IBF - Updates - 2011 (Q4 v1.1)

QUARTERLY UPDATES Q4 2011

Copyright Š 2011 by Institute of Business & Finance. All rights reserved.

v1.1

Quarterly Updates Table of Contents MUTUAL FUNDS AND VARIABLE ANNUITIES FEES TIED TO PERFORMANCE GO-ANYWHERE FUNDS MANAGED-PAYOUT FUNDS FEE IMPACT

1.1 1.1 1.1 1.2

STOCKS AND BONDS RATE INCREASE EFFECTS ON BOND FUNDS RUSSELL INDEX UPDATES COUNTRY CREDIT RATINGS INDEX VOLATILITY

2.1 2.1 2.1 2.2

REAL ESTATE BOTTOM OF THE REAL ESTATE MARKET

3.1

HEDGE FUNDS HEDGE FUND QUESTIONS

4.1

COMMODITIES HISTORICAL UPDATE FOR GOLD AND COTTON SILVER PRICES COMMODITY FUND TAX REPORTING UNEQUAL COMMODITY INDEXES

5.1 5.1 5.1 5.2

TAXES WHAT 2011-2014 DEDUCTIONS COST TAX REPORTING INCOME TAXES

6.1 6.1 6.2

ESTATE PLANNING ESTATE PLANNING COMPUTER ACCESS CODES PROVIDING FOR PETS POWERS OF ATTORNEY DOCUMENTS TO LEAVE AT DEATH SPECIAL NEEDS TRUST

7.1 7.2 7.2 7.3 7.4

INSURANCE LONGEVITY INSURANCE INDIRECT ELDERLY CARE

COSTS INCREASE

8.1 8.1

QUARTERLY UPDATES MUTUAL FUNDS AND VARIABLE ANNUITIES

Mutual Funds and Variable Annuities

1.FEES

1.1

TIED TO PERFORMANCE

In theory, incentive fees to active fund managers should result in better fund returns; some studies reflect this belief while other studies indicate that such incentives mean management takes additional risk. The backward-looking nature of performance fees is one reason many investors object to them. As of the middle of 2011, less than 5% of all open- and closed-end funds had incentive fees (e.g., Fidelity began such incentives in the 1970s and now has about half of its equity fund asset management fees tied to incentives.

A 2008 Lipper report found that for the 10-year period 1998-2008, incentive-fee funds outperformed their category average by a 0.74 percentage point per year. When looking at returns adjusted for risk, incentive-fee funds beat their peers over a 3- and 5-year period, by not for the 10-year period. It could be argued that virtually all funds have tied their fees to performance since a top-performer attracts more money, which means more money under management and more dollars in fees collected.

GO-ANYWHERE FUNDS A concern of “go-anywhere” funds is that investors have no idea how the portfolio will change if the market suddenly changes, which means advisors do not know if such a fund will complement other investments in the client’s portfolio. Some of these flexible funds stick mostly with stocks; others shift between stocks, bonds and cash, while still others invest in assets ranging from private transactions and commodities to real estate, emerging markets and derivatives. By July 2011, there were over 250 go-anywhere funds, which are often compared to world allocation and moderate allocation funds.

MANAGED-PAYOUT FUNDS A chief objective of managed-payout funds is to provide a steady income stream without incurring the costs of variable annuities with living benefits. Some managed-payout funds tie distributions to market interest rates; others determine payouts based on historical returns. A large number of these funds make distributions from income and principal.

Managed-payout funds generally invest in a sampling of the sponsoring firm’s mutual funds. Some advisors view a managed-payout fund as just one of several building blocks (i.e., annuities, pensions, Social Security, etc.) that comprise a client’s retirement income.

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Mutual Funds and Variable Annuities

1.2

FEE IMPACT The table below shows a $10,000 investment returning 3%, 6% or 9% and having an annual expense ratio ranging from 0.1% to 1.5%. The purpose of the table is to show the impact different expense ratios have on total return over five years.

