10 Questions that you may ask your Financial or Retirement Planner

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10 Questions that you may ask your Financial or Retirement Planner

Investors spend decades saving for retirement in their 401k , IRA , or Investment accounts. As a result, it isn’t surprising that these funds are extremely high on any family’s or individual’s list of priorities. eRollover has come up with a list of things that you may want to think about asking your financial planner or insurance agent. These quick questions can increase the likelihood that you will have a positive experience with your investments and insurance moving forward.

1. What experience do you have?
Find out how long the planner has been in practice and the number and types of companies with which she has been associated. Ask the planner to briefly describe their work experience and how it relates to their current practice. Choose a financial planner who has experience counseling individuals on their financial needs .

2. What are your qualifications?
The term “financial planner” is used by many financial professionals . Look for a planner who has proven experience in financial planning topics such as insurance, tax planning, investments, estate planning or retirement planning. Determine what steps the planner takes to stay current with changes and developments in the financial planning field. If the planner holds a financial planning designation or certification, check on his background with CFP Board or other relevant professional organizations.

3. What services do you offer?
The services a financial planner offers depend on a number of factors including credentials, licenses and areas of expertise. Generally, financial planners cannot sell insurance or securities products such as mutual funds or stocks without the proper licenses, or give investment advice unless registered with state or Federal authorities. Some planners offer financial planning advice on a range of topics but do not sell financial products . Others may provide advice only in specific areas such as estate planning or on tax matters.

4. What is your approach to financial planning?
Ask the financial planner about the type of clients and financial situations she typically likes to work with. Some planners prefer to develop one plan by bringing together all of your financial goals . Others provide advice on specific areas, as needed. Make sure the planner’s viewpoint on investing is not too cautious or overly aggressive for you. Some planners require you to have a certain net worth before offering services. Find out if the planner will carry out the financial recommendations developed for you or refer you to others who will do so.

5. Will you be the only person working with me?
The financial planner may work with you himself or have others in the office assist him. You may want to meet everyone who will be working with you. If the planner works with professionals outside his own practice (such as attorneys, insurance agents or tax specialists) to develop or carry out financial planning recommendations, get a list of their names to check on their backgrounds.

6. How will I pay for your services?
As part of your financial planning agreement, the financial planner should clearly tell you in writing how she will be paid for the services to be provided.
Planners can be paid in several ways:
• A salary paid by the company for which the planner works. The planner’s employer receives payment from you or others, either in fees or commissions, in order to pay the planner’s salary.
• Fees based on an hourly rate, a flat rate, or on a percentage of your assets and/or income .
• Commissions paid by a third party from the products sold to you to carry out the financial planning recommendations. Commissions are usually a percentage of the amount you invest in a product.
• A combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommendations and commissions are received from any products sold. In addition, some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations.

7. How much do you typically charge?
While the amount you pay the planner will depend on your particular needs, the financial planner should be able to provide you with an estimate of possible costs based on the work to be performed. Such costs should include the planner’s hourly rates or flat fees or the percentage he would receive as commission on products you may purchase as part of the financial planning recommendations.

8. Could anyone besides me benefit from your recommendations?
Some business relationships or partnerships that a planner has could affect her professional judgment while working with you, inhibiting the planner from acting in your best interest. Ask the planner to provide you with a description of her conflicts of interest in writing. For example, financial planners who sell insurance policies , securities or mutual funds have a business relationship with the companies that provide these financial products. The planner may also have relationships or partnerships that should be disclosed to you, such as business she receives for referring you to an insurance agent, accountant or attorney for implementation of planning suggestions.

9. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?
Several government and professional regulatory organizations, such as the National Association of Securities Dealers (NASD), your state insurance and securities departments, and CFP Board keep records on the disciplinary history of financial planners and advisers. Ask what organizations the planner is regulated by and contact these groups to conduct a background check.

10. Can I have it in writing?
Ask the planner to provide you with a written agreement that details the services that will be provided. Keep this document in your files for future reference.

