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Showing posts with label estate planning. Show all posts
Showing posts with label estate planning. Show all posts

Friday, November 23, 2012

Private equity and pension funds: The honeymoon is over, but the marriage is strong

By Matthew Ng

In today's low interest rate environment, pension fund managers have chased high returns by increasing their exposure to alternative investments such as hedge funds and private equity. As pension funds invest heavily in private equity funds, both industries will struggle to adapt to each other in a protracted and iterative process that is likely to be as competitive as it is collaborative.

In the United States, pensions are usually funded with contributions that are periodically adjusted according to actuarial necessity. Historically, contribution levels were discounted against anticipated investment income, but today’s low interest rates have contributed to a shortfall in investment income which has left pension liabilities significantly underfunded. 

Meanwhile, increases in lifespan exacerbate the problem, while changes in the demographic dependency ratio limit the collection of future funds. Pension fund managers find themselves squeezed on both sides, they are pressured by their inability to secure high returns, and motivated to compensate for demographic trends. Understandably, pension funds have embraced private equity funds for their promise of above-market returns.

Last year pension funds increased their exposure to alternative investments by almost 5 percent, resulting in an influx of billions of dollars into private equity. In recent months, however, several state pension funds have sold major holdings in private equity. California, Wisconsin, New Jersey and New York have collectively sold billion dollars of private equity holdings, while Texas and Illinois are poised to make similar divestures. But these recent highly publicized divestures by major state pension funds don’t signal a loss of interest in private equity, but rather a desire for a higher level of engagement with a fewer number of funds.

The losers in the recent exodus are disproportionately the big names in private equity, such as KKR, Carlyle and Blackstone. These larger funds yielded lower returns over the past few years than their smaller counterparts, largely due to the end of the mega-buyout era. While the loosing private equity fund managers are characteristically silent on recent dumping of their funds, pension fund managers have been more forthcoming, citing a misalignment of interests, insufficient returns and high fees.

Talk of misaligned incentives is a backlash against changes in the ownership paradigm of private equity. Since KKR and Blackstone went public in 2007, ownership of private equity management has been up for grabs with public offerings and sales of equity stakes to third parties. These arrangements, according to Wisconsin’s investment consultants, misalign interests between management and the limited partners.

Private equity must reassure skittish pension fund managers that returns for limited partners is the primary goal of the general partners. Also, fund managers must reposition their services as a partnership rather than just money management. This might include providing more services, or discounting fees in return for a large investment, a continued relationship or a longer commitment.

Private equity and pension funds have much to offer each other. In a world where skittish banks are unwilling to back large deals, private equity needs large institutional investors that can tolerate illiquidity. Pension funds need high yield investments that can produce their target 8 percent while providing returns that are uncorrelated with the market. It is no surprise that pension funds and private equity funds have embraced each other. Recent divestures are not a breakup of the marriage, but rather a lover's spat.


Matthew Ng writes on financial investment news and corporations from across Asia. For further reading, he recommends Crescent Point Venture Capital and David Hand Crescent Point Asia.

Wednesday, October 5, 2011

Key tools used In estate planning

Estate planning does not have to be a daunting and expensive ordeal involving endless attorney, accounting and financial planning fees. A key in keeping estate planning cost effective and simple is to separate what is needed from what is not in an estate plan. Many times complicated trusts and financial instruments are not necessary, but even when they are it does not have to be a maze of confusion. 

A good place to begin estate planning is assessing the size or total value of the estate; this includes tax deferred retirement accounts and will determine whether or not specific financial instruments are needed to bypass Federal Estate Tax.  For example, real property such as homes and land are potentially subject to both estate and inheritance tax depending on the value and the state in which the property is located. However, by using a qualified personal residence trust, the total estate value can be reduced according to the CPA Journal Online

Retirement  

Defined benefit plans such as employer pensions and defined contribution plans such as 401(k)s can be used to defer taxes on retirement income until it is withdrawn. These tax benefits allow estate owners to manage retirement income to optimize taxes paid to the Internal Revenue Service. These benefits extend to beneficiaries if they roll over the inherited retirement account to the appropriate account. According to Schwab, a number of retirement accounts can be rolled over into Inherited Individual Retirement Accounts without tax penalty. 

Trusts 

Trusts are financial instruments that protect assets from taxes and designate distribution of estate assets in particular ways determined by the trust and its terms. Numerous types of trusts exist for various purposes such as guaranteeing money for grandchildren, and establishing a foundation upon death. In any case, when a trust is necessary discussing the options with an accredited estate planner such as an insurance agent accredited through the National Association of Estate Planners & Councils might be cheaper than an attorney or accountant with the same estate planning qualification. 

Wills

A Will is a key document probate courts use to allocate assets per the State Bar of California. These documents define trustees and verify beneficiaries for assets within the state's jurisdiction i.e. non-protected assets.  Different types of Wills exist so be sure to review them to identify which is best for you.  Be sure that the terms of other financial instruments such as trusts are conducive to the terms of the Will or this can hold up probate proceedings. The University of Maryland University College and The Porter County Communication Foundation have useful checklist s of information to include in a Will. 



P.O.D.  

Payable on death accounts are an easy way for account beneficiaries to avoid probate. It is a simple matter of going to a financial institution and filling out the appropriate forms. These types of arrangements only apply to FDIC insured accounts, but similar arrangements can be made with non-insured accounts in some states according to Kiplinger. For example, a brokerage account can also carry  similar terms in those states. 

Monday, March 21, 2011

How to open an IRA

Opening an Individual Retirement Account is a retirement planning decision. Depending on whether or not your IRA is a traditional, Roth or Simple IRA, opening an IRA can be subject to specific differences in regulation. To open a traditional or Roth IRA for a specific year usually requires 1) an application, 2) IRA disclosure terms, 3) an initial deposit, and 4) funding before the annual April, 15th tax deadline.

Where to find an IRA

IRAs are opened through IRS sanctioned financial institutions or 'custodians' that hold and maintain the account. Depending on the type of IRA, establishing the account may be a direct procedure between you and a financial institution or insurance company or via a third party such as an employer or financial planner. Financial Institutions are often eager to help with setting up an IRA. This can lead to considerable diversity in the products, services and costs associated with owning an IRA.

When choosing to open an IRA, looking for the option with the most financial potential helps optimize your retirement planning. Many financial institutions offer IRAs, however fees, investment products and maintenance can differ significantly between account custodians. For example, an insurance company IRA may have different reporting procedures and fees than a self-directed IRA through a brokerage firm.

How to qualify for an IRA

To qualify for a traditional IRA, which is not the same as a Roth IRA or Simple IRA, you must also meet the IRS requirements that include 1) having earned taxable income for all years that the IRA is invested in, and 2) being under the 70.5 year age limit for traditional IRAs. IRAs can be funded with any amount of value up to the annual contribution limit and within the minimum deposit parameters allowed by the IRA custodian.

