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

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Financing Real Estate Using Securities-Based Lending

This article discusses how an investment portfolio can help finance a real estate transaction via securities-based lending.

Deciding how to finance a real estate transaction can be as important as deciding which property to select. Most people think of mortgages as the way to finance real estate, but that might not always be the right solution. Liquidating financial assets to cover a large purchase such as real estate is another approach, but it can involve costs that are not immediately apparent, including potential tax consequences,1 the loss of future asset growth and/or an imbalance in your portfolio’s asset allocation.2

images

A Different Way to Borrow
If one takes an integrated approach to their financial needs, there are various potential solutions for credit and liquidity needs. One strategy is securities-based lending.

When you establish a securities-based loan, you in essence unlock the value of your assets, allowing you quick and efficient access to funds (as long as there is adequate eligible collateral in the investment account). This may help you achieve a variety of real estate investment objectives, such as purchasing or constructing a primary or secondary home, financing a bridge loan to be used between selling one home and buying another, financing an investment in commercial or rental property or renovating your existing property.

A Potential Viable Alternative to Home Equity Lines of Credit
Prior to the financial crisis of 2008 and the subsequent housing market crash, some banks offered clients home equity lines of credit at 100% financing with low introductory interest rates and fees lower than mortgage costs.2 It was an inexpensive way to tap the equity in your home without refinancing your first mortgage. Then, when the real estate bubble burst and banks closed most home equity lines, those lines of credit disappeared along with the equity in the home. Some home equity lines of credit have a draw period, but once that period is up you can’t borrow more money and you must repay whatever you borrowed within the “repayment period.” Other home equity lines charge interest for a set period of time, but then charge an additional fee due at the end of the loan’s terms which may be so large that borrowers call it a “balloon amount.”3

images1

By comparison, securities-based loans or lines of credit typically offer competitive interest rates that tend to be lower than traditional bank financing options such as such as mortgages and home-equity lines of credit and other forms of borrowing.4
With no origination, maintenance or facility fees paid to the Bank and no down payment required, securities-based loans may be a cost-effective alternative to traditional bank financing.

Securities-Based Loan vs. Traditional Real Estate Loan—Illustrative Example*
What does it look like to purchase real estate with a securities-based loan instead of a traditional real estate loan? This example highlights some of the potential key advantages to this approach for a buying a $5MM property.

Securities-Based Loan Traditional Mortgage Loan*
Purchase Price $5,000,000 $5,000,000
Down Payment $0 $1,000,000**
Loan Amount $5,000,000 $4,000,000
Interest Rate*** 2.70% (L + 2.50%) 3.20% (L + 3.00%)
Annual Interest $135,000 $128,000
Origination Fee $0 varies

Funds Needed to Close $135,000**** $1,128,000*****

*The chart is for educational purposes only. All client situations are unique and all loans are subject to application and approval. For this example, the Traditional Mortgage Loan represents a 1 Month LIBOR adjustable rate mortgage.
**Assumes 20% down payment for bank financing, which is not necessary for securities-based loans.
***The interest calculation for a Securities-Based Loan is based on a LIBOR rate, which changes daily, plus an incremental percentage, which is determined by the approved loan amount. For this example, the LIBOR rate was 0.20% (as of April 3, 2013). The interest rate calculation for the Traditional Mortgage Loan depends not only on the interest rate, but also the outstanding principal balance from the month prior and the term. The calculation illustrated is a simplified estimate. LIBOR rates may be found at http://www.bankrate.com/rates/interest-rates/libor.aspx
****For letters of credit, there may be outside counsel costs for items such as the review of complicated trust agreements.
*****Real estate fees required for traditional bank financing are not included in the example. Real estate fees include real estate report fees and outside legal fees. The origination fee represents an upfront facility fee. The specific size of the fee may vary depending on the transaction, and it may also fluctuate. Underwriting requirements may include appraisal, survey and title search fees. Total costs will vary depending on the specific transaction. Some or all fees may not be refundable.