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Obama-Elect, The end of 401k, IRA, and Retirement Accounts as we know them?

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Obama-Elect, The end of 401k, IRA, and Retirement Accounts as we know them?

Well, the election of 2008 has come and gone. Barack Obama is the president-elect of our great nation. Now, the main question turns to, “How will Obama’s election affect me personally?” Well, since you asked, the main target of the Obama administration may be your 401k, 403b, IRA, and other Retirement accounts.

2009 may well bring a concerted and all-out effort by the Obama administration and a Congress with well over ½ Democrats shooting to turn the generally Republican Investor Class into an endangered species by, among other tactics, raising investment taxes and ending the tax preferences for 401(k)’s, IRAs, and other retirement accounts.

Here is the emerging battle plan for Obama’s War against Tax-deferred Retirement Plans :

Investment Taxes are going to be raised.
Obama wants to raise capital gains taxes even though he has admitted that it might be bad for the economy and might actually decrease tax revenue to the government. For now, he’s talking about raising the highest cap gains rate by one third to 20 percent, though earlier in the campaign, he floated pushing it as high as 28 percent, a near doubling. Now that he has been elected, he could revert to his early campaign promise of 28%. With the next administration facing a trillion dollar budget deficit—maybe more—there will certainly be pressure to raise taxes to higher levels than now being suggested.

Annuities and Life Insurance had better watch out as well.
The government’s mouth has been watering for a number of years, considering the windfall of cash that would come from taking away the tax deferred status of cash value insurance and annuities , and also the tax free life insurance benefit to beneficiaries. This could have a “double jeopardy” effect on estate taxes as well, since many affluent individuals rely on life insurance to cover the death tax.

401(k)’s, IRAs, and other retirement plans may be a thing of the past.
Democrats in the House are now talking openly about the longtime liberal dream of repealing the tax advantages of putting money into a 401(k) plan or other tax-advantaged retirement account. Some think that since the savings rate isn’t going up for the investment of $80 billion [in 401(k) tax breaks], they have to started to think about whether or not they want to continue to invest that $80 billion for a policy that’s not generating the revenue they say it should.

Teresa Ghilarducci, an economist at the New School for Social Research in New York, floated a radical alternative to 401(k)s at a hearing held by Miller Oct. 7.

Under her plan, workers would receive a annual $600 tax refund if they set aside 5 percent of their pay into a retirement account run by the Social Security Administration, which would then invest globally in risky assets to seek high returns.

From that pool, workers would be paid a guaranteed 3 percent a year indexed to inflation.
The change would encourage workers not to hang on to jobs longer than planned.
Because their returns would be guaranteed, workers would be able to retire on schedule, she said.
“We need people to retire when the economy tanks in order to keep up aggregate demand and to reduce pressure on the labor market. And the only way to do that is to unhook the finance markets from retirement income,” she told Reuters.

Not only would removing the preferential tax treatment of these vehicles raise investment taxes by $100 billion a year, as well as affecting the “Rich” making less than $100,000, it would surely prompt many Americans, already shell-shocked by the market’s recent losses, to flee stocks. There are trillions of dollars in American retirement accounts, and abandoning the higher-returning stock market at a probable bottom is probably the worst long term financial move that an investor could make.

Simply put, if you believe in the American economy’s prosperity over the foreseeable future, then you have to believe in the stock market. If you don’t, then you have to admit that the government will have to fund all of its promises one way or another. The low lying “hanging fruit” of 401k, IRA, and Retirement plans may just be too tempting for them to look the other way.

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Is an Immediate Annuity Right for You?

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Is an Immediate Annuity Right for You?

An income stream that you’ll never outlive sounds pretty
attractive. We’ll see if they’re right for you.

Americans are living longer than ever. The idea of living a longer, healthier life appeals to all of us, but for
many of us, the tradeoff is outliving our retirement savings . The crippling costs of healthcare and the
constant rise of inflation continue to compound this financial predicament. A single premium immediate
annuity (SPIA) may help with this dilemma, providing you with an income stream that you will never outlive.
We’ll take a look at the pros and the cons.

