Angel Chavez – SVL Cultura Ambassador

 

We here at SVL are proud to introduce you to our next SVL Cultura Ambassador:

Angel Chavez, CIMA®

Vice President, Financial Advisor, Executive Financial Services Director

Chavez_18Angel is a holder of the Certified Investment Management Analyst (CIMA®) designation from the Haas School of Business at the University of California Berkeley. Prior to joining Morgan Stanley, Angel was the COO of a technology start up and then became a portfolio manager with cross training in tax, trust and estate planning with Bank of America’s Private Bank, and Merrill Lynch.  A firm believer in community service, Angel has served as a Trustee for the Latino Community Foundation, the advisory board for the Susan G. Komen Foundation for Breast Cancer and currently serves on the Board of Juma Ventures.  In 2014 he was honored to receive the Corporate Advocate Award from the LAM-Network. He received his MBA from Golden Gate University and enjoys hiking, biking, working out, and recently completed a Tough Mudder run.  He lives in the East Bay with his wife Isabel and their two children.

Keeping Financially Fit

 

Keeping Financially Fit:

There’s much more to getting and staying ahead financially than earning a good salary.  This article offers tips and best practices on ways to help improve one’s financial well-being.

Achieving financial success is no simple matter.  It takes hard work, perseverance and adherence to strategies of saving, investing and managing your finances. Just as there are good habits associated with staying physically fit, there are also best practices involved with keeping financially fit.  Simple strategies such as using debt wisely, taking advantage of tax- advantaged investment vehicles, and monitoring spending habits all go a long way toward helping you achieve your personal, business and financial goals.

Consider the “financially fit” best practices below.  If you are not already doing them, consider how they could improve your financial picture.

Reduce and manage debt.

  • Consider how much you spend on debt service for mortgages, auto loans, credit cards, and student or other loans. Lenders typically look at two metrics when deciding whether or not to extend credit: the front-end and back-end ratios. The front-end ratio shows what percentage of your income goes toward housing expenses, including mortgage payments, real estate taxes, homeowner’s insurance and association dues. The back-end ratio shows what portion of your income is needed to cover all of your monthly debt obligations, including housing, credit card bills, car loans, student loans and other debt service. Most lenders look for a front-end ratio of no more than 28% and a back-end ratio of 36% or less.1
  • Develop a plan for eliminating credit card debt. Credit card debt is one of the most expensive debts you can carry. Interest rates often top 18% on existing balances. Paying off just $100 more per month on a $5,000 balance could pay off the entire balance in 32 months instead of 94 months, saving almost $3,000 in interest (assuming an interest rate of 18% and a 2% minimum monthly payment).2
  • Check your credit report. Credit reports offer a snapshot of how the world views your “creditability.” Credit scores range between 300 points and 850 points, and most fall between 600 and 750. A score above 700 usually suggests good credit management.3 You can request a free copy of your credit report once each year from each of three major credit reporting agencies–Equifax, Experian and TransUnion–at AnnualCreditReport.com.

 

Manage your income and expenses.

  • Set a budget and track monthly spending. This is one of the most effective ways to control your costs. The simple act of recording expenses forces you to think about them and to see exactly how much you are spending on a given item on a monthly or annual basis. A $5 latte at the local coffee shop may seem insignificant on its own, but if you buy one five days a week, that adds up to over $100 per month and $1,200 per year.
  • Pay bills on time using online recurring services. Online bill payment saves time and postage, and lets you avoid late fees by automating payments for many services. Timely bill payment also factors in your credit score. According to FICO, credit history accounts for about 35% of your credit score.4
  • Cancel recurring expenses you don’t use. Many services today are purchased on a subscription basis, with monthly charges and automated annual renewals. That includes club memberships, gyms, newspapers, magazines or online publications, not to mention cable TV and phone service. Taken individually, none of these expenses may amount to a lot, but when looked at collectively over the course of a year, they can be surprisingly high. Consider how often you use these services or if they can be renegotiated with the provider by reducing elective options. 
Save more by taking advantage of tax-deferred accounts.
  • Contribute the maximum to your 401(k) or other employer-sponsored retirement plan. Your company retirement savings plan offers one of the best ways to save for retirement. Contributions to traditional plans are tax deductible, and earnings are tax-deferred. And in many plans, employers will match a portion of your contributions. In a 401(k) plan, employees can contribute up to $17,500 in 2013. Individuals aged 50 or older can contribute an additional $5,500. 5
  • Contribute to an IRA. Contributions to a traditional IRA may be deductible, so they may reduce your taxable income. Contributions to a Roth IRA are after tax, but distributions are tax free when you retire. Whether or not you can contribute to a Roth is based on your Adjusted Gross Income. Traditional and Roth IRA contribution limits for the 2013 tax year–which may be made up until April 15, 2014–are $5,500 per individual and $6,500 for those aged 50 or older. 6 Note that deductibility of traditional IRA contributions phases out above certain income levels, depending upon your filing status and if you or your spouse are covered by an employer-sponsored retirement plan.
  • Look into a Health Savings Account (HSA). If you have a high-deductible health plan, you may be able to contribute to a HSA. These accounts let you set aside pre-tax money to pay for health care costs not covered under your plan. The maximum contribution to an HSA for 2013 is $3,250 if you have single coverage, or $6,450 if you have family coverage. No income limits apply to HSAs, and funds do not have to be used in a given year. HSAs are offered through banks or other financial services companies, and may be available as part of your employer benefits package. For more information, see IRS publication 969 Health Savings Accounts and Other Tax-Favored Health Plans.7 
Plan for the future.
  • Set aside money for emergencies and retirement. Whether through contributions to an employer plan or automated payroll deductions to a savings or investment account, making regular, systematic contributions is the easiest and most effective way to save over time. And when it comes to saving, time is your ally because of the power of compounding; so the earlier you start, the more you’ll save.
  • Create a will. Especially if you have children, a will serves not only to specify executors and beneficiaries of your estate, but also to designate guardians for minors. If you die without a will and have minor children, the probate court will appoint a guardian for them, and there is no guarantee that the court’s appointment of a guardian will coincide with your own wishes.
  • Review your beneficiaries annually. This includes your will, insurance policies and retirement accounts. Keep in mind that an account with a designated beneficiary is not included in your estate for distribution purposes. It is distributed to the designated beneficiary. So you will want to make sure your account beneficiaries are coordinated with named heirs in your will.