In the case of employer funded IRAs such as a Simplified Employee Pension IRA your employer will be required to submit additional documentation such as an IRS Form 5305-Sep to the IRS. Individual Retirement Accounts can be rolled over, but must meet IRS authorized criterion. To find out if your IRA rollover is allowable contacting the IRS directly is a good way to find out. Sometimes an IRA may receive direct deposits of assets such as mutual fund shares held within another account.

The different types of IRAs

The differences between each type of IRA are relevant when determining how to open an IRA. For example, a Roth IRA is contributed to with taxable income and has no opening age limit whereas money placed into a traditional IRA is deductible from taxable income and can only be done so up to age 70.5. For an employer IRA such as a Simple IRA, funds are placed into the IRA before being paid out to an employee. Other variations include when withdrawals are required for traditional IRAs and annual contribution matching in the case of Simple IRAs.

Roth IRAs, unlike Traditional IRAs have income restrictions and cannot be funded if your Adjusted Gross Income is beyond the contribution cap. Married couples are allowed to have individual IRAs making the maximum contribution double per married household provided income limitations are met. Allowable annual payments to IRAs vary according to income, and tax filing status.

Monday, March 7, 2011

Estate Planning Tips for the District of Columbia

If you like being near the legislative center of the United States, or have a charitable interest in the numerous non-profit associations in the area, The District of Columbia (DC) might be a good place to plan an estate in. A few items to consider when estate planning in D.C. are the D.C. estate tax code, taxes and planning techniques and tips that may be useful for the estate planner. D.C.'s estate laws are contained within Title's 18-21 and 47 of the District's codified laws. 
Several relevant aspects of the codified law may be of use when planning an estate because they may 1) inform the estate planner of the validity of an estate plan, 2) reveal estate planning options, and 3) answer and/or clarify estate planning questions. A few points with the aforementioned code are listed below:

• Next of kin qualify for $10,000 tangible property exemption.
• Estates under $40,000 in value qualify for small estate probate.
• Probate may not be necessary for estates with only 2 vehicles or less
• Valid creditors may continue to make claims after the probate process
• The estate tax exemption for D.C. is $1 million

District of Columbia (D.C.) estate planning tips:

1. Since the District of Columbia does not charge an inheritance tax, cash inheritance can be transferred tax free if the estate value falls below the minimum taxable amount. Moreover, since inheritance is not subject to income tax according to Kipinger.com, an estate planner may consider it irrelevant to protect liquid accounts from estate, inheritance and income tax.

2. Generation skipping trusts are tax-exempt in D.C. This means any trust that passes estate assets to a generation other than the estate holder's and/or his or her children i.e. grandchildren, then there is no taxable estate limitation. This may be to the estate planner's advantage when trying to allocate estate assets to avoid D.C. estate tax.

3. Another way to avoid estate tax is to give away assets or reallocate assets from the estate prior to the estate administration or probate procedure. Ways to do this include gifts, college tuition savings plans, charitable trusts, and transferable retirement accounts.

4. As per Title 20, Chapter 3.57 D.C. estate code referenced above, vehicular property MAY be used to bypass probate. Moreover, if estate assets are sold, the proceeds of such sale may be used to purchase vehicles of high expense that could in theory be transferred without probate. However, transfer is dependent on the Mayor of D.C.'s concurrence.

Planning an estate can be a complex and important part of one's financial life. There are many financial vehicles and instruments that may suit the needs and requirements of an estate and the State in which the estate is planned and administrated. Since circumstances, values and conditions surrounding estates vary, so to may the documents, asset allocations and conditions of the trust, or will. 

When neither wills or trusts are used, the estate laws of the District of Columbia apply to the distribution of the estates assets. For more information on estate planning in the District of Columbia you may consult the sources below and/or a certified estate planner, licensed attorney or certified public accountant.

Cited Washington D.C. estate related sources 

1. http://government.westlaw.com/linkedslice/default.asp?SP=DCC-1000
2. http://www.finance.cch.com/pops/c50s15d170_DC.asp
3. http://otr.cfo.dc.gov/otr/site/default.asp
4. http://www.willsandtrustslawfirms.com/regional-content.cfm/state/dc/Article/13941/
5. http://articles.directorym.com/Tips_on_Estate_Planning_DC-r1140980-DC.html

Disclaimer: The information in this article is not intended to substitute that of an estate planner. The author of this article assumes no liability for decisions and/or consequences, financial or otherwise related to the information in this article.

Estate Planning Tips for New York

Planning an Estate in New York involves paying attention to benefits and disadvantages of owning an Estate in the New York as well as the options made possible through the State's laws. Other factors affecting New York estate planning include taxes on assets, transactions, and income and the State's economic and market environment. This article will discuss the following factors that can affect the planning and management of an estate in New York:

1. Relevant State laws governing Estates
2. State estate tax regulations
3. State market and economic conditions
4.  Investment and asset ownership opportunities

New York estate laws

New York estate laws can be read at the following links. These laws are elaborate and detailed so enlisting the assistance of an attorney licensed to practice in the State of New York may be helpful in regard to particular questions. That said, some important aspects of New York estate and trust law can be reviewed for a better understanding of estate conformity to these laws. Additionally, the use of State authorized legal documents, legal and financial services may help in confirming and validating estate related legal documents ex. notary public, estate planner etc.

New York State law of Wills
Trusts law of New York State
Updated New York Uniform and Principal Act
Legal definition of Estate assets in New York State

Estate and related taxes in New York

New York State's taxes are different from several other States meaning the taxation of property and transactions in and through an estate may be subject to differing costs. Summary information regarding New York State taxes is provided below as sourced from bankrate.com and the New York State Department of Taxation and Finance.

• Estate tax unpegged to federal minimum taxable estate value
• Sliding scale state estate tax up to 16%
• State income tax: 4-6.85%
• Inheritance tax: None
• Property tax: Variable by municipality and/or county
• Sales tax: 4-8% including local taxes

State market and economic conditions

Regional economic differences can make possible interstate variances in the cost of living, availability of capital and financing, market opportunities such as investment diversity and job scope in addition to legal and regulatory differences affecting the management, and oversight of investments and the business environment. Some items of note when planning an estate are as listed:

Economic Indicators:

• GDP: $1.144 trillion: 2008 (11)
• Population: Approximately 20 million
• Taxes as % of GDP: .51% (13)
• Other economic indicators: See Public Policy Institute of New York State, Inc. "Innovation Economy Index" (10)
Investment and asset owning opportunities

Planning an estate in New York is not vastly different from planning an estate in any other State apart from the differences in State regulations pertaining to estates, their taxation, protection and legality. Since estates are financially important, being aware of State specific options, contingencies and methods in the estate planning process is of relevance. A few New York State specific estate management tips are provided below.