Here’s how they work
While many annuities are designed to build value for retirement, immediate annuities are designed to
provide income immediately in retirement . A fixed immediate annuity is a contract between you and the
insurance company . They are usually purchased with large lump sums of money by conservative investors
in order to pay for expenses over a long period of time. In exchange for this lump sum premium the
insurance company pays you a monthly income for as long as you live.

Let’s take a look at a hypothetical example. We’ll assume we have a 75 year old male purchasing a
$100,000 SPIA policy. Based on current interest rates and his life expectancy he’ll receive approximately
$725 dollars a month, every month for the rest of his life. Now, if the unexpected happens, and he dies
early, his beneficiaries receive the remaining value, less payments received. This is called a “life income
with lump sum refund” option and provides the assurance that you or your heirs will get at least the balance
out of the policy.

If the cash refund option is not of great importance and maximum income is more of a priority, he could
have chosen the “life only” payout option, which would pay a monthly payment of even more, at $900 per
month. This is a common choice for the investor who’s not overly concerned with the endowment of these
particular funds, rather capturing the income derived from these funds.

Tax treatment
Thanks to the “exclusion ratio” immediate annuities offer very favorable tax
treatment; in fact a large percentage of the fixed immediate annuity income is
tax-free. Based on the above example, the income would be 74.02% covered
by the “exclusion ratio”.2 This would mean that about only 4 cents on the dollar
of income would be lost to taxes, and 96 cents would be kept.3 This is because
a large portion of income is considered a return of principle. Keep in mind that
this represents new money, qualified funds such as IRA’s and 401k ’s are
generally taxable because these products represent pre-tax dollars.

Asset Protection - Medicaid
Utilizing Immediate annuities to shelter assets has become one of the latest
“en vogue” planning techniques. Immediate annuities are often purchased for
Medicaid planning purposes. By purchasing an immediate annuity you’re
essentially removing the funds from your estate (for Medicaid purposes),
thereby meeting the Medicaid minimal requirements, and qualifying for
Medicaid. These minimal requirements are very low and vary depending on
your specific state; for most individuals a “Medicaid annuity” is not the answer.
If qualifying for Medicaid is your intent, I suggest you work with a qualified
advisor or attorney—proper planning is a must.

Creditor protection is another sought-after benefit of these policies. In most
states your fixed immediate annuity cash value is exempt from attachment by
creditors. This is especially relevant if things like disability were to loom on the
horizon. Florida and New York offer some of the most favorable laws.

What are the drawbacks of purchasing a fixed immediate annuity?
All of the above information sounds promising but it doesn’t mean that
immediate annuities are for everyone. Purchasing a single premium
immediate annuity is a permanent decision that will last for the rest of your life.
So you should seriously consider the following before selecting an immediate annuity product.

It’s important to remember that these products are purchased for a reliable stream of income with an
emphasis on security. They are not designed for maximum return. You can typically expect fairly
conservative returns that don’t often exceed the returns we see in the bond markets , but they’ll do so with
considerably more security.

The fact that the income derived from SPIA’s will never change can be viewed as a double-edged sword.
While the steady stream of payments is often welcomed the downside is the loss of purchasing power to
inflation. This is the inherent problem with fixed income investments , in general, and for the most part can’t
be avoided without delving into equity type investments.

Investors concerned with passing their assets on to heirs should take a close look at the payout options
within a given policy. This may sound obvious, but when you select the “life only” income option within an
immediate annuity policy the insurance company is only obligated to make payments to you for the rest of
your life. If you die a month into the contract the insurance company gets all your money—nothing goes to
your heirs. On the other hand if you outlive the actuarial tables you’ve won. So, it can work both ways, but
the important thing to understand is you won’t be bequeathing these funds to your heirs.

