financial security in an insecure world presented to : main line assoc. for continuing education...

FINANCIAL SECURITYIN AN INSECURE WORLD

Presented to:Main Line Assoc. for Continuing Education

June 21, 2012

Presented by:

Christopher J. Hackley, CFP, ChFC, CLURobert P. Wermuth, ChFC, CLU

Michael W. Mills, CFP, CPA, JD, LLM

DOFU 5/2011 TN 327825. Securities and investment advisory services offered through Securian Financial Services, Inc., Member FINRA/SIPC. Legacy Planning Partners is independently owned and operated. This presentation is for internal use only, it is not to be used with the general public.

How to Provide Financial Security in an Insecure World

Our World has Changed

Clients already struggle with what may be the most defining aspect of the “new normal” – a prevailing sense of uncertainty regarding every aspect of the economy and finance

~Scott Leibs, “from the editor” CFO Magazine April 2011

WHY THE WORLD HAS CHANGED…

Many have Lost Faith in:• Government• Corporations• “Pillars of Society”• “Nuclear” Family

…How can they gain confidence?

…Who can they trust?

THE WORLD HAS CHANGED……and is changing faster then ever before

We are facing increased complexity & volatility:• Paradox of Globalization• Frequency & Severity of “Black Swan Events”• Technology’s / Internet’s Impact• Impact of Mass Media (Mass Hysteria)

…People need a NEW strategy.

*We Need to Educate Clients on the TYPES OF RISKS

*We Need to Empower Our Clients to be FINANCIALLY RESILIENT Using All the Tools at Our Disposal

As Financial Professionals…

With proper Integration and Implementation, we increase Resiliency.

Pray for potatoes with a hoe in your hand.

~Old Irish ProverbNick Murray May 2011

Financial Planning Increases Resiliency

Asset Management & Ret. Income Planning

Estate Planning & Business Succession

Risk Management & Protection Planning

Debt Management & Cash Flow Planning

Let’s look at the risks embedded in each quadrant.

Categories of Financial Risks

• Tax Risks• Portfolio Risks• Human Risks

Tax Risks

• Income Tax• Payroll Tax• Capital Gains Tax• Property Tax• Gift and Estate Transfer Tax

Portfolio Risks• Market Risk• Security Concentration Risk• Sequence of Return Risk• Liquidity Risk• Inflation Risk - Rising Interest Rates • Deflation Risk - Falling Interest Rates • Credit Risk• Currency Risk• Legislative Risk

Human Risks• Mortality Risk• Morbidity Risk• Longevity Risk• Psychology and Behavioral Finance Risk• “Entitlement” Risk• Divorce• DUI and Other Malfeasance• Property and Casualty

Continually Educate Clients through the Planning Process:

• It is incredibly important to be crystal clear about the PURPOSE behind every investment position and strategy that you recommend

• You must explain what SPECIFIC RISK each position and solution is addressing

Resiliency Techniques1) Debt Management & Cash Flow Planning:• Income & Asset to Liability Ratios

– Increase them!

• Liquidity Risk: – Buy 30 year mortgage, make payments over 15 years– Fixed Mortgage along with Equity Line

• Deflation Risk: – Debt elimination– Variable interest rate

• Interest Rate Risk:– Fixed or Variable discussion

• Inflation Risk:– Fixed interest rate

Resiliency Techniques:2) Risk Management & Protection Planning:• Liquidity Risk: Insurance Solution & “Cash” Reserves

• Tax Risk: Permanent Life Insurance Products, Qualified Plans

• Mortality Risk: Life Insurance Product

• Longevity Risk: Insurance Product; Annuity

• Morbidity Risk: Disability; Long-Term-Care Insurance

• Sequence of Returns Risk: Annuity and Cash Reserves

Resiliency Techniques3) Asset Management & Ret. Income Planning• Liquidity Risk: 3-6 mos. liquidity reserves; money mkt.; cash reserves

• Interest Rate Risk: Shorten Maturities

• Credit Risk: Increase Quality & Diversification

• Inflation Risk: Equities; Hard Assets

• Currency Risk: Non-Monetary Denominated Assets

• Security Specific Risk: Diversification/Sale Strategy

• Market Risk: Diversify; Increase Reserves

• Tax Risk: Roth, Muni Bonds, Tax-Loss Harvesting, Qualified Plans

• Investor Behavior: Education, Trusted Advisor

• Deflation Risk: Annuities; Guaranteed Income Sources

Resiliency Techniques

4) Personal Estate Planning & Business Succession :• Disclaimer Style Wills• Properly Funded Buy/Sell Agreement