Footnotes/Disclaimers

1Source: Bankrate.com, http://www.bankrate.com/finance/mortgages/why-debt-to-income-matters-in-mortgages-1.aspx. 2Source: S&P Capital IQ. Example is hypothetical. Your results will differ.
3Source: Experian, http://www.experian.com/credit-education/what-is-a-good-credit-score.html.
4Source: Fair Isaac Corporation, 2013, http://www.myfico.com/crediteducation/whatsinyourscore.aspx.

5Source: Internal Revenue Service, http://www.irs.gov/uac/2013-Pension-Plan-Limitations.
6Source: Internal Revenue Service, http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics- IRA-Contribution-Limits.
7Source: Internal Revenue Service. http://www.irs.gov/pub/irs-pdf/p969.pdf.

If you’d like to learn more, please contact [Angel Chavez 415-984-6008].
Article by Wealth Management Systems, Inc. and provided courtesy of Morgan Stanley Financial Advisor.

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

Morgan Stanley Financial Advisor(s) engaged (Name of Publisher) to feature this article.

may only transact business in states where is registered or excluded or exempted from registration [Insert URL link to FA website or FINRA . Transacting business, follow-up and individualized responses involving either effecting or

attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where [Name] is not registered or excluded or exempt from registration.

© 2013 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 758843 11/13]

 

 

 

 

All About Indexes

Whether you are using market indexes as benchmarks to track the potential performance and risk of a given investment or you are engaged in index investing, indexes have something to offer every investor.

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Thoughtful investors can gain significant insight on the market’s behavior by studying index values and understanding what the numerical changes in indexes might represent. To help give you the context for judging index performance, it helps to first know what goes into the numbers reported by common market indicators.

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What Is an Index, Really?

An index is a select group of investments whose collective performance can be taken to represent a market as a whole, or at least a clearly defined subset of that market. While some indexes may be recalculated once a day or less, indexes representing large, liquid and active markets (such as the US stock market) are typically recalculated continuously during trading periods to reflect up-to-the-moment pricing data and to indicate the direction and magnitude of the market’s price sentiments.

Of course, major US equity indexes are not simply the sums of the individual prices for the investments they represent. Rather, indexes such as the S&P 500 and Dow Jones Industrial Average are statistical models of the universes they were created to mirror. They take the latest prices and adjust them to better reflect long-term changes in financial markets, the constituent companies and the economy.

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The numerical values of common indexes do not directly convey either the actual daily prices or percentage changes of their constituents, and when viewed as isolated points of data, major indexes typically provide little or no actionable significance. Rather, index values are intended to be viewed in a series so they can provide time lines that can chart relative performance from a consistent foundation. An index value today can be compared with its value days, years or even decades in the past to give a meaningful estimate of how the market might have changed over that time.
The components for each index are chosen according to the stated rules and policies of that index. Moreover, each index’s value is calculated using its own proprietary formula. As a result, even though two or more indexes may include the same company in their statistics, any particular market price change for that company is likely to have different effects on each index.

Distinguishing Among Different Indexes

The most commonly cited stock indexes in the United States—benchmarks such as the S&P 500, the Dow, the Morgan Stanley Capital International’s EAFE and Russell Investment’s Russell 2000—are actually parts of large index families. Some indexes in those families focus on specific areas of the market, such as large, midsized or small companies. Others specialize in sectors or investing styles such as growth and value. Each index has its own unique philosophy and methodology you should consider. Here are overviews of some of the key factors you can use to compare them:

• Coverage Criteria Some indexes use rigid statistical rules to select their constituents. For example, Russell Investment Group ranks substantially all publically traded stocks by their total market value, and then assigns each company on that list to an index based solely on its position on that list. Others use more fluid processes. For example, Standard & Poor’s analyzes and weights the relative importance of each business sector in the economy. It then selects cross-sections of companies from each sector to create stratified samples that mirror the market.
• Diversified or Focused? Among the most commonly quoted market benchmarks, the S&P 500 and Russell 1000 can be considered diversified, while the Dow Jones Industrial Average is not. Rather, it is composed of 30 of the largest and most venerable companies in the US economy. What the Dow might lack in market breadth, it could make up in depth—it has been calculated continuously since 1896, allowing direct performance benchmarking that stretches for more than a century.
• Sector Segmentation Many providers of diversified indexes segment their primary indexes into sector subsets. However, the definitions of sector vary, with different classification schemes in use. The Global Industry Classification Standard (GICS) was developed jointly by Morgan Stanley Capital International and Standard & Poor’s and forms the basis for each of these firms’ index sector distinctions. GICS is composed of 10 sectors, each of which includes one or more industry groups drawn from the GICS list of 24 such groups. The North American Industrial Classification System (NAICS) and its ancestors such as the Standard Industrial Classification (SIC) system are widely used by economists, the Securities and Exchange Commission and some other index providers. This system defines more than 400 individual industries in the economy, each of which can be grouped into one of 24 different sectors. An investor looking to use indexes for a sector rotation strategy should consider the classification systems used by the indexes.
• Market Capitalization and Float In the context of indexes, there are no universally applicable definitions for large-cap, midcap or small-cap. A company that is listed as small in one provider’s universe may be considered medium or large in another’s. That’s because some index providers view only market value when making their groupings, while others may adjust their categorizations to reflect variances in company age or maturity, business factors and growth rates. Float is another factor that leads to variation. Some index providers consider all shares equally when assessing the size of a company. Others consider only the value of shares that can be publically traded, a statistic known as the free float. For example, a company with a large number of shares held by insiders who are bound by trading restrictions will have a much smaller free float than a similar-sized company with no stock subject to trading restrictions.
• Weighting is the practice of adjusting each constituent’s contribution to the index to reflect its relative size in the index. Weighting is most typically based on price per share or total company size. In price weighting, a stock whose share price is $20 will have twice the influence on the index as a stock whose share price is $10. In capitalization weighting, a constituent whose total market value is twice as great as another’s would have twice the influence on the index. The DJIA, for example, uses price-weighting factors in its calculations, while the S&P 500 uses capitalization-weighting factors.
• Company Domicile Major stock indexes in the United States all reflect pricing action on US stock exchanges. But some indexes (such as the S&P 500) include companies based outside the United States who list their shares here, while others (such as the Dow and Russell) limit their constituent universes to US-domiciled firms.
• Index Turnover Some firms follow fixed schedules for reevaluating their constituent lists and making changes to those lists. Russell, for example, undertakes this kind of index revision once each year, at the end of June. Others respond more fluidly. Standard & Poor’s analysts continually monitor their index constituents and make changes to their indexes as conditions warrant, sometimes as often as daily or weekly.
• Investability and Tracking Error While it may be impossible to invest directly in any index, asset managers can create portfolios that are intended to replicate index performance. Along the same lines, index architects can design benchmarks that simplify the process of replication for portfolio managers. One important tool for measuring how well a portfolio tracks an index is tracking error. In its simplest statistical form, tracking error is the arithmetic difference between portfolio returns and benchmark returns; the smaller the difference, the closer the manager is to the benchmark.
A Brief Guide to Major Investment Benchmarks Around the World