• Qualified Personal Residence Trust (QPRT): Can lower estate value by discounting future value without appreciation. (2)

• Write a valid Will to name an executor and avoid estate division complications. (3) Also, use correct documentation available at the following link (5)

• Estate generation skipping transfer trusts bypass estate taxes after being inherited by Grandchildren, and still provide income for children. If the income received by the children is taxable at a lower rate than the tax on the entirety of the estate, then the tax benefits are advantageous. (6)

• New York State does not tax Government pension annuity distributions (10)

• Personal property in New York State is not taxed, whereas real property is (12)
Ex: Real estate is taxable, cars are not.

New York Estate Planning Resources:

1. http://public.leginfo.state.ny.us/menugetf.cgi?COMMONQUERY=LAWS
2. http://www.nytimes.com/2006/01/21/business/yourmoney/21money.html?_r=1&pagewanted=2
3. http://www.newyorklife.com/cda/0,3254,11274,00.html
4. http://tax.custhelp.com/cgi-bin/tax.cfg/php/enduser/std_alp.php?p_cats=34

5. http://www.tax.state.ny.us/forms/estate_cur_forms.htm
6. http://www.nolo.com/definition.cfm/Term/90F87212-5E5A-40B4-9866BC456070BCFA/alpha/G/
7. http://www.tax.state.ny.us/forms/estate_cur_forms.htm
8. http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_NY.asp

9. http://www.seniorlaw.com/newtrusteerules.htm
10. http://federalretirement.net/annuity.htm#Annuity_Tax_Considerations
11. http://www.ppinys.org/reports/JustTheFacts.html
12. http://www.empire.state.ny.us/nysdc/Economic/GSP_Home.asp

13. http://www.statemaster.com/graph/eco_tol_tax_bur_pergdp-total-tax-burden-per-gdp

Tuesday, March 1, 2011

Estate Planning Tips for Connecticut Residents

Planning an estate in Connecticut may require careful consideration and diligence to the State's laws because doing otherwise could end up costing more money and time than necessary when the estate transfers ownership. This article will discuss the planning of Connecticut estates in terms of 1) estate deductions, 2) estate relevant taxes, and 3) additional Connecticut estate planning information. It will also provides links throughout as reference, and sources of additional information regarding a particular aspect of estate planning in Connecticut.

Connecticut estate deductions

Familiarizing with estate deductions is important in reducing the value of an estate for tax purposes. For example, if an estate is taxable when it reaches a value of $2 million dollars, lowering its value via deductions to below $2 million dollars would eliminate that particular tax. In Connecticut, estates are valued after the same deductions allowed by the U.S. Internal Revenue Service. These and other deductions are viewable at the following links:

Federal estate deductions:

State estate deductions:

As evident in the above link, some examples of these deductions include estate administrative expenses, and property transferred to a spouse after the estate holder's and/or primary trustee's death. However, take note of the sentence stating in some cases property transferred to a spouse may not qualify for deduction.

To avoid complication in deductions such as transfer of property and debt, documents and financial instruments proving ownership of property and debt are of importance. For example, the IRS may require documentation that payable on death bank accounts are legitimate from the financial institution. This assists the tax agency in certifying the type of account, its applicability to an estate or lack thereof, and validation of account owners and/or beneficiaries.

Estate relevant taxes in Connecticut

Connecticut implements a sliding scale on estate taxes meaning the higher the taxable amount of the estate, the greater the tax. This estate tax currently ranges between 8-16% and does not include other taxes. Also included in the Connecticut estate's valuation are real and personal property. Moreover, the State of Connecticut does impose a generation skipping tax. The aforementioned information and other Connecticut estate law can be found at the following link.

Connecticut Estate tax law:

Other taxes such as income tax, inheritance tax, and gift tax may apply in the State of Connecticut if the estate's income sources, and assets are not tax protected via financial vehicles and instruments allowing such. For example, income from business within the estate is likely to be taxable either as a corporation or individually depending on the structure of the business.

i) Connecticut inheritance tax:

ii) Connecticut gift tax:

However, if that business is registered overseas and owned by a foreign trust with assets within the company remaining abroad, the possibility of that business qualifying for taxation in the United States is reduced dependant on the legal separation of that business and/or its income from the estate's beneficiaries.

Additional Connecticut estate planning information

When an estate transfer takes place, the State of Connecticut requires tax documents be filed with the State's probate court regardless of value according to bankrate.com. These and other forms can be found at the Connecticut Department of Revenue website below and includes estate and gift tax forms, domicile declaration, estate tax returns and insurance statements.

Also important to note is that certain financial instruments may not be considered as within the jurisdiction of a trust according to Michael J. Keenan, Esq of Keenan Law, LLc, Specifically, in his estate planning blog, Keenen refers to 401K's, POD accounts, life insurance death distributions and IRA;s are distributed according to listed beneficiaries and not a Will.

Other estate documentation pertaining to estate planning include living wills, last will and testament, trust(s) and power of attorney should comply with Connecticut's estate law in order to be legally valid for estates within that State. These documents can be found and prepared at a number of locations and may required the assistance of an estate planner skilled, certified and/or licensed in the State of Connecticut.

Wednesday, February 23, 2011

Estate Planning Tips for California Residents

Image attribution: Arkyan. GFDL, CC BY-SA 3.0

Estate planning tips for California include those aspects of estate planning that may benefit either the estate planner or the inheritors of the estate. Determining the benefits of estate planning first involves defining the objectives of the estate in order for specific actions to take place to meet those goals.

In other words, in order to provide detailed estate planning tips, one must first know the intent of the estate. That said, this article will illustrate certain aspects of estate planning regarding California that may be of benefit or interest to the estate planner or estate beneficiaries. It will do so in three parts consisting of California estate planning tips, distribution via probate, and relevant references.

California estate planning tips

To plan an estate involves defining its objectives, after which techniques can be applied to the estate's and/or beneficiaries benefit and in accordance with financial and regulatory limitations and options. These tips can vary depending on the size of the estate, type of assets in the estate, complexity of the estate's goals, health and family of the estate planner etc. In California, some items to consider in regard to estate planning are listed below.

• A California State Tax Return is NOT required for Estate holders who die after 2004 as per California State Controller (7)

•A Grantor Retained Annuity Trust (GRAT) may reduce tax on inherited income (5)

•Family Limited Partnership may not be helpful in cases of favorable creditor rulings (8)

• California Gift tax does not apply to spouses of the estate holder (9)

• California probate, civil and other relevant legal code may supersede living Will (2)

• No inheritance tax is due from new California estate beneficiaries (7)

As evident from the points above, there are many nuances to estate planning in California as with any State. Due to the many potentially relevant laws, codes or requirements, California estate planning may best be achieved with the assistance of a qualified estate planner, accountant or attorney.

California estate distribution tips

The California probate process can take anywhere from 6 months to 21 months depending on the case and the circumstances. This California probate diagram illustrates an example of one California County's probate process from start to finish. However, in some instances, particularly when an estate's value is low, the probate process may be reduced in length or requirements.

