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“Gifting” & Things To Be Thankful For |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. Gifting To Those You Love 2. Gifting: Control Is The Issue 3. A Good WayTo Gift, In My Opinion 4. A Time To Give Thanks 5. Thanks To Those Both Near And Far 6. The Biggest Thanks Of All Introduction My gosh, it’s Thanksgiving already and the holidays are upon us. Where did this year go? With two teenagers and all their activities, plus my very busy writing schedule, time just flies by for me. Probably for you too. Christmas and New Years will be here before we know it, and we’ll be into 2007. While we’re all very busy this time of year, the holidays are also a very good time to review your investments and make any changes you deem necessary prior to the year-end. Use your holiday time to implement changes, if needed, and get everything in place for the start of the new year. Since we’re entering the season of giving, I want to talk about the issue of “gifting” and how you can give up to $12,000 per year to your kids or grandkids (or anyone for that matter) with no tax consequences. A husband and wife can give $12,000 each, or a total of $24,000 a year, with no tax consequences for the donor(s) or recipient(s). Gifting is one good and legal way to minimize estate taxes. You can transfer large sums of money to your kids or grandkids (or whomever) by taking advantage of gifting. Of course, there are smart ways to do this, and there are not-so-smart ways to do this. You need to be careful in how you take advantage of the “gift tax exclusion.” The point is, this is the time of year to consider the smart ways of gifting to those that you love. I will discuss this in more detail in the pages that follow. And given that this is the week of Thanksgiving, I will tell you what I am particularly thankful for this year. Let’s get started. Gifting To Those You Love Let me start this discussion with a quick bit of background. Being in the investment management business, we get questions every year from clients and prospective clients who are trying to help their kids or grandkids learn to save and invest wisely. One of the most common observations along this line is: “I would really like to help my kids with investing, but they just don’t have enough money to get started.” This is all too true. Most young families just make ends meet and don’t have the savings to start an investment program when they really need to. Along that line, another very common comment we hear is: “I would love to give them the money to get started, but I worry they would just blow the money on wasteful things.” Yet there are ways to gift money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life. And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire. I will talk more about that below, but first let’s explore the basics of the gift tax exclusion. Current tax law allows that you can gift up to $12,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient. As noted above, a husband and wife can give $12,000 each, or a total of $24,000 a year, with no tax consequences for the donor(s) or recipient(s). The annual gift tax exclusion is one of the most popular ways that wealthy individuals transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay. Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government. I’m surprised that more families don’t take advantage of the gift tax exclusion. My wife, Debi, and I gift the maximum to our two kids – currently $12,000 per parent or $24,000 a year to each kid. We gift this money each year into trusts that we have set up for each of our kids. Gifting: Control Is The Issue One of the requirements of the gift tax exclusion is that the beneficiary must have ownership and control of the assets donated. This is a big deal when considering gifting $12,000-$24,000 (perhaps annually) to a child, grandchild or other person(s). Generally speaking, if you gift it, the money becomes theirs, and it is possible that they can just blow the money on wasteful spending if they want. This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys. But there are ways – directly and indirectly - to effect control of the assets gifted to a child or grandchild. If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever. As noted above, Debi and I have established trusts for each of our minor children, and these trusts are where we make our annual contributions. Trust laws vary among the states, so I won’t get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children and maintain control over those assets, at least until they reach legal age, or whatever age you specify in the trust(s). In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their names. In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities. The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance. The UTMA is slightly more flexible than the UGMA. To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. Most UGMAs end at 18 and most UTMAs at 21, but it does depend on the state. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. Custodial accounts are most often established at banks and brokerages. The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences. But there must be a high degree of trust involved. If you do elect to form trusts, be sure to consult with an attorney that is familiar with the laws of your state. Gifting To Adult Children As noted above, you can gift to minors by establishing trusts in which the donor(s) can maintain control of the assets. But there is also a way to gift to adult children which can also be effective, at least in my experience. Consider gifting them an investment account. Here is one way it can work. Let’s say you are the parents or grandparents of an adult child. The two of you agree to gift $24,000 (or some lesser amount) to your adult child or grandchild. But you only agree to gift the money if it goes into a specified investment account. And you may agree to gift another $24,000 in the following year (or years) if things go as planned. This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help). It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc. For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children. You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years. This provides a huge incentive for the beneficiary to keep the money in the investment account. If they don’t, you simply stop the gifts beyond the first year. Sounds simple, but it can be very effective. This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want. If they get into investing, that means they’ll likely get more serious about saving, cutting expenses, building wealth, etc., etc. A Good Gifting Strategy, In My Opinion Let’s say that you and your wife want to gift $24,000 to a child or grandchild via the gift tax exclusion. And let’s say you agree with me that an investment account is the way to go. Now what? In previous issues of this E-Letter, I have discussed our “Absolute Return Portfolios.” We have searched among the thousands of stock mutual funds to find those that have delivered consistent returns in both up and down markets. We have put together groups of these successful funds to make up our Absolute Return Portfolios. The Absolute Return Portfolios are structured to fit the needs and goals of different types of investors. We have three different Absolute Return Portfolios which we refer to as Moderate, Moderate-Plus and Aggressive. Each of the three portfolios contains 5-6 different mutual funds. The funds selected for each of these portfolios vary in terms of performance, ranging from conservative to more aggressive. Best of all, the Absolute Return Portfolios can accommodate various levels of gifts. The minimum investment required to invest in one of our Absolute Return Portfolios is normally $15,000. However, if you would like to gift an investment to someone you love, we will accept minimum accounts of only $10,000 for a limited time. There is no maximum amount that can be invested in our Absolute Return Portfolios. In order to do this with our assistance, you establish an account at TD Ameritrade where your funds are held, and grant us the authority to purchase the funds on your (or the recipient’s) behalf. You will receive copies of the monthly account statements if you are the custodian for an UTMA or UGMA account. As always, I have my own money invested in all three of these programs. We have our kids’ money invested in the Moderate Absolute Return Portfolio. If this sounds like something you are interested in, or if it may be a suitable gift for someone you love, give us a call at 800-348-3601 and we will send you the necessary paperwork to get started. A Time For Giving Thanks Our recent decision to offer the “All They’ll Need To Know” booklet in the E-Letter prompted literally thousands of requests. While processing these requests, my staff and I were impressed by the many who took the extra time to write a note of thanks for our offering this valuable resource. I was very impressed by this outpouring of thanks on the part of my loyal readers. While I can review readership statistics back to the time I started the E-Letter, I can’t tell from that information whether those who read each weekly issue are benefiting from what I provide. The recent flood of requests and comments from long-time readers let me know that my readers do appreciate what I write each week. It is a very rewarding feeling knowing that I am making a difference in my readers’ lives. The numerous expressions of thanks that we received, coupled with this season of the year when we think about all of the things we are thankful for, reminded me that it is also important for me to convey my thanks to all of those who influence my life and my business throughout the year. Thanks For Long-Distance Relationships One of the benefits of writing a nationally distributed E-Letter is that I have business relationships spread all across our great country. Sometimes it is easier to express thanks to those that you see and talk to in person than those who are only available via e-mail or telephone. However, I want to take this opportunity to thank the various long-distance relationships that mean so much to me personally. First, I want to express appreciation for my clients, who really make all of this possible. Were it not for those who have entrusted us to manage their investments, there would be no E-Letter. My companies currently have almost 1,300 clients representing every state in the Union, and many of these individuals have been our clients for over a decade. In many cases, what began as client/advisor relationships have now developed into warm friendships. Next, I want to express my sincere appreciation to all of you who regularly read my E-Letters. Since its start in September of 2002, I have continued to be impressed at the quality of most responses to my writing. While there have been a few abusive responses (usually riddled with spelling and grammatical errors), even most readers who did not agree with me offered reasoned