Cumulative 5-Year Gain on $10,000 Annual Expense Ratio

3% Annual Return

6% Annual Return

9% Annual Return

0.1%

$1,537

$3,319

$5,316

0.5%

$1,314

$3,070

$5,037

1.0%

$1,041

$2,763

$4,693

1.5%

$773

$2,462

$4,356

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QUARTERLY UPDATES STOCKS AND BONDS

Stocks and Bonds

2.RATE

2.1

INCREASE EFFECT ON BOND FUNDS

As of the middle of 2011, a one percent increase in interest rates would result in a return of -1.9% for short-term, -4.7% for intermediate- and -9.4% for long-term bond funds.

RUSSELL INDEX UPDATES Each year on May 31, Russell ranks by market capitalization all stocks traded on U.S. exchanges plus a few overseas large caps. Roughly the top 1,000 stocks qualify for the Russell 1000, the firm’s large cap benchmark; the next 2,000 qualify for the Russell 2000 small stock index. On June 10, Russell then publishes a list of all the stocks falling out of, or being added to, each index. The actual Russell indexes are not adjusted until after the market close on the last Friday in June.

COUNTRY CREDIT RATINGS As of August 2011, the U.S. represented 23% of nominal GDP, while ranking 21st in terms of global credit ratings. The U.S. rating by S&P of AA+ places the country’s rating below a number of AAA-rated countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, Isle of Man, Liechtenstein, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, U.K. and Belgium. In 1993, Canada lost its AAA-rating. As of the end of 2010, the 10 largest economies of the world were (source: World Bank):

World’s 10 Largest Economies [12-31-2010] (in trillions) U.S. ($14.6)

U.K. ($2.2)

China ($5.9)

Brazil ($2.1)

Japan ($5.5)

Italy ($2.1)

Germany ($3.3)

India ($1.7)

France ($2.6)

Canada ($1.6)

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Stocks and Bonds

2.2

INDEX VOLATILITY The table below shows the standard deviation for 28 indexes, as measured by 90-day rolling periods for the 10-year period 2000-2009. The far right column shows average daily volatility; the “Max” column shows the highest 90-day volatility the index has experienced over the 10-year period (source: Pro Funds).