Generally speaking, immediate annuities are irrevocable contracts. Once you purchase the immediate
annuity it is non-refundable, you lose the liquidity and no longer have access to these funds, save for the
introductory “free-look” period. This restriction of principle is by far the number one disadvantage with
these products. The tradeoff for this loss of liquidity is a lifetime of income. SPIA’s are NOT suitable for
individual investors with liquidity needs.

Should you wait?
We know that the older we get the more our income needs increase. So, if you’re in no rush and have no
immediate need for income it often pays to wait. Remember that the payment amount is based on life
expectancy, so the shorter the life expectancy and the older you get, the larger your income payments
become. Also, keep in mind that payment amounts are based on current interest rates, which are still
relatively low. Waiting just a few years can make a significant difference.

Right for you?
Depending on your specific financial needs/goals a fixed immediate annuity may be the right choice for
you. They’re not the end-all, do-all investment product (nothing ever is), but for certain income seeking
investors, SPIA’s are a highly tax favored way of achieving a guaranteed income which will not change due
to outside forces like a declining economy. To those individuals an income that can’t be outlived can be
particularly comforting in these uncertain times.

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How much life insurance do I need?

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How much life insurance do I need?

In most cases, if you have no dependents and have enough money to pay your final expenses, you don’t need any life insurance.

If you want to create an inheritance or make a charitable contribution, buy enough life insurance to achieve those goals.

Ask yourself:
• How much money will my family need after my death to meet immediate expenses,
like funeral expenses and debts?
• How much money will my family need to maintain their standard of living over the long run?

To make it easy for you to get a general sense of your needs, check out our life insurance needs calculator.

If you have dependents, buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide (for a simple example, if you do your own taxes, the survivors might have to hire a professional tax preparer). Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.

You should also plan to replace “hidden income” that would be lost at death. Hidden income is income that you receive through your employment but that isn’t part of your gross wages. It includes things like your employer’s subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other “perks,” large and small. This is an often-overlooked insurance need: the cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.

Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with “winding up” an estate and passing property to heirs. At a minimum, plan for $15,000.

Other sources of income

Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors’ benefits.

Social Security survivors’ benefits can be substantial. For example, for a 35-year-old person who was earning a $36,000 salary at death, maximum Social Security survivors’ monthly income benefits for a spouse and two children under age 18 could be about $2,400 per month, and this amount would increase each year to match inflation. (It drops slightly when the survivors are a spouse and one child under 18, and stops completely when there are no children under 18. Also, the surviving spouse’s benefit would be reduced if he or she earns income over a certain limit.)

Many also have life insurance through an employer plan, and some from another affiliation, such as through an association they belong to or a credit card. If you have a vested pension benefit, it might have a death component. Although these sources might provide a lot of income, they rarely provide enough. And it probably isn’t wise to count on death benefits that are connected with a particular job, since you might die after switching to a different job, or while you are unemployed.

A multiple of salary?

Many pundits recommend buying life insurance equal to a multiple of your salary. For example, one financial advice columnist recommends buying insurance equal to 20 times your salary before taxes. She chose 20 because, if the benefit is invested in bonds that pay 5 percent interest, it would produce an amount equal to your salary at death, so the survivors could live off the interest and wouldn’t have to “invade” the principal.

However, this simplistic formula implicitly assumes no inflation and assumes that one could assemble a bond portfolio that, after expenses, would provide a 5 percent interest stream every year. But assuming inflation is 3 percent per year, the purchasing power of a gross income of $50,000 would drop to about $38,300 in the 10th year. To avoid this income drop-off, the survivors would have to “invade” the principal each year. And if they did, they would run out of money in the 16th year.

The “multiple of salary” approach also ignores other sources of income, such as those mentioned previously.
This may look simple enough, but calculating one’s life insurance needs can actually get pretty complicated. To make it easy for you to get a general sense of your needs, check out our life insurance needs calculator. It’ll walk you through the process and provide you with an estimate of your insurance needs in a matter of minutes.

But remember, our calculator (or anyone else’s for that matter) is no substitute for the guidance and assistance you’ll get by meeting with a qualified insurance agent or other financial professional. So if you’re serious about protecting your family’s future, contact an insurance professional in your community.