Here are many of the investment world’s most prominent and widely followed benchmarks (and keep in mind that this listing is only a sampling; index compilers typically create broad families of benchmarks based on their overall indexing philosophies and practices):

• Standard & Poor’s Composite Index of 500 Stocks (S&P 500® Index): The S&P 500 is a broad-based index of the average performance of 500 widely held US stocks. Many people believe that the S&P 500 includes the 500 largest stocks on the New York Stock Exchange. Not true: Rather, it includes the stocks of companies that are or have been leaders in their respective industries and that are listed on the New York Stock Exchange and the Nasdaq system.
• Dow Jones Industrial Average (DJIA): Following the returns of 30 well-established, blue-chip US companies, the DJIA is among the most renowned of the stock market indexes. However, the S&P 500 can be considered a more diversified indicator of the stock market.
• Nasdaq Composite: This index was created in 1971 and tracks all domestic and non-US-based common stocks listed on the National Association of Securities Dealers Automatic Quotation System (Nasdaq) market. The index is composed of more than 4,800 stocks that are traded via this system. Traditionally, the Nasdaq composite has been considered representative of technology stocks; however, today it is composed of an ever-broadening variety of issues.
• MSCI EAFE® Index: Morgan Stanley Capital International’s Europe, Australasia, Far East (EAFE) Index is the most prominent of the indexes that track international stock markets. It is a subset of MSCI’s All Country World Index of investable markets, which reflects the performance of more than 9,000 securities across all capitalization, sector and style segments in 45 developed and emerging markets.
• Russell 1000® Index: The Russell 1000 Index measures the performance of the largest publically traded companies in the US equity market. It is composed of the 1,000 largest firms as determined by Russell Investment’s annual ranking by market capitalization.
• Russell 2000® Index: The Russell 2000 Index measures the performance of the small-cap segment of the US equity market. It includes the 2,000 companies ranked below the Russell 1000 in Russell Investment’s annual market-capitalization ranking.
• FTSE 100 Index: This index is part of the FTSE UK Series and is designed to measure the performance of the 100 largest companies traded on the London Stock Exchange that pass screening for size and liquidity.
• Nikkei 225 Index: This index is composed of the 225 largest stocks on the Tokyo Stock Exchange.
• Barclays Capital U.S. Aggregate Bond Index: Covering the principal investment-grade sectors of the US bond market (such as corporate, government and mortgage-backed), this benchmark is among the most broadly diversified indexes of bond market total returns.
• 10-Year U.S. Treasury Bond: The yield on this long-term US government bond is often looked to as the foundation bond yield for analyzing the performance potential of other long-term bond investments. The yield is not an index but a statistic derived from the reported prices for bond trades.
• iMoneyNet Money Fund Averages™: These benchmarks track the averages of taxable and tax-free money market fund yields on a 7- and 30-day basis. They are not indexes but averages of reported yields as calculated by the publisher (iMoneyNet).
Investment indexes are complex devices that can be invaluable tools when used properly, or hazardous when used inappropriately. And while you cannot invest directly in any index, you can find investments that mirror the performance of a specified index. Many investors find these investments ideal for certain purposes. I can help you get a better understanding of indexes and also find suitable index-based investments as appropriate to your particular needs. Please feel free to contact me with any questions.

If you’d like to learn more, please contact Angel Chavez, CIMA®, 415-984-6008.

Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor. Standard & Poor’s Financial Services LLC (“S&P”), which maintains the S&P500 index, is a subsidiary of The McGraw-Hill Companies.

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Morgan Stanley Financial Advisor(s) engaged Silicon Valley Latino to feature this article.

Angel Chavez, CIMA® may only transact business in states where he is registered or excluded or exempted from registration www.morganstanleyfa.com/elcaminogroup/ Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Angel Chavez, CIMA® is not registered or excluded or exempt from registration.

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.

CRC 608588 (01/13)

It’s 2013. Do You Know Where All Your Retirement Savings Are?

The case for consolidating your retirement accounts only grows more compelling over time.