– Death/ Disability…Divorce, Done?• Contingent Beneficiaries/Trustees/Guardians• Liquidity Risk

– Federal & State Estate Taxation, Probate, Capital Gains Tax*

• Wealth Transfer Risk

* This information should not be considered as specific tax/legal advice. Clients should consult their tax/legal advisor regarding their own specific tax/legal situation

Retirement planning demands obsessive scrutiny of risk. If we fail at this point, we can ruin lives. Clients must be better educated about the known and possible risks they face in their retirement portfolios.

~Rick Adkins, CFP®, ChFC, CLU“What I’ve Come to Believe about Retirement Planning”

Journal of Financial Planning, July 2010

MARKET, HUMAN AND TAX RISKS:

Deflation & RecessionDownside Market VolatilityReturn Sequence Risk

High InflationUpside Market VolatilityParticipation / Opportunity Risk

Live too LongDie too SoonBecome Disabled

Low Tax RatesHigh Tax Rates

Periods of Moderate Taxation

Normal Market Performance & Volatility

Normal Life Expectancy & Morbidity

Market:

Human:

Tax:

Retirement Income Planning: “Build it with the end in mind!”

•“Normal” Financial Market Performance and Volatility•“Normal” Life Expectancy and morbidity experience.•Periods of Moderate Taxation

•Periods of Unusually poor Market Performance and Deflation

-Market Risk•Premature Death or morbidity issues/LTC•Periods of unusually High Taxation.

•Periods of unusually High Inflationand Volatility. -“Return Sequence” Risk•Considerably outliving normal Mortality.•Periods of unusually Low Taxation

Solution Alternative: Solution Alternative: Solution Alternative:•A variable annuity contract with living benefits riders to provide guaranteed inflation-adjusted income.•A variable annuity contract with living benefits riders to provide guaranteed lifetime income without annuitization

•Traditional sources of retirement income; pensions, S.S., Treasury bonds, CDs, Dividends•Fixed Annuity Contracts•Life Ins. & L.T.C. Benefits and features (Including guaranteed income options)

Risk Scenarios: Risk Scenarios: Risk Scenarios:

•Traditional asset allocation models with disciplined rebalancing capabilities•Term Life Insurance Protection

*

**

Retirement Income Planning: “Build it with the end in mind!”

Disclosures

*The previous graphics are for illustrative purposes only. It is not indicative of any particular investment or guarantee of future performance. Neither diversification not asset allocation guarantee against loss, they are methods used to manage risk.

**Riders are available at an additional cost and subject to restrictions including limitations as to annual withdrawal amounts, periods which the rider may not be cancelled, and investment limitations.

Phases of Retirement

FRIDAYS

SATURDAYS SUNDAYS

MONDAYSEarly/Pre-Retirement:•Often still working Either Part-time or Flex-Time

Honeymoon Phase:•Travel•Hobbies•“Academic Indulgences”•Charitable/Give-Back Initiatives•Often need additional income to fund expensive pursuits.

Veteran Retiree Phase:•Spiritual•Family•Rest•Often looking for simplicity and consistency in routines

Fight for Independence and Dignity Phase:•Often facing complexities of Long Term Care, nursing home, and end of life issues.

Why we need to keep it Flexible!

But it brings to my mind the H.L. Menken quote, “For every complex problem there is an answer that is clear, simple and wrong.”

~Rick Adkins, CFP®, ChFC, CLU“What I’ve Come to Believe about Retirement Planning”

Journal of Financial Planning, July 2010

Benefits of Integrating Resiliency Techniques

• Efficiency– True cost

• Allocate dollars to solutions that:– Serve more than one purpose– Address more than one risk– Add benefit throughout life stages

• Flexibility

Retirement Income v.Wealth Transfer

• Two sides of the same coin• Wealth Transfer Emotions / Risks

– Risk of giving away more than client can afford– Risk of negative impact on children or other

recipients (“entitlement”)– Risk of changes in the law

• Managing the risks

Federal Estate Tax

Federal Estate TaxExceptions• Unlimited Marital Deduction• Charitable GiftsValue of bequest• FMV as of date of death (step-up in basis)Must pay tax within 9 months • Look for liquidityPortability• Transfer unused exemption on death but only to

surviving spouse

Federal Gift TaxExceptions• Annual exclusion gifts

• $13,000 (2012) per person, per year• Must be a present interest

• Unlimited Marital Deduction• Medical and Education expenses• Tax Payments relative to Intentionally Defective Grantor

TrustsValue at gift• Donor’s basis

Federal Gift Tax

Glimpse of the Future

Republican View – Eliminate Estate Tax

Democratic View - Sensible Estate Tax Act of 2011

Obama Administration View – Budget Proposal for 2013

Asset Segmentation by Purpose:Determining “Core Capital”

34%

33%

33%

2 out of 3 is “Hall of Fame”!