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Stocks and Bonds

2.3

Index Standard Deviation: 90-Day Rolling Periods [2000-2009] Index

Median

Range

Max

Daily

Barclays 7-10 Year Treasury

6%

3.7% to 11.2%

14%

0.2%

Barclays 20+ Year Treasury

10%

6.9% to 22.1%

26%

0.4%

DJIA

16%

8.8% to 36.2%

67%

0.6%

S&P 500

17%

8.7% to 40.3%

73%

0.7%

Russell 3000

17%

9.0% to 41.0%

73%

0.7%

S&P Mid Cap 400

18%

10.9% to 46.9%

76%

0.7%

S&P Small Cap 600

19%

13.0% to 50.4%

75%

0.8%

Russell 2000

24%

13.9% to 52.4%

80%

0.8%

NASDAQ-100

24%

12.7% to 68.2%

80%

1.1%

MSCI EAFE

15%

9.4% to 33.8%

63%

0.6%

MSCI Emerging Markets

17%

10.7% to 35.2%

72%

0.7%

MSCI Europe

17%

8.8% to 39.1%

62%

0.7%

MSCI Pacific ex-Japan

17%

10.3% to 35.1%

70%

0.7%

FTSE/Xinhua China 25

25%

13.7% to 59.4%

97%

1.0%

Russell Midcap Value

14%

8.6% to 49.5%

78%

0.6%

Russell 1000 Value

15%

8.6% to 46.4%

78%

0.6%

Russell 2000 Value

18%

13.3% to 57.4%

83%

0.8%

Russell 1000 Growth

18%

9.3% to 41.8%

69%

0.7%

Russell Midcap Growth

20%

10.6% to 56.0%

78%

0.9%

Russell 2000 Growth

22%

14.2% to 49.0%

78%

0.9%

Dow Jones U.S. Real Estate

16%

9.1% to 96.3%

135%

0.9%

Dow Jones U.S. Utilities

17%

8.9% to 40.0%

70%

0.6%

Dow Jones U.S. Oil & Gas

24%

14.0% to 46.5%

105%

0.9%

U.S. Dollar Index

8%

4.8% to 13.0%

19%

0.3%

London PM Gold Fixing

16%

8.9% to 31.1%

47%

0.6%

Dow Jones-UBS Commodity

16%

11.3% to 29.0%

43%

0.6%

London Silver Fixing

26%

11.7% to 59.1%

78%

0.9%

S&P GSCI Crude Oil

33%

24.7% to 67.5%

91%

1.3%

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QUARTERLY UPDATES REAL ESTATE

Real Estate

3.BOTTOM

3.1

OF THE

REAL ESTATE MARKET

Three often-overlooked indicators as to whether or not a real estate market has started to rebound are: local unemployment rates, rents and foreclosures. It used to be that the three biggest determinants of a property’s value were location, location and location; in a slow economy it could be jobs, jobs and jobs. In the case of rental rates, the general rule is if real estate prices are more than 15 times annual rents, the market favors renters—under 15 and the market favors buyers. Finally, healthy communities have fewer foreclosed properties. Key Indicators in housing include (source: Center for Housing Studies at Harvard):  Housing as a share of GDP: 17% in 2010 and 21% in 2005  Home ownership rates: 67% in 2010, 69% in 2004 and 67% in 2000  Monthly payments (median-priced home w/ 10% down + 30-year mortgage): $900 in 2010 and $1,360 in 2007  Percentage of household income spent on median-priced home payment: 18% in 2010 and 32% in 2005  Sale price, new single-family home (2010 dollars): $222,000 in 2010 and $240,000 in 1980

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QUARTERLY UPDATES HEDGE FUNDS

Hedge Funds

4.HEDGE

4.1

FUND QUESTIONS

Before recommending a specific hedge fund, get answers to the following questions:  A list of institutional investors, the contact person and their phone number o telephone several customers and find out their satisfaction level  Explanation of the fund’s performance o have management explain how the fund has done so well  What the fund’s watchdogs have concluded o fund auditors are required to enroll in the AICPA program o trades executed internally may be easily altered by a brokerage firm o fund bank accounts and track record should be verified  Check management’s resume o contact manager’s former boss and colleagues o seek release waiver to verify manager’s previous track record  Look at credit report and any SEC filings o check on the firm’s credit history ($60 from Dun & Bradstreet) o check SEC website any carefully read any ADV filed  Find out about the fund’s history and the history of its manager o LocatePlus may be able to provide names, addresses and SS numbers o International Business Research will search newspaper clippings  Asset safety o who is in charge of custody and security of the assets o what is the relationship between the fund, trading firm, custodian, etc. o last time the fund’s books or operations were independently audited  Trading supervision o what are the safeguards against trading irregularities o how are traders supervised o length of time to liquidate all positions  Subscriptions and redemptions o number of investors who have come and gone since fund inception o list of money laundering checks in place o growth of personnel and who has left in the last 1-2 years

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QUARTERLY UPDATES COMMODITIES

Commodities

5.HISTORICAL

5.1

UPDATE FOR GOLD AND COTTON

Back in the early 1980s, during gold’s previous peak, inflation was over 12% a year and interest rates were 14%+. The $1.6 trillion invested in gold exceeded the $1.4 trillion value of U.S. stocks.

Futures prices for cotton peaked for 2011 in March, when the price per pound reached $2.15, the highest price in the 140 years that the commodity has traded on an exchange.

During July 2011, the price for December delivery was 98.6 cents a pound.

SILVER PRICES The market for silver is much smaller than many other commodities, making the metal and futures prices potentially quite volatile. For example, gold futures contracts trade about four times more than silver futures contracts. Roughly 17% of gold’s total supply is held by the world’s central banks, versus less than 5% for silver. During the 2008 financial crisis, silver dropped to $9 an ounce. During July 2011, the price of 32 ounces of silver equaled one ounce of gold; over the past three decades, it took an average of 63 ounces of silver to equal an ounce of gold. The last time silver was considered expensive compared to gold was in 1983.

