THE BASICS OF STRETCH IRAs

You can plan to have your heirs inherit your IRA assets.

Can an IRA keep growing for a century or more? In theory, it can. Some people are planning to “stretch” their Individual Retirement Accounts over generations, so that their heirs can receive IRA assets accumulated after decades of tax-deferred or tax-free growth. A stretch IRA can potentially create a legacy of wealth to benefit your heirs, and it could also help to reduce your estate taxes.

Usually, this is a choice of the high net worth investor. Typically, an individual, couple or family has amassed sizable retirement savings – so sizable that they don’t need to withdraw the bulk of their IRA assets during their lifetimes.

How does this work? Simply put, a stretch IRA is a Roth or traditional IRA with assets that pass from the original account owner to a younger beneficiary when the original account owner dies. The beneficiary can be a spouse or a non-spousal heir (or in some cases, not a person at all but a “see-through” trust.)¹

If the beneficiary is a person, this younger beneficiary will have a longer life expectancy than the initial IRA owner, and therefore may elect to “stretch” the IRA by receiving smaller required minimum distributions (RMDs) each year of his or her life span. This will leave money in the IRA and permit ongoing tax-deferred growth – or tax-free growth, in the case of a Roth IRA.

In fact, since you don’t have to take RMDs from a Roth IRA at age 70½, you could opt to let your Roth IRA grow untapped for a lifetime. At your death, your beneficiaries could then stretch payouts over their life expectancies without having to pay tax on withdrawals.²

What options do the beneficiaries have? Well, the rules governing inherited IRAs are quite complex. The explanation below is simply a summary, and should not be taken as any kind of advice or guide.

If you have named your spouse as the beneficiary of your IRA, your spouse can roll over the inherited IRA assets into his or her own IRA after your death (presuming they don’t need the money).

If you die before age 70½, your spouse can treat the inherited IRA as his or her own and make contributions and withdrawals. Or, instead of treating the IRA as his or her own, your spouse can elect to begin receiving distributions on either December 31st of the calendar year following your death, or the date that you would have been age 70½, whichever date is later.

If your beneficiary is non-spousal, he or she cannot treat the IRA as his or her own, and cannot make contributions to it or rollovers into or out of it.³ A non-spousal beneficiary can either take the lump sum and pay taxes on it, or transfer the IRA assets to an IRA distribution account.

If your non-spousal beneficiary elects to set up a distribution account and you have passed away before age 70½, he or she must follow either the one-year rule or the five-year rule.

Under the one-year rule, annual distributions are based on the life expectancy of the designated beneficiary and must start by December 31st of the year following the original IRA owner’s death. In this way, your beneficiary can stretch out the distributions over his or her life expectancy, which can allow more of the inherited IRA assets to remain in the IRA and enjoy tax-deferred or tax-free growth.

Under the five-year rule, there are no minimum annual distribution requirements, but the beneficiary must withdraw their full interest by the end of the fifth year following the owner’s death.

The beneficiary can be determined even after the original IRA owner dies – if there is somehow no named beneficiary, you have until the end of the year following the death of the primary IRA owner to establish one.⁴ But it is vital to establish a beneficiary during your lifetime: if you don’t, your IRA assets could end up in your estate, and that will leave your heirs with two choices. If you pass away after age 70½, the RMDs from the IRA are calculated according to what would have been your remaining life expectancy. If you pass away before age 70½, the five-year rule applies: your heirs have to cash out the entire IRA by the end of the fifth year following the year of your death.²

Things to think about. The decision to stretch your IRA cannot be made casually. A beneficiary must be selected with great care, and there is always the possibility that you may end up withdrawing all of your IRA assets during your lifetime. A stretch IRA strategy assumes that your beneficiary won’t deplete the IRA assets, and it also assumes a constant rate of return for the account over the years. It’s also worth remembering that stretch IRA planning is based on today’s tax laws, not the tax laws of tomorrow.

If you are interested in stretching your IRA, you must find a truly qualified financial advisor to help you. While many financial advisors know something of the rules and regulations governing stretch IRAs, look for an advisor with an advanced education in IRA planning.

These are the views of Peter Montoya, Inc., and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Citations.

