FINANCIAL SECURITY
IN AN INSECURE WORLD
Presented to:
Main Line Assoc. for Continuing Education
June 21, 2012
Presented by:
Christopher J. Hackley, CFP, ChFC, CLU
Robert P. Wermuth, ChFC, CLU
Michael W. Mills, CFP, CPA, JD, LLM
DOFU 5/2011 TN 327825. Securities and investment advisory services offered through Securian Financial Services,
Inc., Member FINRA/SIPC. Legacy Planning Partners is independently owned and operated. This presentation is for
internal use only, it is not to be used with the general public.
How to Provide Financial Security in an
Insecure World
Our World has Changed
Clients already struggle with what may be the most defining aspect
of the “new normal” – a prevailing sense of uncertainty regarding
every aspect of the economy and finance
~Scott Leibs, “from the editor”
CFO Magazine April 2011
WHY THE WORLD HAS CHANGED…
Many have Lost Faith in:
• Government
• Corporations
• “Pillars of Society”
• “Nuclear” Family
…How can they gain confidence?
…Who can they trust?
THE WORLD HAS CHANGED…
…and is changing faster then ever before
We are facing increased complexity & volatility:
• Paradox of Globalization
• Frequency & Severity of “Black Swan Events”
• Technology’s / Internet’s Impact
• Impact of Mass Media (Mass Hysteria)
…People need a NEW strategy.
As Financial Professionals…
*We Need to Educate Clients on the TYPES OF RISKS
*We Need to Empower Our Clients to be FINANCIALLY
RESILIENT Using All the Tools at Our Disposal
With proper Integration and Implementation, we
increase Resiliency.
Pray for potatoes with a hoe in your hand.
~Old Irish Proverb
Nick Murray May 2011
Financial Planning Increases Resiliency
Risk Management &
Protection Planning
Debt Management &
Cash Flow Planning
Asset Management &
Ret. Income Planning
Estate Planning &
Business Succession
Let’s look
at the risks
embedded
in each
quadrant.
Categories of Financial Risks
• Tax Risks
• Portfolio Risks
• Human Risks
Tax Risks
•
•
•
•
•
Income Tax
Payroll Tax
Capital Gains Tax
Property Tax
Gift and Estate Transfer Tax
Portfolio Risks
•
•
•
•
•
•
•
•
•
Market Risk
Security Concentration Risk
Sequence of Return Risk
Liquidity Risk
Inflation Risk - Rising Interest Rates
Deflation Risk - Falling Interest Rates
Credit Risk
Currency Risk
Legislative Risk
Human Risks
•
•
•
•
•
•
•
•
Mortality Risk
Morbidity Risk
Longevity Risk
Psychology and Behavioral Finance Risk
“Entitlement” Risk
Divorce
DUI and Other Malfeasance
Property and Casualty
Continually Educate Clients through the
Planning Process:
• It is incredibly important to be crystal
clear about the PURPOSE behind every
investment position and strategy that you
recommend
• You must explain what SPECIFIC RISK
each position and solution is addressing
Resiliency Techniques
1) Debt Management & Cash Flow Planning:
• Income & Asset to Liability Ratios
– Increase them!
• Liquidity Risk:
– Buy 30 year mortgage, make payments over 15 years
– Fixed Mortgage along with Equity Line
• Deflation Risk:
– Debt elimination
– Variable interest rate
• Interest Rate Risk:
– Fixed or Variable discussion
• Inflation Risk:
– Fixed interest rate
Resiliency Techniques:
2) Risk Management & Protection Planning:
• Liquidity Risk: Insurance Solution & “Cash” Reserves
• Tax Risk: Permanent Life Insurance Products, Qualified Plans
• Mortality Risk: Life Insurance Product
• Longevity Risk: Insurance Product; Annuity
• Morbidity Risk: Disability; Long-Term-Care Insurance
• Sequence of Returns Risk: Annuity and Cash Reserves
Resiliency Techniques
3) Asset Management & Ret. Income Planning
• Liquidity Risk: 3-6 mos. liquidity reserves; money mkt.; cash reserves
• Interest Rate Risk: Shorten Maturities
• Credit Risk: Increase Quality & Diversification
• Inflation Risk: Equities; Hard Assets
• Currency Risk: Non-Monetary Denominated Assets
• Security Specific Risk: Diversification/Sale Strategy
• Market Risk: Diversify; Increase Reserves
• Tax Risk: Roth, Muni Bonds, Tax-Loss Harvesting, Qualified Plans
• Investor Behavior: Education, Trusted Advisor
• Deflation Risk: Annuities; Guaranteed Income Sources
Resiliency Techniques
4) Personal Estate Planning & Business Succession :
• Disclaimer Style Wills
• Properly Funded Buy/Sell Agreement
– Death/ Disability…Divorce, Done?