Based on 1981 prices, when gold and silver both peaked in price, silver should be selling for $140 an ounce on an inflation-adjusted basis (since its 1981 peak) versus about $2,000 for gold (which reached $1,600 in late July 2011).

COMMODITY FUND TAX REPORTING Generally, mutual funds are not allowed to hold commodities directly—so they have turned to ETFs that are formed as partnerships, trusts or corporations. For example, SPDR Gold Shares holds gold bullion in a grantor trust, thereby subject to a 28% longterm capital gains tax rate because physical gold is considered a collectible. A number of ETFs issue an annual K-1 to shareholders, requiring the investors to pay higher tax preparation fees because the ETF is a partnership.

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Commodities

5.2

The Sprott Physical Silver Trust, a Canadian fund, is a foreign corporation that can qualify for the 15% rate because the fund files a special tax form. Powershares BD Commodity Index Tracking Fund and the United States Oil Fund have gains and losses classified as 60% long-term and 40% short-term, regardless of the funds’ holding period.

Surprisingly, an investor in a publicly traded partnership could end up filing a tax return in multiple states, even if the investor has only one house and lived in the same state for his entire life. All partners of a publicly traded partnership have to file in each state where income generated for the partnership exceeds a certain amount (think oil wells spread out over several states). Mutual funds must usually send out 1099s by February, but ETF partnerships often get extensions and do not file returns until September 15. Some report results to investors by March 15 and others send a letter post a website notice before the April due date with estimates of income.

Some investors who own a publicly traded partnership within a traditional IRA or Roth IRA may have to file a separate 990-T form and pay taxes at a corporate rate. Such taxation only occurs if taxpayer has more than $1,000 of UBTI (Unrelated Business Taxable Income) within the IRA for the year.

UNEQUAL COMMODITY INDEXES Modern commodity indexes got their start in 1956, when the Commodity Research Bureau created an index based on futures contracts to measure potential price inflation.

The first CRB index contained barley, lard and rye, but not oil or gold. The 10th and most recent revision of the index includes crude, gold and 17 other materials and is known as the Thomson Reuters/Jefferies CRB Index.

In the early 1990s, Goldman Sachs began publishing its own commodity index, then sold it in 2007 to S&P, which renamed it the S&P GSCI. The Dow Jones-UBS index was created in the late 1990s. A 2006 index, DBIQ Optimum Yield Diversified Commodity Index Excess Return, which was started by Deutsche Bank in 2006, tries to offset some of the possible problems caused by contango by buying futures contracts due within a month plus other contracts that do not come due for a number of months. The table below shows the composition of three broad commodity indexes as of the middle of 2011 (source: Index providers).

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Commodities

5.3

Three Commodity Indexes and Tracking ETFs S&P GSCI ETF: GSG

Dow Jones-UBS ETF: DJP

DBIQ Excess Return ETF: DBC

70% energy

35% energy

60% energy

15% agriculture

28% agriculture

19% agriculture

7% industrial metals

16% industrial metals

11% industrial metals

3% precious metals

15% precious metals

10% precious metals

4% livestock

5% livestock

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QUARTERLY UPDATES TAXES

Taxes

6.WHAT

6.1

2011-2014 DEDUCTIONS COST

For the period 2011-2014, the top 10 individual tax deductions and credits will cost more than $3 trillion in forgone tax revenues (source: Congressional Joint Tax Committee). By contrast, the top 10 corporate tax breaks will cost just $350 billion over the same period.