In addition to the benefits illustrated above, securities-based lending may offer other perks:

The process of applying for and closing a securities-based line of credit can be faster than the process for a traditional loan and relatively simple. The applicant can be an individual or a legal entity, such as a family trust, LLC, LLP or General Partnership.

There are flexible repayment options, including capitalizing the interest if you are borrowing for short term needs, paying interest only, or making payments to principal as desired. Many business owners find this helpful in managing seasonal cash flow for their business.

Perhaps the most important benefit is that since your investments are not liquidated, you preserve your potential for the growth of your assets.

There are risks associated with using your assets as collateral in a securities-based loan, and doing so is not beneficial for all clients. Sufficient collateral must be maintained and you may need to deposit additional eligible securities on short notice.2

For more information on these lending strategies and others, please contact Angel Chan, Private Banker with the El Camino Group for Morgan Stanley.
415-984-6006

1 Morgan Stanley and its Financial Advisors do not offer tax advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions.

2 Securities-based Lending Risks: Borrowing against securities may not be suitable for everyone. You should be aware that securities-based loans involve a high degree of risk and that market conditions can magnify any potential for loss. Most importantly, you need to understand that: (1) Sufficient collateral must be maintained to support your loan(s) and to take future advances; (2) You may have to deposit additional cash or eligible securities on short notice; (3) Some or all of your securities may be sold without prior notice in order to maintain account equity at required collateral maintenance levels. You will not be entitled to choose the securities that will be sold. These actions may interrupt your long-term investment strategy and may result in adverse tax consequences or in additional fees being assessed; (4) Morgan Stanley Smith Barney LLC or its affiliates (the “Firm”) reserves the right not to fund any advance request due to insufficient collateral or for any other reason except for any portion of a securities-based loan that is identified as a committed facility; (5) The Firm reserves the right to increase your collateral maintenance requirements at any time without notice; and (6) The Firm reserves the right to call your securities-based loan at any time and for any reason.

Asset allocation does not assure a profit or protect against loss in declining financial markets.

3 The Wall Street Journal, “Home Equity Lines and HELOCS – Getting a Good Deal” December 17, 2008

4The Wall Street Journal, “Putting Stocks in Hock: Securities Are Backing for More Big Loans” March 4, 2013.

Morgan Stanley Smith Barney LLC is a registered Broker/Dealer, not a bank. Where appropriate, Morgan Stanley Smith Barney LLC has entered into arrangements with banks and other third parties to assist in offering certain banking related products and services. Banking and credit products and services are provided by Morgan Stanley Private Bank, National Association or Morgan Stanley Bank, N.A., members FDIC (the “Banks”). The Banks and Morgan Stanley Smith Barney LLC are affiliates. Investment products and services are offered through Morgan Stanley Smith Barney LLC, member SIPC. Unless specifically disclosed in writing, investments and services offered through Morgan Stanley Smith Barney LLC are not insured by the FDIC, are not deposits or other obligations of, or guaranteed by, the Banks and involve investment risks, including possible loss of principal amount invested.

Article by McGraw Hill 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.

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.

© 2013 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC 648831 4/2013

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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)

 

Charitable Giving: Mapping Out a Lasting Legacy

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Planning for the distribution of your wealth can take many paths, depending on your intentions regarding charitable and noncharitable beneficiaries. Whatever your aspirations, there are many strategies and techniques that can be tailored to help you achieve your charitable giving objectives.

If you had the opportunity to leave a legacy that included making resources available to help family members lead more comfortable lives or to help a favorite charity continue its mission, and save estate taxes while doing so, wouldn’t you do it?

In the book, Cultivating the Middle-Class Millionaire, (Wealth Management Press, 2005) authors Russ Alan Prince and David A. Geracioti studied more than 850 individuals with a net worth of between $1 million and $10 million. Their research revealed that nearly 38% of those interviewed had not updated their estate plans in the past six to ten years; another 35% had not done so in three to five years.

