MAKING CENTS: Celebrate what is going right in your world

I don’t know if it’s the turkey or the non-sectarian nature of this U.S. holiday, but Thanksgiving is my very favorite. Seeing loved ones that we encounter too infrequently, and hanging around to do nothing but catch up and enjoy each other’s company should happen more often.

But how many actually celebrate and give thanks for what is working well? In this column, we try to address issues frequently misunderstood or ignored by savers, investors, taxpayers and insurers. But today we are going to ask you to list the things that are going right in your world, and keep that list with you this Thanksgiving week to remind yourself that we all have something to celebrate.

Because we are social creatures, let’s start with people. Who are the people that enable you to be who you are? Family ranks high on the list here for many. Be grateful for what you have, and what you do not have. Accepting children for who they are and who they want to be is healthy, but making sure that your kids don’t grow up as entitled over nurtured brats is just as important to many. Celebrate your children’s being when you see them, and find the courage to address issues that may be bringing them down at some private moment before the next holiday.

Outside the family, friends and neighbors will probably make the list. Maybe this is a good time to re-kindle an old friendship. Celebrate the professionals in your life. Look at the time it gives you back to pursue other interests and the polish that it puts on those areas of expertise.

Whether it’s your CPA who diligently helps you reduce your tax bill or your doctor who works to cure whatever illness you may have, celebrate these people who care about you and want to give you their best.

It’s also healthy to celebrate financial success. Making a note of the financial things that worked well for you this year will serve as motivation to keep the momentum building into the New Year. Don’t get giddy or greedy, and keep your eye on what is important about investing and what can ruin this celebration in future years.

Did you pay down debt in 2013? Calculate how much and put it on the list. Paying off debt is always a wise thing to do.

Celebrate the gaps that you may have plugged in your financial plan. Did you get your estate plan done? Did you beef up your life or long term care insurance plan? Did you finally get that rental property into a protected entity such as an LLC? Accomplishing any financial matter that has been on your to do list for a lengthy period deserves celebration.

Happy Thanksgiving.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Significant gifts come with consequences

AS the year winds down, many think about making gifts to charities or loved ones as a part of shedding assets in their estate. This could be for estate tax planning, the fear of loss through a long term illness or simply for philanthropic purposes. Here we are going to dispel a few myths and highlight a few common misunderstandings surrounding gifts.

Starting with charity; any gifts that you make to a qualified charity are generally tax deductible. I say generally because if you do not itemize deductions on your tax return, there will be no tax benefit. On the other extreme, for those with very large charitable contributions, your deductions could be limited because of the Alternative Minimum Tax. If you are thinking of a big gift, check with your accountant to see if there will be any restrictions on your deduction.

Gifts to family members or friends; are never deductible for income tax purpose, but these gifts may be excluded from your future estate tax return. Under current law, each taxpayer has an exemption whereby any taxpayer may gift up to $14,000 to any recipient. That means a husband and wife can each give $14,000, making a total possible gift of $28,000. To do this properly, there should be two separate checks. If the account is in only one name, then the two checks should come from each donor’s personal account.

There is also a lifetime federal exemption of $5.25 million in 2013. This amount rises to $5.340 million for 2014. Essentially, this means that you can give away or die with up to $5.25 million, and pay no gift or death taxes to the IRS in 2013.

There may, however, be state death taxes to pay. In Massachusetts, the current exemption sits at $1 million.

When a gift is given that exceeds the annual exclusion amount of $14,000, a gift tax return must be filed or technically you owe gift taxes on that gift. This is frequently overlooked with gifts of real estate or college 529 plans. For the 529 plans, there is yet another tax exemption that allows you to contribute up to 5 years of 529 gifts currently, and spread them over a 5 year period. This also requires an annual gift tax return.

Gifts of real estate have a few problems. The first may be the tax cost. If mom gives you her house because she is concerned about losing it to long term health care costs, you’ve just inherited her tax cost. Your cost basis for calculating future gains from a sale will be whatever her cost basis is. If she bought the home five years ago, you probably have a high basis. But if she bought five decades ago, this could be a big tax hit.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Is life insurance a good deal for everyone?