It should be noted that individual income taxes bring in more than four times as much revenue as corporate taxes. Here is a breakdown of the revenues given up by the federal government for the 2011-2014 period, based on tax regulations as of the middle of 2011 (source: WSJ):  Health and long-term care insurance premiums paid by employers: $660 billion.  Mortgage interest deduction: $485 billion  Capital gains and dividends (the 15% rate): $405 billion  Pre-tax pension contributions: $305 billion  Earned-income tax credit (for low-income taxpayers): $270 billion  Deductible charitable contributions: $240 billion  Deduction for state and local taxes: $235 billion  401(k) earnings not taxed while in the plan: $210 billion  Capital gains at death (no tax on appreciated assets): $195 billion  Social Security benefits not taxed: $175 billion

TAX REPORTING All investment providers are required to start tracking each customer’s cost basis and holding period for securities purchased or acquired (e.g., gifts or inheritance) and report such information, along with sales proceeds, on IRS Form 1099-B. The first part of the new regulations will go into effect for 1099s in 2011. Tracking for open- and closed-end funds starts January 2012, with the first reports going to the IRS in 2013. Most ETFs will be subject to these same rules.

Your clients can calculate basis in one of three ways: FIFO, identified shares or average cost per share. The “double category” method of averaging is being phased out by the IRS; as of April 1, 2011, the two averaging methods were combined into a single category—average cost per share.

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Taxes

6.2

If your client does not indicate which shares are being sold by the settlement date, the provider will use a default method. For stock investors, brokers will use FIFO as default; for mutual funds and ETFs, the broker gets to pick the default method. Most mutual fund companies choose average cost as the default—once a client “defaults,” average cost must be used for all remaining shares of that fund or ETF while newly acquired shares are not restricted to the average cost method. Brokers are required to report cost basis for securities acquired (and later sold) in 2011 and later.

INCOME TAXES Taxation has been around since at least 3000 B.C., when Egyptian pharaohs taxed many items, including grain, imports, livestock and beer. In 1705, Peter the Great introduced a beard tax. Any man who wanted to wear a beard, with the exception of priests and peasants, had to pay a tax of as much as 900 rubles. He then had to wear a special medallion around his neck as proof of payment. One of the grievances that fueled the French Revolution of 1789 was the salt tax. In India, the British salt tax became a focus of Gandhi’s nonviolent protest against English rule.

Enacted in England in 1696, after the short-lived hearth tax on fireplaces, the window tax was based on the number of windows in a house. The tax was repealed in 1851, on public health grounds.

In 2005, Tennessee passed the “crack tax,” which mandated that drug dealers pay taxes anonymously on illegal substances. If a dealer was caught without proof of payment, the state collected taxes, with penalties. Close to 3,000 people were eligible for refunds after the law was struck down in 2009; a revised law soon followed. In Alabama, any buying a deck of playing cards must pay a 10 cent tax. Other states and cities have their own special charges. Maine has a blueberry tax, New York City taxes sliced (but not whole) bagels and Minnesota has a fur clothing tax.

During America’s early years, Congress relied on tariffs for ~ 90% of federal revenues.

During the Civil War, Congress adopted the nation’s first income tax: a flat 3% levy on high-income individuals. During the course of the war, the tax increased and eventually reached a rate of 10%. During 1865, this tax on the wealthy raised ~ 21% of the nation’s total revenue. Congress let the income tax expire in 1872.

In 1913, the states ratified the 16th amendment, making it much easier for income taxation. The new tax structure was similar to the old, only taxing the rich at a rate of 2%.

In 1944, marginal tax rates topped out at an all-time high of 94%.

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Estate Planning

7.ESTATE

7.1

PLANNING COMPUTER ACCESS CODES

Often left out of the estate planning discussion is testator’s personal computer and its access codes, or PINs. The co-author of Your Digital Afterlife (2011) recommends that your clients make an inventory of anything of importance on the family computer, including the user name and all passwords. There are over 20 paid services that provide “digital” estate planning (i.e., DataInherit, Entrustet and Legacy Locker).