A couple of interesting points in the California probate code are 1) the surviving spouse of the estate holder's legal right to contest the will in some cases of real property and 2) the legal right of family members and interested persons to file petition for information regarding the will of the deceased.

In other words, there is at least one instance in the California probate code in which a spouse can contest a valid will, and where information regarding the estate can be requested from persons not involved with the probate. The above points are further elaborated below with legal code or related links.

(1) Spousal contest of estate will:

According to California's probate code, section 120, the spouse of the deceased can "elect" to take a "portion" of real property if such property is not jointly owned and allocated otherwise in the deceased's will if the deceased lived out of State but owned property in California.


(2) Heirs may file a petition to determine beneficiary status of real property

California probate code 248-249.8 also states that heirs not entitled to real property via succession may request information regarding the will of the deceased via petition.


(3) Probate can be simplified in some cases when estate values are under a certain amount

In some counties, estates valued below an amount determined by the State and/or County may bypass the probate process via filing of an affidavit with the county court.

Useful California estate planning references

The following is a list of references both used in the creation of this article and potentially useful for the estate planner or reader. These references include information on California estate laws, taxes, and other references in addition to general estate planning instruments. The references are categorized as such for quicker location of information and are numbered in accordance with numbered references within the article.

California probate law:

1) http://www.megalaw.com/ca/top/caprobate.php
2) http://caselaw.lp.findlaw.com/cacodes/prob.html

California taxes:

3) http://www.retirementliving.com/RLstate1.html
4) http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_Cal.asp

Estate planning techniques:

5) http://library.findlaw.com/2002/Sep/1/130768.html
6) http://www.dsbcpas.com/estatetaxplanning/estateplanningtech.html
Additional California estate references:

7) http://www.sco.ca.gov/ardtax_estate_tax.html
8) http://www.rjmintz.com/ownership-spouse.html
9) http://www.taxes.ca.gov/Income_Tax/specialind.shtml

Disclaimer: The above content is provided for informational purposes only and does not replace the advice of a certified financial planner, accountant or attorney. The information herein is to be used at the reader's discretion and the author assumes no liability for any consequences associated from such.

Tuesday, February 22, 2011

Estate Planning tips for Michigan Residents

Planning an estate in Michigan involves several of the key aspects of estate planning used in several other States. However, Michigan has its own estate relevant tax laws, probate procedures, and trust regulations that may affect the managing of, value and cost of the estate. Estate management can be divided into to categories 1) financial and 2) legal.

Since end of life constitutes legal settling of assets, identity, debts and taxes in addition to family related matters of end of life management, decision making etc. the estate management process has the potential to become complex, but doesn't always have to be.

This article will outline some of the basic aspects of estate management and planning in the State of Michigan, specifically probate, and taxes and then provide additional tips that may assist in the Michigan estate planning process.

Michigan estate probate law

Michigan's estate law can be read at the Michigan State Legislature website, the link for which is provided with this article and in this section. Some key points regarding probate outlined by the Michigan Estate Law are provided below. Please note, the probate process is not the only way to transfer an estate, as trusts may also be used and may limit public record of the deceased's Will and/or estate details.

• Probate proceedings must take place in county of next of kin's residence unless out of State, in which case County of estate holder's property subject to Court transfer. (Act 386, Section 700.3201)

• Informal application for probate can be filed with the probate court if no formal application has be filed within 28 days following death of estate holder (Act 386, Section 700.3301)

http://www.legislature.mi.gov/(S(i04vr0azntmhxaebq0y1in55))/mileg.aspx?page=getObject&objectName=mcl-Act-386-of-1998

Michigan estate and related taxes

In Michigan no inheritance tax currently exists and estate tax is variable along with the Federal Estate Tax that will be 0% for 2010 and $1 million thereafter excluding adjustments to the law. The maximum State income tax in Michigan is 4.35% and tangible personal property is taxed with real estate exemptions locally and not by the State. (retirementliving.com)

http://www.retirementliving.com/RLstate2.html#MICHIGAN

Holding assets in a Michigan estate may be worth taking a second look at due to the fact 1) tangible property is taxed heavily at the local level and 2) no Standard or Federal deduction exists for taxable income. Even though no inheritance tax is currently in place within Michigan, the potential tax levied on income and property can be quite high.

At the local level property tax can be as high as 50% with some exemptions regarding real estate according to retirementliving.com. Since the real estate exemption is quite high, it may be advantageous to transfer property to make use of this exemption and reduce property tax. A property tax calculator from the Michigan Department of the Treasury is provided below.

https://treas-secure.state.mi.us/ptestimator/ptestimator.asp

If Michigan estate property qualifies for the Michigan Principal Residence Exemption (PRE), total property tax of assets within the estate, be it inherited or otherwise, may be significantly reduced. Instructions on how to apply, qualify and obtain PRE are linked to below. This tax is quite relevant to the estate as property that does not become the principal residence of the estate beneficiaries may not qualify for the PRE exemption.

http://ww.michigan.gov/documents/2856_11014_7.pdf

Michigan estate tips

There are many aspects to estate planning in Michigan that should ideally be considered in the process. Since individual circumstances can differ considerably, no one estate planning method may be of best fit to the majority of Michigan estate planners. However, that said, several aspects of estate planning generally do stay the same in many cases including 1) estate tax strategy, 2) estate administration and 3) estate value and cost. The tips below are just a few of the actions, to be used with the reader's discretion and judgment, that may be helpful in estate planning in Michigan.

• File a principal residence affidavit to qualify for principal residence exemption
• Contemplate different asset ownership options ex: joint tenancy
• Read of the State probate laws and other relevant laws linked to in this article
• Keep track of changes to the Federal estate law as Michigan estate law is related to it
• Limit annual taxable estate derived income received after transfer
• If real estate does not qualify for exemption, consider non-taxable asset reallocation
• Contact and discuss estate planning with a local financial advisor or attorney
• Develop a short, medium and long-term estate plan, or whichever is appropriate
• Allow for estate flexibility in terms of asset transfer, ownership and management

Monday, February 21, 2011

Florida Estate Planning Tips

Florida is a good State to have one's estate owned in because of its favorable tax benefits to individuals with high worth and income. For starters, Florida has no State income tax meaning that any income earned is subject to 2%-11%(6) less Government tax in comparison to some other U.S. States, and in 2009 , Florida has no Estate tax, meaning those estates passed on via inheritance in 2009 will not be taxable under Florida estate tax law.(5) Florida estate tax laws can be found and reviewed at the following link: Florida estate tax laws.(2)

Estate planning in Florida

Estates are the totality of an individuals' assets which may include a number of financial instruments, property, investments and legal holding structures. Since different assets are subject to different financial, tax, and ownership regulations, managing an estate to take into account State specific regulations is wise to consider. For example, in Florida, for assets to be subject to State estate law, the estate owner must be a resident of Florida. (1)

Secondly, the good management of an estate may allow it to increase in value, be subject to lower costs, and less taxation, and/or legal complications. Thus, two primary estate planning principles can be used for Florida estates include, 1) Asset specific financial management and 2) goal and/or objective specific estate planning. For example, Florida has specific legal documents such as wills that are ideally used to be applicable in regard to distribution of estate assets.

