide retirement income are now asking themselves if they will have enough cash to live out their lives in comfort. These are real concerns for many retirees who have seen their hard-earned savings evaporate under the pressure of a collapsing economy. Will you have time to recover what was lost? Should you keep your money in the market since you've already lost so much? Will you have to cut back on your lifestyle and future plans? These questions and others are keeping many seniors awake at night. However, one solution has appeared on the horizon that might just be your saving grace - your life insurance policy.

Several months back, I wrote about a new asset class called Life Settlements. The following is an excerpt from that article:

"This new asset class provides the potential for handsome returns while giving the investor a safe, non-correlated investment alternative. Until recently, there was no way for an individual investor to participate in this asset class. Now, there are companies in the marketplace who will sell fractional ownership in life settlement investments for as little as $50,000. What are life settlements anyway? A life settlement is simply the sale of an existing life insurance policy by a terminally ill or elderly person to another party. The price of the policy is negotiated and sold by the owner at a discount to the face amount. The purchaser then collects the full amount paid out under the policy. Life settlements are attractive to policy holders because they provide secondary market for life insurance policies that are no longer needed or wanted. Investors are attracted to life settlements because they offer the opportunity for potentially high returns that are not tied to stock or bond markets, interest rates, or business cycles."

The companies I mentioned in the excerpt above are willing to pay you good money for the right to purchase your life insurance benefits. They are willing to pay you cash now for the right to collect your policy when it matures. For insureds who meet a specific set of criteria, these settlement companies may offer you as much as 50% or more for your future death benefit in cash now! That is money you can put in your pocket to supplement your retirement or make up for market losses. So, rather than continuing to pay on that policy you can no longer afford or no longer need, you can sell it to willing buyers for a percentage of the death benefit.

These types of arrangements are not for everyone and having adequate representation as the seller is important. However, for the right person, a life settlement could be just the ticket to providing much needed cash in your golden years. Call CFS today for a free evaluation of your life insurance policy and to see if your policy qualifies for a settlement.

Supercharge your IRA with Life Max

2009-05-22T14:05:00.000-07:00

As most of you already know, taking early withdrawals from accounts such as your IRA or 401(k) are subject not only to ordinary income tax, but are also subject to a 10% early withdrawal penalty. In recent years, some IRA rules have changed to eliminate the 10% penalty on early withdrawals for certain limited reasons such as the first time purchase of a home or education costs. However, there is a little known rule that allows for penalty free withdrawals before age 59 1/2. It's called Rule 72t.

Rule 72t is an obscure rule in the internal revenue code that allows for early withdrawal from qualified retirement accounts for any reason. The only catch is that you must take at least five "substantially equal periodic payments." The amount of the withdrawal depends on a relatively complex calculation which takes into account your account balance and life expectancy, among other factors. The IRS allows us to use one of three approved method for this calculation. So, great, penalty-free withdrawals are available from IRAs. So what? Well, this is the time to begin planning on how you intend to use your IRA in the future.

Many of my senior clients actually despise their IRA accounts. They defer taking the money out because they don't want to pay income taxes on the withdrawals. ROTH conversion rules are very restrictive, so many don't elect to do a ROTH conversion. So, what's the alternative? I'd like to discuss an alternative strategy to leverage the most beneficial effects of the ROTH IRA (namely, the power of tax deferred growth and tax FREE withdrawals) with Rule 72t's penalty-free early withdrawal provisions. What is this alternative strategy? It's a little something we like to call Life Max.

Life Max is a unique strategy that combines the use of your IRA funds, Rule 72t and permanent life insurance. The strategy entails withdrawing funds from your retirement accounts to fund a permanent life insurance policy. This policy can be used for future tax free income or as an efficient wealth transfer vehicle depending on your individual circumstances. With Life Max, you can withdraw all or part of your IRA balance and quickly pay up a permanent life insurance policy where your cash values can grow tax deferred, just like in your IRA. However, unlike your IRA, cash can be withdrawn from permanent life insurance policies on a tax free basis (as policy loans). If your goal is to "leave your IRA for the kids", Life Max is a much more efficient way to transfer cash to your heirs. Life insurance proceeds go to your beneficiaries income tax free. IRAs and other qualified retirement accounts are considered IRD (income in respect of a decedent) assets. This designation makes IRAs a terrible asset to pass on, because it is subject to both income and estate tax (where applicable)when you pass on. Transferring the value of your IRA into a paid-up permanent life insurance policy will make sure the kids get the most out of your IRA.