An RIA, LJPR in Troy, Michigan, provides a free form that you can use with your clients. The fill-in form is actually a testamentary letter (letter of final instruction) and can be downloaded by going to ljpr.com (click on “Services,” then “Estate Planning,” and “Letter of Instruction Form.” LJPR’s 7-page form, called a Letter of Final Instruction, includes the following introductory paragraph: “The purpose of this letter is to state my final wishes and to provide you with valuable information you will need to finalize my estate. Although legally binding documents exist regarding my estate, this letter will give you specific information not contained within those documents. My intent is to provide you with answers as to the who, what, where, how, and why in order to finalize my estate. I hope that the contents of this letter will help you and more importantly I hope that you will carry out my wishes.”

The letter is followed by a series of blank spaces with easy-to-follow headings such as a list of people who should be contacted as soon as possible after your client dies (i.e., family, friends, clergy, funeral director, attorney, life insurance agent, employer/business associate and financial advisor). By listing the names, phone numbers and e-mail addresses of those who will play a relevant role in the decedent’s estate will make the executor’s (or trustee’s) job easier.

A testamentary letter can cover topics such as: funeral and burial instructions, specific wishes regarding organ donations, specific personal items that should go to certain people (e.g., “my gold watch should go to my oldest nephew”), where valuable papers can be found (e.g., will, trust, birth certificate, marriage certification, Social Security Card, insurance policies, deeds, bank accounts, PINs to accounts and computer files, credit card accounts, tax returns and stock certificates) and where monetary assets are held (e.g., safe deposit box and keys, safe, mutual funds, brokerage accounts, retirement plans and beneficiaries, annuities and beneficiaries plus any debts). The testamentary letter can end with your client’s wishes as to how the estate should be administered:

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Estate Planning

   

7.2

I hope my trustee will consider the following wishes when paying out trust assets I would like the trustee and other representatives to be compensated as follows I suggest my executor and/or trustee use the following advisors Finally, I would like to explain why I have made some of the decisions regarding my estate and the named representatives

Once completed, your client should sign and date the testamentary letter.

PROVIDING FOR PETS In the U.S., there are close to 87 million cats and 79 million dogs (source: American Pet Products Association). For your clients who wish to include their pets as part of their estate plan, there are two types of pet trusts. A traditional trust, which is effective in all states, requires your client to designate a trustee who regularly pays money to a designated person as long as he/she cares for the pet. A statutory trust, valid in 46 states, is a simpler plan in which state law dictates the details of the pet trust.

The traditional or statutory can be structured as a living trust (which takes effect right away and protects the pet if your client becomes unable to care for the pet) or a testamentary trust (which becomes effective only when the client dies). Either trust document should have a non-binding letter of instruction (which could be part of letters testamentary) that covers the care of the pet: food, routine, grooming and medical care.

POWERS OF ATTORNEY Some financial institutions reject even perfectly executed powers of attorney because they are concerned about their own potential liability. Less than a dozen states have adopted the Uniform Power of Attorney Act, which gives bank employees greater protection from civil lawsuits, allowing them more discretion in deciding which powers to honor or refuse. Fortunately, there are ways to “bullet proof” these legal documents: Set it up early. Once the power is established, the agent has instant access to your client’s money. One way to avoid this is a springing power that goes into effect only after your client has been diagnosed as being incompetent by usually two or more doctors.

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Estate Planning

7.3

Set it current. Some legal sources suggest that powers of attorney be renewed every six months in order to minimize disputes with banks and brokerage firms.

Check with the financial firm. Perhaps the best way to make sure a power of attorney will be accepted is to verify what is required by the client’s bank and brokerage firm.

Keep it under lock and key. A power of attorney that becomes effective as soon as it is signed will not provide the agent with any benefit unless the agent has access to the original document.

Restrict the power. One way to minimize possible abuse is to spread powers to multiple people. For example, your client could have a power of attorney that applies just to the ABC Brokerage Firm; another POA may give a different friend or agent the power over just the XYZ Bank.

Plan for gifts. If your client is planning on making future gifts while alive, specifics about any gift giving program should be included in the POA. Retirement plan accounts. The client’s POA may wish to include a provision allowing the agent to rollover an IRA or pension account into a surviving spouse’s (or other designated beneficiary’s) IRA account.

