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Financial Planning

You spend your entire working life accumulating wealth. Two of the most difficult paths you must navigate are how to preserve that wealth and how to transfer that wealth to your heirs with the least amount of erosion.  While a very broad topic, almost all of your planning can be rooted in three words – Retirement, Disablement, Death. Inadequate planning for the transfer of your wealth, including your business can have a catastrophic ending to your life’s creations. Those three words require planning on your part. Our team includes Financial Planners, Risk Advisors, CPA’s and Attorneys.

Individual

Life insurance may be one of the most important purchases you’ll ever make. In the event of a tragedy, life insurance proceeds can help pay the bills, continue a family business, finance future needs like your children’s education, and/or protect your spouse’s retirement plans. It also can provide living benefits such as cash value that can be borrowed against, has greater accessibility than most retirement savings plans, and much more. The cash value grows tax deferred, and the cash value is not taken into consideration when completing your FAFSA form for your college age student. Did you know that a permanent cash value life insurance policy is protected against creditors in the State of Illinois?

Health insurance pays your medical bills, but once discharged from a hospital where you need ongoing convalescence, where does the money come from to pay a nursing home, convalescence center or even stay-at-home assisted living care? The average cost per year at a facility is $69,000 to $79,000 and 8 hours per day of home health care can cost $44,000 to $75,000 annually. Neither health insurance or Medicare pays for long term care. Forty percent of people over the age of 65 years old will require some kind of custodial care. You might think this is needed only for people in retirement. But 40% of the people receiving custodial care today are under the age of 65. The explanation for this is, while many believe this is necessary for the elderly including cognitive impairment (Alzheimer’s or dementia), it is needed much more for the younger people in the population. While the improvement of auto safety devices are saving more lives, many of those saved have a higher degree of serious injuries which take longer to recover from placing them in the need for Long Term Care insurance. If you and your partner together buy a policy, the discounts can add up to almost 70%-100% off of the second person’s policy – almost a Buy One Get One Free!

How would you like to take a six-month, or longer, unpaid vacation? What is your most important asset you own, is it your home, car, retirement accounts or other possession? We strongly suggest it is your ability to earn a paycheck. All of your dreams and goals in the future, from buying a new home, to taking care of your family, to putting your kids through college, to building your retirement nest egg are based on the idea that you will be earning a paycheck until you decide to stop working. Disability insurance would provide you paycheck to provide for you and your family during these times.

Fixed Deferred Annuities can provide a higher rate of return than you would find in savings accounts or certificates of deposits as part of your retirement plan. A Single Premium Immediate Annuity (SPIA) is when a single premium is paid to the insurance company, and in return they provide you a guaranteed income over time until death or a final contract date, whichever comes first. A Variable Deferred Annuity a investment with guarantees such as life time income, guaranteed principle protection, and guaranteed accumulation. Besides your core investment, there are tax advantages available to you (commonly tax deferred investment until withdrawal). Annuities are not taken into consideration when completing the FAFSA form for your college age student. A healthy 65 year-old has over 50% chance of making it to 90 years old, and over 25% chance to 97 years old. Consider an annuity.

This pays in addition to any other insurance you may have and provides benefit from $5,000 to $50,000 with a limitation to heart attacks, organ transplant, renal failure, stroke, most types of cancer and some other maladies. This helps with your loss of income, deductibles, co-pays, medicine, home healthcare or rehabilitation expense. If you pay for 20 years without a claim, you get 100% of your premium returned to you – all 20 years worth. This can be purchased as an individual, couple, single parent with children or family (the children’s limit of coverage is 20% of the adult limit). One in three women, and one of two men will get cancer in their lifetime.

Where do you want everything you created and worked for go if you died right now? Is it written down in a will? If so, have you updated your will in the past three years? While making the decisions seems hard, it is better to do it yourself than to leave it to others to decide and sort out. Other facets of Estate Planning include Inter-Generational Planning, Life Insurance, and Trusts. One key is to learn and understand the tax implications and how to either avoid or address them. When beginning this process it seems daunting, but when finished and looking in the rear-view mirror you’ll be glad you did it. The questions to consider are: what do you care about; what are you concerned about; and, how do you want to be remembered?