• Asset specific estate planning

Different assets in an estate are subject to different rules. For example, real estate is subject to property tax whereas some investments such as government bonds may be tax free. Furthermore, different counties within Florida have different property tax rates, rendering some Florida counties of potentially lower cost than others. Optimizing the financial planning and management of each asset individually can facilitate a better overall use and allocation of estate resources both financially and legally.

To illustrate the above further to keep an Estate below the State and/or Federal Estate tax minimum, placing estate assets that cause the estate to be worth more than this minimum in the name of 1) foreign company trusts , 2) signing over property ownership to tax deductible charities or 3) giving estate property away to family as a gift.

• Goal and/or objective specific estate planning:

Goal or objective estate planning that is customized for the State of Florida will naturally work within Florida estate law, and possibly be designed to meet the financial wishes such as distribution upon death, asset worth benchmarks, cost controls and portfolio assets allocation percentages.

For example, a goal may to have an estate be subject to the lowest possible inheritance and/or estate taxation possible following death. Or, an objective may be for the estate's use to facilitate sustainable charity operations, support a family etc. Estate goals are not necessarily State specific, but may be required to be State specific to comply with State estate law and goals subject or influenced by that State's law. Specific State information pertaining to Florida estates can be linked to from the urls provided at the 'Florida estate resources' section at the end of this article.

Additional Florida estate planning tips

In addition to the above information, planning an Estate in Florida has further nuances and rules of thumb that may or may not be used in Estate planning for other States. Since most if not all U.S. States have variances in their estate laws, planning estates in Florida should take into account the State specific requirements to be subject to more optimal management.
A few tips that may assist in planning an estate in Florida are listed below; these tips and/or facts may or may not conform with the goals of the estate owner(s) and thus should be read and considered as informational only:

• Verify Florida residence with a paper trail (1)
• Florida estates are not taxed upon death if they are below Federal estate tax minimums
• Choose non-taxable estate financial instruments such as life insurance
• Keep good records and up to date Estate accounts information (1)
• Carefully and clearly define estate distribution intent following death
• Consider using a trust to avoid probate and when assets exceed tax minimums
• Contact a specialized estate lawyer or accounted licenses in Florida
• Protect estate assets from credit collectors, income garnishment and legal proceedings

Summary

The above information is not intended, nor should be received as replacing the advice of an attorney, accountant or licenses estate planner. Rather, the information is presented as a guide that may provide useful information that is used at the discretion of the reader.
That said, this article has discussed estate planning in terms of optimization for cost, goals, worth and Florida State specific requirements. The resources that follow were utilized in the creation of this article and may provide additional or helpful estate planning information.
Florida Estate Planning Resources:

1. http://tinyurl.com/6bsheqa2.http://tinyurl.com/629wzv2
2. http://finance.mapsofworld.com/tax/inheritance/florida.html
3. http://library.findlaw.com/2000/May/1/126207.html
4. http://tinyurl.com/67rxhvo
5. http://www.taxfoundation.org/publications/show/228.html
6. http://tinyurl.com/2vtlnw

Friday, February 18, 2011

Estate Planning Tips for Illinois Residents

Estate planning in the State of Illinois can be simple or complex depending on the steps taken by the estate owner prior to transfer of that estate. The estate can become difficult to manage if there are a lot of assets, beneficiaries, heirs, creditor claims, Will specifications, family disputes, ambiguous or conflicting circumstances etc. To lessen the complications associated with the management of the estate several considerations and familiarity with the Illinois estate management process may be worth while.

This article will discuss Illinois estate planning in terms of 1) Illinois estate law, 2) Illinois estate transfer options, and 3) Illinois estate planning and management methodology. To begin, before planning an estate, it can be helpful to gain an understanding of what is generally involved and required. These things are affected by the State(s) in which the estate and/or its assets are held and the laws governing the distribution of assets in the event of death.

Illinois estate law


Being aware of Illinois Estate Law or planning an estate with someone who is, can be quite important. The following link provides access to Illinois State laws pertaining to State estate taxes, probate, and legal Wills and powers.

These laws can serve as a reference to the estate planner when confirming a specific course of action such as how one's medical treatment will be managed in the case of incapacitation. For example, in Illinois, and according to the Illinois Living Will Act, an individual may create advanced directive limiting the application of medical treatment in the event of non-functional decision making capacity.

http://law.findlaw.com/state-laws/estate-planning-law/illinois/

A few aspects of Illinois State law that may be useful to the estate planner are those laws pertaining to 1) the probate or trust administering process, 2) the creation of legal estate management documents, 3) the management of the estate prior to transfer and 4) the taxation of an estate within Illinois. The following website provides information on Illinois taxes including estate, inheritance, property, and income tax. These taxes are relevant to the value and cost of an estate.

http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_Ill.asp

Illinois estate transfer options

When the time comes for the distribution of an estate in Illinois, the County and/or City Circuit Court may need to be contacted for registration of documents and determination of transfer options as there are several. The following website provides information on many county estate requirements within the State of Illinois and serves as a useful reference as to 1) what estate proceedings may be necessary, 2) what estate management options are available and 3) which Circuit Court and/or persons to contact for information.

http://www.probateillinois.com/index.html

1. Through probate

• File Will with county government as required by Illinois law
• Locate a flat rate probate attorney rather than percentage based if estate is of high value
• Obtain necessary documents of death, residency, creditors etc. of the estate owner

http://www.familyestate.com/main/probate.htm

http://www.illinoislawyerfinder.com/publicinfo/estate.html

2. Through Trust

Estate distributions via a trust are regulated by the Illinois Trust and Trustees Act. This act describes in detail the role of trustees, the extent of a trust's capacity, and the means by which a trust is implemented among other things.

For additional questions pertaining to trusts, registration requirements, and any State mandated documentation related to the death of the primary trustee and/or estate owner, and the execution of the trust the following resources may be consulted:

• Trust documentation itself
• Applicable Circuit Court
• Illinois Trust and Trustees Act
• Attorney's specialized in estate management and certified in Illinois

3. Other estate distribution options

In addition to probate and trust administration of an estate, other means may be available dependant on the size of the estate in terms of dollar value, and the provisions allowed by the Court in which documentation and process may be required. Some of these documents and/or methods include the following, and may assist the Illinois estate recipient(s) in saving time and money.