Think for a moment about your own situation. When was the last time your estate plan was updated? What has changed since then? At a minimum, the tax laws in theUnited Stateshave changed, and will undoubtedly continue to do so (see “Estate Planning—An Exercise in Uncertainty” at the end of this article). Are you making full use of the current IRS rules pertaining to estates and charitable giving to help optimize the impact of your legacy?

In addition to tax changes, you may have experienced significant changes in your professional and/or personal life. If so, does your existing estate plan reflect your current intentions and values? A career move or promotion could mean higher annual income and other forms of enhanced compensation. Your family makeup may have changed: you may have gotten married or divorced, had a child or grandchild or lost a loved one. In terms of your charitable intentions, perhaps you no longer feel connected to or passionate about a charity or cause that you had previously included in your estate.

There is much you can do for those you love and for those causes you are passionate about, if you take the time to plan.

Create a Unique Giving Legacy

Planning for the distribution of your wealth can take many paths, depending on your intentions and your personal giving style. Family groups may work together to channel their charitable goals and build a philanthropic legacy that can be passed down through generations. Entrepreneurs may approach charitable giving with the same drive and commitment they apply to building their businesses. Others may approach philanthropy as an investment, and base their giving decisions on disciplined research and a long-term commitment to a particular organization.

Whatever your charitable aspirations, when selecting a giving strategy, donors with significant wealth must evaluate a number of factors, such as their need for current income, the desired level of involvement for themselves and other family members today and in the future, as well as important tax considerations.

Vehicles to Drive Your Giving Agenda

There are many strategies and techniques that can be tailored to help achieve most, if not all, of your charitable giving objectives. Donor-advised funds, family foundations, charitable trusts and gift annuities round out the field of essential options that are available to donors and their families.

Donor-Advised Funds—Offer Convenience and Flexibility. A donor-advised fund (DAF) is a tax-advantaged charitable giving vehicle that offers individuals maximum flexibility to take tax deductions and recommend grants to charitable organizations. By definition, donor-advised funds are administered by public charities and contributions to such funds are tax deductible.

Donor-advised funds are particularly family friendly, as parents and children can consolidate their giving activities through a single fund account. In addition, children can be named as successors to a fund, ensuring the continuation of a family’s giving legacy.

Another significant advantage of a donor-advised fund is its capacity to accept any one of a variety of assets as charitable contributions. Checks/wire transfers, commercial paper, CDs, mutual fund shares, publicly traded securities, certain privately held securities, bonds and restricted stocks are all potentially acceptable assets.

Donors are able to recommend how their contributions should be allocated among the available investment choices. Plus, the account has the potential to grow over time—increasing the donor’s giving power.

The convenience and administrative simplicity of a donor-advised fund allows donors to spread their charitable giving out over months or even years, in accordance with their own personal giving agenda.

Family Foundations—Building a Legacy, Reaping Tax Benefits. Family foundations offer an effective way to pursue philanthropic objectives, involve family members in charitable activities and reap tax and estate planning efficiencies.

A family foundation derives its assets from the members of a single family, in which the donor and/or the donor’s relatives play a significant role in governing and/or managing the foundation throughout its life. Aside from helping families channel their philanthropic ambitions, family foundations can form a legacy of community involvement and responsible citizenship for generations to come. And, as their founders soon realize, family foundations offer potential tax and estate planning benefits.

While gifts made to famly foundations  are generally tax deductible, the treatment of these deductions differs depending on the foundation’s structure, the type of property/asset contributed and the donor’s income level. But, as a general rule, all gifts to a family foundation are removed from the donor’s estate, thereby avoiding estate and/or gift taxes.

