income deprived in this economy presented by: marta nystrom nystrom & associates

Income Deprived Income Deprived in This Economyin This Economy

Presented by:

Marta Nystrom

Nystrom & Associates

Copyright 2009 Nystrom & Assoc

What We’re Covering Today

• Re-Evaluating:– Dividend Income– CD’s and Money Market Accounts– Treasuries– Bonds

• Finding Income in this Economy:– Options Strategies– Life Insurance Policies– Annuity Lifetime Income Riders– Medical Arbitrage Strategies


Disclaimer

Before implementing any investment or tax strategies, be sure to obtain the advice of your financial and tax advisor.

Before implementing any strategies that alter your estate plan, be sure to consult with your estate attorney and your financial advisor.

Not all strategies are appropriate for all individuals.

Copyright 2009 Nystrom & Associates

Millions Face Shrinking Social Security Payments

“The trustees who oversee [Social Security] are projecting there won't be a (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.

Associated Press, 8/23/09


Where Did All the Dividends Go?

Standard & Poor's, the world's leading index provider, announced today that a record 367 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor's Dividend Record decreased their dividend payment during the first quarter of 2009, representing a 332% increase from the 83 issues that decreased their dividend during the first quarter of 2008...

PRNewswire April 7, 2009


Low, Low CD & Money Market Rates

“It's an economic paradox: The lowest interest rates in decades have unleashed a wave of consumer spending on automobiles and homes, helping bring an end to the recession.

But there's one group that's missing out on this—those older Americans who have seen the rock-bottom returns on certificates of deposit (CDs) and savings accounts sharply reduce their monthly income.

"We're sort of the silent majority," says Onis Cox, 69, of Edmond, Okla. Since he retired from his aerospace job in 1993, Cox has seen rates on the CDs he buys fall from about 8 percent to 2.6 percent.

AARP Bulletin Today | April 2002


And You Thought 2002 Rates Were Low!

LANB 1 Year CD 1.65% State Employees CU 1 year 1.74% INGDirect.com 1 year 1.5% INGDirect.com 3 years 1.5%

Rates as of 8/20/09


Municipal bonds

Repayment is based upon the claims-paying ability of municipalities.– 2 Types:

GO (General obligation) Bonds Money to repay bonds comes from property taxes, income

taxes, license fees, and sales tax revenue. How are these revenue sources faring in this economy?

Revenue Bonds Payable from the specific earnings and net lease

payments of revenue-producing facilities How are these revenue sources faring?


But Muni’s Can Be Insured

Muni bonds lose ratings after Ambac junked.

“Thousands of municipal bonds have lost their ratings and others have been downgraded after Standard & Poor’s this week stripped bond insurer Ambac Assurance of its investment-grade ratings… As of March 31, Ambac guaranteed $232bn of muni debt.

S&P this week cut Ambac’s ratings to double C from triple B after its parent company Ambac Financial warned that it would report a $2.4bn loss on credit derivatives contracts that would put it at risk of violating minimum capital levels required by regulators.

“You may wind up with a generation of muni bonds with semi-permanent illiquidity,” Mr Fabian (managing director at Municipal Market Advisors ) said.”

From the Financial Times, July 31, 2009


The Relationship Between Price and Yield on Treasuries & Bonds

If interest rates increase during the term of your bond, the money invested will be earning less interest than it could elsewhere.

● As interest rates rise, the value of your Treasury or any bond will decline in the resale market for the same reason.


2 Ways to Lose Money in Treasuries and Bonds

When you purchase at a low rate of interest due to excessive demand

When you sell at a low resale rate due to excessive selling


The Downside of Treasuries…

In December 2008, world wide investors fled to long term US Treasury bonds. They hoped to obtain yields better than the near-zero (and occasionally negative) yields on short-term Treasury bills. The plan backfired, however, and instead of locking in 4-4.5% coupon yields, buyers paid such a significant premium that they ended up getting the lowest Treasury bond yield in history: a mere 2.52% on a 30 year Treasury bond.

The problem then compounded when the value of these long term bonds plummeted (due to heavy selling by bond holders), delivering a market loss to these bond holders of 12.85%. The decline occurred over a short six weeks. The net loss was the equivalent of more than five years of interest in just six weeks. (12.85=2.52=5.3 years)


“On Wednesday, the Fed said it would buy up to $300 billion in longer-term Treasuries over the next six months "to help improve conditions in private credit markets.“

…The prospect of a 10-ton buyer entering the market sparked an enormous jump in the price of the 10-year Treasury notes. Its yield, which moves in the opposite direction, plunged to 2.5 percent on Wednesday from 3 percent Tuesday.”

Kathleen Pender San Francisco Chronicle

March 22, 2009

But The Situation HAS Improved, Right?


But the Situation WILL Improve, Right?

“...The central bank cautioned that the recovery would be slow and that unemployment was likely to remain high for the next year. It reiterated that it would keep its benchmark short-term interest rate at virtually zero for an extended period.”

NY Times 8/12/09


Buying Bonds at Premium

Understand the difference between coupon rate and Yield to Maturity

Example: 5% coupon rate

You pay $1100 ($100 premium)

The bond matures in 5 years

The YTM is 2.86%


Where’s the Income These Days?

