What does this mean for you?
Allgen custodies its clients’ accounts at Schwab Institutional. As we actively manage your investments, there will be no fees charged by Schwab for any trades conducted on your account for one year. This can mean significant savings for you. Depending on the size of the account and amount of trades, you could save thousands of dollars. In addition, you will be reimbursed any fees for moving your account to Allgen Financial Services, Inc. & Schwab from another institution. This makes it a great opportunity to consider moving your account over to us since this offer will most-likely only be available for a limited time.

If you would like to learn more about this offer, and/or consider moving your account over to Allgen Financial Services, Inc., please contact us today at: (407) 210-3888 or toll-free 1(888) 6ALLGEN (625-5436).

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According to a study sponsored by U.S. Trust, owners of ultra-high-net-worth (UHNW) family businesses remain exposed to business succession, asset protection and estate planning issues.

“Owners of ultra-high-net-worth family businesses often have a team of advisors focusing on an array of needs such as wealth management, tax strategies and succession planning, without addressing the bigger picture,” said Chris Zander, managing director and head of the Multi-Family Office (MFO) Group at U.S. Trust. “Given the near-term and long-term complexities with managing a successful family business, it is crucial that these families think about the wealth tied to their business and their personal fortune in a holistic, strategic manner.”

The study revealed that while a large majority of owners of UHNW family businesses have wealth transfer plans in place, most of these plans - both professional and personal - have lapsed.

– While over three quarters (76%) of owners have succession plans, only 38 percent implement them, inadequately addressing issues of succession
– Most individuals with succession plans in place are not focusing on tax-mitigation issues (73%), even though nearly all participants (93%) report a desire to lower the tax burden associated with transferring the business

Asset Protection Strategies Missing

A significant portion of owners of UHNW family businesses desire to maintain control of the business and are concerned with protecting their wealth, yet fail to create asset protection plans, which provide wealth structuring strategies that maximize tax efficiencies and mitigate risk.

– Almost nine out of 10 (89%) business owners were “very” or “extremely concerned” about protecting the family’s wealth
– However, nearly three quarters (73%) of them do not have asset protection plans in place

“Most owners of ultra-high-net-worth family businesses don’t implement strategies for asset protection in large part because no one has educated them about such options,” Rosenthal noted.

Estate Plans Outdated

The treatment of estate planning mirrors that of succession planning, with the majority of owners creating estate plans without updating them often enough to keep them viable.

– Over three quarters (78%) of owners have personal estate plans; however, 89 percent have not updated them after a life-changing event such as marriage, birth or death rendering the plan obsolete
– More than half (54%) of participants lacking estate plans reported difficulty dealing with their own mortality, and one quarter (25%) cited a lack of time as reasons for not creating a plan

With the upcoming elections and the tax-fallout many professionals are expecting, and with the already-enacted estate and gift tax sunset approacing, updating and implementing business succession plans, personal estate plans, and asset protection plans take on a new significance.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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The below are adapted from http://assetprotectionsociety.org. Suggested answers will follow in a separate post…

1. Name the types of creditors you need protection from

2. Is AP planning only about forming entities? how else can you protect assets?

3. Should you own REAL ESTATE (e.g., rental property, a vacation home/condo or vacant land) in your own name?

4. For a “professional,” is it good asset protection to have assets titled in the non-professional spouse’s name?

5. Who is everyone’s top creditor every year - guaranteed?

6. How should you own stocks, bonds, mutual funds, etc.?

7. How do you protect against downturns in the stock market and if so how?

8. How do you own boats, waverunners, snowmobiles, or planes, etc.?

9. How do you protect the equity in your home?

10. How do you mitigate capital gains taxes?

11. Do you know how an offshore asset protection trust (OAPT) works and does your money need to go offshore to have a properly setup OAPT?

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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Only direct (trustee to trustee) rollovers qualify (e.g., 60-day indirect rollovers do not).

Generally, the same rules apply to these rollovers as do to conversions of traditional IRAs to Roth IRAs (rollover includible in gross income (except after-tax contributions), and no 10% early distribution tax).

Taxpayers with AGI of at least $100,000 or who are married filing separately, are not eligible for this direct rollover to a Roth. These limitations were repealed by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), but not until 2010.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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The IRS position on the estate taxable value of closely held business interests is generally that they should reflect the underlying assets’ values, i.e., the market value of the investments inside the entity. For example, a family limited partnership owning publicly traded stock should generally be valued at the market value of the publicly traded stock, as opposed some valuation reached by another valutaion approach (e.g., present value of future discounted cash flows, data from actual sales of comparable limited partnerships, etc.).