Is the Life Max strategy right for you? Call Comprehensive Financial Services at (702) 240-4621 to schedule an appointment to see if Life Max fits in your financial plans.

Do you need a Revocable Living Trust?

2009-04-17T10:29:00.000-07:00

Revocable living trusts have become a popular alternative to the traditional will as a way to pass property on when you die. Depending on which state you live in and the size of your estate, a Revocable Living Trust may or may not be the answer for you to pass on your assets.

A revocable living trust is an arrangement you make for management and distribution of your property. Like a will, the trust is "revocable," meaning that you can modify or eliminate it at any time.

These trusts are established by a written agreement or declaration which appoints a "trustee" to administer the property, and which gives detailed instructions on how the property is to be managed and eventually distributed. If you want your trust to substitute for probate (court administration after incapacity), you must give the trustee detailed instructions about how to handle these situations, and you should legally transfer substantially all of your property to the trustee. A revocable living trust agreement or declaration is usually longer and more complicated than a will, and transfers of assets to the trustee can be time consuming and expensive.

Any competent adult can establish a revocable living trust. Husbands and wives can establish a trust together, and can provide that their community and separate property assets be held in different accounts.

Usually, any competent adult can be the trustee, including the person setting up the trust. You can appoint more than one trustee, can delegate different duties to each trustee, and can retain the power to remove the trustee and appoint a new one. Appointing an alternative trustee is essential if you are the first trustee and the trust will carry on after you die or become incapacitated.

Establishing a Revocable Living Trust is fairly simple. First, sign a written agreement or declaration. Then, legally transfer all trust assets to the trustee. Deeds, stock transfers, new bank accounts, and other legal documents may be necessary. Assets not formally transferred to the trustee will probably not be considered part of the trust and might still be subject to probate. I suggest using a competent estate planning attorney to help you establish and fund the trust.

Avoiding probate is one of the key reasons to establish a Revocable Living Trust. Probate is the legal process for transferring your property when you die. It is supervised by a court. Probate usually involves validation of your will, appointment of a personal representative, collection of your assets, notification and payment to your creditors, and transfer of your property to the beneficiaries under your will. A revocable living trust avoids the probate process because you collect your assets and transfer them to the trustee before you die. If you fail to do this, you will not avoid probate.

What about taxes and the trust? By itself, a revocable living trust does not avoid income, estate or gift taxes. Standard provisions for saving estate and gift taxes can be included in a revocable living trust or a will. And a federal estate tax return still must be filed after you die if your net estate exceeds $3.5 million in value. You should not set up a revocable living trust just to save taxes.

The exact cost of a revocable living trust depends on how valuable and complicated your assets are, whether standard documents can be used, how many assets must be transferred to the trustee, and whether tax planning is needed. Before you direct an attorney to set up a trust for you, ask for estimates on how much will it cost, how much writing a will would cost, and how much probating your estate would cost. The fee arrangement should be in writing.

A standard revocable living trust package should include the trust document, the transfer of assets to the trust, a "pour-over" will to add any other assets to the trust, and a similar durable power of attorney; it also might include descriptive materials and related legal documents, such as a directive to physicians or "living will."

Below are the key advantages to establishing a Revocable Living Trust:

- Avoidance of probate; specifically, avoidance of expensive multiple probate proceedings when you own real estate in several different states.

- Reduction of delays in distribution of your property after you die, although delays caused by filing an estate tax return cannot be avoided.

- Privacy, because your trust instrument would ordinarily not be filed in court.

- Continuity of management of your property after your death or incapacity, especially if you do not serve as the trustee.

- For married couples with substantial separate property, segregation of those assets from their community property assets.

Call me at (702) 240-4621 to discuss whether or not a Revocable Living Trust is right for you.

Certain information in this article was provided at www.wsba.org.

Are Equity Indexed Annuities Right For You?

2009-03-31T10:42:00.000-07:00

Last month I wrote in defense of the best, most secure financial product ever conceived... The Annuity. Now, I want to expand on that discussion by focusing on what I consider the best of the lot: The Equity Indexed Annuity. Sometimes called the Fixed Indexed Annuity, these instruments have some very special features that should call the attention of all people at or near retirement.

