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FINANCIAL SECURITY IN AN INSECURE WORLD Presented to : Main Line Assoc. for Continuing Education June 21, 2012 Presented by: Christopher J. Hackley, CFP,

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Presentation on theme: "FINANCIAL SECURITY IN AN INSECURE WORLD Presented to : Main Line Assoc. for Continuing Education June 21, 2012 Presented by: Christopher J. Hackley, CFP,"— Presentation transcript:

1 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 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.

2 How to Provide Financial Security in an Insecure World

3 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

4 W HY THE W ORLD HAS C HANGED … Many have Lost Faith in: Government Corporations “Pillars of Society” “Nuclear” Family …How can they gain confidence? …Who can they trust?

5 T HE W ORLD HAS C HANGED … …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.

6 *We Need to Educate Clients on the T YPES OF R ISKS *We Need to Empower Our Clients to be F INANCIALLY R ESILIENT Using All the Tools at Our Disposal As Financial Professionals… With proper Integration and Implementation, we increase Resiliency.

7 Pray for potatoes with a hoe in your hand. ~Old Irish Proverb Nick Murray May 2011

8 Financial Planning Increases Resiliency Asset Management & Ret. Income Planning Estate Planning & Business Succession Risk Management & Protection Planning Debt Management & Cash Flow Planning Let’s look at the risks embedded in each quadrant.

9 Categories of Financial Risks Tax Risks Portfolio Risks Human Risks

10 Tax Risks Income Tax Payroll Tax Capital Gains Tax Property Tax Gift and Estate Transfer Tax

11 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

12 Human Risks Mortality Risk Morbidity Risk Longevity Risk Psychology and Behavioral Finance Risk “Entitlement” Risk Divorce DUI and Other Malfeasance Property and Casualty

13 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

14 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

15 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

16 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

17 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

18 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

19 MARKET, HUMAN AND TAX RISKS: Deflation & Recession Downside Market Volatility Return Sequence Risk High Inflation Upside Market Volatility Participation / Opportunity Risk Live too Long Die too Soon Become Disabled Low Tax RatesHigh Tax Rates Periods of Moderate Taxation Normal Market Performance & Volatility Normal Life Expectancy & Morbidity Market: Human: Tax:

20 Retirement Income Planning: “Build it with the end in mind!” “Normal” Financial Market Performance and Volatility “Normal” Life Expectancy and morbidity experience. Periods of Moderate Taxation Periods of Unusually poor Market Performance and Deflation -Market Risk Premature Death or morbidity issues/LTC Periods of unusually High Taxation. Periods of unusually High Inflationand Volatility. -“Return Sequence” Risk Considerably outliving normal Mortality. Periods of unusually Low Taxation Solution Alternative: 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 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: Traditional asset allocation models with disciplined rebalancing capabilities Term Life Insurance Protection * **

21 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.

22 Phases of Retirement FRIDAYS SATURDAYSSUNDAYS MONDAYS Early/Pre-Retirement: Often still working Either Part-time or Flex-Time Honeymoon Phase: Travel Hobbies “Academic Indulgences” Charitable/Give-Back Initiatives Often need additional income to fund expensive pursuits. Veteran Retiree Phase: Spiritual Family Rest Often looking for simplicity and consistency in routines Fight for Independence and Dignity Phase: Often facing complexities of Long Term Care, nursing home, and end of life issues. Why we need to keep it Flexible!

23 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

24 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

25 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

26 Federal Estate Tax

27 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

28 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

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30 Federal Gift Tax

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34 Glimpse of the Future Republican View – Eliminate Estate Tax Democratic View - Sensible Estate Tax Act of 2011 Obama Administration View – Budget Proposal for 2013

35 Asset Segmentation by Purpose: Determining “Core Capital” 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 “Core Capital”

36 Questions?

37 Getting Ahead of the Curve: Using Technology to Illustrate Planning Solutions

38 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.

39 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.