When I hear people refer to life insurance as a bet against themselves, I just cringe. The truth is that life insurance is a bet in favor of your family, one that may help them get through some challenging times following the death of a loved one.

Think of a properly structured and funded life insurance policy as an investment that will someday pay a benefit to your beneficiaries. Not all insurance contracts are guaranteed for life, so perhaps your first order of business is to see whether your policy is on a track to last as long as you do.

The next important criteria would be the internal rate of return (IRR) on death benefit. The IRR tells you what the equivalent annual rate of return you are expected to earn for your heirs because of the continued premium payments and the ultimate death benefit that gets paid out.

Naturally, if one dies sooner into the contract, the internal rate of return is quite high. If one lives to life expectancy, many companies are currently illustrating about a 4 to 5 percent IRR. For those who live well past age 90, that IRR may drop to 2 – 4 percent.

Given today’s low interest rate environment, even the most pessimistic life insurance pundit may agree that the IRR forecast is fairly attractive. It looks even more attractive when you consider that these proceeds are received income tax free, and if structured properly, can also avoid all death and transfer taxes.

The risk of a life insurance policy not meeting expectations lies in the assumptions used in the insurance illustration. Companies assume an ongoing rate of return for the premium dollars that they receive.

Typically premium dollars are invested in very secure fixed income vehicles, and are not earning too much in today’s market. They forecast an interest rate that will be credited to any cash value accumulated in the contract. These rates will change over time.

Similar to the interest crediting rates, some companies build anticipated dividends into the forecasts. These dividend scales have been under pressure during this low interest rate cycle.

The last assumption is the mortality costs of the insurer. Some contracts come with a fixed mortality charge; these are the most costly in the early years. Other contracts continue to raise the mortality costs each year and then have a cushion built into the contract allowing them to increase.

If you are comparing apples to apples in terms of assumptions, your IRR on death benefit is one of the best ways to truly evaluate the cost of a life insurance policy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: In case something happens to Mom

It’s when, not what if, something happens to mom

In the ordinary course of meeting with clients, we routinely see situations where elderly parents and adult children do things in case something happens to mom. In case? What’s that about? There is no in case; it is more about when and how something happens to mom and then what are the consequences of your moves in anticipation of the undesired but inevitable outcomes.

Among the more common “in case” moves are to have a child as a joint owner on financial accounts.

As a joint owner, there are several unintended consequences and possibilities that may occur. Either joint owner would have full access and control of the property and can do what they please with the money without consulting the other. Of course, we trust our children, but it may not be wise to leave your nest egg subject to the liabilities and vulnerabilities of another person.

The next consideration is gift taxes. When you add someone other than a spouse as a joint owner of an account, you have made a gift in the eyes of the taxing authorities. If that account is worth less than $14,000, there is no worry. This exemption is called the annual gift tax exclusion.

A further consideration is the ultimate disposition of the property. If we can assume that the elderly mom will pre-decease her joint owner in the account, the younger child will become the sole owner of the account. This is fine if that joint owner is your only child or intended beneficiary, otherwise it could become a disaster. As the new sole owner, your child is not required to fork over any part of that money to their brothers or sisters, regardless of what your will says. And if that child later finds that it is their moral obligation to split the assets with their siblings, it will create gift tax issues.

What could be even worse is changing title to the home to one or more of your children. This poses problems for several reasons. First, you do not own you home anymore and are a tenant of your children. As a tenant, the IRS requires that you pay a fair market rate of rent to the landlord or else they can impute rental income under audit. Imputed rental income means that they’ll require your children to report rental income showing the income and expenses of the rental property.

It is also safe to assume that mom’s home was worth more than $14,000 at the time of the gift, and therefore a gift tax return is required.

In general, mom has the best intentions of protection and legacy for the assets. But unfortunately, this is one area where mom would have been well served to hire a professional to plan this properly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.