Equity Indexed Annuity are a hybrid product, developed by insurance companies to allow for higher yields than the traditional Fixed Annuities, without the potential stock market losses attendant in Variable Annuities. Let's look at each of these separately and then discuss the FIA.

Fixed Annuities earn a guaranteed interest rate during a certain period. They are backed by assets in an insurance company's general account, usually bonds. Fixed Annuities depend entirely on the financial soundness of insurers, which are regulated primarily by state insurance departments.

Variable Annuities can also come with guaranteed benefits, such as a death benefit and a minimum return, but you must pay extra for these features. Once the cost of fees and riders is deducted, the balance of the deposit is invested in a portfolio of mutual fund-like investments. Therefore, variable annuities are more exposed to market risks. In market downturns, owners of VAs can see their balances evaporate. So what is the solution? Do you have to take risks in the market in order to get higher yields? Enter the EIA!

Equity Indexed Annuities are hybrid vehicles that allow you to preserve your capital like a FA, but also allow you to participate in market growth when the markets go up like VAs. In other words, your account values in EIAs only go UP, NEVER DOWN. And, you have the ability to earn up to 3% per MONTH with some contracts! So, when markets are up, you participate on the upside. When markets are down, your capital is preserved and you lose no money. Does this sound too good to be true? Well, it isn't.

Insurance companies are willing to enter into these contracts because they only allocate a portion of the market gains to your account, keeping the rest for themselves. This is a spread they earn on your deposit. For this money, they guarantee that your account balance will never go down, even in bad market years. So, the EIA gives you the best of both worlds, market participation when markets are up, and capital preservation when markets are down.

To see if EIAs should have a place in your financial plan, give us a call at (702) 240-4621 to schedule an appointment.

The Best, Most Secure Financial Product Ever Conceived

2009-02-27T11:31:00.000-08:00

I'm writing today in defense of one of the greatest financial tools available to retirees. I'm talking about annuities. Yes, annuities. I said it. You can quote me. I for one am sick and tired about hearing how annuities are a "bad deal". Annuities are exactly what they purport to be. They are financial savings vehicles that allow the saver to have earnings grow tax deferred until they distributed from the account. They are financial vehicles that, when properly structured, have no risk of loss due to fluctuations in the stock market. They are financial vehicles that, when properly structured, will guarantee that the account holder will never outlive his money. They are financial vehicles that, when properly structured, allow you to participate in market gains when the markets are positive, but allow you to avoid any and all market losses. In essence, it is the best, most secure financial product ever conceived (except for permanent life insurance). Let's take a look at the biggest downsides and upsides of annuities.

Surrender Charges - most annuities are subject to a surrender charge. These charges are usually based on a declining percentage of the account value. The longer you keep your money in the account, the smaller the surrender charge becomes. Most annuities, work like bank CDs as far as surrender charges are concerned. You place money in a CD for a certain period of time. The bank promises a certain interest payment on your deposit. You promise to leave the money in for the specified period. If you must withdraw the money before the end of the period, you will be subject to an early withdrawal penalty. Annuities work much the same way. The time periods can be between 3 and 14 years, depending on the company and the annuity product selected.

Liquidity - most annuities allow for a 10% withdrawal provision annually with no surrender charge. This feature allows access to a portion of the money without incurring a financial penalty. This is a great feature in case an unforeseen circumstance arises. Also, if you become disabled, terminally ill or die, most annuities can be liquidated with no surrender charges at all.

Bonuses - many annuity companies pay deposit bonuses when you open the account, some as much as 12%! They do this as an incentive to consumers to attract long-term deposits. So, on a $100,000 account, you would be credited up to $12,000 in bonuses in your account. Most annuities with large bonuses require longer contracts, usually between 10 to 14 years. These bonuses are very generous and help people recuperate some of their stock market losses.

Guarantees - annuities are insurance contracts, and are guaranteed by the insurance companies issuing the contracts. Many annuity products sold today are of the Fixed Indexed variety. These contracts promise that the account values can never decrease. They also pay competitive fixed rates of interest. Some allow you to participate in market gains without the risk of market losses. Others allow you to add a rider to the contract where the insurance company will guarantee a rate of return as high as 8% per year, based on certain conditions. In this day and age, that is an attractive offer.