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Explaining the Capital Gains Tax

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Explaining the Capital Gains Tax

The election of 08, and the recent stock market crash have contributed to the fact that you always hear about Capital Gains taxes almost daily in the news. Many people have asked me, “What is the Capital Gains Tax, and how does the 2008 change this?”

Here is the basic definition:

Whenever you sell an investment at a profit, you will (in most cases) owe the IRS a tax known as a capital gains tax. This is true for most investments, including mutual funds , bonds, options, collectibles, your home, or business. Capital gains are the amount by which an asset’s selling price exceeds its initial purchase price. A realized capital gain is an investment that has actually been sold at a profit. An unrealized capital gain is an investment that hasn’t been sold yet but would result in a profit if sold; the gain equals the difference between the purchase price and the selling price. The term capital gain is often used to mean realized capital gain. The opposite of a capital gain is a capital loss, which occurs when the selling price of an investment is less than the purchase price.

The IRS divides capital gains into two distinct categories, with each having different tax consequences. Long-term capital gains are gains on investments held for more than a year, while short-term capital gains are gains realized on investments that are held for a year or less. Short-term capital gains are taxed according to your income tax bracket and long-term gains are taxed at 20% if you are in the 28% or higher tax bracket, and only 10% if you are in the 15% bracket. In other words, long-term gains are subject to lower tax rates because the IRS wants to encourage long-term investing.

To determine the capital gains tax on an investment, subtract the amount paid for the investment, including any broker commissions, from the sales price to arrive at the capital gain or loss. Then take this amount and multiply it by the appropriate tax rate, which will give you the tax owed on the sale of your investment.

Another capital gains reduction strategy is through the use of a tax-deferred account, such as an IRA or 401(k). These accounts enable your investment to grow tax deferred until retirement. At the time that you start taking distributions from your IRA , or 401k, you will pay taxes based on your current income tax bracket. 401k Plans, IRA’s, Roth IRA’s, and Annuities, are all vehicles that enable you to gain the tax deferred status on your investments.

What the 2008 Election Means for the Future of the Capital Gains Tax

Investors can expect higher tax rates post-2008 should a Democrat become president. Barack Obama has fervently articulated that he would like to have a pro-tax policy. Their orientation appears to be toward wealth redistribution via higher tax rates. Obama has indicated that he wanted to almost double the maximum tax rate on capital gains from 15% to 28%. The existing tax rates are going to be history after 2008 should a Democrat win control of the White House in tomorrow’s election. That message is also clear from Democrats on the House Ways and Means Committee who have already released a plan to hike personal tax rates.

On the other side is McCain, who has recently stated his support for extending the present tax-rate structure past 2010. However, McCain voted “no” on both the 2001 and 2003 tax rate reduction bills. So realistically, the likelihood of the 15% dividend tax rate and capital-gains tax rate remaining past 2008 is perhaps less than 50-50 at this point.

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Stock Options-What You Need to Know

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Stock Options-What You Need to Know

An option is simply the right, for a specified period of time, to buy or sell an item at a guaranteed price. Stock options then, are rights to buy or sell shares of stock at a guaranteed price during the life of the option.

There are two types of stock options - “puts” which give the holder the right to sell the stock at guaranteed price; and, “calls” which give the holder the right to buy the stock at a guaranteed price. Of course, you have to pay to purchase a stock option. The investor who owns the stock in question sells the option. If the option is exercised then the stock must be sold to the holder of the option if the option is a call (which gives the right to purchase the stock) and the stock must be purchased by the holder if the option is a put (which gives the right to sell the stock).

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To the uninitiated, stock options might seem like gambling and some of those operating in the options market are essentially gambling. However, unlike gambling, in which money simply moves from one person to another with no new value created, stock options do perform a socially useful and productive service.