• Contingent Beneficiaries/Trustees/Guardians
• Liquidity Risk
– Federal & State Estate Taxation, Probate, Capital Gains Tax*
• Wealth Transfer Risk
* This information should not be considered as specific tax/legal advice. Clients should consult their
tax/legal advisor regarding their own specific tax/legal situation
Retirement planning demands obsessive scrutiny
of risk. If we fail at this point, we can ruin lives.
Clients must be better educated about the known
and possible risks they face in their retirement
portfolios.
~Rick Adkins, CFP®, ChFC, CLU
“What I’ve Come to Believe about Retirement Planning”
Journal of Financial Planning, July 2010
MARKET, HUMAN AND TAX RISKS:
Market:
Deflation & Recession
Downside Market Volatility
Return Sequence Risk
High Inflation
Upside Market Volatility
Participation / Opportunity Risk
Normal Market Performance & Volatility
Human:
Die too Soon
Become Disabled
Live too Long
Normal Life Expectancy & Morbidity
Tax:
High Tax Rates
Low Tax Rates
Periods of Moderate Taxation
Retirement Income Planning:
“Build it with the end in mind!”
Risk Scenarios:
•Periods of Unusually poor Market
Performance and Deflation
-Market Risk
•Premature Death or morbidity issues/LTC
•Periods of unusually High Taxation.
Solution Alternative:
•Traditional sources of retirement income;
pensions, S.S., Treasury bonds, CDs,
Dividends
•Fixed Annuity Contracts
•Life Ins. & L.T.C. Benefits and features
(Including guaranteed income options)
Risk Scenarios:
•“Normal” Financial Market Performance
and Volatility
•“Normal” Life Expectancy and morbidity
experience.
•Periods of Moderate Taxation
*
Risk Scenarios:
•Periods of unusually High Inflationand
Volatility.
-“Return Sequence” Risk
•Considerably outliving normal Mortality.
•Periods of unusually Low Taxation
Solution Alternative:
Solution Alternative:
•Traditional asset allocation models with
disciplined rebalancing capabilities
•Term Life Insurance Protection
•A variable annuity contract with living **
benefits riders to provide guaranteed
inflation-adjusted income.
•A variable annuity contract with living
benefits riders to provide guaranteed
lifetime income without annuitization
Retirement Income Planning:
“Build it with the end in mind!”
Disclosures
*The previous graphics are for illustrative purposes only. It is not indicative
of any particular investment or guarantee of future performance. Neither
diversification not asset allocation guarantee against loss, they are methods
used to manage risk.
**Riders are available at an additional cost and subject to restrictions
including limitations as to annual withdrawal amounts, periods which the
rider may not be cancelled, and investment limitations.
Phases of Retirement
Why we need to keep it Flexible!
SATURDAYS
Honeymoon Phase:
•Travel
•Hobbies
•“Academic Indulgences”
•Charitable/Give-Back
Initiatives
•Often need additional
income to fund expensive
pursuits.
FRIDAYS
Early/Pre-Retirement:
•Often still working
Either Part-time or
Flex-Time
SUNDAYS
Veteran Retiree Phase:
•Spiritual
•Family
•Rest
•Often looking for
simplicity and consistency
in routines
MONDAYS
Fight for Independence
and Dignity Phase:
•Often facing complexities
of Long Term Care, nursing
home, and end of life
issues.