Financial Secu-rityPersonal UseWealth Transfer

Examples:Vacation Home – Good for Personal Use and Wealth Transfer, but provides no Financial SecurityLife Insurance – Good for Wealth Transfer and Financial Security, but has no Personal Use

“Core Capital”

Questions?

Getting Ahead of the Curve:Using Technology to Illustrate

Planning Solutions

DisclaimerThe financial analysis provided compares your assets and savings program with your financial priorities and concerns. It provides a broad general guideline that may be helpful in shaping your financial and investment objectives. This analysis is not intended for investment recommendations, but represents possible financial strategies based on your responses to the questions within the Questionnaire regarding your personal circumstances, financial goals and risk tolerance. The reports furnished are dependent on the financial information that you provide as well as the interest rate/rate of return assumptions that have been agreed upon. All future predictions are hypothetical, based solely on hypothetical rates of return and the financial information provided in the Questionnaire. All financial data values provided are current only as of the date of this analysis. Calculations illustrating income tax concepts, deductions, as well as investment gains and losses are based solely on the data provided by you. This report should not be relied upon for tax purposes. Values have been rounded to the nearest whole dollar amount. The values in this report are as of the date indicated. Note: Assets not held with Securian Financial Services (Securian) as indicated above with an "*", are not included in Securian’s books and records and the values shown cannot be verified by Securian. The values used are based on information supplied by you, the client. These assets may not be covered by SIPC. Retain and review your source of data regarding these assets. All examples, charts, and graphs that depict future values, expenses or other estimated numbers are hypothetical in nature, and are not intended to be actual future numbers, but rather an estimation based on reasonable assumptions. The actual value will fluctuate and may be worth more or less than the amount originally invested. If applicable, the values for life insurance and annuity benefit may be reduced by any policy loans or withdrawals. Clients should review and retain individual mutual fund, brokerage account, annuity, and/or life insurance statements and compare them with the values from this report for accuracy. Government Bonds and Treasury Bills offer a fixed rate of return if held to maturity, and are insured by the US Government.

DisclaimerInvestments in the Money Market Account are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency, and there is no assurance that the account will be able to maintain a stable Net Asset Value of $1 per share. It is possible to lose money by investing in the fund. Savings and checking accounts typically offer a fixed rate of interest, and are backed by the FDIC or NCUA insured. Investments in equities, fixed income or cash instruments are not federally insured, and have no financial institution guarantee, and can lose money. This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances. We have made no attempt to review your property and liability insurance policies (auto and homeowners, for example). We strongly recommend that in conjunction with this financial plan, you consult with your property and liability agent to review your current coverage to ensure that it continues to be appropriate. In doing so, you may wish to review the dollar amount of your coverage, the deductibles, the liability coverage, including an umbrella policy, and the premium amounts.

DISCLOSURES CONCERNING MUTUAL FUND/INVESTMENT OPTIONS

Past performance is not necessarily indicative of future results. Investment risks associated with international investing, in addition to other risks, include currency fluctuation, political and economic instability, and differences in accounting standards when investing in foreign markets. Investment risks associated with investing in real estate market, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes, and differences in real estate market values.

Disclaimer

Investments in smaller company and micro-cap stocks generally carry a higher level of volatility and risk over the short term. Refer to the fund's prospectus for specific information about risks associated with the investment, as well as charges and expenses. The risks incurred by mortgage securities include, but are not limited to, reinvestment of prepaid loans at lower rates of return. In addition, the net asset value of mortgage securities funds may fluctuate in response to changes in interest rates and are not guaranteed. Securities and investments are distributed through Securian Financial Services, Inc., Member FINRA/SIPC. Investment Advisory services are provided through Securian Financial Services, Inc., 400 Robert Street North, St. Paul, MN 55101, 1-888-237-1838.

