Making Cents | John P Napolitano: April 2013

Saturday, April 27, 2013

MAKING CENTS: Fitting gold into your portfolio

COMMENTARY — Whenever a specific asset class appreciates significantly, many wonder if they should own something in that category. Gold has been in that camp since the day the USA made it legal for citizens to once again own gold in the early 1970’s.

The first question may be whether or not gold is appropriate in an investment portfolio. That answer may depend on many circumstances. Amongst them are time horizon, tolerance for risk, need for liquidity and your liquidation strategy.

Those who believe that inflation will get higher over the long run are frequently attracted to asset classes that include gold. But the question is why gold? Is it the only hedge against inflation? Or is it because it is the most frequently discussed or newsworthy precious metal?

There are many other metals in which one may invest, such as copper, silver, platinum, palladium and so on. In any given year, any one of the asset classes such as metals, energy or agricultural may outperform the other.

If you believe that broad exposure to the asset class is something you want, build a diversified portfolio that may include all of the above or those you feel strongest about. You can buy equity products that represent an asset class or a company that mines, refines or distributes the metal.

If you are focused on a single metal, such as gold, there are a few ways in which you may invest. The most obvious is physical possession. That means you simply buy the metal and store it somewhere safe.

Storage is an issue. There are three ways to take physical possession and store your holdings; in your home, in a bank safe deposit box or at a gold storage facility.

If you choose to store your metal in the home, get a safe that will properly protect against theft. You may not be able to insure these holdings, but ask your agent about limits and cost of coverage. Without insurance and/or a great safe, remember that losing a small coin containing an ounce of gold is a costly loss.

Many opt for using a bank safe deposit box. The obvious here is the increased safety when compared to the home. Many institutions have insurance for the contents. A possible downside to a bank vault is access. Your bank does not operate 24/7 in the event that you want to retrieve your holding over a holiday weekend.

Another choice is a private depositary. For investors with large holdings, this option makes a lot of sense. The commodities exchange and the U. S. Government use private depositary companies. As the popularity of investing in gold has risen in recent years, so too has the use of a depositary.

Make sure that the depositary you choose is insured. Many will also facilitate the liquidation of your holdings. Making it easier for you to turn your gold into cash at a competitive price is a lot easier than going down to the nearest gold shop to sell your holdings.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

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Saturday, April 20, 2013

MAKING CENTS: What does your parents’ estate plan do?

COMMENTARY - Speaking to your children about money is not easy, but speaking

to parents can be even tougher. No parent goes through life wondering how they can ruin their finances or make their adult children miserable while settling an estate without a plan. Yet it seems that this scenario is more common than the elder parent who deals responsibly with financial issues. These issues are health care, asset composition and location and the age and quality of their estate planning documents.

Starting with health care, I see two similar stories. The first is the grandparent who does not want to be a burden on their children. This person usually buys long-term care insurance and has a plan for what they’d like to happen in the event of their incapacity. They have made responsible choices for their health care advocate and probably have current documents for health care powers of attorney and durable powers of attorney. The second story is the person who expects their children to care for them. In some cases, I understand that this is a responsible plan and the plan desired by the adult children. But you should find out which plan your parent intends to utilize. It is not fair or sensible for the parent to keep the later style of plan a secret known only to them.

Asset location and composition are frequently handled in old school ways. Assets are spread out all over the place. In modest elderly estates, I’ve seen folks with accounts in more than a dozen institutions. There is overlap in the holdings, problems with how the account is titled and beneficiary elections that make no sense at all. Many elderly people feel safer if they have to travel to 15 banks to do their banking. With ownership structures ranging from grandma alone to joint accounts with children and grandchildren, this type of estate is sure to cause heartache, problems and delays when it comes time to settle up.

The estate plan for aging parents is sometimes as old as they are. Even more problematic is when the children expected to serve upon incapacity or death don’t know what the plan is or who will be in the roles of executor or trustee. Some elder people feel that

Start by finding out what written plan your parents have. Insist on copies of documents, especially if you are named in a role to assist with the estate settlement. If the documents are severely out of date, find an estate planning attorney to draft new documents. Make sure that it is an attorney where estate planning is a specialty, not just another service that they can help with.

The goal would be to save taxes, simplify distribution and avoid probate and other time consuming or expensive settlement methods.