An IRA provides tax advantages for retirement savings. It can include any or all of the following: Traditional; Roth IRA; set up as a trust or custodial account set up for the exclusive benefit of the account holder or their beneficiaries or an individual retirement annuity; Simplified Employee Pension (SEP) IRA for small businesses or self-employed individual; or, a Simple IRA that allows both employer and employee contributions similar to a 401(k) plan or a Self-Directed IRA. This provides the opportunity to take your retirement accounts from past employers into your own self directed retirement account where you control the investment choices and fees.

Many see that their offspring are doing reasonably well, and would like to assure that their grandchildren and/or great-grandchildren have opportunities and assurances that will assist them in accomplishing their goals. Establishing a generation skipping trust is one method of providing for the future generations in your family. There are three places your money can go, the government, your family, or a charitable institution. Long range planning can establish adequate reserves to cover the government taxes to accomplish your goals with your family, or a charitable institution.

A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. A mutual fund is registered with the SEC, and overseen by a Board or Trustees and managed with the best interests of the fund’s investors. The fund manager is a registered investment advisor. Advantages of mutual funds over individual direct investing includes: diversification; daily liquidity; professional investment management; ability to participate in investments that may be available only to larger investors; service and convenience; government oversight; and, the ease of comparison. Disadvantages of mutual funds include: fees; less control over timing of recognition of gains; less predictable income; and, no opportunity to customize. Did you know that if you trade within a family of funds, such as the multiple choices within Oppenheimer there are no fees for the trade? But trading to a different family of funds causes a fee for the trade?

The goal of retirement planning is to achieve financial independence, so that the need to be gainfully employed is optional, rather than necessity. An analysis begins with listing all of your assets and liabilities. Then defining what you want in retirement – housing, travel, standard of living, etc. Once the amount of money needed annually in retirement is established, the plan to get from today to retirement is designed and implemented. The single biggest error made in Retirement Planning is taxation as the government continues to target the biggest accumulation of savings, so diversification in different hedging strategies is really important.

The advice is clear, start saving for college the day your child is born. Though easier said than done. Where do you save, where do you invest, and how does this tie in with potential scholarships, grants, financial aid, 529 Plans, college loans, and FAFSA? We offer plans that can provide money should the child go to college or should your child take a different path than college, it can also provide money to start a business, get married, or provide a down payment on a home for your child. Depending on the plan, some of the benefits are tax deferred accumulation, and tax free withdrawals for any expense in your child’s future. Contact our advisors to get you started so that your child can be prepared to succeed.

A Trust is a legal arrangement in which property is transferred by one person, is managed by another person or entity, for the benefit of another. The Trust is created by the Settlor, who transfers some or all of his property to a Trustee, who holds that trust property for the benefit of the Beneficiaries. The purpose of this is to provide direction and goals to the beneficiary, along with tax strategies in order to transfer some or all of your estate to your beneficiaries. Did you know by providing a trust that you can save your estate 5%-8% of its total value by avoiding probate?

Is a legal declaration by which a person, the Testator, names one or more persons to manage his/her estate and provides the transfer of his/her property at death. A Will deals with real property, while a Testament deals with personal property – thus the title “Last Will and Testament,” though seldom used today. A will may also create a testamentary trust that is only effective after the death of the testator. While deciding how to transfer your assets at death, also consider what to do should you lose cognitive power before death. Be sure to include your Living Will (this defines who you want to make decisions for you in the event you lose the ability to communicate), a Power of Attorney, and if your choice, a Do Not Resuscitate order. These should be reviewed by you at the longest every three years to see what changes may be required. While we are not lawyers, we will work with your lawyer, or recommend one of the lawyers we work with extensively to help assist in your goals. If you do not have a will at the point of your death, the State of Illinois shall provide a government created will. A judge will pick where your children go by deciding who has the best home for them and will follow the State laws concerning who will get your assets. Don’t you want to make these decisions?