Illinois Small estate affidavit: May help bypass probate court. (familyestate.com)

Illinois Summary administration: Terminates probate proceedings, and allocates real property to be retained by heirs. (chicagoprobate.com)

Illinois estate planning methodology

To get a better grip on the estate planning process in Illinois it can be helpful to use a variety of tools such as a concept map, checklist, estate planning software, or independently derived estate planning method. The reason why these tools can be helpful are the many potential elements of the estate including asset allocation, estate management, creditor and family claims, and incomplete estate planning.

The following list includes the resources available that can help with the estate planning process in Illinois. If part of an estate is granted to a charity, the legal services of that department may be able to assist with the remainder of the estate planning as part of the agreement. Additional estate planning services include the following:

Illinois Department on Aging legal assistance

State specific estate planning documents (uslegalforms.com)

Trust and Estate planning questionnaire (files.ali-aba.org)

Illinois estate lawyers (lawyers.com)

Additional estate planning resources I (legaline.com)

Additional estate planning resources II (giftestate.com)

Disclaimer: The information contained in this article does not replace the advice of an attorney or certified estate financial planner. The author of this article does not claim liability for any consequences regarding the reader's use of such data. The information in this article is to be used at the sole discretion of its recipient.

Estate Planning Tips for Hawaii

If moving to a continental United States estate friendly State isn't for you, Hawaii might be. With no inheritance tax or tax on personal property, descendents can own the priciest of vehicles without property tax provided they aren't classified as 'real property'. Keep in mind Hawaii does have state income tax up to 8.5% (1) meaning inherited annuities that aren't tax protected may be subject to income tax.

Hawaii does have an estate tax aka. Death tax that is linked to the federal estate tax which will be non existent in 2010 (7). That said, if the estate tax law is not re-legislated by 2011, an estate tax may once again exist for estates valued over $1 million or higher. The remainder of this article will discuss estate planning in Hawaii in terms of 1) ease of estate distribution, 2) pros and cons of estate planning in Hawaii and 3) useful procedure(s) in estate planning.

Ease of estate distribution

Estate distribution takes place following the death of the Estate's original owner. How this takes place can be affected considerably by 1) how assets are owned within Hawaii, and 2) what financial instruments and/or assets the estate is comprised of.

Moreover, assets that are already owned by the beneficiary prior to probate or action by a trustee executor don't need to be distributed as an estate in Hawaii. The following techniques may prove helpful in bypassing some of the more lengthy procedures of an estate's administration such as estate tax filing, probate, private management etc.



• Joint ownership of real property and personal property (4)
• Gifts from the estate less than $1 million in taxable gifts (10)
• Property location in Hawaii instead of many States (5)
• Spouse beneficiaries receive estates tax-free (6)
• Use of asset protecting trust (APT trust) or other beneficial trusts (11)

The following legal website suggests several options for estate planning in Hawaii that bypass the need for a Will in addition to additional estate planning tips.

With joint ownership with rights of survivorship, property passes directly to the survivor even if that person is not related. This avoids transfer of assets and the death tax. Additionally, if property is owned and/or registered in Hawaii instead of multiple States, the possibility of out of State estate axes being imposed on that property are reduced and legal complications bypassed.

Pros and cons of estate planning in Hawaii

The advantages of planning an estate in Hawaii are perhaps less tangible than in some other estates. If scenery, climate and a relatively stable housing market count as benefits along with some tax free property ownership and no tax on inherited money, then there are some.

However, cost of living and income tax in Hawaii is high making owning the proceeds of an estate or an estate that hasn't been passed on potentially high maintenance in terms of costs.

Furthermore, having an estate in excess of the Federal and/or State Minimum value requires the filing of Estate tax returns that involve additional bureaucracy. For Federal returns an IRS form 706 (8) is required and for Hawaii Department of Taxation estate returnsM6 and/or M6 GS are required. (9)

Estate planning procedures

To plan an estate in Hawaii starting from the beginning of the process helps. For example, the following process illustrates how one might go about thinking about an estate plan.

• List assets by type, value, account etc. then total estate worth
• Identify estate value lowering techniques as well as estate cost saving measures
• Verify asset distribution prior to creating legal documents
• Consult with an estate attorney, accountant, or financial planner if necessary
• Create Hawaii specific living Will (3), Trust(s), Power of Attorney if applicable
• Place assets in appropriate trust(s), increase insurance death benefit
• Convert assets to tax free financial instruments/assets
• Monitor estate, market developments and State laws for changes

In Hawaii, specific estate planning methods may prove cost effective when implemented in conjunction with Hawaii's and Federal estate law. For example, real property may be transferred to personal property and then that personal property may be registered as being jointly held with rights of survivorship in which case the property is not part of the estate's total value.

Since Hawaii has a high income tax, estate assets that could yield a high income such as non-insurance death benefit annuities, dividend income, estate property rental income may be reallocated into non-income bearing assets that can be sold or converted as needed.

Additional Hawaii estate planning resources

The following resources were used in compiling the above article and may be of additional assistance to estate planners, readers or others interested in learning about estate planning in Hawaii.

The content of this article does not replace nor does it intend to replace the advice of an attorney, accountant or any other professional involved with estate planning and is to be used at the readers own discretion. The author of this article assumes no responsibility or liability for the use of content within this article or the estates of said parties.

Sources:

1. http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_Haw.asp
2. https://www.fhb.com/ins-estate.htm
3. http://www.legalzoom.com/wills-state-requirements/hawaii-will.html

4. http://research.lawyers.com/Hawaii/Estate-Planning-in-Hawaii.html
5. http://library.findlaw.com/2001/Feb/1/127804.html
6. http://tinyurl.com/4fwp7cp

7. http://www.hawaiireporter.com
8. http://www.irs.gov/pub/irs-pdf/f706.pdf
9. http://www.state.hi.us/tax/a1_b3_4estate.htm

10.www.irs.gov/pub/irs-pdf/p950.pdf
11.http://www.rjmintz.com/appch9.html

Thursday, February 17, 2011

Filing taxes on revocable living trusts

Income earned through and distributed from a revocable living trust is taxable and may be taxed at higher amounts than regular income if income is reported on an IRS form 1041. Revocable living trusts are legal documents that define heirs and trustees of a person's assets in the event of death. These documents can be changed to remove, add or adjust heirs, trustees, and terms of distribution during the life of the primary trustee who is the creator of the trust. The purpose of a living trust is to avoid the lengthy probate court process after the death of a loved one.

Taxation of trust income during life of the trustee

The Internal Revenue Service considers revocable living trusts to be a "grantor trust" because the primary trustee i.e. the owner and creator has the ability to retain, recall and revoke the trust. Income earned from these trusts during the life of the primary trustee is taxable as income and reportable through an IRS form 1041. The form 1041 instructions and guidelines for reporting income in a revocable living trust can be found through the U.S. Internal Revenue Service. Depending on the type of assets held within a trust, different tax forms and procedures may be necessary.