Call us today to schedule an appointment to see if an annuity is right for you.

The Roles of Life Insurance in Estate Planning for IRAs

2009-01-30T14:13:00.000-08:00

1. Spouse IRA Rollover Enhanced With Life Insurance
Upon your death, your spouse can assume ownership of your existing IRA or rollover your IRA into a new IRA in your spouse's name. While distributions prior to age 59 1/2 may be subject to a premature distribution penalty tax, as the new IRA owner, your spouse has the opportunity to defer distributions and income tax until reaching age 70 1/2. The unlimited marital estate tax deduction will also defer estate taxes until your spouse's death. A properly structured life insurance policy can then supply a source of liquidity to cover estate and income taxes upon your spouse's death.

2. Stretch IRA Legacy Enhanced With Life Insurance
The stretch or inherited IRA strategy can set the state for many years of income tax deferred growth for your IRA beneficiaries. Life insurance proceeds can ensure sufficient liquidity to pay estate and income taxes, so your beneficiaries won't have to invade the IRA beyond their required minimum distributions. Ensuring sufficient liquidity enables your beneficiaries to keep the IRA intact, and comply with their stretch schedules, so the maximum amount can accumulate and build a larger legacy over time.

3. Stretch IRA Legacy for Children and Life Insurance Legacy For Spouse
In some situations, it may be more desirable to pass your IRA to a younger child or grandchild who may have a greater opportunity for income tax deferral using the stretch technique. A life insurance legacy can instead be provided for your spouse to replace the value of the IRA, and ensure equity of inheritance. Your spouse's life insurance bequest will be received free of income tax, and free of federal estate tax due to the unlimited marital estate tax deduction.

4. Charitable Remainder Trust For IRA With Wealth Replacement Life Insurance Legacy
A testamentary Charitable Remainder Trust (or CRT)created under your Will can be the beneficiary of your IRA, reducing or eliminating income and estate taxes. The CRT can ensure lifetime income for your surviving spouse, children or other heirs, as well as a legacy for charity - the CRT remainder beneficiary. The benefits of a CRT can compare favorably with a stretch IRA, and can be designed with a feature allowing the income beneficiaries to defer their distributions and taxation until desired - without required minimum distributions. A life insurance legacy can then replace the value of the charity's remainder interest for your heirs.

5. Life Insurance Legacy in Lieu of IRA Legacy
In some cases, it may practical and economic sense to utilize your IRA to fund an alternative life insurance legacy for your heirs - particularly if you own sufficient other assets, and you won't need your IRA. This strategy can represent a powerful leverage of IRA funds. The proceeds from a properly structured policy pass free of federal income, estate and GST tax - unlike an IRA. After you reach age 70 1/2, required minimum distributions must begin, and distributions after age 59 1/2 are free of penalty tax. Your lifetime distributions can also be used to fund premiums on a policy that complements your estate and distribution planning strategy for your IRA.

Tax Musing at Christmas Time...

2008-12-15T12:04:00.000-08:00

As my wife continues dutifully decorating our home for the Christmas season, I began to reflect on the not-so-pleasant year-end tasks which need attention. Nearly every ornament she places on the tree triggers a specific memory of our lives together, our children and even our childhood. Likewise, as I ponder the financial wish list, I felt the need to pull together my own list of things that my readers might do before year end to truly have a Merry Christmas and a Happy New Year. So, in no particular order, here are a few financial "gift ideas" you may want to consider before the calendar changes to 2009.

Harvesting Investment Losses
No one likes to lose money on investments. However, there is a way to take some of the sting out of the loss. You may want to consider selling some of your under performing investments at a loss and offset them with the sale of other investments which may have a capital gain built up. Capital gains and losses are netted against each other on your tax return to yield the net capital gain or loss for the year. If you do this, you can offset the capital gain tax on the "good" investment with the loss on the "bad" investment. Be careful, this strategy does not work for investments in IRA or 401(k)accounts, as gains and losses in those accounts are all deferred. Lastly, your losses can exceed your gains by up to $3,000 per year and still be completely deductible in the current tax year. Capital losses above $3,000 will be carried forward to future years.