Trusts: Combine Charitable Intent With the Need for Income

While the tax deductions and/or transfer tax benefits associated with most charitable giving vehicles help reduce the cost of making charitable gifts, an individual’s own income or wealth transfer needs often have a bearing on his or her ability to give. To address both goals, individuals may want to consider other charitable vehicles such as a charitable remainder trust, a charitable lead trust or a gift annuity.

A charitable remainder trust (CRT) can guarantee a lifetime income stream for you and your spouse, while minimizing current income taxes since you generally may deduct the fair market value of the charity’s remainder interest in the CRT in the calendar year the CRT is funded. A CRT can also be an integral part of a family business succession plan. Lifetime stock transfers can be made to a CRT and subsequently redeemed by the closely held corporation. The redemption funds the CRT with tax-free monies that subsequently can be invested to provide an income stream to the business owner and spouse.

A charitable lead trust (CLT) provides control over and enjoyment of your assets during your lifetime, an estate tax deduction at death equal to the present value of the charity’s future income interest and a legacy to family heirs or a family trust with potentially little or no estate tax consequences.

A charitable gift annuity (CGA) is in some respects even more cost and tax effective than CRTs/CLTs. CGAs have no administrative or setup fees. Virtually any asset can be used to fund a CGA, and the charitable organization itself guarantees either immediate or deferred lifetime payments to the donor. The typical tax deduction available in the year assets are transferred to a CGA ranges from 30% to 45% of the fair market value of the asset.

Including charitable giving strategies in your estate plan can be an effective way for you and your family to enjoy an income stream during your lives, take advantage of  tax savings, and maintain a significant degree of control over assets—all while fulfilling your charitable goals.

If you are creating a charitable giving plan, consider seeking the guidance of an attorney, accountant or other trusted professional who is familiar with trust & estates and nonprofit law. Obtaining assistance from the beginning—and retaining such counsel on a continuing basis—is key to making responsible decisions.

Table Head: Charitable Giving Vehicles at a Glance

Giving Method

             Description            

Tax Treatment

Donor-Advised Fund A fund maintained by a qualified public charity, such as a community foundation or a charitable gift fund sponsored by a private financial institution and administered by a public charity. The donor makes an irrevocable gift to the fund in exchange for the right to recommend grants to charitable causes of his or her choice over time. Cash donations: tax deduction of up to 50% of adjusted gross income (AGI).Long-term appreciated assets: tax deduction of up to 30% AGI.
Family Foundation A private foundation funded by members of a single family. Family members have significant control over giving decisions and investment management. Cash donations: tax deduction of up to 30% of adjusted gross income (AGI).Certain appreciated assets: tax deduction of up to 20% of AGI.

Must distribute 5% of assets each year and pay excise tax of 1% to 2% on investment income.

Charitable Remainder Trust (CRT) An arrangement whereby cash or property is transferred to a trust. The donor and/or other noncharitable beneficiaries receive income from the trust for a period of time, after which the remaining principal becomes the property of the charity. No capital gains tax on donated assets.An income tax deduction based on the present value of the remainder interest in the trust.

Beneficiary is taxed on income received on a tiered system.

Charitable Lead Trust (CLT) Essentially, a CRT in reverse. Charities become the income beneficiaries, receiving a stream of income from the trust for a period of time, after which the named noncharitable beneficiaries receive the remaining trust principal. No capital gains tax on donated assets.The donor pays discounted gift taxes on donated assets.
Charitable Gift Annuity (CGA) An arrangement whereby cash or property is transferred to a charity in exchange for the charity’s promise to make fixed annuity payments to beneficiaries, typically the donors, for life. Tax deduction available in the year assets are transferred range from 30% to 45% of the fair market value of the asset.A portion of income received is usually tax free.

