A couple’s best-laid plans to pass down assets such as real estate, businesses, investments or art work could easily go awry if the children have to sell off that stuff at fire-sale prices because Mom and Dad failed to set aside enough cash to pay the estate taxes.~ Jay MacDonald, Bankrate.com

Turn that thought into a question. How do we protect our children from estate taxes that may consume most of what we want to give them as an inheritance? The answer might be Survivorship Life Insurance.

Also known as second-to-die insurance, this policy covers two people and only pays benefits when the second person dies. Financial planners have found this to be helpful for wealthy couples or business partners. According to Bankrate.com contributor Jay MacDonald, “The purpose is always essentially the same: to provide the cash to pay anticipated estate taxes on an illiquid estate so the assets don’t have to be sold off piecemeal or at an inopportune time.”

Besides its positive impact on taxes several other advantages of survivorship policies exist, but especially pertaining to underwriting. If one person of the two being insured has major health issues, the underwriter can still issue a policy. Underwriters also may follow a “more lenient mortality table” when insuring two. These plusses, coupled with the fact that survivorship policies don’t dispense benefits until the second partner dies, usually leads to lower premiums.

Jonathan Bauer, a lawyer specializing in estates, shares that some young couples are now seeking these policies to assist with support of their children in case of a catastrophe. This is found to be especially true if one partner “has a medical condition that makes life insurance really expensive, it’s a cheaper alternative than even individual term policies,” he says.

Purchasing the best Survivorship Life Insurance policy is complex. It is important to work with a professional financial planner. He or she should help craft a “comprehensive estate plan.” Part of that might include survivorship life insurance. Financial experts will provide the legal intelligence to help protect your money, “[maximize] the tax advantages,” and give the foundation to give beneficiaries the best outcome. Contact Cary Stamp and Company, one of Palm Beaches premiere financial planning firms for more information.

Neither Cary Stamp & Company nor Commonwealth Financial Network® provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Financing College Through 529 Savings Plans

Looking ahead towards funding a college education for one child or more can feel overwhelming yet it is never too early, or too late to start saving. While there are numerous ways to save for college expenses, today we focus on the basic information about 529 savings plans.

The Securities and Exchange Commission website defines this sort of plan as “a tax-advantaged savings plan designed to encourage saving for future college costs”.” Sponsored by state agencies and institutions, there are two categories: pre-paid tuition plans and college savings plans. All fifty states sponsor at least one kind.

• What is Tax Advantage Savings? Basically, income invested with either of these plans will grow on a tax-deffered basis, and if used for its intended purposes, education,then the withdrawals are federally tax-free.  If the money is used for other endeavors or savings are withdrawn prior to the allotted time, taxes and penalties will most likely be assessed. Plans will have different expectations and benefits for college expenses. Be sure to pay attention to all plan details.
• What’s the difference in the two types of plans? According to Finaid.org,, Prepaid tuition plans are designed to cover tuition costs at public instate colleges and universities that allow you to lock in tuition at current rates.”If a family purchases shares worth half a year’s tuition at a state college, these shares will always be worth half a year’s tuition—even 10 years later, when tuition rates may have doubled.” Whereas, College Savings Plans have no lock on tuition, and they are subject to market volatility. However, “with this added risk comes the opportunity for potentially earning greater returns.” Click here for a comparative chart of the two types of plans.
• What is the benefit of investing in a 529? Due to compounding interest, saving for college now is advantageous for those who are likely to pursue higher education. . In terms of the time value of money, it may be less expensive to invest now than to wait. Waiting even one year couldcost significantly more. See this Cost of Waiting chart for more information.

One of the most important things you can do for your children is to save for their future. Seeking expert advice from financial planners, Cary Stamp or Carl Watkins, will help you understand the complexities of saving for college as well as set up and manage your 529 savings plan.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.  

Presented by Cary Stamp

The American Taxpayer Relief Act of 2012 was passed by Congress on January 1, 2013. The act provides a mixed bag for taxpayers, extending or modifying many of the tax provisions that were set to expire on December 31, 20121, while letting others terminate. Where do we stand now? Let’s take a closer look at some of the changes that have occurred and how you may take advantage of them.

Individual Income Tax Rates

For taxpayers with annual income less than $400,000 (individual) and $450,000 (married filing jointly), the act made permanent the current marginal income tax rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent. For taxpayers with taxable income over these thresholds, the act restores the 39.6-percent tax bracket.
Planning tip: Business owners may wish to examine their current entity structure to determine whether or not it remains beneficial under this new legislation. S corporations and LLCs historically have been favored over C corporations due to the ability for the business owner to report business profits on his or her own personal return. Now, however, the C corporation’s highest tax bracket is lower than the highest personal tax bracket. The spread may provide opportunities to defer compensation.

Capital Gains and Qualified Dividends

Taxpayers with income above the $400,000 (individual) and $450,000 (married filing jointly) thresholds will see an increase in the long-term capital gain and qualified dividend tax rate from 15 percent to 20 percent. The 15-percent rate will remain in place for taxpayers below these income thresholds. (For taxpayers in the 15-percent or lower tax bracket, the 0-percent capital gain rate will remain in place.)
Important note: The new Medicare surtax resulting from the 2010 Patient Protection and Affordable Care Act will also play an important role for higher-income taxpayers in 2013. Starting January 1, certain taxpayers will be subject to a 3.8-percent surtax on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over $200,000 (individual) and $250,000 (married filing jointly). This is on top of regular capital gain taxes. The following types of investment income will be affected: taxable interest, capital gains, dividends, nonqualified annuity distributions, royalties, and rental income. Exceptions include distributions from retirement accounts, pensions, 401(k), IRAs, and municipal bonds, although these distributions will impact the MAGI calculation.