Business Owners
There are a number of things you can do before December 31st to create holiday cheer. If you believe taxes will be higher in 2009 and beyond, do your best to receive income in 2008 and defer expenses in 2009. This may sound counter-intuitive, but, if the 39.6% top tax rate returns for 2009, you may wish you had done it. One deduction that can't wait is what has become known as the "SUV" deduction. In essence, if you buy a vehicle for business use that is over 6,000 pounds, you can deduct up to 80% of the cost of the vehicle in the first year. If business is not so good in 2008 and you aren't in need of additional deductions, don't forget the rules for business losses. Depending on the type of loss, you may be able to carry the loss BACK two years and wipe out taxable income from 2007 and 2006. The Economic Stimulus Act of 2008 also has a couple of goodies you may want to take advantage of. This law contains provisions for bonus depreciation on qualifying property purchased in 2008 only, as well as increased $179 expensing for 2008. Also, don't forget to set up and fund a retirement plan for yourself.

Charitable Giving
I'll quote, from memory, from one of my favorite Christmas movies, the 1972 musical version of Scrooge, "...at this festive season of the year, sir, it is more than usually desirable that we should make some slight provision for the poor and the destitute..." For those of you who are charitably inclined, pull together all those clothes and shoes you no longer wear and donate them to a public charity. This act will save you the hassle of the garage sale, it could get you a tax deduction, and you'll make the community a better place. For those of you looking to wrap charitable giving with estate planning, we at CFS have a number of strategies to employ to receive generous tax deductions today and a lasting legacy for tomorrow.

What Happened to Prudent Investing?

2008-11-28T14:25:00.000-08:00

Just what is going on out there? I'm seeing individuals and couples every week that have fifty, sixty, seventy - up to eighty percent of their portfolios invested in stocks. When I see their brokerage statements, some are embarrassed, some are angry, some simply shrug their shoulders. It's almost as if they are trapped in an investment prison and have no idea how to get out.

I live by a set of core principles I've learned throughout my life. Similarly, I invest using a set of core principles I've picked up by reading about investment theory and listening to successful investors. Many of these principles are tried and true...they are not groundbreaking or revolutionary. But, somehow, many of you have thrown them out the window in pursuit of bigger returns. I'd like to review the principles I believe should be followed by every prudent investor, especially those of you nearing or in retirement.

Principle #1
It's more of a rule of thumb, actually, but it goes something like this. For every year old you are, you should have a corresponding percentage of your entire portfolio in safe, low-risk or guaranteed income vehicles. So, if you are 60 years old and beginning to wind up your career, approximately 60% of your investable assets should be in fixed income or guaranteed return investments. Some examples of these types of investments might be bonds, annuities, CDs or life settlement contracts. The importance of this first principle cannot be ignored in times when the stock market is raging. As we have recently learned (again), you have no direct control over what happens in the equities markets. Having an inappropriately high percentage of your portfolio exposed to the risk of the markets can dramatically impact your overall wealth when bad market years come.

Principle #2
This is one I first picked up from my father-in-law over twenty years ago. He is an avid mutual fund investor. He researches the funds he is interested in. He compares their returns against their peers. He evaluates the holdings of the funds. He reviews the past performance of the fund manager. Once he decides to invest, he does something very important.. he sets his stop loss targets. A stop loss is simply an arbitrary point at which you will stop losing money in the investment by selling it. For my father-in-law, his stop loss point is 9%. If the fund he buys loses more than 9% of its value, he dumps it - no matter what. The disciplined use of stop losses can help preserve your capital and help you "live to fight another day". I know some of you are thinking that this principle can be ignored because the market always comes back, right? Well, I suppose you are right...but how long will it take? Suppose in 1985 you invested in the stock market index of the second largest GDP producer on the planet - Japan. The NIKKEI 225 hit its all-time high in late 1989 at 38,916. It has gone downhill ever since. As of this writing, the NIKKEI 225 is trading at 8,577. It has never even come close to its historic high in the intervening 19 years. Could the US equity markets be in for the same ride? Good old American optimism says no, but who could have predicted the DJIA falling to 7,882 in October of 2008?