¹ investmentnews.com/apps/pbcs.dll/article?AID=/20080501/REG/74256949/1031/RETIREMENT

² kiplinger.com/retirementreport/features/archives/2006/06/Cover_Jun2006_03_01.html

³ irs.gov/pub/irs-pdf/p590.pdf

⁴ moneycentral.msn.com/content/Taxes/Taxshelters/P33760.asp

A DREAM HOME FOR LESS?

Your current home may have lost value. But your next one may be a bargain.

Let’s survey the current real estate climate. Prices: down. Foreclosures: way up. Prognosticators: nervous. Sellers: desperate. What does this all add up to?

Advantage: buyer. It’s almost always a seller’s market in real estate, but right now buyers have a real window of opportunity. Even if your current residence is worth 10% or 15% less than a couple of years ago, it may actually be the time to move up.

Really? Yes, really.

The math makes sense. Okay, so let’s say your current residence was worth $300,000 three years ago, and now it’s worth $270,000. The thing to remember is that while your home’s value has dropped 10%, prices on more expensive homes in your area have also probably dropped 10% (and perhaps more). So, three years ago your cost of moving up to a $650,000 home was $350,000. But now, your home is worth $270,000 and that $650,000 home might now be on the market at a price closer to $585,000 … so the gap is only $315,000. (Or less.)

Now think of the properties that are moving right now. Do you think a $250,000 home will move faster in this market than a $750,000 home? Higher-end homes can linger on the market for much longer than sellers anticipate. What if your well-below-market offer is the only offer, and accepted without complaint? It could happen. Stranger things have. Also, you’ve still got low interest rates on your side. If you can buy the new home with 10%-20% down, things look even better. Even if the value of the home you buy continues to decrease, you’ve still paid less for it than you would have two or three years ago.

You can make demands. If you want a seller to fix a roof or a driveway or throw in some furniture, now’s the time to ask. In the current market, many sellers are ceding to demands they would not have entertained in the past.

You should look into this. But before you make a move, talk to a qualified real estate professional. You may even want to locate a buyer’s agent, perhaps one working for a flat fee or for a commission which doesn’t vary from property to property. While the real estate market is down, this could be an ideal time to move up.

These are the views of Peter Montoya, Inc., not and should not be construed as investment advice.  All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

CRITICAL ILLNESS INSURANCE

What it is, why people opt for it.

Ever hear of critical illness insurance? This isn’t standard-issue disability insurance, but a cousin of sorts. With people living longer, it is a risk management option entering more people’s lives.

The notable wrinkle about this type of insurance is that the insurer issues you a lump sum while you are alive.

Insurance for a prolonged health crisis. You buy critical illness insurance to help you out in case you are diagnosed with, suffer from, or experience a serious, potentially life-threatening health concern. Now, what does an insurer define as “serious” or “life-threatening”? That varies.

Events or illnesses that often qualify include organ transplants, open-heart surgeries, deafness or blindness, Alzheimer’s disease, HIV or AIDS diagnoses that are not sexually linked, heart attacks, paralysis or the loss of limbs, serious cancers and other maladies. Many non-fatal, but trying conditions also fall within the category.

The idea is that you will use the payout to get through the crisis financially – the treatment, the surgery, the costs incurred. The cash premium is either paid directly to you, or to someone that you designate.

A lump sum to use as you see fit. While critical illness insurance pays out a lump sum to the ill, insured party, there are usually no strings attached to the money. It usually does not have to be used for medical payments. The money is tax-free, and you can use it to pay hospital bills, living expenses, business expenses … whatever costs you need or want to pay in a time of crisis.

Things to remember. Critical illness insurance policies only pay out if you come down with one of the stipulated illnesses. This is why many people do not purchase them. However, with lifespans extending, many people recognize that more years may give them more chances to encounter a serious but survivable illness.

If you would like to know more about critical illness insurance and whether it may be appropriate for you or a loved one, then be sure to talk with a qualified insurance or financial professional today.

These are the views of Peter Montoya, Inc., and should not be construed as investment advice.  All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

A CD, or a CD-type annuity?

How they compare – and why annuities are so attractive.

If you’re a conservative investor, you may be wondering what fixed-rate alternatives you have to certificates of deposit. Have you ever looked at fixed annuities? Specifically, fixed “CD type” annuities? Right now, they look a lot better than CDs do.

Yes, CDs are FDIC-insured. But fixed annuities come with a guarantee as well, and often a better rate of return – plus the opportunity for tax-deferred growth and compounding.