Business

Life insurance may be one of the most important purchases you’ll ever make. In the event of a tragedy, life insurance proceeds can help pay the bills, continue a family business, finance future needs like your children’s education, and/or protect your spouse’s retirement plans. It also can provide living benefits such as cash value that can be borrowed against, has greater accessibility than most retirement savings plans, and much more. Individual Life Insurance can be purchased through a business and offered on a voluntary basis. The Individual Life policies are portable and can be ‘taken with’ if an employee leaves the business. Group Life Insurance is guaranteed acceptance whereby individuals are underwritten including medical exams. The cash value grows tax deferred, and the cash value is not taken into consideration when completing your FAFSA form for your college age student. Did you know that a permanent cash value life insurance policy is protected against creditors in the State of Illinois?

Health insurance pays your medical bills, but once discharged from a hospital where you need ongoing convalescence, where does the money come from to pay a nursing home, convalescence center or even stay-at-home assisted living care? The average cost per year at a facility is $69,000 to $79,000 and 8 hours per day of home health care can cost $44,000 to $75,000 annually. Neither health insurance or Medicare pays for long term care. Forty percent of people over the age of 65 years old will require some kind of custodial care. You might think this is needed only for people in retirement. But 40% of the people receiving custodial care today are under the age of 65. The explanation for this is, while many believe this is necessary for the elderly including cognitive impairment (Alzheimer’s or dementia), it is needed much more for the younger people in the population. While the improvement of auto safety devices are saving more lives, many of those saved have a higher degree of serious injuries which take longer to recover from placing them in the need for Long Term Care insurance. A large enough Group can have guaranteed acceptance (around 200 or more employees), where Multi-Life will have limited underwriting and some may not be accepted. Individual Long Term Care Insurance can be purchased through a business and offered on a voluntary basis. The Individual Long Term Care policies are portable and can be ‘taken with’ if an employee leaves the business. If you and your partner together buy a policy, the discounts can add up to almost 70%-100% off of the second person’s policy – almost a BOGO!

How would you like to take a six-month, or longer, unpaid vacation? What is your most important asset you own? Is it your home, car, retirement accounts or other possession? We strongly suggest it is your ability to earn a paycheck. All of your dreams and goals in the future, from buying a new home, to taking care of your family, to putting your kids through college, to building your retirement nest egg are based on the idea that you will be earning a paycheck until you decide to stop working. Disability insurance would provide you paycheck to provide for you and your family during these times. Group Disability Insurance is guaranteed acceptance whereby Individual Disability is underwritten including medical exams. Individual Disability Insurance can be purchased through a business and offered on a voluntary basis. Individual policies are portable and can be ‘taken with’ if an employee leaves the business. You are four times more likely to become disabled than to die before age sixty-five.

Is a retirement savings account which is places retirement savings upon the workers themselves. Monies placed in a 401(k) are not taxed at all, until the funds are withdrawn from the account. Employers may elect to match contributions employees make. Employees commonly have a selection of Mutual Funds that emphasize stocks, bonds, money market investments or a mix of the above. Some allow the option to purchase the company’s stock. While an attractive investment tool, highly compensated employees need to be aware that there are limits applied to them that is a comparison to what the remaining employees contribute. We advise on the average deferral percentage and the safe harbor provisions to avoid highly compensated individuals from getting the plan out of balance which can cause difficulties for the highly compensated individuals. Starting in 2012, it will become public record what all internal fees, commissions, and charges exist in all 401(k) plans to make it obvious to you and your employees what expenses are being withdrawn against your investments. Get your expenses under control now, before being embarrassed publicly.

Commonly the 403(b) is used for not-for-profit entities, however changes in the tax laws now allow not-for-profit entities to use a 401(k) plan that is more flexible than a 403(b). Many not-for profits are opting to convert their plans to a 401(k). There is a catch-up provision available if you need to put in funds above the normal limits, discuss this with our advisors to see if you qualify.

Fixed Deferred Annuities can provide a higher rate of return than you would find in savings accounts or certificates of deposits as part of your retirement plan. A Single Premium Immediate Annuity (SPIA) is when a single premium is paid to the insurance company, and in return they provide you a guaranteed income over time until death or a final contract date, whichever comes first. A Variable Deferred Annuity is an investment with guarantees such as life time income, guaranteed principle protection, and guaranteed accumulation. Besides your core investment, there are tax advantages available to you (commonly tax deferred investment until withdrawal). Annuities are not taken into consideration when completing the FAFSA form for your college age student. A healthy 65 year old has over 50% chance of making it to 90 years old, and over 25% chance to 97 years old. Consider an annuity.

