How to Help Your Kids and/or Grand Kids Understand Investing

h2. One way is to set up a custodial account

Setting up a custodial account can be a savvy move for adults who want to either teach their kids to invest with their own money or for parents to gift their assets and help their children under the age of 18 to become financially independent.

But there are many considerations – and consequences – to weigh before opening an account.

The Account Options

The two types of accounts you can use to set up an investment account or to gift assets to your youngster are called a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Which one you use will depend on your state of residence. Most states – with the exception of Vermont and South Carolina – have phased out UGMA accounts and now only offer UTMA accounts.

UTMA accounts allow the donor to gift most security types, including bank deposits, individual securities, and real estate. UGMA accounts limit gifts to bank deposits, individual securities, and insurance policies. Here are some points to consider.

1. There are no contribution limits. Parents, grandparents, other relatives, and even non-related adults can contribute any amount to an UGMA/UTMA at any time. Note that the federal gift tax exclusion is currently $14,000 per year ($28,000 for married couples). Gifts up to this limit do not reduce the $1 million federal gift tax exemption.

2. The assets gifted are irrevocable. Once you establish an UGMA or UTMA, the assets you gift cannot be retrieved. Parents can set themselves up as the account’s custodian(s), but any money they take from the account can only be used for the benefit of the custodial child. Note that basic “parental obligations,” such as food, clothing, shelter, and medical care cannot be considered as viable expenses to be deducted from the account.

3. Taxes are due – potentially for both you and your child. Some parents may initially find custodial accounts appealing to help them reduce their tax burden. But it’s not that simple. The first $1,000 of unearned income is tax exempt from the minor child. The second $1,000 of unearned income is taxable at the child’s tax rate, which could trigger the need for you to file a separate tax return for your child. Any amounts over $1,900 are taxable at either the child’s or the adult’s tax rate, whichever is higher. Note that state income taxes are also due, where applicable.

4. Your child will eventually gain complete control. Once your child reaches the age of trust termination recognized by your state of residence (usually 18 or 21), he or she will have full access to the funds in the account. Be warned that your child could have different priorities for the assets in the account than you do. Money that parents had earmarked as paying for college tuition could instead be used to purchase a sports car or fund a suspect business venture. This is where you need to make sure your child understands the account and how it works. Make them responsible for attending meetings with your adviser.

5. It could impact financial aid considerations. For financial aid purposes, custodial assets are considered the assets of the student. If the assets in the account could jeopardize your child’s chances of receiving financial aid, speak to your tax and/or financial professional. One of your options could involve liquidating the UGMA/UTMA and establishing a 529 account.

Before making any decisions about establishing a custodial account, be sure to talk to your tax and financial professionals.

Source/Disclaimer:
This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

3 Diversification Mistakes that cause Dysfunction

Every adviser talks about diversification. Basically having your investments spread across a variety of asset classes, such as large companies, small companies, international, etc… The weightings assigned to each asset class mainly depends on your time horizon, goals, and risk tolerance.

One of the largest mistakes investors make is thinking they are diversifying their portfolio by diversifying the advisers or companies managing their money. Having your assets spread across companies may seem diversified but actually can be destructive to your goals.

When one person isn’t seeing the whole picture, advice becomes centralized on what they know. The more spread out you are, the narrower the scope of the advice. Be open with your advisers about what you have, and where.

The second mistake is concentrating on one asset, gold comes to mind. Whenever anyone wants “to sell everything and buy gold.” it usually sends chills down my spine. The whole point of diversifying is making sure you are not relying on one asset to fund your goals.

Every asset class has bad years and good years. No one can accurately predict the ups and downs. When everyone invests in the same asset a bubble can occur when emotion trumps fundamentals. Remember when people say real estate “always goes up”? Or technology can only go higher? Beware of concentrating money in only one area.

The last diversification issue is diversifying your taxes. Not only do you have options on where and how you are taxed, most people forget to think about it as they plan for retirement. Tax deferred and tax free can be the difference in a few hundred dollars a month in income. Although the tax situation is still uncertain right now, it’s not a bad idea to explore Roth IRA‘s and whether you should hold growth stocks in a taxable account or not.

Remember an IRA is great for tax deferral but eventually you will pay income tax on every dollar coming out when you begin receiving distributions.