The drawbacks of CDs. The interest rate on CDs today is often disappointingly low – often well below 5%. Besides the pitiful return, you have another disadvantage: the interest your CD earns is fully taxable.¹ (And FDIC or no FDIC, do you really want your money in a bank right now with the hassles bank customers are going through?)

But you have an alternative.

The appeal of the “CD type” fixed annuity. Just like a CD, a “CD type” fixed annuity is designed to grow your money over a specified term until maturity – usually five or ten years. Right now, some of these annuities are earning well over 5% interest.² (The interest rate is locked in for the whole term of the annuity, unlike some fixed annuities where the interest rate is only guaranteed for one year.)

Unlike a CD, a “CD type” fixed annuity gives you tax-deferred growth. The earnings aren’t taxed until withdrawal.³

With five- and ten-year terms, these annuities are particularly appealing to people in their fifties who are seeking a conservative retirement savings vehicle.

Learn more. If you think of yourself as a risk-averse investor, you might want to examine the range of options in fixed “CD style” annuities. Before you make a decision, make sure you talk to a qualified insurance agent or financial advisor who can explain the terms and conditions of these annuity contracts.

These are the views of Peter Montoya Inc., and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

6 STEPS TO GET OUT OF DEBT

Why not plan to lighten your financial burden?

Positive moves to counteract negative cash flow. In July, a New York Times article mentioned that half of American families were carrying more than $25,000 in debt. Of course, some of this can be attributed to mortgages. But the borrowing doesn’t stop there.

Every day, people draw on money they don’t actually have – via credit cards, payday loans, home equity lines of credit, and even their 401(k)s. Many of them end up making minimum payments on these high-interest loans – a sure way to stay indebted forever.

If this is your situation, you may be wondering: how do I get out of debt?

Let me give you some ideas.

1) Make a budget. “Where does all the money go?” If you are asking that question, here is where you learn the answer. You might find that you’re spending $80 a month on energy drinks, or $100 a week on lousy movies. Cable, eating out, buying retail – costs like these can really eat at your finances. Set a budget, and you can stop frivolous expenses and redirect the money you save to pay down debt.

2) Get another job. I know, this doesn’t sound like fun. But having more money will aid you to reduce debt more quickly. A family member who isn’t working can work to help reduce a shared family problem.

3) Sell stuff. The Internet has proven that everything is worth something. Go to eBay, craigslist or Kijiji – you’ll be amazed at the market (and the asking prices) for this and that. What people collect, want and buy may surprise you. Don’t be surprised if you have a few hundred dollars – or more – sitting around your house or in your garage. You might be able to pay off a couple of credit cards – or even a loan – with what you sell.

4) Ditch the big car payment and drive a cheaper car that gets good MPG. Say goodbye to the monster SUV (or the overpriced sports coupe). Get a car that makes sense instead of a statement. Your wallet will thank you.

5) Pay off all debts smallest to largest. The benefits are psychological as well as financial. Knock off even a small debt, and you have an accomplishment to build on – encouragement to erase bigger debts. Also, every debt you have incurs its own interest charge. One less debt means one less interest charge you have to pay.

6) Or, pay off your highest-interest debts first. Take a minute to figure out which of your debts hits you with the highest interest rate. Pay the minimum amounts toward each of your other debts, and apply all the extra money you can toward paying off the debt with the highest interest. This will have a cumulative effect. Your highest-interest debt will become smaller, meaning you will be saving some dollars on interest charges on the balance because the balance is lower. If the balance is lower, you should be able to pay off the debt faster. When you say goodbye to that debt, you can start paying down the debt with the next highest interest, and so on.

Keep the real goal in mind. Building wealth, not reducing debt, should be your ultimate objective. Some debt reduction and debt consolidation planners obsess on getting you out of debt, but that is only half the story. Minimizing debt is great, but maximizing wealth is even better.

You can plan to build wealth and reduce debt at the same time. If you have a relationship with a financial advisor, you might be able to do it in the same unified process. Why just keep debt at bay when you can leave it behind? Do yourself a favor and talk with a good financial advisor who can show you ways toward financial freedom.

These are the views of Peter Montoya Inc., and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.

¹ nytimes.com/2008/07/20/business/20debt.html [7/20/08]

IS IT TIME TO REFINANCE?

Mortgage rates haven’t been this low since 2005.