Principle #3
Be engaged in your financial affairs. Question your advisors and their recommendations. As you get older, continually evaluate your exposure to risk and reallocate as necessary. Stay involved in the financial decision making. Educate yourself on financial affairs. Stay abreast of what is going on in the world from an economic and political standpoint. It's your money! No one else will be as concerned about it as you are!

Presidential Elections and Market Cycles

2008-10-31T15:25:00.000-07:00

In The Stock Trader's Almanac 2004, Yale Hirsch notes that based on his studies, "Presidential elections every four years have a profound impact in the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term and bull markets, in the latter half." What does this statement portend for the 2008 election? It's anyone's guess. Given the current state of the markets, the banking system and the level of fear amongst investors, history may not be as good a guide as in years past. Although the results of the presidential election remain in doubt, the financial landscape will remain unpredictable for the foreseeable future.

Many of you, in an effort to capitalize on the upside of the market, have left your portfolios exposed to significant downside risk. This overexposure to the equities markets has meant significant losses in account value over the past few months. You are not alone. According to the September 30th, 2008 edition of the Wall Street Journal, many wealthy investors are staging revolts against their advisors due to what is perceived as an over-allocation to stocks. Unfortunately, many investment professionals ignore sound investment principles in an effort to increase investor returns. When we ignore sound, time-tested principles, the results are often negative in the long run. Let's take a fresh look at one of the foundational principles of finance: asset allocation.

Every investor should maintain a broad diversification in different asset classes. Please note, i don't mean the kind of diversification you get buying a mutual fund instead of a particular stock. I'm talking about owning different classes of assets. For example, a truly diverse portfolio will hold assets from many risk classifications, tailored for the age and goals of the individual investor. Asset classes include, but are not limited to, annuities, life insurance, life settlements, bonds (treasury, muni and corporate), equities (stocks, mutual funds and ETFs), real estate (residential or commercial), commodities (precious metals, cattle or FCOJ), as well as private business arrangements (private placements). Although some of these classes of assets may not be right for you, some exposure to each class would represent a broad diversification in your portfolio. Diversification is very important, with the current market downturn acting as a painful reminder of this principle. Simply put, a broadly diversified portfolio is essential to minimizing overall portfolio risk.

At Comprehensive Financial Services (CFS), we specialize in creating investment portfolios that are broadly diversified. We have access to many unique asset classes that are not correlated to the stock market. If your portfolio has suffered losses from the recent market downturn, it may be time for one of the professionals at CFS to evaluate where you are and make recommendations to protect what you have.

To convert or not to convert - The ROTH dilemma

2008-09-26T16:29:00.000-07:00

When Public Law 105-34 was adopted in 1996, who knew that it would cause so much consternation among seniors and retirees? This is the law that created the ROTH IRA. Senator Roth, in my opinion, did all Americans a favor by sponsoring and shepherding his brain child to passage. Since the ROTH is a late-comer to the retirement savings table, many of us had already built up substantial assets in other types of "pre-tax" retirement vehicles such as Traditional IRAs, 401(k)s, and the like. In promoting these pre-tax plans, employers and tax accountants extolled the virtues of investing pre-tax dollars for retirement. We heard about all the advantages... current year tax savings, tax-deferred growth... it was all just a dream come true. Now, with many of us either past or approaching the magical age of 59 1/2 (I wonder which Ways and Means committee staffer came up with that number?), we are faced with real decisions regarding those little nest eggs.

Once we really start focusing on our retirement account, we quickly discover that the first "myth" about tax-preference savings begins to melt away. IRAs actually used to be marketed by telling us that we would be in a lower tax bracket at retirement than we were while we were saving all that money. The reality is that, by the time, we hit retirement age, many of us no longer benefit from the same types of tax deductions we used to enjoy during the working years. High mortgage interest deductible as an itemized expense, child tax credits, education credits and, yes, even for contributing to IRAs! Most of those deductions have long since passed, leaving us with a HIGHER tax bracket in retirement. Facing this unforeseen dilemma, we turn to IRA planning to find a way out of the mess we voluntarily put ourselves into.

