Planning For The Future

IRAs
An Individual Retirement Account (IRA)—an individual qualified savings plan that you set up and contribute to yourself—can be a key component of your financial plan.
The IRA offers two significant tax advantages—deductibility and deferment. Some people can deduct their entire IRA contribution, generally up to $3,000, from their taxable income for the year. Everyone who opens an IRA, however, can enjoy the advantages of tax-deferred compounding. All IRA contributions and the interest, dividends and capital gains earned on them are allowed to grow tax-deferred in the account. No taxes come due until money is withdrawn, presumably after the investor has retired and is in a lower tax bracket.

The Roth IRA
In 1998, we witnessed the arrival of a new and exciting retirement product—the Roth IRA. This investment vehicle represents an opportunity to create tax-free income without having to invest exclusively (or at all) in municipal bonds. The minimum earned income requirements for contribution are the same as for a traditional IRA. However, contribution eligibility "phases out" based upon (and only upon) very specific adjusted gross income (AGI) ranges. Contributions are not deductible.

Rollover IRA’s
If you collect a lump sum of cash or stock from a company qualified plan, you can save taxes by depositing it into what is known as a direct IRA rollover. Any distributions from qualified retirement plans can be deposited into a rollover IRA tax-free. All earnings are also tax-deferred. This way you can continue to defer paying taxes until retirement, when you are likely to be in a lower tax bracket. Although you can’t roll over any after-tax contributions made to the company plan, you can roll over employer contributions. You have up to sixty days to deposit the funds into an IRA rollover account, or you can have your employer deposit the funds directly to avoid income tax on the distribution.

Getting Started
Any individual younger than 70-1/2 years who is receiving taxable compensation may establish an IRA, and the annual maximum contribution is $3,000. Although you have until April 15 of the year following the year for which a contribution is made to open or fund your IRA, it will grow much faster if you make your contribution as early as possible in the tax year. You don’t have to deposit the maximum every year — any amount is better than nothing. You don’t have to make your deposit in one lump sum, either.
As long as you meet the April 15 deadline, you can make periodic deposits throughout the year. You can even skip a year, but you won’t be able to make up for it with a larger deposit in the next year. You can open as many IRAs as you like and divide the deposits between them, but your annual contribution cannot exceed the maximum allowed.
Plan to hold your IRA over the long term. If you withdraw money from it before you turn 59 1/2, you face a penalty on the funds withdrawn. You’ll also be taxed at your normal income tax rate.

Withdrawing from your IRA
You can begin withdrawing funds from your IRA without any penalties anytime after age 59 1/2. Withdrawals must begin after you turn 70 1/2, specifically by April 1 of the next calendar year after one turns 70 1/2, or you face a stiff 50 percent excise tax. At that time, you’ll need to withdraw at least a minimum annual amount, based on life expectancy tables.
At your death, the assets in your IRA go to any beneficiary you have named. If this is your spouse, he or she can continue to defer paying income taxes on the money until it is withdrawn — at any time during his or her lifetime. If someone other than your spouse inherits your IRA, it must be withdrawn according to a specific schedule.
You can invest your IRA into a wide variety of securities. Only a few are excluded by law, including collectibles like gems, stamps, art and antiques; commodities; and investments made with borrowed cash. Although you can borrow money to deposit in your IRA, you cannot invest in margined stocks, commodity futures or mortgaged real estate.