• Options Strategies

• Life Insurance Policies

• Lifetime Income Riders

• Medical Arbitrage Strategies


Options Strategies

Basic Terms: Option Writer vs Seller, Strike Price, Expiration Date

You must set up an options trading account with your brokerage firm and be approved to trade options.

– Approval is determined at different risk levels. – Beginner traders usually limited to level 1 or level 2, which typically

includes covered calls and may or may not include selling puts. – The use of options may be considered higher risk and may be limited to

more experienced and/or affluent investors. Not the same as having a Margin Account. These strategies are not beginner strategies, but are viewed as

a strategies to hedge and conserve portfolios. Selling covered calls (and often puts) are generally allowed inside retirement accounts as they are considered appropriately conservative by the IRS. Professional assistance is highly recommended.


Selling Call Options

Making income on stocks already in your portfolio


Selling Put Options

“Naming Your Price” for stocks and receiving income while doing it


Taking Money From a Life Insurance Policy

Your policy must have cash value. There are potential tax consequences.

– #1 Withdraw the funds you’ve put in as premium.– #2 Further withdrawals should be taken as loans against

the death benefit. Caution – You may have to begin paying premiums

again or increase premium payments later as cost of insurance rises with your age.

– Policies typically charge interest on the loan.– Policy implosion could have negative tax consequences.


Alternative Solution to Life Insurance Funds

Shift from a whole life policy or Universal Life policy with cash value to a Universal Life policy with no cash value.

Create a tax-deferred exchange into an immediate annuity for income and use a portion of the income to buy a new UL policy.

– Must still be insurable.– You will lose the cash value of the policy.– Strategy works for approximately 40% of life insurance

cases. – Check with a financial advisor to make sure there are no

“unintended consequences.”


Lifetime Benefit Income Riders

Annuity product– Provided by life insurance companies– Check financial health of the company– Understand fees and surrender charges– Work with an independent; complex products that come in a variety of

“flavors” Variable versus fixed annuities

– Typically higher fees in variable annuities, including life insurance fees– Understand HOW the life insurance works in variable plans– Variable products can go down in value; fixed products cannot– Variable products may offer more upside potential, depending upon market

conditions Offers lifetime income without annuitization Probably best suits the age 55-70 age bracket

NOTE: Annuities may be highly illiquid and may have long surrender periods. Most restrict the amount of money that may be removed prior to the end of the surrender period. The GIBR annuities (above) are meant to be held permanently in order to obtain maximum benefit.


How GIBR Annuities Work

Account Value Side Grows at rate determined by

various strategies. If variable annuity, could go down in value.

Fees usually deducted from this side of annuity.

This side is what beneficiaries would inherit if any left after income stream taken on Income Account.

Income Account Side Grows at rate set by contract Grows tax-deferred until

funds are removed After deferral period, allows

you to take income stream at set rate even after account value funds are exhausted

If account value funds are exhausted, beneficiaries receive nothing


Arbitrage Strategies

Arbitrage (as defined by Webster): “The Purchase Of A Security, Commodity, or Foreign Exchange In One Market And Immediate Resale In Another Market To Profit From Price Discrepancies.”

The Arbitrage Strategies That I’m Going To Share With You Today Are Unique, And Will Only Be Suitable In Certain Situations. I’m Going To Explain These Concepts Through Several Examples:


Arbitrage Using CD’s and Money Market Accounts

Problem: James and Mary need more money than they can currently obtain from the interest on their CD’s and money market accounts.

Assumptions:– James & Mary have $600,000 in a money market and CD’s

generating a combined interest rate of 2%. ($12,000/year pre-tax in interest income.)

– They are in a 25% tax bracket.– Given the way they have structured their estate, they do not

expect to have any estate (death) tax due when they die. – Either or both James and Mary are insurable.


The Income Plan

$500,000 is placed into a personal lifetime income contract based upon James’ life expectancy.

This generates an annual income of $40,300/year. It also creates a problem of replacing this income

when James dies. So $11,250 of the $40,300 is put into a $750,000 life

policy on James to replace the $500,000 given up to create more income.


End Result

Before $12,000/year income Tax due $3,000 Spendable income: $9000 Size of inheritance:

$600,000

After $2000/year on remaining

$100,000 in MM $40,300 from life income

contract Tax due $3525* Life insurance policy cost

$11,250 Spendable income: $27,525 Size of inheritance:

$750,000

*Assumes a tax exclusion ratio of 70% and 25% tax bracket.


How would James find out if this strategy is Feasible in his situation?

As part of a “Feasibility Study” James and Mary would get quotes on:

● A Medically Underwritten Immediate Annuity ● A Universal Life Insurance Policy


Consumer Cautions

The outcome of such a financial arbitrage strategy would depend upon many factors, including the age, health and assets of the individual(s) concerned.

Such strategies cannot be “undone.” Such strategies will not work in all cases. Such strategies should be considered carefully with

the assistance of a financial advisor and tax preparer.