Many of my clients ask me if it is worth it to "just pay the tax" and convert the balance of their IRAs to a ROTH. Well, I for one never concede the payment of taxes that easily! In truth, there are several strategies which may be employed to reduce, or in some cases, eliminate the taxes on your IRAs. These strategies range from aggressive to very conservative. There are strategies that are perfect for business owners. There are strategies that are perfect for those already receiving Required Minimum Distributions. Depending on your individual goals and circumstances, one of these strategies may be just right for you. Call us to set an appointment to discuss the wide array of IRA strategies offered at Comprehensive Financial Services.

Life Settlements

2008-08-29T11:04:00.000-07:00

Actually, life settlements are not new, they have been around for the better part of 25 years. This new asset class provides the potential for handsome returns while giving the investor a safe, non-correlated investment alternative. However, most life settlement businesses are conducted at the "institutional" level, with portfolios of hundreds of millions of dollars in life insurance contracts bought and sold. Companies like Berkshire Hathaway, Merrill Lynch and Morgan Stanley invested millions into life settlement contracts. Until recently, there was no way for an individual investor to participate in this asset class. Now there are companies in the marketplace who will sell fractional ownership in life settlement investments for as little as $50,000.

What are life settlements anyway? A life settlement is simply the sale of an existing life insurance policy by a terminally ill or elderly person to another party. The price of the policy is negotiated and sold by the owner at a discount to the face amount. The purchaser then collects the full amount paid out under the policy. Life settlements are attractive to policyholders because they provide a secondary market for life insurance policies that are no longer needed or wanted. Investors are attracted to life settlements because they offer the opportunity for potentially high returns that are not tied to stock or bond markets, interest rates, or business cycles.

Over the past few years, the market for life settlement has grown substantially both from the demand and supply sides of the transaction with an increase in the average face amount of policies presented for sale. Based on our market research, the total face value of life settlement transactions completed during 2006 was approximately $5 Billion in face amount. In 2005, Sanford C. Bernstein & Company, LLC a research unit of Alliance Bernstein, L.P. estimated the market to be approximately $13 Billion in face value of policies purchased from 1998 to 2005.

Because of the large number of policies available and the diversification that life settlements provide, interest from both individual and institutional purchasers will continue to grow steadily throughout the next fiscal year.

Are life settlements right for you? Contact your Comprehensive Financial Services financial advisor and schedule an appointment to talk about how life settlements may be integrated into your portfolio.

Demystifying Life Insurance - Permanent Insurance

2008-07-28T12:10:00.000-07:00

Permanent insurance is a financial arrangement little understood by the general public. What people think they know about permanent insurance is often bad information. There are several flavors of permanent insurance. Each performs in a different way. Let's start by identifying the two major sub-categories of permanent insurance: whole life and universal life. Whole life was the first type of permanent insurance, meant to insure the individual for his entire life. Generally, premium payments are established and fixed when the policy is issued and often remain unchanged for the life of the insured, much like a fixed mortgage. Universal life insurance was introduced by the insurance industry to give the consumer some flexibility in paying for permanent life insurance coverage. The key difference between whole life and universal life is the premium payment arrangement. As indicated before, whole life payments are generally fixed and unchanged for the duration of the policy. On the other hand, universal life insurance contracts have variable payment schedules. As long as there is enough cash to keep the policy in force, the purchaser of a universal life contract may pay more or less than the scheduled payment, within limits. After the advent of universal life, the industry came out with variable universal life and indexed universal life. All three types of universal life have the variable payment feature. However, VULs, as they are called, have separate accounts where the cash values in the policy are separately accounted for and invested, generally in mutual funds. Therefore, VULs carry market risk. In good markets, the cash can grow substantially. In down markets, you may find yourself reaching for your checkbook to avoid a lapse in your policy. Many VULs during the 2000-2002 market down turn experienced just such an issue. Ultimately, the insurance industry produced indexed universal life, or IULs. For IULs, rather than invest the cash values directly in the market, the insurance company issuing the policy credits the cash account based on the performance of a pre-determined market index such as the S&P 500. Many IULs have minimum and maximum cash value credit guarantees, generally ranging from 0%-14%, depending on the performance of the underlying index. Therefore, IULs can participate in the upside if market performance is good, but will never receive a credit less than the minimum guaranteed by the insurance company. Hence, IULs never lose cash value due to market risk. So, there you have it... a basic description of the types of permanent life insurance policies. Next month, I'll write about the features and benefits of permanent insurance and how you may benefit by owning a permanent insurance policy.