The Sticker Shock of Medicare Part D – Why you should shop around

The enrollment season for Medicare prescription drug Part D and Medicare Advantage Part C runs from October 15th through December 7th. Reevaluating coverage annually can make the difference of hundreds of dollars in your pocketbook.

The suprise is that you may be facing double-digit premium increases if you stay with your current plan.

So start with your statement, review the annual notice of change that you should have received in September. This will explain any basic benefit changes for 2013.

Dig deeper, if you are currently taking any prescription drugs look for statements that the insurance company has the right to ask the ordering physician about cheaper alternatives, this could delay prescription drug fulfillment. Also pay attention to how much the plan charges for the drugs you need.

The doughnut hole is shrinking. Good news for those caught in the middle of spending $2,970 – $6,733. Enrollees will receive discounts on brand name drugs and a higher discount on generics.

Many plans are moving to a “preferred delivery network”. That means you must agree to receive your drugs through a specific retail or online pharmacy network. Make sure it works for you.

For those of you still working be aware of the high income surcharges on Medicare. This year the surcharges affect individuals with annual income starting at $85,000 (single filers) or $170,000 (joint filers), and move up from there. And there is a two year lag in income reporting so your 2012 surcharges are based on your 2010 tax returns.

The best online tool is the Medicare Plan Finder on the Medicare website. Fill in your medicare number and drugs you are using to find the right plan. Another site for one on one help is medicare counseling, a network of non-profit Medicare counseling services. And if you prefer to talk to someone on the pone there is the Medicare Rights Center offering free counseling by phone at 1-800-333-4114.

What’s a Money Script?

Lately the idea of money and how you think about money has become an interesting topic. As a financial planner I know the advantage of investing, diversifying and planning for major life events. When I sit down with a new client we do the usual gathering of information, flush out some goals and go to work figuring out what they need to do to achieve those goals.

The part that catches me off guard later in the relationship is the “money scripts” people have. These are defined in the book “The Financial Wisdom of Ebenezer Scrooge” by Ted Klontz, Rick Kahler and Bard Klontz. These are beliefs about money that you may or may not be aware of. What I found is that by asking someone what their first true memories about money are, it begins to unravel a thought process that could be a barrier to having a healthy relationship with money. We are caught up in beliefs that may or may not be true. By identifying these behaviors and thoughts you can begin to make some changes to your belief system. Money itself is not evil or bad. It is a means of exchange and the choices we make spending and saving often will determine our success.

Take some time and think about what your first memory of money is. How does it affect your decisions now? Are you afraid to spend money because of something that happened to you or your family in the past? Do you believe that investing is only for wealthy people? Do you not make good choices with your money? If you go back and identify what those money thoughts are you may discover a pattern.

Put Your Family First

Do you have a trust? Do you have a POD or TOD on your single or joint accounts? What is a POD or TOD? When was the last time you reviewed your will, or do you even have one? Estate planning is an important tool when you want to make sure your wishes are carried out as you intended. If you’ve ever been through the probate process or had friends talk about the nightmares of improper estate planning, you know how important it is.

For example, a will is a great tool to simply state how you want your assets to be distributed. The probate process is efficient but it is public record and can be contested by anyone that has a stake in your property. Contested wills take time and money and can hurt those that you were trying to protect in the first place.
Trusts are a great way to avoid these problems. They must be drafted by an attorney and you definitely want an estate planning attorney to do them. Discuss what you are trying to achieve with your advisor and see if a trust may be the way to go.

If you don’t have a large estate the POD (Payable on Death for banks) or TOD (Transfer on Death for brokerage accounts) allow your assets with those institutions to pass on directly to the beneficiaries you list quickly and without going through probate. Also, any account with beneficiaries such as IRA’s, Roth IRA’s, annuities, Employer Retirement Plans, and life insurance policies automatically pass to your beneficiaries without going through probate by contract. If this is the only thing in your estate then you may not need a trust.

Make a list of the things important to you and revisit the beneficiaries listed on your accounts. Next look at your net worth and financial plan. What do you want to happen when you are no longer able to control your finances? And although you may not see the value, involve your family in the process.