But it brings to my mind the H.L. Menken quote,
“For every complex problem there is an answer
that is clear, simple and wrong.”
~Rick Adkins, CFP®, ChFC, CLU
“What I’ve Come to Believe about Retirement Planning”
Journal of Financial Planning, July 2010
Benefits of Integrating Resiliency
Techniques
• Efficiency
– True cost
• Allocate dollars to solutions that:
– Serve more than one purpose
– Address more than one risk
– Add benefit throughout life stages
• Flexibility
Retirement Income v.
Wealth Transfer
• Two sides of the same coin
• Wealth Transfer Emotions / Risks
– Risk of giving away more than client can afford
– Risk of negative impact on children or other
recipients (“entitlement”)
– Risk of changes in the law
• Managing the risks
Federal Estate Tax
Federal Estate Tax
Exceptions
• Unlimited Marital Deduction
• Charitable Gifts
Value of bequest
• FMV as of date of death (step-up in basis)
Must pay tax within 9 months
• Look for liquidity
Portability
• Transfer unused exemption on death but only to
surviving spouse
Federal Gift Tax
Exceptions
• Annual exclusion gifts
• $13,000 (2012) per person, per year
• Must be a present interest
• Unlimited Marital Deduction
• Medical and Education expenses
• Tax Payments relative to Intentionally Defective Grantor
Trusts
Value at gift
• Donor’s basis
Federal Gift Tax
Glimpse of the Future
Republican View – Eliminate Estate Tax
Democratic View - Sensible Estate Tax Act of
2011
Obama Administration View – Budget Proposal
for 2013
Asset Segmentation by Purpose:
Determining “Core Capital”
2 out of 3 is “Hall of Fame”!
33%
34%
Financial
Security
Personal Use
“Core
Capital”
Wealth Transfer
33%
Examples:
Vacation Home – Good for Personal Use and Wealth Transfer, but provides no Financial Security
Life Insurance – Good for Wealth Transfer and Financial Security, but has no Personal Use
Questions?
Getting Ahead of the Curve:
Using Technology to Illustrate
Planning Solutions
Disclaimer
The financial analysis provided compares your assets and savings program with your financial priorities and
concerns. It provides a broad general guideline that may be helpful in shaping your financial and investment
objectives. This analysis is not intended for investment recommendations, but represents possible financial
strategies based on your responses to the questions within the Questionnaire regarding your personal circumstances,
financial goals and risk tolerance.
The reports furnished are dependent on the financial information that you provide as well as the interest rate/rate of
return assumptions that have been agreed upon. All future predictions are hypothetical, based solely on
hypothetical rates of return and the financial information provided in the Questionnaire. All financial data
values provided are current only as of the date of this analysis. Calculations illustrating income tax concepts,
deductions, as well as investment gains and losses are based solely on the data provided by you.
This report should not be relied upon for tax purposes. Values have been rounded to the nearest whole dollar
amount. The values in this report are as of the date indicated.
Note: Assets not held with Securian Financial Services (Securian) as indicated above with an "*", are not included
in Securian’s books and records and the values shown cannot be verified by Securian. The values used are based on
information supplied by you, the client. These assets may not be covered by SIPC. Retain and review your source of
data regarding these assets.
All examples, charts, and graphs that depict future values, expenses or other estimated numbers are
hypothetical in nature, and are not intended to be actual future numbers, but rather an estimation based on
reasonable assumptions.
The actual value will fluctuate and may be worth more or less than the amount originally invested. If applicable, the
values for life insurance and annuity benefit may be reduced by any policy loans or withdrawals. Clients should
review and retain individual mutual fund, brokerage account, annuity, and/or life insurance statements and compare
them with the values from this report for accuracy.
Government Bonds and Treasury Bills offer a fixed rate of return if held to maturity, and are insured by the US
Government.
Disclaimer
Investments in the Money Market Account are neither insured nor guaranteed by the Federal Deposit
Insurance Corporation or any other government agency, and there is no assurance that the account will
be able to maintain a stable Net Asset Value of $1 per share. It is possible to lose money by investing in the
fund.