Demystifying Life Insurance - Term Insurance

2008-06-27T15:43:00.000-07:00

Term Insurance... the affordable choice

Last month, we left off talking about the two different types of life insurance: permanent and term. We likened each to owning or renting a home. Although that analogy is generally accurate, it is also a little simplistic. Life insurance contracts are complex financial tools that few people read or understand. Therefore, in order to understand the features, benefits and drawbacks of term insurance, we will use an example... my friend, the doctor.

My friend has a $2,000,000 term insurance policy that he took out five years ago. It is a 20-year, level payment, convertible term policy. That means the doctor will pay exactly the same premium (monthly, quarterly, semi-annually or yearly) for 20 years. The insurance company promises to pay his beneficiaries $2,000,000 should he die within the coverage period. Let's say the doctor's annual premiums are $2,000. He has already paid $10,000 in premiums in the first five years and, assuming he outlives his coverage, he will pay an additional $30,000 over the next 15 years toward that policy. Now, if the doctor dies prematurely (he's in his early 40s) any time in the next 15 years, his beneficiaries will receive $2,000,000. That's a good deal, right? He pays a maximum of $40,000 in premiums for his beneficiaries to receive $2,000,000. That's a great rate of return! But, how often do people die prematurely? Well, insurance companies hire really smart people called actuaries to crunch all kinds of numbers to determine the price to charge consumers for term insurance. How many term insurance policies in the United States actually pay a death claim? The answer is ... less than 3%! So, in reality, the good doctor will pay $40,000 to insure his life in case of premature death. However, odds are that he will outlive his coverage and his $40,000 goes into the insurance company's pocket.

So, why would anyone buy term insurance if the likelihood of benefiting from it is less than 3%? Well, in most cases, we buy insurance IN CASE something bad happens. For my friend, who has a wife to support and kids to rear, paying for term insurance is the affordable solution to an unthinkable problem. He can get a high amount of coverage for a reasonable price (incidentally, two million dollars is not enough coverage for him). Since my friend believes he will probably outlive his term insurance coverage, he still wants the benefit of having life insurance that he can keep until he dies, no matter when that happens. My friend needs some permanent insurance. We'll discuss permanent insurance next month.

Demystifying Life Insurance - Term vs. Permanent

2008-05-30T10:30:00.000-07:00

Term vs. Permanent - Which is Best?

I'll be honest, the answer to this question has troubled and tormented financial solution providers for years. Some advisors preach the gospel of "buy term and invest the difference". Others proclaim that term insurance is a waste of money, as 97% of term policies never end up paying a claim. Consumers of life insurance products have had the same trouble deciding which type of life insurance is right for them. The answer, as it is with many things in life, is IT DEPENDS.

Therefore, in order to inject some reason and logic into the decision making process regarding the purchase of life insurance, we need to know how each product type works. And I have found no simpler explanation than relating it to something most of us have a handle on: buying or renting a home. Life insurance can be viewed the same way we look at our housing situation. Consider, if you rent a house, you'll have the right to live there for a specified period of time, but you won't own the property, and you won't benefit if the property value goes up. Also, the amount of rent you pay may increase from time to time.

If you buy a house, on the other hand, you may make higher monthly payments, but you'll gain equity in the house that you can keep. You'll also have the right to sell the house, pay off the mortgage, and keep any money remaining from the sale. If the property increases in value, you will benefit if you sell the property. And your house payments probably won't change over time.

Term insurance is like renting a house. You pay premiums for the specified term of the plan and receive insurance coverage during that time. At the end, of the term, depending on the plan, you may have to re-qualify for coverage or renew it at a higher rate if you wish to continue your protection. If your health has changed, you may not be able to qualify or you may have to pay a higher rate.

Permanent life insurance is more like buying a house. It costs more than term insurance, but over time it builds cash value that grows tax-deferred. You can use the cash value in a variety of ways. For example, you can surrender the policy for its cash value, take loans against it, or use it to purchase paid-up insurance. The premium and the death benefit generally stay the same while you own your coverage. And you can keep it for the rest of your life, not just until age 65 or 80 - even if your health changes.

All this being said, which is the right type of life insurance for you? I still can't tell you, but our next few articles will give yet further clarity as to the features, benefits and drawbacks to permanent and term insurance.