The most common use of call options
occurs when an owner of a certain stock is unsure as to whether the price will rise or fall in the next three months. So, this investor “writes” (sellers of options are said to “write” the option) an option contract that specifies sale price higher than the current price of the stock and sells it in the market. If the price of the stock rises to the price specified in the contract (called the “strike” price) the owner will have to sell it. Granted, if the stock keeps rising the writer of the option loses the opportunity for a windfall profit. However, an option strategy like this is a conservative one designed to lock in a predetermined profit and not make a windfall. If, on the other hand the stock never rises above the strike price the seller of the call pockets the price received for the option and keeps the stock.

A second common use of call options involves the giving of stock options to managers, and sometimes employees , of a business as an incentive to work harder to increase revenue and profits. When profits increase the price of the stock usually rises and this becomes a bonus for good work at no cost to the company. The stock here is the stock of the company issuing the option and the shares upon which the options are written are stock that the company has previously purchased (companies can, and due, purchase shares of their own stock and this is called “treasury” stock). In this scenario the options are written for a much longer period than the usual three months and if the stock price has risen above the strike price when the option comes due the employee can exercise the option, buy the stock at the lower strike price and resell it at the higher market price and pocket the profit (actually, there is a market for options and the value of the options increases in proportion to the increase in stock so, in reality, the employee simply sells the option and pockets the profit). Of course, if the stock price has not increased the option expires worthless.

When a person writes a put they are promising to purchase the stock from the buyer of the put at an agreed upon price. An example of the use of a put would be an investor who expects the price of a stock to fall. This investor then borrows stock from someone who owns it, promising to replace it by a specified future date and paying a fee to the owner of the stock. If the stock falls in price as expected the investor buys the shares back at the new, lower price and gives them back to the person from whom he borrowed them. Selling stock you do not own is called “selling short” and it is risky because the short seller can lose money if the stock’s price rises rather than falls. To protect themselves against this a short seller can sell a put thereby limiting his loss if the stock price doesn’t fall.

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Who would purchase a put? Consider the case where a person dies and leaves an estate containing a large number of shares in a company. The family of the deceased needs the money represented by the stock and want the executor to sell the stock and invest it in something more conservative. But it will take a few months before the estate is settled and the court allows the sale of the stock. Fearing that the stock may fall in value, the executor buys the put giving the estate the right, but not the obligation, to sell the stock at the strike price which is close to the current price. If the price of the stock rises the heirs get more money, but, if the price falls the heirs are guaranteed the strike price.

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Will You Owe Estate Taxes ?

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Will You Owe Estate Taxes ?

I am very sorry that this post is long, but there is a TON to cover when it comes to estate taxes and estate planning techniques. There is quite a bit of good information out there, and I have tried my best to condense it into this post.

THE GOOD NEWS is it’s becoming increasingly less likely that you’ll owe estate taxes. That’s because Congress has approved a schedule that increases the amount an individual can leave to heirs tax-free to $2 million in 2006-2008 and to $3.5 million in 2009. In 2010, it will supposedly be repealed altogether.

Still, with 401(k) accounts compounding and life insurance death benefits thrown into the pot, it’s easier than some think for a working couple to be subject to the estate tax, at least for the next few years. And this tax can be brutal. For every dollar more than $2 million that you leave behind, Uncle Sam will take 45 cents.
Want to know where you stand? Well, plug your assets and liabilities into our Estate Tax Exposure Meter. If it looks like your heirs will be sharing their bequests with Uncle Sam, don’t fret. There are plenty of things you can do right now to make sure that the prime beneficiary of your life’s hard work isn’t the government. In fact, the Meter will make some suggestions that apply to your situation.

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One thing. Even though the current law calls for complete repeal of the federal estate tax in 2010, believe it when you see it. Estate tax planning remains critically important until the repeal actually occurs — if it ever does. Politicians have been known to change their minds, and future economic and political events could result in backsliding on the promised repeal. The good news is the federal estate tax exemption is scheduled to increase again to $3.5 million in 2009. That increase is as likely as not to stick even if the estate tax is not completely repealed as currently scheduled in 2010.
Taking advantage of the higher exemption amounts and the relatively simple planning strategies explained in this section will prevent any federal estate tax hit in the vast majority of cases. But first, think about these things to assess how much you would owe right now in the absence of any estate tax reduction moves.