Income from the lifetime income contract does not increase; income erosion due to inflation could become a factor at some point in the future.


Income & Tax Arbitrage Strategy

Maximizing Income and Reducing Taxes in an A/B Trust Scenario


A/B Trust Review

A/B Trusts are used when spouses establish a Revocable Living Trust (RLT) of which half the assets pass into an irrevocable trust upon the death of the first spouse.

When the first spouse passes away, that spouse’s trust becomes the “B” trust. It may also be called a Credit Shelter Trust or Bypass Trust.

At the time of death, the trust gets its own tax ID number and is a separate taxable legal entity with its own assets and files its own tax return.

The trust typically contains provisions that allow the surviving spouse to use the interest generated by the trust and to invade the principal if a need arises for health, education, maintenance, etc.

The assets of the surviving spouse remain in the “A” trust and when the surviving spouse passes away, the assets of both trusts pass on to the heirs with an estate tax exemption preserved for each trust.


Taxation of B Trusts

Most “B” trusts generate income. “B” trusts, like other irrevocable trusts are

taxed at trust tax rates, with the top bracket of 35% beginning at just $11,150 in income.

This level of income tax in a “B” trust can create arbitrage opportunities.


Example

Mary is a widow, age 70, with total assets of $2,649,000 allocated as follows:– $457,000 IRA– $72,000 ROTH IRA– $430,000 “B” Trust– $1,090,000 Taxable Portfolio– $600,000 Home without Mortgage


Example - Continued

Note that in this case, the “B” Trust was not properly funded, having far less than the allowable exemption.

Mary wants to increase her income but also wants to eliminate the income taxes on the “B” Trust and pass on the $430,000 in assets in the “B” Trust to her heirs upon her passing.

Mary is in average health.


Example - Continued

Mary purchases a single pay guaranteed UL policy using $430,000 in the “B” Trust assets.

The resulting life policy has a DB of $1,144,947, which will pass to her heirs income and estate tax exempt.

This represents an increase of $714,947 to the heirs in the “B” Trust.

The assets in the “B” Trust have been removed from the market, and are no longer subject to market volatility.


Example - Continued

Mary then deposits $500,000 of the taxable assets in her RLT into a Single Premium Immediate Annuity to generate annual income of $44,526.

The annuity has a tax exclusion ratio of 72.8%, which means that out of every dollar paid out to Mary, 72.8% will be exempt from income tax.


Example - Result

Mary has increased her income by $44,526/year. She has reduced the size of her estate by $500,000

in her RLT, but she has INCREASED the estate in the “B” Trust by $714,947.

Mary’s taxes have been reduced due to the exclusion ratio of the annuity as compared to receiving the same income from interest and/or dividends.

The “B” Trust no longer pays taxes because it no longer earns income.


How could Mary know if an Arbitrage Strategy was Appropriate and Feasible in her Situation?

She has a Feasibility Study done and received an assessment of:

● Her current asset and income situation● Her present and future tax situation● Her financial and estate objectives● Her insurability


Other Applications ofFinancial Arbitrage Strategies

Providing income from a retirement account and while replacing it with a tax-advantaged asset to the beneficiary.

Leveraging assets in a portfolio not being “used” by the current owner in such a way as to eliminate market volatility and increase the size of the non-taxable estate for the beneficiaries.

Providing for a tax-advantaged solution to help pay for grandchild’s education while retaining the value of the estate for beneficiaries.

Providing a tax-advantaged solution to help a family member purchase real estate while maintaining the value of the estate for beneficiaries.

Providing a tax-advantaged solution to purchase long term care coverage without diminishing current income and without diminishing the value of the estate for beneficiaries.


Additional Points on Arbitrage Strategies

A lifetime income contract will cease upon the death of the annuitant. In order to replace the value, a life insurance policy must be purchased and maintained.

Every situation is different. A thorough review of assets, exposure to estate taxes, objectives of the client, income sources, and health situation are required to see if an arbitrage strategy would benefit you.

Because arbitrage strategies cannot be “unwound,” such a decision to enter into such a strategy must be carefully considered.

Arbitrage strategies result in commission compensation for the representative as well as the company doing the feasibility studies.


Personal Income Continues to Drop

U.S. personal income continued to decline in the first quarter of 2009, falling 0.5 percent..., according to estimates released today by the U.S. Bureau of Economic Analysis. In the fourth quarter of 2008, U.S. personal income fell 0.4 percent.

Disposable personal income dropped a hefty 1.3% in June, reports the Bureau of Economic Analysis.


Where Do You Go From Here?

• What Is Your Risk Tolerance And Time Horizon?• What Are Your Objectives?

– Income? Tax Reduction? Estate Planning?

• What Is Your Outlook On The Economy And The Market?– Bull? Bear? Fence Sitter?

• What Strategies Appeal To You?– Income Portfolios? Option Strategies? Removing Funds from Life

Insurance? Arbitrage Strategies?

• Get Personal Guidance, Make Your Plan And Implement It

income deprived in this economy presented by: marta nystrom nystrom & associates

Documents

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income taxes

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standard poors dividend

dividend information

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monthly income