Now and Later: How Investing Can Help You Reach Your Financial Goals

Every time you turn around the news seems to be worse about our economy, taxes, jobs, etc…. What do you do? If you have a savings account for emergency and/or current needs it should be in a money market or Certificate of Deposit. You’re already ahead of the game. Both are FDIC insured, up to $250,000, and are the most secure place for money you need in the next year or two.

But what about investing for future needs? The easiest way to give yourself options and more control when you do retire is by investing in retirement accounts. Everyone should have a traditional IRA or Roth IRA, you can start one as long as you have wages. If you are self-employed there are options for you. If you are retiring in the next 5 years this may not apply to you, but for those with 5 or more years to retirement you need to look closely at your retirement plan. Too many people wait until the last minute to plan out their retirement income and realize there were things they could have done to make it better. They start looking for investment’s that don’t exist. There is no such thing as no risk, high return investments. Where investors get in trouble is trying to find that one investment that will make up for time lost. Listen to the marketing messages out there. They play on people’s insecurities and fears and end up costing people their hard earned money. Your overall risk is actually lower the younger you are, which gives you more flexibility. If you are reading this and think I’m already old, then make sure you are teaching your kids and grand kids good money management. There is no age limit for clients in my practice. The younger the better.

How many times do you say “If only…..” it’s up to you to seek the information you need to have a powerful and effective plan. I can help you but only you have the power to make it happen.

More Questions People Ask Me about Being Independent

How we are compensated? Financial planning fees have 2 components. The negotiable hourly fee is up to $150/hour and is paid after the consultations.
Written financial plan fees range from $150 to $2,500, depending on the complexity of your financial situation. Half the negotiable fee is due in advance, the rest upon presentation of the plan, which will always be well within 6 months of our engagement. If you cancel, any prepaid fees will be refunded on a pro-rated basis.
Managed money fees also have 2 components. If we manage your money the annual negotiable fee for doing so ranges from ½ of 1% to 2%, depending on the size and complexity of your account. The fee is paid quarterly, at the end of each quarter. If we help you select other money managers and we monitor them for you, the other money managers (registered or notice filed in Oregon) pay us a portion of the fees generated by you. You do not directly pay for this service.

Are we registered representatives of a securities broker/dealer? No one at Clarity is or will ever be a securities broker/dealer or a securities registered representative.

Do we invest in securities we recommend to you? On occasion, we may buy or sell securities we recommend to you. We have found over the years that clients like to invest in the same investments we do. That makes sense. If we like it for ourselves, why shouldn’t our clients like it too? The type of security always depends on the client’s investment goals, objectives and time frames. When we recommend investments we hold ourselves, we’ll always disclose to you what we own and how much we own. (As an aside, we’ve seen that some salespeople tell clients that they own the same thing they are recommending, but it’s often a minimal amount. We find that to be very deceptive.) We feel that there is just a tiny conflict of interest in owning the same securities as we recommend to you because the securities we recommend are widely held and publicly traded and we are too small advisors/investors to affect the market in widely held and publicly traded securities.

Where the name Clarity Wealth Development came from

Trying to name your business is a difficult thing to do. With so many financial advisors naming themselves as either a financial group or a wealth management something I wanted a different name. Advisors manage money in one way or another, and development sounded more appealing than wealth management.

As for Clarity, that also developed the more I thought about it. People are sometimes intimidated by advisors. They worry about not having enough money or feeling pressured. My philosophy is to educate first, then let people have ownership in their decisions. You are more involved when you understand and have clarity about what you are trying to achieve. My Dad is also a part of this decision. He was a large influence in my desire to own a business. He built a successful farming operation from modest beginnings. His Mother operated a small farm in Coburg but Dad started with his own 10 acres and built it into a 1500 acre farm in Corvallis. In 2003 he sold the farm and did well enough to retire, unfortunately Alzheimer’s disease has taken his memory from him and is shutting down his body also. He has trouble communicating and there is occasionally a clear sentence that he can say, although the thought is gone as soon as it’s spoken. He always had a goal and clear headed thinking that made him successful and that’s what I want clients to understand. I want you to feel like you have clarity so you can make the right decision.

That’s how Clarity Wealth Development came to be.

Dad passed away December 16, 2010. I will forever be grateful for his support and guidance. Thanks Dad.