A Traditional IRA here, a rollover IRA there, four job changes (so far!) and three retirement plan account balances left in the plans of former employers…

If this describes your situation, you are not alone.  Over the years, people accumulate a significant sum in retirement savings, often spread across various accounts.  As accounts multiply and companies change ownership, it can become difficult to keep track of exactly how much you have saved toward retirement and how those funds are invested. You may also find it challenging to determine your distribution requirements on various accounts once you turn 70 ½.

Consolidating accounts can help you make sure your savings are invested appropriately for your overall goals, track the performance of your holdings and, in many cases, discover more investment choices and incur lower fees.

With retirement savings in just a few accounts, it becomes far simpler to execute your strategy and to measure your progress.

 

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Why Consolidate?Streamlining the account structure of your retirement savings has many potential benefits.

 

 

 

Comprehensive investment strategy. Over time, your investment objectives and risk tolerance may have changed. Thus, it can be difficult to maintain an effective retirement investment strategy—one that accurately reflects your current goals, timing and risk tolerance—when your savings are spread over multiple accounts. Once you begin the consolidation process, you can strategize investments to match your current goals and objectives.

Greater investment flexibility: Often, 401(k) plans, other employer-sponsored retirement programs and even many IRAs have limited investment menus. A Morgan Stanley self-directed IRA can offer you the ability to choose from a wide range of investments including stocks, bonds, mutual funds, managed accounts and more.

Simplified tracking: It is easier to monitor your progress and investment results when all your retirement savings are in one place.

Less paper: By consolidating your accounts, you will receive one statement instead of several. That simplifies your life while protecting the environment.

Lower costs: Reducing the number of accounts may result in fewer account fees and other investment charges.

Clear required minimum distributions (RMDs): Once you reach age 70½, having fewer retirement accounts to manage can mean having fewer RMD requirements to follow.

Comprehensive knowledge of your assets. If your employer-sponsored retirement plan is terminated or abandoned (an “orphan plan”) or is merged with or transferred to a retirement plan of another corporation after you leave, it may be difficult to locate the plan administrator to request a distribution of your benefits or to change investments. By contrast, assets in an IRA are

always accessible if you want to change your investment strategy or need to take a distribution.

 

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Consolidate Your Retirement Savings and Qualify for a Lifetime Fee Waiver

With the Free Forever IRASM  you can transfer, roll over or add $100,000 or more to an IRA at Morgan Stanley during 2013 and we will waive your annual maintenance fee for the life of the account.¹

What Can Be Consolidated?  Listed below are types of retirement accounts eligible for consolidation.

  • IRAs held at financial institutions (banks, credit unions, mutual fund companies, etc.).
    • Retirement plan assets held at former employers including:

–   401(k) plans

–   profit-sharing plans

–   money purchase plans

–   defined benefit plans

–   Keogh plans

–   ESOPs

–   government 457(b) plans

–   403(b) plans

How it works.There are several ways to combine retirement assets into a single account.

  • IRA-to-IRA transfers: Ask the IRA custodian where you will be establishing your account to help you complete their IRA transfer paperwork. Once you’ve set up your IRA, the custodian will do the rest, including contacting your previous IRA custodian(s) to get your assets moved over. There’s no limit on the number of IRA-to-IRA transfers that you can complete in any given year. (However, please note that a Roth IRA can be consolidated only with another Roth IRA.)

 

Knowing how rollovers work can help you make a decision about whether or not to consolidate.

  • IRA-to-IRA rollovers: You can ask your current IRA custodian to send you a check for the amount held in your IRA. You will then have 60 days to deposit the funds into another IRA without incurring any current tax liability. Note that your former IRA custodian will report the amount as a distribution on IRS Tax Form 1099-R; your new IRA custodian will report the rollover contribution on IRS Tax Form 5498. If you miss the 60-day time period, taxes and penalties may apply. IRA-to- IRA rollovers are restricted to one every 365 days per IRA.
  • Direct rollover from qualified plan to an IRA: Ask your previous employer(s) about the paperwork needed to complete a direct rollover of your qualified retirement plan assets to your IRA. The assets will be transferred once you complete the paperwork. Note that your former employer’s plan will report the amount as a distribution on IRS Tax Form 1099-R; the IRA custodian will report the rollover contribution on IRS Tax Form 5498.  There are special rules involved in transferring a “pre-tax” retirement plan balance to a Roth IRA—talk with your tax advisor about the impact this may have on you.
  • Indirect rollover from qualified plan to an IRA: Like the IRA-to-IRA rollover, you can ask your previous employer(s) to send you a check for your vested plan balance and then redeposit those funds into an IRA or other qualified retirement plan within 60 days. However, the plan trustee will be required to withhold 20% of the taxable portion of the distribution as mandatory federal withholding. You will need to make up that 20% when you redeposit the funds into an IRA or the amount withheld will be subject to taxes and possibly penalties if you are under age 59½.

Speak with your tax advisor about these and other rules that may apply when consolidating retirement plan assets.

When You Might Not Want to Consolidate.  Notwithstanding the many benefits to consolidating your retirement accounts, there are some caveats to keep in mind. For example, while many qualified plans allow for loans, you cannot take a loan from an IRA. Thus, once you roll over a qualified plan into an IRA, the ability to take a loan is no longer available.  However, once you leave the company you may not be able to take a loan out anyway, since few qualified plans allow loans to be taken out by former employees.

Another consideration is RMDs. Upon reaching age 70½, owners of a Traditional IRA must begin taking required minimum distributions or face stiff IRS penalties. If the plan permits, qualified plan participants can delay taking required minimum distributions after attaining age 70 ½ if they are still working.

A final consideration may be employer stock. Employer (and former) employer stock held in a qualified retirement plan may be eligible for special tax treatment on distributions (known as “net unrealized appreciation” or “NUA”) that you lose if you roll over the stock to an IRA.  Check with your plan administrator and your tax advisor on whether or not the NUA rules may apply to you.