Saturday, April 13, 2013

MAKING CENTS: How to combat long-term care premium rises

pic source: avamere.com

Premiums for long-term care insurance are on the rise. A few of the major companies have applied for permission from state insurance commissioners to significantly raise their rates.

Among the reasons why are two primary theories. One is the slowdown in sales and the higher than expected lapse rates among policy holders.

It is possible that policy holders simply refuse to pay the higher rates requested by some insurers. The second theory would be insurance companies underestimating the risk and expected increases in longevity. This theory, ironically, builds a case for considering long-term care insurance.

What alternatives may there be to own the coverage and not be stung by future premium rises?

There are two alternatives.

Most long-term care insurance is quoted in the premium mode that would have you paying for life. These are most susceptible to future premium increases.

But a 10-pay policy, which would require a larger annual outlay of cash, is fully paid for in the 10-year period.

The company can apply for a rate increase within the 10 years, and you could pay more at some future point. But at least that initial exposure is going to last for the remaining years of the 10-year commitment.

This shorter payment period may make sense for younger applicants or business owners who may be able to deduct some or all of the premiums.

A second alternative may be one of the new hybrid life/long-term care policies. These are life insurance policies that are designed to provide long-term care benefits during your lifetime.

These policies generally require a large cash deposit from the policy holder, but they have characteristics very different from most life policies. These are not bought for a death benefit, the death benefit is merely incidental to the core purpose of providing long-term care benefits.

The initial deposit, buys three benefits. First is the promise by the insurer to pay long-term care benefits should you qualify. Second is some life insurance benefit. The amount of the death benefit is more than your initial deposit, but it will never have the leverage of a typical life policy.

The third benefit, one that people generally like the most, is the policy holders’ ability to surrender the policy at any time and receive a full refund of premiums paid. With interest rates at all time lows, this alternative has been extremely attractive to those reluctant to pay premiums on traditional long term care policies.

Saturday, April 6, 2013

MAKING CENTS: Avoiding the kiddie tax

pic source: hellenmilleronine.com

Under the kiddie tax rules, children under age 20 and full-time students living with their parents will pay income taxes at the parents’ highest marginal tax bracket on all unearned income above $2,000 in 2013.

This rule isn’t new, but it has even greater impact under the higher rates we all will pay on unearned income and capital gains starting this year. The IRS made these rules in the 1980s to curb a common tax reduction strategy of shifting investment assets into the children’s names to pay less in taxes.

Unearned income includes any type of investment income, whether from banks, stocks, bonds, mutual funds or real estate. On the first $1,900 in 2012 and $2,000 in 2013, these children will pay taxes at their own, presumably lower tax bracket. But for any unearned amounts in excess of the threshold amounts, the tax due will be calculated at the parents top marginal tax bracket. That could be as high as 44 percent in 2013. Any income the child earns from employment will be taxed at the normal income tax rate for that child.

Avoiding the kiddie tax is very difficult, but there are a few strategies that you may wish to consider.

The first is to simply make sure that the unearned income does not exceed $1,900. This is done by limiting gifts to kiddies to those assets that are non-interest bearing or dividend paying. There are plenty of securities that do not pay dividends and plenty of other asset classes, such as raw land, that create no income. The theory here is that any possible future appreciation may be taken in the form of lower taxed gains on the child’s return up to $2,000 while under the age limit. After the age limit, the child can sell whatever they want and pay at their own rate.

If the assets to be gifted are for future college expenses, consider the use of a 529 savings account. In these accounts, all gains and income are tax deferred, and then tax free if used to pay for qualified educational expenses. A further benefit of the 529 account is that the grantor can control the assets leaving the child beneficiary not in control of the assets.

U.S. Savings Bonds may have a similar tax benefit. The income tax on the interest from U.S. Savings Bonds can be deferred until the bonds are . If the redemption occurs after the age threshold is reached, the bonds can be cashed in at the adult child’s own tax bracket.

A final word of caution about having assets in a child’s name; when that child reaches age 18 or 21 they are free to do what they want with the money. Obviously this may be too tempting for some children to pass up, and care should be taken to protect the assets. Consider the use of a trust with the parent or some other mature individual as the trustee. Now the parent controls the flow of the money and the associated tax consequences of any distributions to the child.