Other states. If your client spends a fair amount of time in more than one state, the POAs should comply with each state.

A fallback trust. Your client may want to set up a disability trust—a type of revocable living trust—to become effective if the POA does not work. Such a trust can avoid the court from having to assign a guardian or conservator.

DOCUMENTS TO LEAVE AT DEATH The following is a list of documents that your clients should consider leaving in a series of files whose location is known to loved ones. These comprehensive folders can be accessed by family members if there is an emergency. The documents can be stored with an attorney or kept at home in a fire-proof safe.

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Estate Planning

7.4

Consequences of not keeping these kinds of records can be significant: [1] state treasurers currently hold $35 billion in unclaimed bank accounts (search for unclaimed assets at MissingMoney.com) and [2] tens of thousands of workers fail to claim pension assets each year (source: U.S. Dept. of Labor).

Documents to Leave at Death File Name

Paper

Marriage and Divorce

 marriage license and divorce papers

Insurance and Retirement

 life insurance policies  IRA and pension plan statements  annuity contracts

Health Care Confidential

   

Bank and Brokerage

 bank and brokerage firm statements  list of all user names and passwords  safe deposit box information (+ key)

Proof of Ownership

    

The Essentials

 wills, trusts and letters of instruction

personal and family medical history durable health care POA living will DNR order

real estate and cemetery deeds proof of loans made and debts owed stock certificates partnership and corporate agreements tax returns

SPECIAL NEEDS TRUST One of the most important things parents of children with special needs can do is set up a special needs trust (supplemental-needs trust). A child can be denied significant Medicaid and Social Security benefits if more than $2,000 of assets are in his/her name. Assets in a special needs trust are not counted against the dollar limit. A home, car and personal items are also not counted toward the $2,000 limit.

Funding for special needs trusts typically come from the parents’ life insurance. Money can be placed in a special needs trust while the parent is still alive, but any funding should be done by anyone but the parents and child (e.g., assets contributed by a parent to the trust can disqualify a child from receiving Medicaid and Social Security benefits.

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Estate Planning

7.5

Advisors recommend the child’s guardian and trustee are different people. The guardian should be someone who understands the child’s needs and gets along with the child. The parents can prepare the guardian by drafting a letter of intent, outlining their wishes for the child, information about the child’s mental and physical health and the child’s likes and dislikes (e.g., types of food, entertainment, clothes, etc.). The trustee should be someone who is knowledgeable about finances and investments. Using different people means there is a system of checks and balances.

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QUARTERLY UPDATES INSURANCE

Insurance

8.LONGEVITY

8.1

INSURANCE

By giving a lump sum to an insurance company, your client can guarantee a future income by purchasing a fixed-rate annuity today—also known as longevity insurance.

For example, during middle of 2011, a 54-year old male could invest $10,000 in a fixedrate annuity, pay $3,100 a year for the next 29 years and then begin taking money out two years later (age 85); the amount of annual income for the 85-year old was guaranteed to be $52,300 a year. Making annual contributions of more than $3,100 a year would increase the annual amount.

INDIRECT ELDERLY CARE COSTS INCREASE Since 1994, the percentage of adult children caring for their parents has tripled to 10 million people (source: U.S. Health and Retirement Study, a data bank collected by the University of Michigan). The financial toll on care providers who are 50 or older averages $304,000 per person in lost wages, pension benefits and Social Security benefits over their lifetime.

For women, the cost is higher, $324,000 ($143,000 in lost wages, $50,000 in lost pension benefits or matching contributions and the balance from lost future Social Security benefits); for men, the average lifetime loss totaled $284,000. Another study found that depression, hypertension, diabetes and pulmonary disease were among caregivers’ morecommon health problems. The group also experienced higher rates of stress and was more likely to smoke or drink plus was less likely to get preventive health screening (source: 2010 study released by MetLife).

Providing Care for an Aging Parent 1994

2008

men

3%

17%

women

9%

28%

QUARTERLY UPDATES

IBF | GRADUATE SERIES