SAMPLE CASE 1

Sample Case 1: AssumptionsBase Facts• Tax Laws

– Estate tax law fixed at 2012 levels without indexing

– Income tax law sunset occurs EOY 2012

– PA state tax at 3.07%• Family Information:

– John & Jane Samplecaseone • Age 65• John healthy, Jane some medical issues• Retired• Assumed age of death is 90 for both

– 3 children w/ 3 spouses– 5 grandchildren

• Trusts– Irrevocable Trust

• Remainder beneficiaries are the children & grandchildren

• 6% growth

• Property– $1M jointly owned primary

residence• 2% growth• No mortgage

– $1M jointly owned second home

• 2% growth• No mortgage

Sample Case 1: Assumptions• Investments

– NQ• $10M jointly owned stock account

– 6% growth– $2M tax basis

• $10M stock account owned by Jane– 6% growth– $2M tax basis

• $10M stock account owned by John– 6% growth– $2M tax basis

• Realization on all stock accounts:– 50% qualified dividends (when

applicable)– 10% investment income subject to

ordinary income tax– 30% capital gains (short or long

term)– 10% non-taxable

• Qualified– $1.5M John’s IRA

• 6% growth– $1.5M Jane’s IRA

• 6% growth

• Cash– $2M jointly owned cash

• 2% growth

• Income:– Social Security at age 67

• $24,000 annually for John growing at 2%

• $21,600 annually for Jane growing at 2%

• Expenses– $371,280 annual living expenses

growing at 4%

Sample Case 1: Assumptions• Wills

– Generic will• Fund a CST• Remainder to spouse

Scenario 1: Financial Independence

• Base Facts PLUS– $120,000 annual medical

expense growing at 6% from age 70 to age 80

– Total inflated additional after tax costs total $2,404,246

Scenario 2: Gifting• Base Facts PLUS

Scenario 1 PLUS– $13,000 per child and

grandchild per parent– Every year until death– Goes into Irrevocable

Trust (growing at 6%)– Indexed– Total annual gifting

$208,000/year

Sample Case 1: AssumptionsScenario 3: Education• Base Facts PLUS Scenario 1 PLUS

Scenario 2 PLUS– Education for all grandchildren (all

children out of school)• Cost

– $20,000/year for grade school– $25,000/year for HS– $55,000/year for college

– 5% growth indexed immediately– Total inflated education costs $3,682,281

Scenario 4: Roth Conversion• Base Facts PLUS Scenario 1 PLUS

Scenario 2 PLUS Scenario 3 PLUS– Convert IRAs to Roth IRAs with tax

expense of $1.2M (calculated in transfer)

Scenario 5: Gift to ILIT• Base Facts PLUS Scenario 1 PLUS Scenario 2

PLUS Scenario 3 PLUS Scenario 4– An ILIT owns a $10M Survivorship Universal

Life– $2.5M one-time premium

• $2.5M planned one-time (2012) gift with ILIT as recipient

– $1.25M from John’s stock account– $1.25M from Jane’s stock account

– $7.5M planned one-time gift to Irrevocable Trust 2 (growing at 6%)

• $3.75M from John’s stock account• $3.75M from Jane’s stock account

What-If: Bear Market -30% Year 1• There is a What-If option that takes the

portfolios lose -30% that first year 2012 that may be applied to any scenario. Shown at the end of Scenario 5.

Base Facts: Balance Sheet

Base Facts: Assets

Base Facts: Cash Flow

Base Facts: Estate Flow Chart

Base Facts: Estate Transfer

Scenario 1: Cash Flow

Scenario 2: Estate Flow Chart

Scenario 4: Retirement Asset Summary

Scenario 5: Assets

Scenario 5: Cash Flow (Bear Market)

SAMPLE CASE 2

Sample Case 2: AssumptionsBase Facts

Family Information• Dave & Donna Samplecasetwo

– Age 70– Retired– Assumed age of death is 90 for both

• 4 children (w/ 4 spouses)• 7 grandchildren• Business Interest• Family Business

– $20M value (discounted value)• Business FMV = $90M• Dave & Donna are 33% owners

– C-Corp– 5% growth

• Business Real Estate 1 LLC• Business Real Estate 2 LLC• Business Real Estate 3 LLC• Business Real Estate 4 LLC