Will You Be Ready for Retirement?
The first of the 76 million baby boomers are rapidly approaching their retirement years. These investors and future generations face financial challenges that need to be addressed to help preserve their assets, grow their wealth and ensure their standard of living in retirement.
Social Security benefits will be insufficient. Many believe the government will provide an adequate amount of money to help them enjoy a comfortable retirement. However, Social Security provides only about one-third of the amount needed to maintain an individual’s standard of living in retirement.
What's more, despite the government’s best efforts to secure Social Security benefits for every working American, the system's future remains uncertain. One reason is the large number of baby boomers who will become eligible for benefits when they attain retirement age.
Retirement plan assets will need to last a long time. To say that life expectancies are on the rise is an understatement. Today, there are four million people aged 85 or older -- 33 times larger than it was in 1900. There are more than 56,000 centenarians, up from 36,000 just a decade ago.
The good news is that today’s retirees may spend two decades or more enjoying their leisure years. The bad news is that their money is going to have to last much longer than those of previous generations, underscoring the importance of sound financial planning and prudent investing.
Company retirement plans offer no guarantees. Attractive corporate pension plans are becoming increasingly scarce in today's competitive economic environment. What's more, many of these plans do not provide the guarantees offered by plans in generations past.
Lump sum distributions may generate less income than expected. Many investors expect to receive a hefty lump sum distribution from their employer's retirement plan. However, the amount may not be enough to deliver a high steady flow of income to meet anticipated costs in retirement.
For example, a lump sum distribution of $300,000 that earns seven percent would only generate $21,000 in annual income. A distribution of $300,000 that produces six percent would deliver just $18,000 in yearly income. And these figures don't take into account federal income taxes.
Retirees have to protect their assets from the impact of inflation. Some individuals believe their investment portfolios can earn a little less than inflation and still enjoy a comfortable retirement. However, assets that don’t keep pace with inflation can lose their purchasing power, affecting one’s standard of living.
Retirees may need to care for aging parents. Most health insurance plans don't cover the cost of nursing home care, and the average cost of a nursing home stay today is more than $50,000 a year in many regions around the country. What’s more, the average nursing home stay is approximately three years.
Here are some steps you can take to overcome these challenges and ensure your financial future:
Revisit your financial plan. Identify what you want to achieve financially. The more specific you are, the better your chances of achieving them.
Make sure long-term growth is part of your strategy. To maintain your standard of living in the years ahead, remain invested in securities that can deliver the types of returns that will help your money grow fast enough to achieve your investment objectives.
While past performance is no guarantee of future investment results, equities have been the best performing asset class over time. Since 1926, the Standard & Poor's 500 composite index, a broad measure of stock market activity, has registered gains of approximately 11 percent annually, far outpacing bonds and money market assets.
Don't invest too conservatively. Conservative financial products are appropriate for short-term needs but not long-term investment goals. When your money isn't growing fast enough, you’re earning returns that may fall short of protecting your lifestyle and achieving your objectives.
Consider international investments. Since all the world's markets do not move in step with one another, investing internationally enables you to participate in markets that may be going up when the U.S. market is going down, which can help enhance performance and reduce portfolio volatility over time.
Be mindful of taxes. Tax laws have recently changed, making certain financial products more valuable to you than before. What's more, as a result of these changes, strategies employed long ago may no longer be the most beneficial for your specific needs.
Remain diversified. You wouldn't put all your eggs in one basket so why put most of your money in just a handful of securities? Investing too much money in one type of security can subject your portfolio to an inordinate amount of risk, which can be hazardous to your financial health at this stage of your lifecycle.
Prudent security selection and prudent portfolio management are the cornerstones of every successful long-term financial plan. It also keeps you from making emotional investment decisions or trying to time the market, an investment strategy fraught with risk.
Your financial advisor will be happy to review your portfolio and propose strategies and investments that best reflect your current financial situation.