To illustrate the above, charitable contributions made through a trust are reported on Schedule A of the form 1041. The form 1041 instructions published by the U.S. internal revenue service indicate higher taxation rates on income earned through a living trust than through a normal taxable income. For example, income over $10.450 is taxable at a rate of 35% , any amount under which is taxable at 25.8%. The same amount of income taxed as regular income would be taxable at a 15% rate , $7550.00 of which is currently taxable at 10%.

Taxation of trust distributions after death of primary trustee

Once the secondary trustee has distributed trust funds to beneficiaries listed in the revocable living trust, the assets, assuming no liabilities, become taxable as estate property. To be taxable as an estate, the value of the trust must exceed a government determined minimum amount, which is currently over $1million.

If, after the death of the primary trustee, income is still generated within the trust before distribution of the assets within the trust takes place, the trust is taxable as income i.e. tax filings for the deceases must be filed and any taxes due will be paid for either from assets within the trust or from assets within the deceased's estate.

Tax avoidance, and tax fraud in revocable living trusts

According to the U.S. Internal Revenue Service, income within a revocable trust may be "distributed to other trusts so long as they are named as beneficiaries within the trust". In other words, to lower taxable income of a trust, the income can be spread around to a life insurance trust or an AB Trust. What is not considered legal by the IRS is the illegitimate reduction of trust income through false expense deductions.

Legitimate ways to lower taxation of living trusts include the above, optional tax reporting methods that do not use a form 1041 and selective allocation of assets within the trust. Since the primary trustee can amend revocable living trusts at any time, assets potentially subject to higher taxation can be added at later times to avoid potential higher taxation if a form 1041 is filed.

Revocable living trust tax tips

The use of a revocable living trust may be a good legal strategy but in terms of taxation, these types of "legal entities" may be best left to later years since the assets within a revocable living trust may be taxable at a higher rate than if they were in another financial instrument. A few tips one might consider before and after establishing a revocable living trust are the following:

• Consider alternative trusts: Trusts such as Life Insurance trusts can allow income to grow tax deferred and in the case of estate beneficiaries tax free.

• State Probate Law: Since revocable living trusts are used primarily to avoid probate and to increase privacy of beneficiaries, being familiar with the applicable state law may reveal certain advantages or legal mechanisms that exist within the probate process.

• Trust Assets: Certain assets within a revocable living trust may not incur income on an annual basis and/or provide negligible tax deductions to normal income. Such assets may be placed in a revocable living trust without disproportionate tax losses. Example of such assets may include jewelry, and art.

• Form 1041 Instructions: Become familiar with the tax consequences and preparation time associated with having a revocable living trust. If a revocable living trust must be used, consider optional filing methods.

• Estate Planning Professionals: Consulting with an estate planning professional, whether it be a financial planner, accountant or lawyer may be prudent especially in cases of large estates.

Summary

Revocable living trusts are subject to similar if not higher taxation than regular income unless income within the trust is re-distributed to not taxable trusts. To file taxes on revocable living trust income, an IRS form 1041 can be used, however the tax rates on income using this reporting method are higher. In light of this using an optional tax reporting method illustrated by the IRS may incur lower taxation.

Assets held within a revocable living trust become taxable as an estate after the death of the death and distribution of the trust owner(s) and may still incur regular income taxes if the trust earns income before assets have been distributed by the trustee(s). Becoming familiar with the purpose, techniques, benefits and disadvantages of revocable living trusts may assist one in appropriately reporting taxes as well as in the decision to list assets within such a trust.

Sources:

http://www.irs.gov/pub/irs-pdf/f1041.pdf
http://www.irs.gov/pub/irs-pdf/i1041.pdf
http://www.nysscpa.org/cpajournal/old/08770612.htm
http://www.irs.gov/instructions/i1041/ch01.html#d0e474
http://www.irs.gov/businesses/small/article/0,id=106538,00.html

Estate Planning Tips for New Jersey Residents

New Jersey is a heavily taxed State and its estate tax is not directly linked to the Federal estate tax as of July 1, 2002. (10) This and other State tax regulations can affect estate values and estate derived income considerably. These regulations are contained with New Jersey Statute, Chapter and Case law, notably Title's 3A, 3B and 54 of New Jersey Statute law and Chapter 31 of New Jersey Chapter Law. These laws can be found and read at the New Jersey State Legislature website.

Since there are many estate regulations in New Jersey that can impact the management and value of an estate, a carefully planned estate may be necessary to optimize the estate's value and cost. This article will discuss key aspects of New Jersey estate planning, taxation and regulation. It will also provide tips to consider when planning around New Jersey estate regulations, as there are ways to plan an estate to minimize estate taxes and maximize estate objectives.

New Jersey estate planning considerations

The following section illustrates the potential taxes and noteworthy items that may affect an estate, in addition to estate or estate related requirements that can prolong or limit the receipt of an estate by beneficiaries of that estate. More regulations than can be covered in this article exist pertaining to New Jersey estate planning, however some notable aspects of such regulations are the following.

• $675,000 of a New Jersey estate's value is estate tax free (11)
• New Jersey compliant out of State wills filed in State are accepted (8)
• New Jersey inheritance tax returns are often required (3)
• Estate assets may require property release waivers (3)
• Safety deposit boxes and contents, are not "inventoried" by the State (3)
• Transferred retirement instruments can reduce immediate estate tax
• "Entity structuring" may afford liability protection from creditors (13)

• Inheritance tax 0%-16% (3)
• Estate tax: Determined from information on Federal Estate tax return (4)
• Property tax: Locally determined and based on market asset value (4)
• Income tax 1.4-8.97% (1)
• Gift tax 0% (15)

In light of the above factors, the following techniques may be helpful when planning an estate in New Jersey as clearly an estate tax strategy may be in order when planning a New Jersey estate. As with all estate planning, it can be a good idea to first determine the estate's goals and objectives prior to devising a strategy and putting together estate planning technique to accomplish such.

• To avoid default intestate estate transfer, complete a valid New Jersey will (2)
• A bypass trust may be useful if the estate's value is higher than State estate tax exemption, and will be transferred into two generations. (10)
• Make use of New Jersey's lack of gift tax to pass estate value prior to death
• Receive estate income distributions via annuity rather than lump sum
• Relocate and register real and tangible property to another State if possible
• Transfer non-necessary assets into tax protected financial instruments
• Maximize life insurance death benefits as they are tax-free (3)

Estate planning financial instruments

Several financial instruments and allowances may be beneficial when planning an estate. These instruments or allowances within the law can assist in maximizing exempt estate value, reducing tax, and increasing estate value either through higher retained value from lower management cost or improved estate management techniques. The following is a list of financial instruments and possibilities that may assist in the estate planning process. Since New Jersey is quite particular about estate values and inheritance, the use of specialized estate management tools may be wise.