Savings and checking accounts typically offer a fixed rate of interest, and are backed by the FDIC or NCUA
insured. Investments in equities, fixed income or cash instruments are not federally insured, and have no
financial institution guarantee, and can lose money.
This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be
used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to
support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of
their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.
We have made no attempt to review your property and liability insurance policies (auto and homeowners, for
example). We strongly recommend that in conjunction with this financial plan, you consult with your
property and liability agent to review your current coverage to ensure that it continues to be appropriate. In
doing so, you may wish to review the dollar amount of your coverage, the deductibles, the liability coverage,
including an umbrella policy, and the premium amounts.
DISCLOSURES CONCERNING MUTUAL FUND/INVESTMENT OPTIONS
Past performance is not necessarily indicative of future results.
Investment risks associated with international investing, in addition to other risks, include currency
fluctuation, political and economic instability, and differences in accounting standards when investing in
foreign markets.
Investment risks associated with investing in real estate market, in addition to other risks, include rental
income fluctuation, depreciation, property tax value changes, and differences in real estate market values.
Disclaimer
Investments in smaller company and micro-cap stocks generally carry a higher level of volatility and risk
over the short term. Refer to the fund's prospectus for specific information about risks associated with the
investment, as well as charges and expenses.
The risks incurred by mortgage securities include, but are not limited to, reinvestment of prepaid loans at
lower rates of return. In addition, the net asset value of mortgage securities funds may fluctuate in response
to changes in interest rates and are not guaranteed.
Securities and investments are distributed through Securian Financial Services, Inc., Member FINRA/SIPC.
Investment Advisory services are provided through Securian Financial Services, Inc., 400 Robert Street
North, St. Paul, MN 55101, 1-888-237-1838.
SAMPLE CASE 1
Sample Case 1: Assumptions
Base Facts
• Tax Laws
– Estate tax law fixed at 2012
levels without indexing
– Income tax law sunset occurs
EOY 2012
– PA state tax at 3.07%
• Family Information:
– John & Jane Samplecaseone
• Age 65
• John healthy, Jane some medical
issues
• Retired
• Assumed age of death is 90 for
both
– 3 children w/ 3 spouses
– 5 grandchildren
• Trusts
– Irrevocable Trust
• Remainder beneficiaries are the
children & grandchildren
• 6% growth
• Property
– $1M jointly owned primary
residence
• 2% growth
• No mortgage
– $1M jointly owned second home
• 2% growth
• No mortgage
Sample Case 1: Assumptions
•
•
Investments
–
–
NQ
•
–
6% growth
$2M tax basis
•
6% growth
$2M tax basis
–
–
–
–
50% qualified dividends (when
applicable)
10% investment income subject to
ordinary income tax
30% capital gains (short or long
term)
10% non-taxable
$2M jointly owned cash
•
Social Security at age 67
•
•
•
2% growth
Income:
–
Realization on all stock accounts:
6% growth
Cash
–
•
6% growth
$1.5M Jane’s IRA
•
$10M stock account owned by John
–
–
•
•
6% growth
$2M tax basis
$10M stock account owned by Jane
–
–
•
$1.5M John’s IRA
$10M jointly owned stock account
–
–
•
Qualified
$24,000 annually for John growing
at 2%
$21,600 annually for Jane growing at
2%
Expenses
–
$371,280 annual living expenses
growing at 4%