Note 1: You can avoid estate tax on life insurance proceeds by setting up an irrevocable life insurance trust to own the policies on your life. However, if you transfer an existing policy into a life insurance trust, it is still considered part of your estate until three years have passed

Note 2: Please enter the amount of net worth included above that would end up in your spouse’s hands. Include both his or her separately owned share of the net worth plus the share that would be inherited from you.

• Example 1: Say your total net worth is $3.5 million. Your spouse owns $1.1 million. You own $2.4 million. Of that amount, $2 million goes to your children with the remaining $400,000 going to your spouse. You should enter $1.5 million ($1.1 million + $400,000). This is the amount of net worth your spouse would wind up with if you die.

The unlimited marital deduction enables you to transfer an unlimited amount free of any federal gift or estate taxes to your spouse while you are still alive or at death — provided your spouse is a U.S. citizen. (If not, you can still avoid taxes by taking some further planning steps that are beyond the scope of this article.) You can take advantage of the privilege without using up any of your $1 million gift tax exemption or any of your separate estate tax exemption.

• Example 2: You have $3 billion in assets (or $3 million, whatever). You can transfer all or part of that wealth to your spouse — assuming he or she is a U.S. citizen — by gift or via bequest. No federal gift or estate taxes are due, and your federal gift and estate tax exemptions remain intact. So even after any transfers to your spouse, you can still move up to $1 million to other persons (typically your children or grandchildren) by gift or up to $2 million by bequest. No federal gift or estate taxes will be due there either.

Note 3: While you are alive, you can gift up to $12,000 to an individual recipient each year without owing any federal gift tax or using up any of your $1 million gift tax exemption or any of your separate estate tax exemption. (Prior to 2006, this figure was $11,000; and prior to 2002, it was $10,000.) If you are married, the current annual tax-free gift limit is $24,000 per recipient if you and your spouse make joint gifts. While still alive, you can also give away an unlimited amount as long as the money goes directly to an educational institution for tuition or to a medical service provider to pay for uninsured expenses.

• Example: You pay $25,000 directly to a private college to cover your grandchild’s tuition (not room and board, books or supplies). This gift doesn’t use up any of your $1 million exemption, nor does it preclude you from making an additional tax-free gift under the $12,000 rule. So you could transfer another $12,000 by writing a check to your grandchild for room and board, books, supplies, personal expenses and whatever. If you have two grandchildren, you could do the same for both. Your $1 million gift tax exemption and separate estate tax exemption both remain fully intact.

Note 4:
• Planning Suggestion 1: If the calculator shows a tax liability on your spouse’s estate, it may be because you have not taken full advantage of both of your $2 million estate-tax exemptions.

Set up a bypass trust arrangement to make sure both you and your spouse make good use of your respective exemptions. Together, the two of you can then pass along up to $4 million free from federal estate tax.

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• Planning Suggestion 2: Another likely explanation for a tax bill on your spouse’s estate is “unbalanced estates.” Say your estate is well under the $2 million exemption and your spouse’s estate is well over the magic number. If you die first, your estate won’t owe any tax, but it isn’t big enough to take full advantage of your $2 million exemption (even with a bypass trust arrangement). When your spouse dies, his or her $2 million exemption won’t be enough to fully shelter against the federal estate tax.

If this is the case, consider transferring assets between you and your spouse to more or less balance your estates. That way, you can each shelter up to $2 million with a bypass trust arrangement. Another possible solution to the “unbalanced estates” dilemma is a QTIP trust arrangement.

• Planning Suggestion 3: Yet another possible cause of a tax bill on your spouse’s estate is when he or she winds up with more cash than is really needed from life insurance death benefits after you die.