To date, the IRS has been generally unwilling to allow for the “built-in” capital gains tax on those underlying assets when computing the value of the interests in the closely held entity (sometimes referred to as “tax-effecting” the valuation). This is problematic when the entity holds highly appreciated assets which, if sold, would generate a significant capital gains tax.

A recent decision by the Eleventh Circuit (Alabama, Florida, Georgia) in Estate of Jelke v. Commissioner reversed the Tax Court and held that, when valuing a decedent’s stock in a closely held company, the estate is entitled to a discount for the company’s entire “built in” capital gains tax liability on its underlying investments. By following this rationale, the Eleventh Circuit observed that courts are not burdened with trying to predict when a decedent’s assets will be sold and the tax paid to arrive at the taxable value of the closely held business interests.

That decision by itself - that the built in capital gains tax potential is fully allowable in computing the value of the assets in the entity - is significant. Other courts (namely, the Tax Court) dealing with this issue have proposed speculative ways to discount the potential tax liability based on the present value of some expected future liquidation. In so doing, the discount for the tax is clearly less than the dollar-for-dollar approach in the Eleventh Circuit’s decision in Jelke.

NOTE: Query whether other circuits will follow the Eleventh Circuit on this issue. The Fifth Circuit (Texas, Louisiana, Mississippi) has an earlier court decision (Estate of Dunn) which was actually the first to emerge with a precise methodology re: the allowable reduction for built in capital gains taxes and how to calculate them for estate tax valuation purposes.

NOTE: Query how this result will bolster tax-effecting closely held business interests where the underlying assets themselves are not publicly traded and thus have no ready ascertainable fair market value (e.g., an operating business). That debate has been ongoing…

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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The bad news is that on top of a foreclosure (or a deed-in-lieu of foreclosure, or a “short sale”), the IRS can dip their hand into your transaction to make a bad situation worse.

The key under current law is generally whether your debt is “recourse” or “nonrecourse”…states like California, for example, are nonrecourse states whiles others, like Florida, are recourse states. If you are unsure about your debt, ask an attorney.

Bottom line is that with a nonrecourse loan, a lender can only satisfy the loan from that loan’s collateral (hence the term “nonrecourse”). Conversely, a lender can pursue the debtor’s other assets with a recourse loan.

Here’s the difference in how they are taxed:

Mortgage balance: $500,000
Fair market value of the collateral property: $450,000
Basis in the property: $300,000

If the lender forecloses, or accepts a deed-in-lieu of foreclosure (a “walk-away” scenario), or accepts a short-sale arrangement (debtor sells property to third party and lender accepts sale price in full satisfaction of the debt), the IRS considers all these as “sales” by the debtor. Question is: how much is the “sale price?”

With a nonrecourse loan, the mortgage can only be satisfied by the collateral property. So, the IRS would consider the sale price to be $500,000 (the mortgage balance satisfied). With a tax basis of $300,000, the gain on the sale would be $200,000. In the case of retirement assets outside a qualified plan (i.e., not held in an IRA or 401(k), etc.), this gain is taxable, generally at 15% long term capital gains tax rates. If the property were a rental, there could be “depreciation recapture” at a 25% tax rate.

The tax picture is different, however, with recourse debt. Remember, in each scenario (foreclosure, deed-in-lieu, or short sale), the lender is agreeing to forgive a portion of the debt (i.e., the fair value of the property is less than the debt balance). Since the lender has the RIGHT to pursue the debtor personally in a recourse loan - whether or not they exercise that right - the forgiveness of debt now takes on a nasty character…

[same facts as above]
Recourse Loan Balance: $500,000
Property Fair Market Value: $450,000

= “Cancellation of Indebtedness Income”: $50,000 —-> Taxed as “ordinary income” at your highest marginal tax rate.

This is on top of the ordinary capital gains treatment you would receive if the property were simply sold at an outright sale:

[same facts as above]
Property Fair Market Value: $450,000
Tax Basis: $300,000
= Capital Gain: $150,000

You can see that whether the loan is recourse or nonrecourse, total additional taxable income is $200,000, but with the recourse loan, $50,000 of that (the forgiveness of debt) is taxed as ordinary income, rather than more preferential long term capital gain…

NOTE: If the “retirement” asset is a primary residence, the capital gain would not be taxable under Section 121 of the Internal Revenue Code ($500,000 of gain on sale of principal residence excluded for married filing jointly and was primary residence 2 of the past 5 years). However, this $50,000 of forgiveness of debt income would STILL be taxed - it does not qualify for the normal exclusion of gain rules.