 Estate Planning—An Exercise in Uncertainty

Many favorable tax laws, including those involving estate and gift taxes are scheduled to “sunset” December 31, 2012, unless Congress once again moves to extend them (see table below). The uncertainty surrounding the current tax landscape underscores the need for individuals to meet with their advisors and start putting a plan of action in place. If the current tax laws are allowed to expire, individuals with estates larger than $1 million will have a very narrow window of opportunity to utilize the $5.12 million in exclusions and other benefits of the current law. This is a year in which pre-planning—including a charitable giving strategy—is crucially important. Please contact me to learn more about charitable giving strategies.

 

Table Head: Estate and Gift Taxes—Past, Present and Potential Sunset Rates

Year

Top Estate and Gift Tax Rate

Amount Exempt From
Estate Tax

2009

45%

$3.5 million

2010

Top individual tax rate (for gift tax only)

Unlimited—estate tax repealed

2011

35%

$5 million

2012

35%

$5.12 million

20131

55%

$1 million

1If current laws are allowed to expire.

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

 Tax laws are complex and subject to change.  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, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.

 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 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 530221 [08/12]

 

 

Bond Investing – One Ladder at a Time


When portfolio managers talk about successful investing, they often mention risk diversification and money management. These strategies can separate those investors who are successful because of knowledge and skill from those investors who are simply lucky.

Investors relying on money market funds to build their wealth may soon find themselves scrambling as money market funds are close to going negative and as the SEC considers new rules in response to the collapse of Reserve Primary Fund in September 2008.

For these investors, short-term Bond Ladder portfolios may provide many of the benefits investors seek in money market funds such as relative stability, predictable income as well as an alternative temporary parking place for assets.

A simple and effective strategy of buying bonds with staggered maturities reduces interest rate risk exposure in a rising interest rate environment. As bonds systematically mature, they are re-invested at prevailing rates. Unlike bond funds, holding individual bonds to maturity eliminates fluctuations in the principal value and provides a steady stream of predictable income.

What are bonds?
Bonds are debt securities issued by corporations, governments and municipalities and are similar to IOUs. Investors lend money to an organization and in return receive interest payments. In addition, the organization is obligated to return the principal to investors on a future predetermined date. When purchasing bonds, investors become creditors of the bond issuer and, therefore, have a priority claim on the issuer’s assets in the event of bankruptcy.

What is a Bond Ladder
A bond ladder is the name given to a portfolio of bonds with different maturities. Suppose you had $50,000 to invest in bonds. Using a Bond Ladder approach, you could buy five different bonds with a $10,000. face value each. Each bond, however, would have a different maturity date. One bond might mature in one year, another in three years and the remaining bonds might mature in five or more years. Each bond represents a different rung on the ladder.

Why Use A Bond Ladder?
There are two smart reasons to use a bond ladder approach. First, by staggering the maturity dates of your bonds, you won’t be locked into one particular bond for a long period of time. A problem with locking yourself into a bond for a long period of time is that you can’t protect yourself from bull and bear bond markets. If you invested the full $50,000 into one single bond with a yield of five percent (5%) for a term of 10 years, for example, you wouldn’t be able to capitalize on increasing or decreasing interest rates.

How to Create a Bond Ladder
To create a bond ladder, first determine how much money you wish to invest and how long you want to invest it. Let’s say you want to invest $150,000 over 10 years.

Now envision the parts of a ladder:

Rungs:  Take the total dollar amount you plan to invest ($150,000) and divide it equally by the number of years you wish to have a ladder (10 years). This gives you the number of bonds you’ll want for your portfolio, or the number of rungs on your ladder.  The greater the number of rungs, the more diversified your portfolio will be.

Height of your ladder:  The distance between the rungs is determined by the duration between the maturities of the bonds you have chosen to purchase. The maturities can range anywhere from every few months to a few years. The taller you make your ladder, the higher the average return should be in your portfolio since bond yields generally increase with time. This higher return, however, is offset by reinvestment risk and the lack of access to the funds. Making the distance between the rungs very small reduces the average return on the ladder, but you have better access to the money.