arguments that respected the right to have a different opinion. These comments, both those that agree as well as those that disagree, help me to put out a better E-Letter. I also want to say “thanks” to all of the staff at Investors Insight for providing a platform for me to get my message out to you. As I have said before, the E-Letter grew out of periodic e-mails to my clients after the 9/11 tragedy. There was so much mis-information out there that I wanted to try to help sort through the stories. A year later, Investors Insight saw some of my writings and requested permission to publish them as a weekly E-Letter and the rest, as they say, is history. Other long-distance relationships to which we owe a debt of gratitude are our consultants, which include accountants, legal counsel and those that help us evaluate and track money managers. It has become a fact of life that good counsel is necessary for a successful business, and I think ours are among the best in the industry. The final long-distance relationships I’d like to thank are the Advisors we recommend. Since we perform due diligence on each of them, we are well aware of all of the work it takes to formulate and implement a market strategy designed to manage the risks of being in the market. We also appreciate the hard work of each of their staffs, who diligently process account paperwork that we send to them. Thanking Those Close To Home I would be remiss if I did not extend a hearty “thanks” to my internal staff. I am very fortunate in that all of my employees have been with my company at least four years, and a number of my employees have been with me for over a decade. There are members of my staff that help me research topics for the weekly E-Letters, while others process information requests and speak to readers who call with questions or comments. And all of this is over and above their regular duties required in our investment management business. The recent reader response for the “All They’ll Need To Know” booklet seemed overwhelming to me, but my staff handled it like a well-oiled machine. So thanks guys, you really help make me look good. During this time it is important to never forget to be thankful for your family. My wife, Debi, works in the business and is an important sounding board for many of the ideas that make their way into the weekly E-letters. She is also the CFO of the company, and handles all of the detailed financial duties that allow me to concentrate on writing and overseeing our investment management business. She does all that and is still my best friend and a great Mom! I’m also thankful for my kids. While many newspaper, radio and TV stories lament “out of control” teenagers, I am thankful that my kids are not among them. My son, Tyler, is now a high-school junior, makes good grades and plays sports year-round, and works here in the business during the summers. My daughter, Jordyn, is an energetic freshman who also makes good grades and plays sports, and I expect that she will also begin working here in the near future. Both are also actively involved in their youth group at our church. The Biggest “Thank You” Of All On a larger scale, I am thankful to be living in the greatest country on the face of the earth. Sure, we have our problems, but I’d be willing to bet that there are citizens of many other countries who would trade places with us in a heartbeat. I’m even grateful in the wake of an election that didn’t go the way I would have preferred. Only in a country where you have the freedom for political discourse can you have a situation where the will of the people speaks as loudly as it did just a few weeks ago. In 1994, a similar message was sent when the Republicans gained control. In many countries, such a shift in power cannot happen without a bloody revolution, but here in America, our votes give us the ultimate say as to the direction of the country. I am sometimes amused at politicians and celebrities who want to make controversial statements, and then complain about losing votes or income. It is important to remember that our freedom of speech has never been a freedom from consequences for what we say. These complainers should be thankful that they live in a land where they have the right to say whatever they want without having to fear being hauled away in the middle of the night by the “thought police.” And finally, though there seems to be a vocal minority who want to challenge the “One Nation, Under God” concept, I don’t think that we should ever forget to thank Him who has blessed our nation so bountifully. No matter what detractors may say, our nation was founded upon Biblical principles, and I think that’s a big reason why America has been so successful and has lasted for so long. Even though a vocal minority wants to push the separation of church and state to ridiculous extremes, they’ll never be able to remove God’s influence from the precepts upon which this country was founded, nor the solid beliefs of its people. These are just a few things that I am very thankful for during this Thanksgiving season. As you are inundated with food, football and Christmas shopping promotions this week, please don’t forget to stop for a minute, bow your head and be thankful for all of the blessings you have received during the year. I certainly am! Wishing you a bountiful Thanksgiving holiday,
Gary D. Halbert SPECIAL ARTICLES:
Bench-Clearing Brawl — Democrats & The Courts
The (Liberal) Press At War
Thanksgiving: The Way It Used To Be |
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