What if the property had decreased in value (e.g., a recent real estate purchase)?

[new facts]
Mortgage balance: $500,000
Fair market value of the collateral property: $450,000
Basis in the property: $700,000

In this case, there is a tax loss on the property (the property has declined in value since purchase), and, as in the prior example, the tax results are different if the loan is recourse vs. nonrecourse:

Nonrecourse -
Mortgage balance: $500,000
Tax Basis: $700,000
Capital Loss: $200,000 (nondeductible, personal loss if it’s a primary residence or second/vacation home)

Recourse -
a) Recourse Loan Balance: $500,000
Property Fair Market Value: $450,000
“Cancellation of Indebtedness Income”: $50,000 —-> Taxed as “ordinary income” at your highest marginal tax rate.

b) Property Fair Market Value: $450,000
Tax Basis: $700,000
Capital Loss: $250,000 (nondeductible, personal loss if it’s a primary residence or second/vacation home)

So, as you can see, the already frightening results can be even worse if you have a recourse loan.

Congress is wrestling with this to provide relief, but until they do, those who are considering a foreclosure, deed-in-lieu of foreclosure, or a short sale should consult with a knowledgeable attorney and accountant before they do.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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However, PPA 2006 also significantly changes valuation rules for more significant charitable contributions, such as gifts of appreciated securities to a Charitable Remainder Trust (often connected with the sale of a closely-held business to shelter gain on the sale from tax).

Under PPA 2006, new statutory definitions for “qualified appraisals” and “qualified appraisers” apply generally to those non-cash contributions greater than $5,000. If your deduction is not supported by a qualified appraisal prepared by a qualified appraiser, you are on dangerously thin ice.

More bad news for appraisers: PPA 2006 gives the IRS expanded powers to sanction appraisers in all tax related circumstances, not just those involving charitable contributions (e.g., estate and gift tax valuations).

DEFINITIONS FOR CHARITABLE CONTRIBUTIONS
A “qualified appraisal” is an appraisal is generally one conducted by a qualified appraiser in accordance with “generally accepted appraisal standards” (and any regulations or other guidance prescribed by the Treasury Secretary).

Prior to PPA 2006, the law did not explicitly require that an appraisal follow appraisal standards (though admittedly, most professional appraisers are trained to follow such appraisal standards). The “Uniform Standards of Professional Appraisal Practice” (USPAP) are cited as an example of generally accepted appraisal standards.

A “qualified appraiser” (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Treasury Secretary, (2) regularly performs appraisals for which the individual receives compensation, and (3) meets such other requirements as may be prescribed by the secretary in regulations or other guidance.

This definition of a qualified appraiser breaks new ground by requiring explicit professional qualifications.

Interestingly, these two definitions are specifically applicable only to charitable contributions. PPA 2006 makes no reference to estate or gift tax valuations. However…

NEW IRS POWERS TO SANCTION APPRAISERS IN ALL TAX AREAS
The IRS now has broader powers to penalize an appraiser when it significantly disagrees with a valuation - and these sanctions are NOT limited to just valuations of charitable contributions, but for all tax purposes.

BOTTOM LINE
As these rules have tightened regulation on appraisers, taxpayers should expect the costs of qualified appraisals (and why would you have anything other than a qualified appraisal?) to increase…

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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According to analyses by Towers Perrin and the American Benefits Council, this bill dubbed the “Women’s Retirement Security Act of 2007″ would, among other things:

(i) require employers to allow part-time employees that meet age and service requirements over three consecutive 12-month periods to make elective deferrals to their 401(k) plans (this change benefits those whose family responsibilities take them out of the fulltime workforce for long periods of time - and all part-time workers would benefit as well);

(ii) require employers (other than certain very small employers) that currently do not sponsor a retirement plan to allow employees to contribute a portion of their pay to an IRA;

(iii) permit the transfer of up to $500 of unused benefits under flexible spending arrangements (FSAs) to certain retirement plans (like a 457 retirement plan or an IRA);

(iv) provide favorable tax treatment for a portion of the annuity payments made from certain tax-qualified retirement plans and nonqualified annuities; and