Funding Education Expenses
As a caring parent, you want the best for your children—especially when it comes to their education. However, with the cost of a college education steadily on the rise, how can you ensure that you’ll be able to give your children the quality college education they deserve?
For the 2001-2002 school year, the average cost of tuition, books and supplies, and room and board was $3,754 at a four-year public college and $17,123 at a four-year private college, according to the College Board.
529 Savings Plans and the Coverdell Education Savings Account offer you two excellent ways to accumulate assets for projected higher education costs.
A 529 Savings Plan is a type of plan named for the section of the IRS Code where the plan is explained. These plans offer estate planning advantages, and their tax benefits have been enhanced by the 2001 tax law changes.
Here are a few of the key benefits:
Contribution limits are extremely high. Depending on your state of residence, you may be able to contribute more than $250,000. Some states even allow you to take a tax deduction on your contribution.
All earnings in a 529 Savings Plan accumulate free from immediate taxation. As long as the money is used for higher education costs, all money can also be withdrawn free from federal taxation. Qualified expenses refer to tuition and fees and educational-related expenses, e.g., the cost of uniforms, supplies, books, etc., for a child or grandchild.
Most plans offer a great deal of flexibility, from making investment choices to changing your beneficiary to determining how to spend the assets.
A 529 Savings Plan has no annual income eligibility limits.
Another good toll to supplement your education savings is the Coverdell Education Savings Account, formerly the Education IRA. These accounts have been greatly enhanced by the recent tax law changes.
You can make much higher contributions than you could to an Education IRA. For 2003, the maximum annual contribution is $2,000. In 2001, the contribution limit for the Education IRA was $500.
You have the flexibility to fund your Coverdell with a wide range of financial products, including mutual funds, individual securities and bank Certificates of Deposit.
If needed, you can access your assets to pay for elementary and secondary school expenses.
All earnings grow federal tax-free for as long as they remain in the account.
If assets are withdrawn for "qualified expenses," you do not have to pay any income taxes on those earnings. Qualified expenses refer to tuition and fees and educational-related expenses, e.g., the cost of uniforms, supplies, books, etc., for a child or grandchild.
If you're single and your Adjusted Gross Income (AGI) is less than $110,000 annually, you can contribute to a Coverdell. Adjusted Gross Income is that amount a taxpayer must use for computing income tax. It is determined by subtracting from gross income any un-reimbursed business expenses or deductions, such as moving expenses. If you're married, you and your spouse are eligible if your AGI is less than $160,000 annually.
Having a 529 Savings Plan does not preclude you from establishing a Coverdell Education Savings Account, provided you meet the eligibility requirements for the Coverdell. In addition to opening a Coverdell or 529 Savings Plan, consider establishing a regular investment account for college planning and contribute to it regularly, such as monthly or quarterly. Contributing regularly enables you to enjoy the benefits of compounding, one of the fastest ways to build wealth over time. Compounding is the amount earned on your original principal plus income, capital gains and/or accumulated interest reinvested.
For more complete information about the Coverdell Education Savings Account or the 529 Savings Plan, call your financial advisor today. He or she will help you create the college-planning strategy that best suits your financial needs.

Estate Planning Basics
Estate planning is the process of arranging your financial affairs so that your wealth will be distributed after your death according to your wishes and your estate will be settled with a minimum of delay and cost. In formulating your estate plan, you must address important personal issues. The way you resolve these issues may have significant tax consequences.
Some questions to consider are:
Who will receive the benefits of your wealth after you die?
Who will take care of the settlement of your estate and the on-going management of any trust funds you wish to establish?
If dependent relatives who are minors or who are physically or mentally handicapped survive you, who will be responsible for their physical care?
Do any of your beneficiaries need assistance in managing the inheritance you plan to leave them?
After resolving these important personal issues, you may also need to consider strategies permitted by law to reduce death taxes.
All assets you own at death in your individual name plus your share of tenants-in-common property are considered part of your estate and are fully taxable. One hundred percent of the value of all jointly owned property is taxable at your death, except to the extent that the surviving joint owner can prove that the property was originally acquired with the survivor’s own funds.
The exception to that guideline is joint interests owned by husband and wife. In that case, only 50 percent of the value is included in the taxable estate of the first deceased spouse, but the surviving spouse then becomes the sole owner. The entire value is then taxable when the surviving spouse dies.