Generally speaking, simplifying your retirement account structure can help you take control of your financial future.  Your tax and financial advisors will be able to assist you in determining if consolidation makes sense given your specific circumstances and goals.

Don’t wait.  Your actions now can greatly affect your quality of life in retirement, whether it is years away or just around the corner.

 

¹Free Forever IRA program requirements:  The following IRA account types are eligible:  Traditional, Roth, Rollover, SEP, SIMPLE and SAR-SEP; the $100,000 addition to the IRA can be a combination of any of the following:  IRA contribution, rollover from another non-MS or qualified retirement plan, e.g., 401(k) or a transfer from another non-MS IRA; the fee waiver offer is limited to one lifetime annual account maintenance fee waiver per Social Security Number listed on the account documentation; other product fees and charges (e.g., commissions) continue to apply; assets must remain in the account for one year from the date of  deposit to qualify for the Free Forever IRA maintenance fee waiver; redeposit of a client’s prior IRA distribution does not qualify. The fee waiver will occur at the anniversary billing date following funding.

 

Tax laws are complex and subject to change.  Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under such account.

 

If you’d like to learn more, please contact Angel Chavez, 415-984-6008. Angel.chavez@morganstanley.com
Article by Morgan Stanley Smith Barney LLC. Courtesy of your Morgan Stanley Financial Advisor.

 

Morgan Stanley Financial Advisor(s) engaged Silicon Valley Latino to feature this article.

 

Angel Chavez may only transact business in states where he is registered or excluded or exempted from registration www.morganstanleyfa.com/elcaminogroup/ Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Angel Chavez is not registered or excluded or exempt from registration.

© 2013 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC 599636  12/12

Finding Yield in a Low-Rate Environment With Dividend-Paying Stocks

Where do you go to find yield in today’s low-rate environment? Think dividends. A growing number of companies pay dividends and offer attractive yields.

 

For today’s income-oriented investor, it’s been a frustrating time. Yields on US Treasury bonds, as well as investment-grade municipal and corporate bonds have hovered near historical lows. Even longer-term issues remain in the doldrums; rates on 30-year Treasuries have not topped 4% since October 20081

 

But for investors seeking income, there is an alternative: dividend-paying stocks. There are now 395 companies in the S&P 500 that pay dividends, and the average yield on these stocks has been rising since 2000. As of December 31, 2011, the average yield of a dividend-paying stock in the S&P 500 was 2.4%, compared with 1.9% for 10-year US Treasuries.1

 

But there’s more to dividend-paying stocks than yield. The long-term benefits of dividends are significant:

 

•           Dividends are a key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.

 

•           Dividends help boost returns in down markets. Since 1926, dividends have accounted for over a third of the returns of the S&P 500. In down years, when price return is negative, dividends help offset the drop. Since 1926, dividends have provided an average return of 4.5% in all 12-month periods where the index declined, which helped offset the average price decline of 18.6%.1

 

•           Dividend-paying stocks offer potentially stronger returns and lower volatility.  Dividend-paying stocks have outperformed the broader market over time. Stocks with a history of increasing their dividend each year have produced higher returns with lower risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats–those stocks within the S&P 500 that have increased their dividends each year for the past 25 years–produced annualized returns of 11.04% versus 8.23% for the S&P 500 overall, with less volatility, as measured by standard deviation (14.14% versus 15.22%, respectively).2

 

 

•           Dividends benefit from continued favorable tax treatment. The extension of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill passed in late 2010 extended the 15% tax on qualifying dividends and other forms of investment income through December 31, 2012. Because there are restrictions on the types of dividend income subject to the lower 15% rate, investors should consult a tax advisor to determine how tax laws apply to their situation.

 

•           Dividends are a sign of corporate financial health. Dividend payouts are often indicative of a company’s financial health and management’s confidence in future cash flow. They are usually paid by mature businesses, and communicate a positive message to investors who perceive a long-term dividend as a sign of corporate strength.

 

The Growth of Dividend-Paying Stocks, 1950-2011

Dividend-paying stocks historically have demonstrated a performance edge. As this chart shows, an investor who invested a $1,000 portfolio consisting of the dividend-paying stocks within the S&P 500 in 1950 and reinvested all the dividends would have amassed in excess of $500,000 more than an investor with a portfolio of non-dividend-paying stocks within the index.

 

Source: Standard & Poor’s. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad US stock market. For the period January 1, 1950, through December 31, 2011. Past performance is not indicative of future results. Investors cannot invest directly in any index.

 

Keep in mind that like any stock, dividend-paying stocks can lose money, and there is no guarantee that dividends will be paid in the future. But for investors seeking current income or an income-producing alternative to diversify a portfolio, dividend-paying stocks can be an attractive choice. Morgan Stanley can help you find dividend-paying stocks that suit your portfolio.

 

Equity Securities’ prices may fluctuate in response to specific situations for each company, industry, market conditions, and general economic environment.

 

Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors do not provide tax advice.  Individuals are urged to consult their tax advisor regarding their own tax or financial situation before implementing any strategies.

 

 

1Sources: Standard & Poor’s; The Federal Reserve, Selected Interest Rates (Daily) – Report H.15.

2Source: Standard & Poor’s. The S&P 500 Dividend Aristocrats index measures the performance of all stocks within the S&P 500 that have increased their dividends each year for the past 25 years. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad US stock market. For the period January 1, 1950, through December 31, 2011. Past performance is not indicative of future results. Investors cannot invest directly in any index.

 

 

Notices & Prohibitions:

The Morgan Stanley Legal and Compliance Department has approved this article for use exactly as it appears. It may not be changed in any way. However, longer articles may be run in two or more parts as long as any disclaimers also appear in the respective parts. Please note that the non-solicitation clause must appear at the end of every article.

