Income Deprived in This Economy Presented by: Marta Nystrom Nystrom & Associates.

  • Published on
    11-Jan-2016

  • View
    216

  • Download
    0

Transcript

  • Income Deprived in This EconomyPresented by:Marta NystromNystrom & Associates

  • What Were Covering TodayRe-Evaluating:Dividend IncomeCDs and Money Market AccountsTreasuriesBonds

    Finding Income in this Economy:Options StrategiesLife Insurance PoliciesAnnuity Lifetime Income RidersMedical Arbitrage Strategies

  • DisclaimerBefore 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 PaymentsThe 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

    Copyright 2009 Nystrom & Associates

    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

    Copyright 2009 Nystrom & Associates

    Low, Low CD & Money Market RatesIt'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 thisthose 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

    Copyright 2009 Nystrom & Associates

    And You Thought 2002 Rates Were Low!LANB 1 Year CD1.65%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

    Copyright 2009 Nystrom & Associates

    Municipal bondsRepayment is based upon the claims-paying ability of municipalities.2 Types: GO (General obligation) BondsMoney 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 BondsPayable from the specific earnings and net lease payments of revenue-producing facilities How are these revenue sources faring?

    Copyright 2009 Nystrom & Associates

    But Munis Can Be InsuredMuni bonds lose ratings after Ambac junked. Thousands of municipal bonds have lost their ratings and others have been downgraded after Standard & Poors 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 Ambacs 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

    Copyright 2009 Nystrom & Associates

    The Relationship Between Price and Yield on Treasuries & BondsIf 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.

    Copyright 2009 Nystrom & Associates

    2 Ways to Lose Money in Treasuries and BondsWhen you purchase at a low rate of interest due to excessive demandWhen you sell at a low resale rate due to excessive selling

    Copyright 2009 Nystrom & Associates

    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)

    Copyright 2009 Nystrom & Associates

    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?

    Copyright 2009 Nystrom & Associates

    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

    Copyright 2009 Nystrom & Associates

    Buying Bonds at PremiumUnderstand the difference between coupon rate and Yield to MaturityExample: 5% coupon rate You pay $1100 ($100 premium) The bond matures in 5 years The YTM is 2.86%

  • Wheres the Income These Days?

    Options StrategiesLife Insurance PoliciesLifetime Income RidersMedical Arbitrage Strategies

    Copyright 2009 Nystrom & Associates

    Options StrategiesBasic Terms: Option Writer vs Seller, Strike Price, Expiration DateYou 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.

    Copyright 2009 Nystrom & Associates

    Selling Call OptionsMaking income on stocks already in your portfolio

    Copyright 2009 Nystrom & Associates

    Selling Put OptionsNaming Your Price for stocks and receiving income while doing it

    Copyright 2009 Nystrom & Associates

    Taking Money From a Life Insurance PolicyYour policy must have cash value.There are potential tax consequences.#1 Withdraw the funds youve 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.

    Copyright 2009 Nystrom & Associates

    Alternative Solution to Life Insurance FundsShift 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.

    Copyright 2009 Nystrom & Associates

    Lifetime Benefit Income RidersAnnuity productProvided by life insurance companiesCheck financial health of the companyUnderstand fees and surrender chargesWork with an independent; complex products that come in a variety of flavorsVariable versus fixed annuitiesTypically higher fees in variable annuities, including life insurance feesUnderstand HOW the life insurance works in variable plansVariable products can go down in value; fixed products cannotVariable products may offer more upside potential, depending upon market conditionsOffers lifetime income without annuitizationProbably best suits the age 55-70 age bracketNOTE: 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.

    Copyright 2009 Nystrom & Associates

    How GIBR Annuities WorkAccount Value SideGrows 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 SideGrows at rate set by contractGrows tax-deferred until funds are removedAfter deferral period, allows you to take income stream at set rate even after account value funds are exhaustedIf account value funds are exhausted, beneficiaries receive nothing

    Copyright 2009 Nystrom & Associates

    Copyright 2009 Nystrom & Associates

    Copyright 2009 Nystrom & Associates

    Arbitrage StrategiesArbitrage (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 Im Going To Share With You Today Are Unique, And Will Only Be Suitable In Certain Situations. Im Going To Explain These Concepts Through Several Examples:

    Copyright 2009 Nystrom & Associates

    Arbitrage Using CDs and Money Market AccountsProblem: James and Mary need more money than they can currently obtain from the interest on their CDs and money market accounts.Assumptions:James & Mary have $600,000 in a money market and CDs 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.

    Copyright 2009 Nystrom & Associates

    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.

    Copyright 2009 Nystrom & Associates

    End Result Before$12,000/year incomeTax due $3,000Spendable income: $9000Size of inheritance: $600,000 After$2000/year on remaining $100,000 in MM$40,300 from life income contractTax due $3525*Life insurance policy cost $11,250Spendable income: $27,525Size of inheritance: $750,000*Assumes a tax exclusion ratio of 70% and 25% tax bracket.

    Copyright 2009 Nystrom & Associates

    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

    Copyright 2009 Nystrom & Associates

    Consumer CautionsThe 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.

    Copyright 2009 Nystrom & Associates

    Income & Tax Arbitrage StrategyMaximizing Income and Reducing Taxes in an A/B Trust Scenario

    Copyright 2009 Nystrom & Associates

    A/B Trust ReviewA/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 spouses 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.

    Copyright 2009 Nystrom & Associates

    Taxation of B TrustsMost 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.

    Copyright 2009 Nystrom & Associates

    ExampleMary 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

    Copyright 2009 Nystrom & Associates

    Example - ContinuedNote 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.

    Copyright 2009 Nystrom & Associates

    Example - ContinuedMary 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.

    Copyright 2009 Nystrom & Associates

    Example - ContinuedMary then deposits $500,000 of the taxable assets in her RLT into a Single Premium Immediate Annuity to gen...

Recommended

View more >