The Federal Estate Tax
The federal estate tax is an excise tax based on the value of everything you own at death. With few exceptions, every individual is entitled to an “estate tax credit equivalency (ETCE)” against the estate tax. The ETCE, $1,000,000 in 2002, is scheduled for incremental increases until reaching $3,500,000 in 2009.
The federal estate tax is repealed for 2010. However, without additional congressional action, the current law will expire in 2011 and the tax will be reinstated with the ETCE equal to $1,000,000. Currently, the lowest effective federal estate tax rate is 41 percent, with a maximum rate of 50 percent. These high tax rates place a premium on estate tax reduction strategies.

The Marital Deduction
Federal estate tax rules allow a deduction of the total value of assets that pass from a married decedent to the surviving spouse, whether by will, by joint property survivorship or through a beneficiary designation. This is known as the unlimited marital deduction.
The marital deduction causes some couples to conclude that they have no reason to consider estate tax saving strategies. This view is short-sighted. If the entire estate passing from the first deceased spouse is combined with any separate assets of the surviving spouse, there is the potential for a very large estate tax when the survivor dies.

The Bypass Trust
The most popular method of avoiding a high estate tax at the death of the surviving spouse is known as the bypass trust. At the death of the first spouse, up to $1,000,000* of assets is placed in a trust fund. The estate tax, on this transfer, is eliminated through the estate tax credit equivalency available to the first spouse. Upon the death of the surviving spouse, the balance of the trust is distributed to children, grandchildren or other designated beneficiaries.
The value of this trust fund is not included in the taxable estate of the surviving spouse. Since the surviving spouse’s estate is entitled to a separate, additional $1,500,000* credit equivalent exemption, this strategy enables a couple to pass a total of $3,000,000 in 2004 to children or other beneficiaries free of estate tax.
Generally, a bypass trust can only be created with probate assets. If the married couple holds all their assets in joint names, for instance, the survivorship feature of joint ownership may destroy the ability to create a bypass trust. As a general rule, joint property interests should be kept to a minimum in the case of a married couple who wish to take advantage of the bypass trust plan.

Lifetime Gifts
All gifts of substantial value are added back to the donor’s taxable estate at death. This makes it impossible simply to “give it all away” in an effort to avoid the estate tax. There is, however, a gift tax annual exclusion. The first $10,000 in value of gifts (that’s $10,000 per year, per recipient) is completely free of gift tax and is not added back to the value of the donor’s estate at death. The exclusion can be doubled for married couples regardless of how the gift assets are owned by them.
For some, a yearly gift program is a simple, effective means of helping to ease the potential estate tax burden. If the value of your estate exceeds $1,000,000*, you may save between $4,100 and $5,000 for every $10,000 you give away while living. Some clients are well advised to consider making a one-time substantial gift of up to $1,000,000* ($2,000,000 for a married couple). While this amount is added back to the donor’s taxable estate at death, there is no gift tax presently payable and future earnings, as well as future appreciation on the property given away, escape gift and estate tax.

*The scheduled increases in the estate tax credit equivalency are as follows:

Caring for Your Heirs
Throughout your lifetime, you have worked hard to build a comfortable financial foundation for yourself and your loved ones. And along the way, you have paid your fair share of taxes. Is there any reason your estate should be subject to as much as 50 percent in federal taxes upon your death?
Of course not. But that is what happens to the estates of many people when they die. You can make sure it doesn’t happen to yours by setting up an estate plan designed specifically with your needs in mind. A personally tailored estate plan ensures your heirs will receive all the money that they are entitled to. It also guarantees that all of your property will be distributed in accordance with your wishes.
If your estate is valued at less than $1,000,000 ($2,000,000 for married couples), you may not have to pay federal estate taxes. If it’s valued at more than $1,000,000, your estate may be subject to federal taxes of up to 50 percent. Just because an estate is valued at less than $1,000,000 does not mean estate planning is unnecessary. Coordinating the affairs of a loved one without an estate plan can be a trying and time-consuming administrative burden for the survivors.
While you will need an estate planning professional to help you plan your estate, you can take some steps to start the process:

Step one: Make sure you have an up-to-date will. Name an executor. This is the person who will manage the distribution of your assets after your death. Designate heirs for those assets for which no beneficiary is named (trusts, insurance policies, and IRAs include beneficiary designations.) Identify a guardian for any minor children. Review your will annually or whenever you experience a major life change (divorce, death of a spouse or child, move to another state, change in financial status, etc.); or if the government passes laws regarding inheritance, taxes or trusts. However, a will does not help your estate avoid probate or reduce estate taxes.

Step two: Consider gifting as a way to reduce taxes. You may give $10,000 a year free from taxes to each of any number of individuals. You may also make direct medical or tuition payments to individuals free of gift tax. In most circumstances, an unlimited amount may be given to a spouse without tax consequences.

Step three: Consider using trusts to transfer ownership of property to others. Also, trusts can eliminate the need for probate, provide instructions for your care should you become incapacitated and potentially reduce estate taxes. Many types of trusts exist, each offering varying degrees of control and shelter from taxation.

Step four: Keep good records. Make copies of your will, trust documents, a list of assets and obligations (loans, credit card statements, etc.), insurance policies, investment accounts, and the names and telephone numbers of any professional advisors, such as a lawyer or accountant. Store this information in a safe place, and let your loved ones know where you keep it.

Step five: Work with an estate planning expert. Your estate plan is only as good as the professional who guides you. Ask friends for referrals. Do your own due diligence. A knowledgeable professional can help ensure your heirs will receive their fair share.

The Benefits of Charitable Giving
Would you like to secure a large federal income tax deduction and avoid capital gains taxes on highly appreciated assets? Are you interested in increasing your income and providing a special gift to your favorite charity?*
If so, consider creating a charitable remainder trust. It can provide you—or anyone else you choose—with lifetime income and provide the charity of your choice, such as a church, university or non-profit hospital, with remaining trust assets upon your death.
When you set up a charitable remainder trust, you receive an immediate federal income tax deduction and avoid capital gains income taxes on the sale of highly appreciated property you place into the trust.
You can name yourself as beneficiary and even name joint beneficiaries over one or more lifetimes. Naming successive beneficiaries will decrease the amount of your charitable deduction.
A charitable remainder trust is an irrevocable trust, which means that, once established, the trust cannot be modified or terminated without the beneficiary’s permission.
There are two basic types of charitable remainder trusts: the Charitable Remainder Unitrust and the Charitable Remainder Annuity Trust. With a Charitable Remainder Unitrust, you place assets in a trust and receive a set amount each year, based on a percentage selected by you. (No less than five percent of the fair market value of trust assets is permitted.) Following the death of the beneficiaries, the charity receives the trust property.
Annual payments to beneficiaries from a Charitable Remainder Annuity Trust must be in a specific dollar amount that remains the same until your death. It must be equal to five percent or more of the trust’s starting value.
To set up a charitable remainder trust, you need to have a good understanding of a wide range of issues from tax laws to investment strategies. You should ask yourself some important questions such as, do you want to donate appreciated property or cash? Can you be sure your trust will remain fully qualified at all times?
Setting up and maintaining a charitable remainder trust requires professional expertise and should only be administered by a qualified professional. Moreover, there are certain things you should learn about a trustee to ensure your trust will remain qualified at all times. Consult with your legal and tax advisor.

*Contributions to organizations that qualify as 501(c)(3) organizations under the Internal Revenue Code are usually tax deductible. Contributions to most foreign charities are not deductible.

Any comments regarding tax implications are informational only; Grand Capital Corp. does not provide tax or legal advice. As always, you should consult your tax or legal advisor. Grand Capital Corp. is pleased to offer this and other personal financial planning reports to help you build and protect your wealth.

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