 

Finding Yield in a Low-Rate Environment With Dividend-Paying Stocks

Courtesy of: El Camino Group at Morgan Stanley, Angel Chavez, CIMA®, Financial Advisor

Branch Name: Morgan Stanley San Francisco, CA

Phone Number: 415-984-6008

Web Address: www.morganstanleyfa.com/elcaminogroup/

 

 

 

If you’d like to learn more, please contact Angel Chavez, CIMA®, 415-984-6008.

 

Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“MSSB”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged to feature this article.

 

Angel V. Chavez may only transact business in states where he is registered or excluded or exempted from registration www.morganstanleyfa.com/elcaminogroup/. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where [Name] is not registered or excluded or exempt from registration.

 

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.

 

CRC 498648    (05/12)

Shining a Spotlight on Your Finances May Brighten Your Future

Year-End Review — Shining a Spotlight on Your Finances May Brighten Your Future by Angel Chavez

 

A year-end financial review can be instrumental to your future financial success. However, you may not want to wait until the end of the year to review your financial affairs. Consider doing it during the fall so you’ll have ample time to take any corrective action before year’s end. Here’s a quick look at some of the key issues you should consider when conducting your review.

Review your retirement assets. Whether your retirement is a long way off or right around the corner, it is likely that you’ll have to make periodic adjustments to your retirement portfolio. Make sure the investments you’ve chosen are still an accurate reflection of your risk tolerance and time horizon.

 

 

Keep tabs on college funding plans. With college costs reaching astronomical heights, you need to utilize every available college funding resource. Financial aid and scholarships, as well as the Lifetime Learning Credit and Hope Scholarship Credit may help alleviate the college cost crunch. However, aid and tax credits alone generally will not fund your child’s college education. Make sure you’re saving and investing enough to help meet your goals. At a minimum, take advantage of the tax savings offered through an Education IRA.

Assess your income tax picture. You may be able to reduce your tax burden — sometimes significantly — by making strategic tax decisions before the end of the year. Your tax professional can alert you to any tax planning strategies that might make sense for your situation.

Review critical documents. Because life’s circumstances continually change, you should review your legal documents and beneficiary designations every year. This will entail carefully combing through any wills, trusts, retirement plan documents and life insurance policies to make sure they’re up-to-date. Seek the assistance of a qualified adviser if any modifications are necessary.

Set goals for next year and beyond. A year-end review is an excellent time to start thinking about next year and setting some long-term goals. Take a close look at your day-to-day finances to see if you can reduce expenses and save more. Then make an honest assessment of which goals are most important to you and then commit to meeting them.

If you’d like to learn more, please contact Angel Chavez, CIMA® at 415-984-6008.

 

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice.  This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

 

Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“MSSB”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged Morgan Stanley to feature this article.

 

Angel Chavez may only transact business in states where he is registered or excluded or exempted from registration www.morganstanleyfa.com/elcaminogroup/ Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Angel Chavez is not registered or excluded or exempt from registration.

 

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.

 

CRC 580167   (11/12)

 

Getting Children Involved in Saving for College

Most articles about college planning focus on advice for parents or other adults who expect to pay the cost for a younger person’s education, but what about the beneficiary who plans to attend college?

Although most young people don’t have the assets for college savings that their elders do, being part of the planning process can be educational, offering financial lessons for the future. Children can earn money, learn about sources of financial aid, research potential colleges, and take other steps that may relieve their parents of some of the responsibility of college planning. In addition, some experts believe that if children are actively involved in planning for their future, they may be more committed when entering college and ultimately have a more successful experience than they would have otherwise.

Starting Early
According to the U.S. Department of Education, the best time to introduce children to college planning is when they are in the sixth, seventh, or eighth grade. Parents may want to initiate discussions about college and explain the importance of developing good study habits and getting involved in extracurricular activities – to instill the idea that the family supports higher education.

Parents may also want to encourage children to begin thinking about the career they would like to pursue, which is likely to influence their choice of college, as well as to establish a savings account that could be earmarked for education expenses. In addition, parents can teach basic lessons about compounding, investing, and other money management issues.

When students are in the latter part of middle school, they can also start planning to make the most of high school experiences with an eye toward college. Remind the budding scholar that success in high school depends on skills and attitudes that are developed in middle school or earlier. For example, time management skills developed in middle school may eventually help a high school student manage schoolwork, a job, sports, and other interests. And when the time comes to pick classes for the first year of high school, a good mix of college prep courses may be important.

Budgeting Basics
Parents can help their child plan for college by assisting him or her with developing a realistic budget. The chart below details enrollment-weighted averages and is intended to illustrate the costs that a student is likely to pay in various situations.1

   Tuition
     and
Fees
   Books
     and
Supplies
Room
and
Board
Trans-
portation
Other
expenses
Total
Expenses**
Two-Year Public
Resident $2,713 $1,133 $7,259 * $1,989 $13,094
Commuter $2,713 $1,133 * $1,491 $1,989 $7,326
Four-Year Public
In-State $7,605 $1,137 $8,535 $1,073 $1,989 $20,339
Out-of-State $19,595 $1,137 $8,535 $1,073 $1,989 $32,329
Four-Year Private
Resident $27,293 $1,181 $9,700 * $1,440 $39,614
Commuter $27,293 $1,181 * $862 $1,440 $30,776


**Based on estimated average student expenses. Average total expenses include room and board costs for commuter students, which are average estimated living expenses for students living off-campus but not with parents.
*Sample too small to provide meaningful information.1Source: Trends in College Pricing Annual Survey, the College Board, 2010-2011 academic year.

A Higher Gear in High School
Many high school students are mature enough to plan for college at a deeper level. Appropriate planning may include the following:

Matching personal aptitudes with vocational interests – High school guidance counselors can help students learn about careers that utilize skills in math, science, language arts, social studies, and other areas of interest, as well as postsecondary courses of study in these areas.