Trusts• Irrevocable Trust

– Remainder beneficiaries are the children & grandchildren

– 6% growth• Property (business property & mortgages based on

33% ownership)• $500K jointly owned primary residence

– 2% growth– No mortgage

• $500K jointly owned second home– 2% growth– No mortgage

• $500K business real estate 1– Owned by Business Real Estate 1 LLC– 2% growth– No mortgage

• $600K business real estate 2– Owned by Business Real Estate 2 LLC– 2% growth– $400K, 15yr mortgage at 6%

Sample Case 2: Assumptions• $750K business real estate 3

– Owned by Business Real Estate 3 LLC– 2% growth– $450K, 15yr mortgage at 5%

• $1M business real estate 4– Owned by Business Real Estate 4 LLC– 2% growth– $700K, 15yr mortgage at 5.5%

Investments• NQ

– $5M Dave’s low basis stock account• 6% growth• $2.5M tax basis

– $5M Donna’s low basis stock account• 6% growth• $2.5M tax basis

– Realization on all stock accounts:– 25% qualified dividends (when

applicable)– 20% investment income subject to

ordinary income tax– 55% capital gains (short or long

term)– 0% non-taxable

• Qualified– $2M Dave’s IRA

• 6% growth

• Cash– $2M jointly owned cash

• 2% growth

Sample Case 2: AssumptionsIncome• Social Security at age 67

– $26,400 annually for Dave growing at 2%

– $12,000 annually for Jane growing at 2%

• NQDC– Jointly owned– $180K annually ($15k/month)– No growth

• Dave’s Board Income– $250K annually from age 70 to 80– No growth

• Dave’s dividend Income– $1M annually until death– No growth

• Business real estate 1 income:– $54,000/year– 2% growth– Owned by Business Real Estate 1 LLC




Sample Case 2: Assumptions• Expenses• $371,280 annual living expenses

growing at 4%• Gifting• $13,000 per child and grandchild

per parent• From the Family Business• Every year until death• Everything goes into the

Irrevocable Trust• Wills• Generic will

– Fund a CST– Remainder to spouse

Scenario 1: Education• Base Facts PLUS

– Education for 4 of the 7 grandchildren (3 of the grandchildren and all children out of school)

• Cost– $20,000/year for grade school– $25,000/year for HS– $55,000/year for college

• 5% growth indexed immediately– Total inflated education costs $877,362

Scenario 2: $10M Gift• Base Facts PLUS Scenario 1 PLUS

– $10M gift in 2012 to the Irrevocable Stock Trust (growing at 6%)

– Dividend income $500,000– Dividend Income to Trust $500,000

Sample Case 2: AssumptionsScenario 3: Estate Distribution 60/40• Base Facts PLUS Scenario 1 PLUS

Scenario 2 PLUS– Family Foundation (charity) (its core cash

growing at 5%)– 2 bequests added to base facts will:

• 60% of remaining estate to kids• 40% of remaining estate to Family

Foundation (charity)– $10M Life Insurance Survivorship policy

• $200K premium– First 10 years the premium is paid by

the Other Family Business Owners– Remainder years the premium is paid

by the Irrevocable Trust• Beneficiaries on the policy are

– 80% Irrevocable Trust– 20% Other Family Business Owners

(this shows the $2M paying back for the 10 years of premium payments)

What-If: Family Business Growth at 2%

• There is a What-If option that takes the Family Business Growth to 2% that may be applied to any scenario.

What-If: Family Business Growth at 10%

• There is a What-If option that takes the Family Business Growth to 10% that may be applied to any scenario.

Base Facts: Balance Sheet

Base Facts: Assets

Base Facts: Cash Flow

Base Facts: Estate Flow Chart

Base Facts: Estate Transfer

Scenario 2: Assets

Scenario 2: Estate Transfer

Scenario 3: Estate Transfer

Scenario 3: Estate Flow Chart (Family Business Growth at 2%)

Scenario 3: Estate Flow Chart (Family Business Growth at 10%)

Questions?

Financial Advisors do not provide specific tax/legal advice. This information should not be considered as specific tax/legal advice. You should consult your tax/legal advisor regarding your own specific tax/legal situation.

Securities and investment advisory services offered through Securian Financial Services, Inc., Member FINRA/SIPC. Legacy Planning Partners is independently owned and operated.

Separate from the financial plan and an advisors’ role as financial planner, an advisor may recommend the purchase of specific investment or insurance products or accounts. These product recommendations are not part of the financial plan and clients are under no obligation to follow them.

financial security in an insecure world presented to : main line assoc. for continuing education...

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