As a result, the effective top rate for net long-term capital gains for many higher-income taxpayers is now 23.8 percent.

Federal estate, gift, and Generation-skipping Transfer (GST) Tax

The act retains the annual inflation-adjusted $5 million estate tax exclusion but increases the maximum estate tax rate to 40 percent. The lifetime gift tax exemption remains unified with the $5 million exemption. Portability between spouses also becomes permanent, and the act extends the GST tax-related provisions, including the inflation-adjusted $5 million exemption.
Portability allows the surviving spouse to apply any unused exclusion of the deceased spouse to his or her own transfers during life and at death (if the proper elections are made). Portability should bring with it flexible planning strategies for high-net-worth estates.

Planning tip: The $5 million exemption amounts offer greater flexibility for high-net-worth individuals to transfer assets during life or at death—potentially gift and estate tax-free. With the “permanency” of these provisions, taxpayers are encouraged to take time to execute well-thought-out estate plans, instead of trying to implement changes at the last minute, before legislation expires.

Qualified Charitable tax-free IRA Distributions

Congress restored the Qualified Charitable Distribution (QCD) provision for 2012 and 2013. The QCD allows taxpayers age 70½ and older to transfer up to $100,000 from an IRA directly to a qualified charity to avoid recognition of the income and to partially or fully satisfy the required minimum distribution (RMD) requirement. For 2013, the QCD must be made prior to December 31, 2013.

Planning tip: A QCD may still be made for the 2012 tax year under the following conditions:

1. An individual may make a direct transfer from the IRA to charity prior to February 1, 2013, and characterize it as made on December 31, 2012.
2. If an individual took an RMD after November 1, 2012, and before January 1, 2013, the individual may treat the distribution as a QCD if the amount (up to $100,000) is transferred to charity prior to February 1, 2013. Please note: RMDs taken prior to November 1, 2012, are not eligible.

Education Incentives

The American Opportunity Tax Credit is extended through 2017. This provides for a 100-percent tax credit of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a maximum credit of $2,500 per eligible student. The credit applies to the first four years of a student’s post-secondary education.

The Qualified Tuition and Related Expenses “above the line” deduction (meaning you don’t need to itemize to claim it) is extended until December 31, 2013, and was retroactively extended for 2012.

The Student Loan Interest Deduction is a $2,500 “above the line” deduction. The act makes permanent the suspension of the 60-month time limit.

Coverdell Education Savings Accounts received a permanent maximum contribution limit of $2,000. Distributions must be used for qualified higher education expenses while attending elementary, secondary, or post-secondary educational institutions.

Planning tip: A taxpayer cannot claim the Qualified Tuition deduction in the same year as he or she claims the American Opportunity Tax Credit or the Lifetime Learning Credit. Nor can the tuition deduction be claimed for a student in the same tax year if anyone else claims the American Opportunity Tax Credit or Lifetime Learning Credit for the same student in the same year.

Alternative Minimum Tax (AMT)

The last AMT “patch” expired at the end of 2011. The 2012 act permanently extends AMT amounts to $50,600 for individuals and $78,750 for married filing jointly. These amounts are retroactive for the 2012 tax year. The exemption will be adjusted for inflation in 2013.

Planning tip: In previous years, the AMT patch was not released until the year after the previous tax year, making it difficult to plan without knowing the exemption amounts. Now that the AMT has been given a more permanent fix, planning should be easier.

Itemized deductions and personal exemptions
For tax years 2010–2012, itemized deductions and personal exemptions were not subject to phase-out. The new legislation revives phase-out rules for 2013 at these applicable thresholds:

• $300,000 for married filing jointly
• $275,000 for heads of household
• $250,000 for single filers
• $150,000 for married filing separately

The itemized deduction rules reduce the allowable itemized deductions by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeds the applicable threshold. The itemized deduction cannot be reduced by more than 80 percent. Certain items, such as medical expenses, investment interest, casualty, wagering, and theft losses, are excluded.

The total amount of personal exemptions that may be claimed by a taxpayer is reduced by 2 percent for each $2,500 or portion thereof (2 percent for each $1,250 for married filing separately) by which the taxpayer’s adjusted gross income exceeds the applicable thresholds listed above.

Planning tip: For taxpayers with a higher income and larger deductions, the itemized deduction and personal exemption limitations may create a “stealth” tax on tax liability, effectively increasing the marginal rate. Taxpayers may wish to recognize income or deductions in certain tax years to help minimize the impact.

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As you may know, late Tuesday night, our government leaders approved a bill to avert the dreaded fiscal cliff, avoiding widespread tax increases and deep spending cuts.

Here are some of the specifics of the plan:

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Presented by Cary Stamp

The Holiday season is a time for reflection. The experiences of our past teach us to create a better future.  Life’s uncertainties can present us with personal hardships that affect us not only emotionally, but financially as well.

The death of a spouse or life partner is one of the toughest events you can go through. Along with the emotional adjustment of continuing on without your best friend, there is additional stress involved in facing the relevant financial issues while you are still grieving. Even if you are the primary person who handles the family finances, this loss can leave you overwhelmed with financial affairs; it’s not unusual for the surviving partner to experience depression as well. Because of this, it is easy to forget the details you need to attend to for your financial security.

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