Whether members of a LLC, Partners in a Partnership or Shareholders of a closely held Corporation, should one of the parties die and the control of that portion of ownership transfers to the spouse, the remaining partners may not be prepared to deal with the spouse, or the spouse might sell their portion of the company to an outsider. In order to plan for the unexpected loss of a ‘partner’ a relatively simple contract that requires the sale of each ‘partners’ portion of the company back to the company or the other partners at their death is a common practice. However, few companies or individuals have the capital to pay for a partner’s share of a company at a moment’s notice. The solution is to fund the Buy-Sell agreement with Life Insurance for pennies on the dollar. There are tax considerations to be made for both the business and the owners when engaging in this plan. As business valuations change over time, it is recommended to review the Buy-Sell Agreement every 3-5 years at a maximum.

Rarely in business do laws support discrimination, however the laws do support providing better benefits to select employees. This is done commonly to attract special talented individuals, to retain existing talent and provide a non-compete to keep them from working for your competitors or starting their own business. These benefits may contain a better retirement plan, health plan, life, disability or long term care. Sometimes these benefits are called “Golden Handcuffs.” There are plans available that can discriminate, that are deductible to the business, and you do not include on the employee’s W-2. These options are even available to business owners, contact us to learn if you qualify.

An executive bonus plan is a way for business owners or companies to provide additional supplemental benefits to key employees or executives of their choice. The business can use tax deductible company funds to selectively provide valued benefits to key people as well as attract and retain key executives. The benefits usually include life insurance policy death benefits as well as cash value accumulations that can be used as a retirement income supplement. The premium is a treated as a bonus that is taxable by the recipient. When the cash value grows it is tax free, loans against the policy are tax free, and should the recipient die, their heirs will receive a death benefit tax free too if the employee does their estate planning appropriately. A double bonus arrangement provides the employee additional bonus to pay the taxes on the benefit eliminating any out-of-pocket expense for the employee.

If the company wishes to retain some measure of control over the bonus, the Controlled Executive Bonus is a good choice. With a Controlled Executive Bonus, the company and the key executive enter into an agreement which includes a vesting schedule on the policy’s cash value growth. The vesting schedule is a form of “Golden Handcuffs” that allows a company to limit the availability of the cash value benefits until the executive has fulfilled the terms of the agreement. At that time, the executive is “vested”. Once the key executive is vested, they gain full and complete access to the policy’s cash value.

All of the death benefit goes to the employee’s beneficiary, most of the control of the cash value is the employees unless the company places restrictions on the employee, the employee must include this bonus as taxable income, the employee should re-evaluate their estate plan for the potential death benefit from this policy.

An IRA provides tax advantages for retirement savings. It can include any or all of the following: Traditional; Roth IRA; set up as a trust or custodial account set up for the exclusive benefit of the account holder or their beneficiaries or an individual retirement annuity; Simplified Employee Pension (SEP) IRA for small businesses or self-employed individual; or, a Simple IRA that allows both employer and employee contributions similar to a 401(k) plan or a Self-Directed IRA. This provides the opportunity to take your retirement accounts from past employers into your own self directed retirement account where you control the investment choices and fees.

The mover and shaker in your office, the one who pulls it all together, or the one who has the relationships with the big steady clients bringing the sales year after year – he or she drops dead. It may even be the business owner. In order to find a replacement, in order to train that replacement, in order to give time to get the replacement up to speed will have a drop off in sales during this time. A Key-Person life insurance policy is payable to the business, so there is money on hand to help smooth over the finances of the company until the new mover and shaker is up to speed. As this policy is owned by the company, should the Key-Person leave, you can change the insured to the new Key-Person (subject to underwriting).