40 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,

41 SAMPLE CASE 1

42 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

43 Sample Case 1: Assumptions Investments –NQ $10M jointly owned stock account –6% growth –$2M tax basis $10M stock account owned by Jane –6% growth –$2M tax basis $10M stock account owned by John –6% growth –$2M tax basis Realization on all stock accounts: –50% qualified dividends (when applicable) –10% investment income subject to ordinary income tax –30% capital gains (short or long term) –10% non-taxable Qualified –$1.5M John’s IRA 6% growth –$1.5M Jane’s IRA 6% growth Cash –$2M jointly owned cash 2% growth Income: –Social Security at age 67 $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%

44 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

45 Sample Case 1: Assumptions Scenario 3: Education 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 Scenario 4: Roth Conversion Base Facts PLUS Scenario 1 PLUS Scenario 2 PLUS Scenario 3 PLUS –Convert IRAs to Roth IRAs with tax expense of $1.2M (calculated in transfer) Scenario 5: Gift to ILIT Base Facts PLUS Scenario 1 PLUS Scenario 2 PLUS Scenario 3 PLUS Scenario 4 –An ILIT owns a $10M Survivorship Universal Life –$2.5M one-time premium $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%) $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.

46 Base Facts: Balance Sheet

47 Base Facts: Assets

48 Base Facts: Cash Flow

49 Base Facts: Estate Flow Chart

50 Base Facts: Estate Transfer

51 Scenario 1: Cash Flow

52 Scenario 2: Cash Flow

53 Scenario 2: Estate Flow Chart

54 Scenario 3: Cash Flow

55 Scenario 3: Estate Flow Chart

56 Scenario 4: Cash Flow

57 Scenario 4: Retirement Asset Summary

58 Scenario 4: Estate Flow Chart

59 Scenario 5: Cash Flow

60 Scenario 5: Assets

61 Scenario 5: Estate Flow Chart

62 Scenario 5: Cash Flow (Bear Market)

63 SAMPLE CASE 2

64 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 –C-Corp –5% growth Business Real Estate 1 LLC Business Real Estate 2 LLC Business Real Estate 3 LLC Business Real Estate 4 LLC Trusts Irrevocable Trust –Remainder beneficiaries are the children & grandchildren –6% growth Property (business property & mortgages based on 33% ownership) $500K jointly owned primary residence –2% growth –No mortgage $500K jointly owned second home –2% growth –No mortgage $500K business real estate 1 –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%

65 Sample Case 2: Assumptions $750K business real estate 3 –Owned by Business Real Estate 3 LLC –2% growth –$450K, 15yr mortgage at 5% $1M business real estate 4 –Owned by Business Real Estate 4 LLC –2% growth –$700K, 15yr mortgage at 5.5% Investments NQ –$5M Dave’s low basis stock account 6% growth $2.5M tax basis –$5M Donna’s low basis stock account 6% growth $2.5M tax basis –Realization on all stock accounts: –25% qualified dividends (when applicable) –20% investment income subject to ordinary income tax –55% capital gains (short or long term) –0% non-taxable Qualified –$2M Dave’s IRA 6% growth Cash –$2M jointly owned cash 2% growth

66 Sample Case 2: Assumptions Income Social Security at age 67 –$26,400 annually for Dave growing at 2% –$12,000 annually for Jane growing at 2% NQDC –Jointly owned –$180K annually ($15k/month) –No growth Dave’s Board Income –$250K annually from age 70 to 80 –No growth Dave’s dividend Income –$1M annually until death –No growth Business real estate 1 income: –$54,000/year –2% growth –Owned by Business Real Estate 1 LLC Business real estate 2 income: –$57,600/year –2% growth –Owned by Business Real Estate 2 LLC Business real estate 3 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

67 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

68 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.

69 Base Facts: Balance Sheet

70 Base Facts: Assets

71 Base Facts: Cash Flow

72 Base Facts: Estate Flow Chart

73 Base Facts: Estate Transfer

74 Scenario 1: Cash Flow

75 Scenario 1: Estate Flow Chart

76 Scenario 2: Assets

77 Scenario 2: Cash Flow

78 Scenario 2: Estate Flow Chart

79 Scenario 2: Estate Transfer

80 Scenario 3: Cash Flow

81 Scenario 3: Estate Flow Chart

82 Scenario 3: Estate Transfer

83 Scenario 3: Estate Flow Chart (Family Business Growth at 2%)

84 Scenario 3: Estate Flow Chart (Family Business Growth at 10%)

85 Questions?

86 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.


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