Materials:  Just like real ladders, bond ladders can be made of different materials. One approach to reducing exposure to risk is investing in different companies, but investing in products other than bonds is sometimes more advantageous depending upon your needs.

Debentures, government bonds, municipal bonds, treasuries and certificates of deposit – each having different strengths and weaknesses – are different products that you can use to build your ladder. One important thing to remember is that the products in your ladder should not be redeemable or “callable” by the issuer. This would be the equivalent to owning a ladder with collapsible rungs.

It’s been said that an investor should not attempt to build a bond ladder unless they have enough money to fully diversify their portfolio by investing in both stocks and bonds. Investors generally need $10,000 to start a ladder that has at least five rungs.

As with any investment choice, make sure that all your eggs aren’t in one basket so that you can control your exposure to risk, have greater access to emergency funds and have the opportunity to capitalize on ever-changing market conditions.

 

Written by Elizabeth Luna: Contributing writer on Finance
Vice President and Financial Advisor, CONCERT Global, Ltd.

It’s Never too Early to Save for Your Retirement

Photo courtesy of MS clips

Your retirement may seem a long ways off, but starting to save for it today can help ensure you’ll have a comfortable lifestyle and have the money to do the things you’ll want to do.

A popular retirement savings tool for individuals is an Individual Retirement Account (IRA). IRAs provide tax advantages by reducing your taxable income as you save. They are opened through a bank or an investment broker, and anyone over 18 who is earning income from an employer may open one.

The IRS currently allows you to deposit up to $5000.00 a year into an IRA if you are under 50.

You have Choices

There are two types of IRAs:  Traditional and Roth.

  1. With a Traditional IRA, contributions you make to it are usually tax deductible and are made with pre-tax dollars. You won’t pay taxes on your gains (profits) until you start taking distributions, or withdrawals, at age 59-and-a-half. The advantage of this is that you’ll keep more money in your IRA account over a long period of time, which allows your money to compound at a faster rate.
  2. With a Roth IRA, the contributions you make to it are made with after-tax dollars. You pay taxes now, at your current income tax rate, because taxes on the money you’re contributing were already taken out before you received your paycheck. This allows your earnings to grow tax fee, and if you anticipate being in a higher tax bracket in the future, the Roth IRA is probably your best choice.

Eligibility

Both the Traditional IRA and the Roth IRAs have eligibility requirements. With a Traditional IRA, you can only deduct your contributions at tax time if your family earnings fall below certain maximums and if you’re covered under an employee-sponsored plan like a 401(k). According to Vanguard Group®, one of the world’s largest investment management companies, if your Traditional IRA isn’t deductible, then a Roth IRA is the better choice. With a Roth IRA, your contributions are not deductible and there are income limits. If you’re single and make more than $125,000 in 2012, you are not eligible to open a Roth IRA.

What will this cost me?

To open an IRA, you’ll need a bank or investment broker. Some discount brokers offer no-fee IRAs. Other brokers will charge a yearly management fee even if they don’t manage the IRA for you. No-fee IRAs are preferable. If you’re charged a 1% management fee, that could equate to a 30% lower balance in your IRA over a 30 year period. Make sure you understand any fees involved with maintaining your IRA, and keep them to a minimum.

Whether you choose a Traditional or a Roth IRA to help you save for retirement, the point is to get started now. If you have money that’s sitting in a savings account and earning little interest, you might be able to make that money work harder for you by putting it into an IRA.

It’s not hard mastering basic financial planning and investment concepts and incorporating them into your daily life. Some people, however, feel more comfortable having a professional help them through this process. If this is you, you may want to seek out a professional Financial Advisor who, for a fee, will help you build a financial plan, explain investment options to you, provide objective advice and help guide you through decision processes.

Regardless of whether you decide to do your own financial planning or you hire a Financial Advisor to help you, you should first educate yourself on the basics of financial and investment concepts. There is plenty of information online to help get you started.

Written by Elizabeth Luna: Contributing writer on Finance

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.