This is a non-contractual fringe benefit arrangement under which an employer promises to pay an executive specified benefits (supplemental retirement income and/or survivor benefits) at retirement or in the event of disability. This assists in smoothing the income from work through retirement. Should the executive die prior to retirement, specified amounts would be paid to the executive’s beneficiaries. This fringe benefit helps attract, motivate and retain key executives. There are tax advantages to both the company and the employee or their heirs, depending on how the arrangement is established. A reserve fund can be established or an investment strategy is made using life insurance to finance this liability for the business.

The types of non-qualified plans are unlimited. Options range from your simple promise to add to a savings account each month, or complex deferred compensation plans funded with insurance. A deferred compensation plan funded by life, brokerage stock account, mutual fund, or annuity insurance is the most popular “non-qualified” plan type. An employer agrees to pay compensation to a key employee in the future if he or she meets certain conditions, for example, that the employee must work for the employer until retirement. The plan objective is to defer income tax on the employee’s pay until it’s paid out in retirement. The premium payments may or may not be tax deductible to the employer depending on how this is arranged. Be aware, the corporation’s creditors may attach these as company assets.

A pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Commonly the employer and employee make contributions tax-free and receive a defined benefit at retirement. As this is “deferred compensation” the pension payments during retirement are then taxed as income. Beginning in the 1990’s hybrid plans were developed that combined defined benefit (pension-like) and defined contribution plans (401(k)-like), also known as cash balance or pension equity plans. While 401(k) and Profit Sharing Plans limit the amount of deferred income to relatively small amounts, a Pension Plan can allow you to defer four to five times more.

Profit Sharing, refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company’s profitability in addition to employees’ regular salary and bonuses. In privately held companies, this is commonly a cash contribution to a Profit Sharing Plan. In publicly traded companies these plans typically amount to allocation of company stock shares to employees. The profit sharing plans are based on predetermined economic sharing rules that define the split of gains between the company as the principal and the employee as the agent.

This agreement (written by an attorney in concert with our advisors) provides that the employer continues the employee’s salary at retirement, death, or in some instances disability. The concept is to provide continuing payments upon retirement in return for the employee’s continued employment for a specified amount of time. It also provides that the employee will not compete against the employer for a period of time or inside some geographic territory. The benefit is regularly expressed in terms of a percentage of salary and length of employment. Sometimes a death benefit or disability benefit is includes for the extended employment. Funding of this plan involves a combination of life insurance and payroll. The employer is reimbursed by the death benefit and can borrow against the cash value of the policy to meet its obligations to the employee. The employer does not receive a tax deduction on the premiums paid since the company is both the owner and the beneficiary of the policies. If the employer surrenders the policy, the difference between the cash received and the premiums paid by the employer is taxed as ordinary income. If the employer does not surrender the policy and keeps it in force, the employer receives the death benefit tax free at the employee’s death.

This is a method of paying for insurance coverage. A split-dollar plan is an arrangement between two parties that involves “splitting” the premium payments, the cash values, the ownership of the policy, and the death benefits. An insurance policy with substantial cash value can be used by an employee as a source of supplemental retirement income. At the time of death of the insured-employee, the employer will receive an amount equal to the total premiums paid and the beneficiaries designated by the employee will receive the remaining death benefit. Since these agreements are informal, the premium payments are not tax deductible. However, the refunded contributions to the employer and the death benefits to the insured’s beneficiaries are tax free. It is important to incorporate Split-Dollar Insurance with both succession planning for the business and estate planning for the employee.

You spend years building your business. Then one day you realize that it will become someone else’s responsibility to run if you retire, become disabled, or meet an untimely demise. There are many nightmares that can occur should you not make a timely plan for that day. Health issues, accidents, or other maladies can cut short the American Dream. With a Succession Plan, you have written down what it is you expect to achieve at your exit (sell the business, turn the business over to family, employees or a hired gun), along with assuring that with your absence (planned or unplanned) the goal can be met. This also involves reviewing all of your assets, personal and business, to assure each is considered to achieve your goal. Part of the design includes tax implications, how it coordinates with your Estate Plan, along with the sale or giving of your business to the next owner.

Consult the Chicago Insurance Agents at The David Agency today to learn how we can help develop personal insurance, business insurance and employee benefit plans that are right for you and your business.

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