Maintaining high academic standards – Colleges prefer applicants that have exceeded basic requirements and taken more challenging courses in language arts, math, science, social studies, foreign languages, and other areas. Many high schools permit qualified students to earn college credits by taking Advanced Placement courses. Excelling in these classes may demonstrate motivation and reduce the number of academic requirements after a student enters college.

Learning about college costs – Students may gain a deeper appreciation of their family’s financial sacrifices when they realize how expensive college is. They can learn about college costs from the College Board at www.collegeboard.com, the U.S. Department of Education at www.ed.gov, and high school guidance offices.

Researching scholarships – There are numerous Web sites with information about sources of financial aid. For example, www.fastweb.com and www.finaid.org contain search engines with data about thousands of scholarships with varying eligibility criteria. In addition, www.fafsa.ed.gov provides an overview of federal student aid programs, including Pell Grants, campus-based aid programs, Stafford Loans, PLUS Loans, and others. Also, local libraries and high school guidance offices may have information about state-sponsored aid programs and scholarships sponsored by local organizations.

Earning money – High school students can set aside a portion of their wages from part-time or summer jobs for higher education expenses. Also, students may be able to obtain jobs that build on career interests as a way of solidifying their future plans.

Getting organized – College planning encompasses numerous details, including visiting institutions that a student may want to attend, applying for financial aid, obtaining transcripts and letters of recommendation, and meeting deadlines. A high school student can take responsibility for making sure that important matters are tended to ahead of time. For example, if a student has a school vacation coming up, he or she could help organize a family trip to visit colleges of interest or spend some time completing college applications.

Parents and the prospective student may be able to think of more ideas that could add value to the family’s efforts to save for a college education. Getting the budding scholar involved in the process – financially and otherwise – could ultimately be a pivotal lesson in responsibility that impacts his or her later success in life.

A Family Affair
Young people can assume varying levels of responsibility for college planning depending on their age and interests. Consider the following, if parents are looking to get a middle or high school student involved.

6th – 8th Grades
Continue good study habits
Enhance computer and Internet skills
Participate in arts activities or sports
Start saving money

9th – 10th Grades
Enroll in college-preparatory classes
Establish high academic standards
Research careers that match personal aptitudes
Learn about college costs
Identify prospective colleges
Research financial aid
Set aside money from babysitting, yard work, or other odd jobs for college expenses

11th – 12th Grades
Get a part-time job and continue saving for college
Visit colleges of potential interest
Take the Scholastic Aptitude Test
Enroll in Advanced Placement classes, if available
Apply to colleges and for financial aid

Points to Remember
Although young people may not have access to the same level of assets that their parents do, there are many ways they can help their families plan for college — maintain good study habits, take college preparatory classes, and set aside money from part-time jobs for college expenses.

  1. Many experts recommend introducing children to college planning when they are in the sixth, seventh, or eighth grade, depending on the child’s maturity level and interests. Children at this age can be encouraged to maintain good grades, enhance computer skills, and think about potential careers.
  2. High school students can explore college planning at a deeper level, including using the Internet to research college costs and sources of financial aid. Web sites such as www.ed.gov, www.collegeboard.com, www.fastweb.com, www.finaid.org, and www.fafsa.ed.gov provide considerable information in these areas.
  3. Since attending and financing college requires planning and attention to detail, high school students can help their parents develop a plan to make sure things get done on time. For example, the plan could encompass visiting prospective colleges, completing applications and other paperwork, applying for financial aid, and other tasks.
  4. Parents and students can work together to develop a budget for college expenses. Average costs for various types of two-year and four-year colleges are available at www.collegeboard.com.

Written by Angel Chavez CIMA® | Contributing writer on Finance
For more information please contact by phone (415) 984-6008 or visit http://fa.smithbarney.com/angelchavez.

Morgan Stanley Smith Barney LLC, it’s affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice.  This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC (“MSSB”). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by MSSB of any information contained in the publication. The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned. Article written by McGraw Hill and provided courtesy of Morgan Stanley Smith Barney Financial Advisor Angel Chavez, CIMA® Morgan Stanley Smith Barney LLC. Member SIPC.

Children and Wealth: Important Early Life Lessons


Wealth can be a mixed blessing that creates great opportunity as well as weighty responsibility, especially for children. As a parent, grandparent, or relative, we hope to pass on what we have learned about managing and preserving wealth to the younger generation. However, we want the family legacy to be about more than astute money management; we want it to reflect your personal values, which may include a social conscience and philanthropic ideals.

How do we combine financial knowledge and charitable intent in our wealth management lessons? Let’s consider:

Shared Concerns

Multi-billionaires Bill Gates and Warren Buffett have vowed to leave the majority of their fortunes to charity, reasoning that a large inheritance would do their children more harm than good. Many wealthy families across America share these concerns.

To counter these and other potentially negative effects of wealth, many parents are committed to educating children about finances from an early age. Studies show that marketers start targeting children as early as age two.

The sooner we start talking about money, the better. Explain the meaning and purpose of employment, the importance of managing credit and paying bills, and the best way to handle cash through banks and ATMs. Let children practice what they learn about earning, saving, spending, and giving money through their own experiences with allowances and after-school jobs.

As children mature, their financial education should become more rigorous. Learning how to balance a checkbook, create a budget, respect the role of credit and debt, and develop strategies for funding important goals such as a college education help teens make the important transition from child to adult.

While parents generally are competent educators about financial matters and are a child’s most important role models, our children can use some support.

Set a Charitable Example

If we want to ensure future generations of volunteers and donors, we must teach our children how to give of their time, skills, and money. Adult family members set the example by pursuing their own philanthropic and volunteer activities, or by encouraging the whole family to get involved in charitable activities based around a shared interest, such as the outdoors, sports, or religion.

Ensure Your Legacy through Incentive Planning

Wealth holders often worry that the values they pass on to heirs during our lifetime will be lost once we are gone. Therefore, creating testamentary trusts that allow us to reward our children’s desired behaviors or discourage undesirable activities are a meaningful addition to an estate plan. For instance, a trust may offer educational support for heirs who pursue a specific field of study or attend a particular institution.