If this is the case, consider setting up an irrevocable life insurance trust with your kids as the beneficiaries. The trust then takes over ownership of the “excess” life insurance coverage. That keeps the death benefits out of both your taxable estate and your spouse’s taxable estate. When you die, the death benefits are paid to the trust. The trust fund can then be used to finance your children’s college educations. Or you can arrange for staggered trust fund payouts when your children reach certain ages (say 30, 40 and 45). Or both.

• Planning Suggestion 4: The fourth-most-likely reason for a tax bill on your spouse’s estate is that you and your spouse are just plain wealthy. In this case, you should consider more aggressive tactics. Consider making gifts to your children, grandchildren, other loved ones and charities to reduce the value of both your taxable estate and your spouse’s taxable estate

Note 5: While you are alive, you can gift up to $12,000 to an individual recipient each year without owing any federal gift tax or using up any of your $1 million gift tax exemption or any of your separate estate tax exemption. (Prior to 2006, this figure was $11,000; and prior to 2002, it was $10,000.) If you are married, the current annual tax-free gift limit is $24,000 per recipient if you and your spouse make joint gifts. While still alive, you can also give away an unlimited amount as long as the money goes directly to an educational institution for tuition or to a medical-service provider to pay for uninsured expenses.

• Example 1: You pay $25,000 directly to a private college to cover your grandchild’s tuition (not room and board, books, or supplies). This gift doesn’t use up any of your $1 million exemption, nor does it preclude you from making an additional tax-free gift under the $12,000 rule. So you could transfer another $12,000 by writing a check to your grandchild for room and board, books, supplies, personal expenses, and whatever. If you have two grandchildren, you could do the same for both. Your $1 million gift tax exemption and separate estate tax exemption both remain fully intact.

• Example 2: Say you are single. In 2004, you gave $25,000 to your adult daughter to help her start a business. This means you made a taxable gift of $14,000 ($25,000 minus the $11,000 “freebie” that applied for 2003-2005; gifts made prior to 2002 were subject to a $10,000 limit). If you never made any other taxable gifts, you would enter $14,000 on the taxable gifts line. If you are married and you and your spouse jointly made the $25,000 gift, the taxable gift is only $3,000 ($25,000 minus your $11,000 “freebie” minus your spouse’s $11,000 “freebie”). You should enter $1,500 on the line for your taxable gifts and $1,500 on the line for your spouses taxable gifts.

Note 6:
• Planning Suggestion 1: Married people are usually advised to leave $2 million (the federal estate-tax exemption amount for 2006-2008) to heirs, via direct bequests or bequests to a trust set up for your kids, including a bypass trust. You are then advised to leave the rest of your dough estate-tax-free to your spouse under the unlimited marital deduction. However, you may have good reasons for not wanting to do this. For example, say this is a second marriage and you really want most of your money to go to children from your first marriage, rather than to your current spouse. Or your spouse may not be good with money. Or you may be worried about what will happen to your money if your spouse remarries. In all these scenarios, a possible “cure” is a QTIP trust. You can specify the ultimate beneficiaries of the trust (usually your kids). Nevertheless, the money in the trust qualifies for the unlimited marital deduction. Your spouse is entitled to all the income from the trust assets as long as he or she lives.

• Planning Suggestion 2: If you are single, the most likely cause of a big tax bill on your estate is lots of life insurance coverage. If this is the case, consider setting up an irrevocable life insurance trust with your kids — or whomever you wish — as the trust beneficiaries. The trust then takes over ownership of the insurance policies on your life. That keeps the death benefits out of your taxable estate (and out of your spouse’s taxable estate if you are married). When you die, the death benefits are paid into the trust. The trust fund can then be used for whatever purposes you specify in the trust document (for example to pay for your child’s college education or to make staggered payouts when the beneficiary reaches specified ages).

• Planning Suggestion 3: The other likely reason for a tax bill on your estate is that you are wealthy, plain and simple. In this case, you should consider more aggressive tactics than the ones explained above. Consider making gifts to your children, grandchildren, other loved ones, and charities to reduce the value of your taxable estate.

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