Sample Case 1: Assumptions
• Wills
– Generic will
• Fund a CST
• Remainder to spouse
Scenario 1: Financial
Independence
• Base Facts PLUS
– $120,000 annual medical
expense growing at 6%
from age 70 to age 80
– Total inflated additional
after tax costs total
$2,404,246
Scenario 2: Gifting
• Base Facts PLUS
Scenario 1 PLUS
– $13,000 per child and
grandchild per parent
– Every year until death
– Goes into Irrevocable Trust
(growing at 6%)
– Indexed
– Total annual gifting
$208,000/year
Sample Case 1: Assumptions
Scenario 3: Education
Scenario 5: Gift to ILIT
•
•
Base Facts PLUS Scenario 1 PLUS
Scenario 2 PLUS
–
Education for all grandchildren (all
children out of school)
•
–
Cost
–
–
–
–
–
–
$20,000/year for grade school
$25,000/year for HS
$55,000/year for college
5% growth indexed immediately
Total inflated education costs $3,682,281
Convert IRAs to Roth IRAs with tax
expense of $1.2M (calculated in transfer)
$2.5M planned one-time (2012) gift with
ILIT as recipient
–
–
–
$1.25M from John’s stock account
$1.25M from Jane’s stock account
$7.5M planned one-time gift to Irrevocable
Trust 2 (growing at 6%)
•
•
Base Facts PLUS Scenario 1 PLUS
Scenario 2 PLUS Scenario 3 PLUS
–
An ILIT owns a $10M Survivorship
Universal Life
$2.5M one-time premium
•
Scenario 4: Roth Conversion
•
Base Facts PLUS Scenario 1 PLUS
Scenario 2 PLUS Scenario 3 PLUS
Scenario 4
$3.75M from John’s stock account
$3.75M from Jane’s stock account
What-If: Bear Market -30% Year 1
•
There is a What-If option that takes the
portfolios lose -30% that first year 2012
that may be applied to any scenario.
Shown at the end of Scenario 5.
Base Facts: Balance Sheet
Base Facts: Assets
Base Facts: Cash Flow
Base Facts: Estate Flow Chart
Base Facts: Estate Transfer
Scenario 1: Cash Flow
Scenario 2: Cash Flow
Scenario 2: Estate Flow Chart
Scenario 3: Cash Flow
Scenario 3: Estate Flow Chart
Scenario 4: Cash Flow
Scenario 4: Retirement Asset Summary
Scenario 4: Estate Flow Chart
Scenario 5: Cash Flow
Scenario 5: Assets
Scenario 5: Estate Flow Chart
Scenario 5: Cash Flow (Bear Market)
SAMPLE CASE 2
Sample Case 2: Assumptions
Base Facts
Family Information
•
Dave & Donna Samplecasetwo
–
–
–
•
•
•
•
Age 70
Retired
Assumed age of death is 90 for both
4 children (w/ 4 spouses)
7 grandchildren
Business Interest
Family Business
–
$20M value (discounted value)
•
•
–
–
•
•
•
•
Business FMV = $90M
Dave & Donna are 33% owners
Trusts
•
Irrevocable Trust
–
–
•
•
•
2% growth
No mortgage
$500K business real estate 1
–
–
–
•
2% growth
No mortgage
$500K jointly owned second home
–
–
C-Corp
5% growth
Business Real Estate 1 LLC
Business Real Estate 2 LLC
Business Real Estate 3 LLC
Business Real Estate 4 LLC
Property (business property & mortgages based
on 33% ownership)
$500K jointly owned primary residence
–
–
•
Remainder beneficiaries are the children &
grandchildren
6% growth
Owned by Business Real Estate 1 LLC
2% growth
No mortgage
$600K business real estate 2
–
–
–
Owned by Business Real Estate 2 LLC
2% growth
$400K, 15yr mortgage at 6%
Sample Case 2: Assumptions
•
–
–
–
•
–
$750K business real estate 3
Owned by Business Real Estate 3
LLC
2% growth
$450K, 15yr mortgage at 5%
$5M Donna’s low basis stock
account
•
•
–
6% growth
$2.5M tax basis
Realization on all stock accounts:
–
$1M business real estate 4
–
–
–
Owned by Business Real Estate 4
LLC
2% growth
$700K, 15yr mortgage at 5.5%
–
–
–
•
Qualified
–
Investments
• NQ
–
$5M Dave’s low basis stock account
•
•
$2M Dave’s IRA
•
•
6% growth
$2.5M tax basis
25% qualified dividends (when
applicable)
20% investment income subject to
ordinary income tax
55% capital gains (short or long
term)
0% non-taxable
6% growth
Cash
–