A trust may promote family values by providing income support to heirs who choose to stay at home to raise children or who foster or adopt children in need. Alternatively, a trust can also withhold benefits from heirs convicted of a crime or who fail conditional drug or alcohol testing.

Financial advisors play an important role in the creation and success of a legacy by helping us articulate the values, beliefs and priorities we want to perpetuate and the methods to achieve our goals. Working together, we can offer meaningful relationships that go beyond a financial inheritance.

If you’d like to learn more, please contact Angel Chavez, CIMA® at 415-984-6008 http://fa.smithbarney.com/angelchavez.   Morgan Stanley Smith Barney LLC, it’s affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice.  This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC (“MSSB”). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by MSSB of any information contained in the publication. The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned. Article written by McGraw Hill and provided courtesy of Morgan Stanley Smith Barney Financial Advisor Angel Chavez, CIMA® Morgan Stanley Smith Barney LLC. Member SIPC.

Exit Strategies for Small-Business Clients

Photo MS courtesy clips

For successful entrepreneurs, the road into the business is often more clearly laid out than the route from involvement. However, a well-drawn roadmap for the endgame makes the difference between achieving success and missing the target on important life goals. As a result, preparing an effective exit plan provides a valuable service.

Laying the Groundwork

Since a viable entrepreneurial exit strategy must take account of both where your client is today and where he or she would like to be in the future, exit planning starts with a comprehensive appraisal of business and personal finances. Many planners find it valuable to start with their clients’ net-worth assessment. This not only helps to identify all available resources, but also to match those resources against specific goals (The assessment process also assists to identify potential opportunities for client relationships unrelated to the exit plan). Perhaps less objective but no less key to a successful exit strategy is values clarification. For example, if some or all of your client’s children are involved in the business, does your client want them to continue in their current roles or expect that all will move on when the business is sold? Your client might have a clear choice for a successor, and might wish to consider how that choice will impact other family relationships. Keep in mind that many exit plans have foundered because of internecineconflicts. A related area of concern that forms a backdrop for the exit strategy is your client’s vision for life after the event. Is he or she planning to retire? To remain involved as a consultant or part-time executive? To start a new venture in another field? How each of these questions is addressed will direct the practical thrust of the nascent exit strategy. Finally, a successful exit process is based on a sound understanding of existing business relationships and provisions. Your client should identify the key professional and executive talent in his or her firm, and then formulate appropriate reward and retention strategies for them.

Potential Deal Forms to Consider

The various choices of deal structure each offer unique cost/benefit tradeoffs (Options overview):

  • Buy-sell agreement – This arrangement is designed to permit the dissolution of a partnership by setting the parameters for some partners to buy out others. It enables one or more partners to maintain involvement in a business when others might wish to sever their ties to it. A buy-sell agreement requires careful design to ensure that its execution does not work at cross-purposes with other estate and succession planning tools.
  • Cash sale to a third party – A pure cash transaction may create the greatest immediate liquidity for the seller, but other financing structures may have the potential to generate greater net yield over time. A cash sale may also be the simplest means to execute a complete and immediate separation from the business.
  • Buyout or recapitalization – In leveraged transactions, partners, managers, or the business as a corporate entity borrows the funds to purchase the stock of the exiting entrepreneur. These deals may be especially useful for dissolving a partnership while otherwise maintaining the business as a going concern. They are also often used for transferring business responsibility to children or other heirs while creating financial independence from them. Recapitalizations can also be used to finance an annuity for a business owner who might wish to combine financial independence with limited business involvement.
  • Employee Stock Ownership Plan (ESOP) – An ESOP is a form of leveraged buyout designed specifically to give control of the business to a broad base of its current employees. ESOPs may have higher transaction costs than ordinary cash sales, but in many cases these costs are not out of line with the costs of other more complex deals. There are also specific tax benefits for ESOP transactions that may improve their net value significantly.

Managing the Proceeds

A key part of any exit strategy is the financial plan for managing the proceeds of the deal in a manner consistent with the client’s post-sale goals. Such plans typically include a blueprint for investing sale proceeds in a diversified portfolio. They also typically include an estate plan crafted to take advantage of the trust structures and tax code features that allows you to preserve wealth and protect the future interests of heirs. Among the favored devices are family limited partnerships and grantor retained annuity trusts, which can reduce the estate value of shares passed on to heirs. In addition, many entrepreneurs are interested in charitable remainder trusts. These are used to fund philanthropic programs that realize specific charitable goals while maximizing tax benefits and minimizing costs.

Points to Remember

  1. The sale of a business is only one small transaction at the center of a larger plan often referred to as an exit strategy.
  2. The most successful exit strategies are those that give the business owners the greatest probability of comfort with the results as seen in their financial security, family dynamics, and long-range goals.
  3. There are many options for structuring the sale of the business, and each has different implications for other elements of the broader strategy. Buy-sell agreements can help maintain continuity for remaining partners in a wide range of circumstances. Pure cash transactions typically yield the greatest immediate liquidity. Leveraged transactions may enable managers, partners, or family to take over and maintain continuity for the business. ESOPs can provide tax benefits and empower employees.
  4. Trusts can be valuable tools for managing the income tax and estate planning implications of the wealth derived from a business sale.

If you’d like to learn more, please contact Angel Chavez, CIMA® at 415-984-6008 http://fa.smithbarney.com/angelchavez.   Morgan Stanley Smith Barney LLC, it’s affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice.  This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC (“MSSB”). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by MSSB of any information contained in the publication. The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned. Article written by McGraw Hill and provided courtesy of Morgan Stanley Smith Barney Financial Advisor Angel Chavez, CIMA® Morgan Stanley Smith Barney LLC. Member SIPC.