• Retirement plans such as IRA's can be effective asset protection vehicles (14)
• A/B Trusts: Make use of estate holder and spouse's estate tax exemption (11)
• Life insurance: Cash value may be taxable whereas death benefit is not. (3)
• Asset protection trusts, and/or companies i.e. trust companies (14)
• Marital joint property (14)

Also included in estate planning are the records, especially State specific estate documents. These records or documents may include those listed below, some of which are available and/or viewable at the New Jersey Department of the Treasury, Division of Taxation website. Determining which documents are needed should ideally become apparent during the estate planning process.

The legality and effectiveness of these records can be validated by an attorney, notary, state official etc. Invalid documents and assets that aren't registered in a trusts name may cause an estate to go through probate or similar process, hence the importance of creating valid documents. Listed below are some documents that may be needed in New Jersey.

• Form L-8 and L-9 Real Property tax waiver
• IRS Form 706 required for New Jersey estates over $675,000
• New Jersey estate tax return, form IT-State
• Insurance proceeds, form O-71
• Estate corporation formation certificates and registration documentation

New Jersey estate planning preferences

Listed below are sources that may assist the reader in the New Jersey estate planning process. The information in these sources are referenced in this article. Since the estate planning process is diverse, and potentially complex, many considerations can come into play when planning an estate. For this reason consulting local estate planners trained and familiar with New Jersey estate regulations may be worth the cost and potential headache of not having planned correctly or overseeing certain aspects of the estate planning process.

Sources:

New Jersey estate planning:
(1) http://www.jerseyestateplanning.com
(2) http://research.lawyers.com/New-Jersey/Estate-Planning-in-New-Jersey.html

New Jersey tax information:
(3) O-10-C - General Information - Inheritance and Estate Tax (paste in internet browser)
(4) http://www.state.nj.us/treasury/taxation/index.shtml
(5) http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_NJ.asp

New Jersey estate laws:
(6) http://law.findlaw.com/state-laws/estate-planning-law/new-jersey/
(7) http://www.megalaw.com/nj/top/njprobate.php
(8) New Jersey State Statute(s)

New Jersey tax forms:
(9) http://www.state.nj.us/treasury/taxation/taxprnt.shtml

Additional New Jersey estate information:
(10) http://www.demaio.com/fs/articles/decouple.htm
(11) http://www.allbusiness.com/government/government-bodies-offices-regional-local/12362447-1.html
(12) http://www.oceancountygov.com/surrogat/guide.htm#a2

New Jersey Estate Law: Chapter 31 of New Jersey Public Laws of 2001, estate tax
(13) http://www.njleg.state.nj.us/2002/Bills/A2500/2302_I1.HTM
New Jersey asset protection:

Friday, February 4, 2011

Best funds for inflation protection

In the World of investing the practice of hedging is used to combat inflationary pressures. This is done in order to protect one's investments from adverse circumstances arising in particular industries and sectors, economic down turns and inflation. In the case of inflation, hedging involves investing in funds that traditionally perform well and/or better than most other funds during periods of high inflation.


To illustrate the affect of inflation on wealth, in the United States a period of high inflation was the 1970's during the first oil crisis period. During these times the value of the dollar declined against stronger foreign currencies and the spending power of one's income declines. This can often go hand in hand with rising cost of goods such as gasoline, and consumer staples further deteriorating one's spending power.

Financial institutions and Governments are well aware of inflation and take great measures to avoid it because of its negative affect on economic performance. For investors this is good news because it allows them to utilize these financial vehicles to hedge their own investments against inflation. A few of these investment vehicles are the following:

• U.S. Treasury Inflation Protected Securities (TIPS)
• British Inflation-linked Gilts (ILG's)
• Canadian Real Return Bonds (RRB's)
• Australian Capital Indexed Bonds
Gold and other Metal Exchange Traded Funds (ETF's)
• High Grade Inflation Protected Corporate Bonds (IPI's)
• High Yield Domestic and International Certificates of Deposit


U.S. Treasury Inflation Protected Securities (TIPS)

TIPS are a U.S. Government backed financial instrument first instituted in 1997 and that is periodically adjusted for inflation. For example, if inflation in time period A is 2% the TIPS return on investment will incorporate this into the total yield. If however, in period B the inflation rises to 3% the yield in the TIPS will also rise. In addition to this inflation protected yield is a 'real yield' of around 3.3%. So no matter what inflation is, the TIPS 'real yield' on top of inflation should be steady. A similar method is used in ILG's and RRB's.

High grade inflation protected corporate bonds (IPIs)

Corporations like the Government, issue Bonds to raise money for their project capitalization operations. These Bonds are rated as high as AAA and as low as D. Most bonds in the A range are considered secure investments and since the return is fixed, volatility during times of inflation can be a hedge against one's more risky investments. IPI's are corporate bonds that are inflation adjusted allowing for a fixed yield when inflation rises. IPI's are very similar to TIPS except for the fact they are corporate rather than Government backed.

Gold and metal exchange traded funds

Gold and Metals have traditionally held their value well during periods of high inflation and in some case deflation. This is due to the international confidence in Gold as an alternate form of exchange. Unlike money the supply of Gold cannot be drastically reduced or increased allowing its value to remain more fixed.

During periods of high inflation, confidence in this more secure form of exchange rises, sometimes leading to a steady an/or rising price. The same is true for some other precious metals such as platinum. Gold can be purchased through mutual funds and other securities specializing in this type of commodity.

High yield certificates of deposit

Since investors can lock into a fixed interest rate on Certificates of Deposit this can be advantageous if timed correctly. That is to say, the yield on CD's changes periodically and since one locks into a yield that is the yield one is stuck with if the CD yield rises. Nevertheless, CD's are a stable and fixed form of interest that can be a stabilizing factor in a turbulent economic cycle. Moreover, some countries offer attractive fixed and variable rates on bonds, New Zealand and Australia being two current examples with CD rates in excess of 5%.

Australian inflation protected bonds (RBAs)

In seeking to diversify and protect an investment portfolio, and ideal decision may be to invest in an international financial instrument priced in a currency with low inflation , that yields high interest and offers inflation protection. Australian inflation protected bonds may be suitable for this purpose with a 2009 inflation rate of 2.5% and yields above inflation.

Protecting against inflation is a realistic concern in the investment World and among financial institutions. While there are more financial vehicles for protecting against inflation than listed above some of these other methods like SWAPS are more designed for financial institutions and not the individual investor. One can become increasingly sophisticated with how one protects against inflation but the key principle behind Hedge investing is balancing higher volatility and even outperforming those investments during inflation with more stable and secure returns such as those provided in this article.

Sources:

1. http://money.cnn.com/2007/01/16/commentary/sivy/sivy.moneymag/index.htm
2. http://tinyurl.com/6ybljpl
3. http://www.finpipe.com/tips.htm
4. http://personal.fidelity.com/products/fixedincome/bondratings.shtml
5. http://www.bankrate.com/brm/news/investing/20031021a2.asp