(v) exclude from taxation certain retirement planning services (would allow employees to exclude from income up to $1,000 for qualified retirement planning services in situations where the employee has a choice between cash or the services);

(vi) expand the Saver’s Credit (a tax credit for certain low and moderate-income individuals who contribute to workplace retirement plans and IRAs. Many lower income taxpayers are ineligible for the credit because they don’t have any tax liability. The bill would make the credit refundable and require the refund to be deposited into a qualified account, like an IRA);

(vii) expand access to IRAs for people on disability and those who have taken a short time off from the workforce, and revise IRA rules to count disability income, unemployment compensation and other “wage replacement” income in determining allowable contributions;

(viii) provide incentives for lifetime payments allowing individuals to exclude from taxation a portion of payments from qualified (retirement plan or IRA) or nonqualified (after-tax) annuities that last a lifetime;

(ix) equalize tax treatment of retirement plan contributions of the self-employed(employer contributions to a qualified retirement plan on behalf of an employee are generally excluded from both income and employment taxes while contributions to a qualified plan by self-employed generally are not excluded from employment taxes).

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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Liability can also spring up from not providing access to investment advice when the employer provides a defined contribution plan (e.g., employees defer salaries into the plan and choose their own investments;their retirement benefit depends on the combination of contributions and fund performance with no guarantee from the employer).

Clearly, the trend away from defined benefit plan liability has only been accelerated with enactment of the Pension Protection Act of 2006 (”PPA 2006″). PPA 2006 requires employers to fully fund defined benefit plans, which means employers are not only less likely to adopt such plans going forward, they are freezing existing plans (ref. Hewlitt Packard) and implementing defined contribution plans (like 401(k)s) in their place.

As to investment advice liability, Enron is a case in point.

Enron employees who held Enron stock as part of their 401(k) plans initially were doing well…then the stock collapsed along with many retirement dreams. Apart from the accounting scandal issues, the question is: did Enron have a duty to proactively:

a) inform employees about investment options and diversification or risk?
b) recommend specific asset allocations or investments (other than employer stock)?

Under the Employment Retirement Income Security Act of 1974 (”ERISA”), employers do have a fiduciary responsibility to retirement plan participants. Fiduciary responsibility (and the legal liability that goes with it) also extends to those offering investment advice. Traditionally, then, these factors made employers reticent to offer investment advice to employees. Rather, they offered only general employee education.

PPA 2006 alleviates this responsibility from employers to encourage them to provide genuine investment advice - whether internally from tested and unbiased computerized models, or externally by engaging an outside investment adviser. In either case, the employer now has an exemption from liability - in fact, interestingly, liability may actually increase for employers who DO NOT provide investment advice…

To be sure, earlier legislative attempts tried to reduce employer liability for employee investment decisions (specifically, Sec 404(c) of ERISA added in 1992), but PPA 2006 provides more specific relief for employers, providing that investment advisers can offer “personally tailored investment advice”.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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Of those, two really jump out:

1) Not Funding Your Trusts, and
2) Failing to Plan for the Care of Family Pets

UNFUNDED TRUSTS
It has amazed me over the years to see such thought and care go into word-smithing trust documents, only to then let these beautifully crafted documents sit on a shelf and never get properly “funded”.

Funding a trust may require a formal process to retitle the assets (e.g., real estate, bank or brokerage accounts, or vehicles).

On the other hand, for non-titled assets (like furnishings, jewelry, etc.), an unambiguous itemization of the assets as an attachment to the Trust document is usually all that is required.

In any case, funding a trust is a highly proactive step. Without funding (and your documentation is your evidence!), you are really undoing everything the trust was designed to do…

CARING FOR PETS POST-MORTEM
If you have animals you love, it makes sense to include their care in your estate planning. We’re not talking about making Fido the income beneficiary of your testamentary trust to try and avoid taxes…just simple provisions to name a guardian and provide monetary assistance for the well being of your loved ones after you’re gone.

Of course, if you are charitably minded and want to help fund animal causes at death, a Charitable Remainder Trust provides a significant income tax deduction for the present value of your eventual contribution to the charity, plus gives you an income stream for life (or a period of years, if you prefer not to take income for life).

This isn’t really an option if you only want to provide for a specific pet…but if you want to help fund general causes, this may be an ideal solution.

For professional investment advice on this topic contact:
Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com
www.allgenfinancial.com

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