$2M jointly owned cash
•
2% growth
Sample Case 2: Assumptions
Income
• Social Security at age 67
–
–
•
NQDC
–
–
–
•
Jointly owned
$180K annually ($15k/month)
No growth
Dave’s Board Income
–
–
•
$26,400 annually for Dave growing at 2%
$12,000 annually for Jane growing at 2%
$1M annually until death
No growth
Business real estate 1 income:
–
–
–
•
•
$57,600/year
2% growth
Owned by Business Real Estate 2 LLC
Business real estate 3 income:
–
–
–
•
$54,000/year
2% growth
Owned by Business Real Estate 1 LLC
Business real estate 2 income:
–
–
–
$250K annually from age 70 to 80
No growth
Dave’s dividend Income
–
–
•
$81,000/year
2% growth
Owned by Business Real Estate 3 LLC
Business real estate 4 income:
–
–
–
$60,000/year
2% growth
Owned by Business Real Estate 4 LLC
Sample Case 2: Assumptions
•
•
•
•
•
•
•
•
•
Expenses
$371,280 annual living expenses
growing at 4%
Gifting
$13,000 per child and grandchild per
parent
From the Family Business
Every year until death
Everything goes into the Irrevocable
Trust
Wills
Generic will
–
–
Fund a CST
Remainder to spouse
Scenario 1: Education
• Base Facts PLUS
–
Education for 4 of the 7 grandchildren
(3 of the grandchildren and all children
out of school)
•
Cost
–
–
–
•
–
$20,000/year for grade school
$25,000/year for HS
$55,000/year for college
5% growth indexed immediately
Total inflated education costs $877,362
Scenario 2: $10M Gift
• Base Facts PLUS Scenario 1 PLUS
–
–
–
$10M gift in 2012 to the Irrevocable
Stock Trust (growing at 6%)
Dividend income $500,000
Dividend Income to Trust $500,000
Sample Case 2: Assumptions
Scenario 3: Estate Distribution 60/40
• Base Facts PLUS Scenario 1 PLUS
Scenario 2 PLUS
–
–
Family Foundation (charity) (its core cash
growing at 5%)
2 bequests added to base facts will:
•
•
–
60% of remaining estate to kids
40% of remaining estate to Family
Foundation (charity)
$10M Life Insurance Survivorship policy
•
$200K premium
–
–
•
First 10 years the premium is paid by
the Other Family Business Owners
Remainder years the premium is paid
by the Irrevocable Trust
Beneficiaries on the policy are
–
–
80% Irrevocable Trust
20% Other Family Business Owners
(this shows the $2M paying back for
the 10 years of premium payments)
What-If: Family Business Growth at 2%
• There is a What-If option that takes the
Family Business Growth to 2% that may
be applied to any scenario.
What-If: Family Business Growth at 10%
• There is a What-If option that takes the
Family Business Growth to 10% that may
be applied to any scenario.
Base Facts: Balance Sheet
Base Facts: Assets
Base Facts: Cash Flow
Base Facts: Estate Flow Chart
Base Facts: Estate Transfer
Scenario 1: Cash Flow
Scenario 1: Estate Flow Chart
Scenario 2: Assets
Scenario 2: Cash Flow
Scenario 2: Estate Flow Chart
Scenario 2: Estate Transfer
Scenario 3: Cash Flow
Scenario 3: Estate Flow Chart
Scenario 3: Estate Transfer
Scenario 3: Estate Flow Chart
(Family Business Growth at 2%)
Scenario 3: Estate Flow Chart
(Family Business Growth at 10%)
Questions?
Financial Advisors do not provide specific tax/legal advice. This information should not be considered as specific tax/legal advice.
You should consult your tax/legal advisor regarding your own specific tax/legal situation.
Securities and investment advisory services offered through Securian Financial Services, Inc., Member FINRA/SIPC. Legacy
Planning Partners is independently owned and operated.
Separate from the financial plan and an advisors’ role as financial planner, an advisor may recommend the purchase of specific
investment or insurance products or accounts. These product recommendations are not part of the financial plan and clients are under
no obligation to follow them.