Rates really fell this fall. Right now, interest rates on 30-year fixed rate mortgages are at their lowest level in two years: 6.10% as of November 29th, as compared to 6.73% in mid-July.¹ Interest rates have fallen on other types of conventional mortgages as well. So this is a prime time to think about refinancing.

If you refinance, keep your long-term goals in mind. Years ago, refinancing came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. But today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you will live in that home.

Let’s say a refi frees up $150 for you each month. Sounds great, right? But it’s not so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it. If you plan to live in that home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are getting out of “ARMs way” and refinancing into a fixed rate mortgage, or moving from a 30-year loan to a 15-year loan or vice versa, you’ve got more variables to think about.

How long will rates stay this low? It’s anybody’s guess. No one can predict the financial future. But historically, mortgage rates have often moved up or down in relation to the yield of the 10-year U.S. Treasury bond. This is because the average mortgage is either refinanced or paid off within 10 years of origination.² When bond yields go down, mortgage interest rates tend to go down, and vice versa. So in the near future, it might help to look at what happens with Treasuries. Bond investors have often gauged mortgage interest rates by adding about 1.7% to the current percentage yield of 10-year Treasuries. On November 21st, 10-year Treasury yields dipped below 4%.³ Here in early December, you can find 30-year fixed rate mortgages at 5.80% or lower.⁴

Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and be sure to talk to your personal financial advisor to see how your choice to refinance relates to your overall financial plan.

These are the views of Peter Montoya, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Citations. ¹ http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp

² http://www.thetruthaboutmortgage.com/what-causes-mortgage-interest-rates-to-move

³ http://www.bloomberg.com/apps/news?pid=20601103&sid=asbcIbOlmKIQ

⁴ http://www.bankrate.com/brm/updates/ybir/ybir_state.asp

IS IT TIME TO ANNUITIZE?

It just might be. Here’s why baby boomers are choosing immediate annuities.

Nobody wants to outlive their money. In fact, somebody recently asked me, “How do I organize my money so that I spend my last dollar on my last day of life?”

Since neither of us knew when that day would occur, we selected an immediate annuity as the solution.

An immediate annuity is a good component of any retirement plan. Immediate annuities are issued by insurance companies, and they are one of the few retirement income sources that guarantee an income until death (like Social Security does).

As long as my client lives, the insurance company must send him income payments resulting from his annuity investment. Upon his death, payments will cease.

Immediate annuities provide “immediate” income. There are two phases to an annuity: the accumulation phase and the income phase.

With a deferred annuity, assets grow during the accumulation phase. Then, at a certain date, the income phase begins – and payments are made to the annuity holder out of the accumulated principal.

With an immediate annuity, you don’t have to wait years for income payments to start. You put a lump sum of money into the annuity, and the payments begin – usually about a month after you set up the annuity contract. (Some “immediate” annuities let you defer income payments for up to one year.)

As owner of an immediate annuity, you have different payout options. A life-only option gives you an income for the remainder of your life. Select a joint and survivor option, and you can add a second life to the contract – that is, payments will continue to be issued to your surviving spouse for the rest of his or her life after you pass away. Or, you can simply structure an annuity payout to last a set number of years.

Longevity has its rewards. If you know a little about the insurance industry, you know insurance policies and annuities are structured around projections of life expectancy. With an annuity, if you die sooner than expected, the insurance company won’t have to pay you as much income as projected. If you outlive their projections, they will have to pay you more. So the healthier you are, the more attractive immediate annuities are.

If your immediate annuity is a life annuity (income payments for life), the older you get, the greater those payments will be. (Life expectancy for annuity payout purposes is determined by insurance company experience and not as a result of a physical examination. If you have a joint and survivor annuity, two lives are used in the calculation and the amount of the payout is smaller than with a single life contract.)

Immediate annuity income can also be affected by insurer assumptions. That is, it may be assumed that the balance of the annuity will earn __% interest or a ___% return annually. Lower interest rates or investment assumptions will lead to a lower income stream.

The after-tax advantage. If an annuity is purchased with after-tax money, the income stream comes with significant tax advantages.

Let’s compare and contrast here. In a deferred annuity, all earnings and investment results grow tax-deferred during the deferral phase. But when income phase starts and the tax-deferred earnings are paid out, the tax collector wants his fair share.

Since an immediate annuity is paying back both principal and tax-deferred earnings, a portion of each payment is considered to be income, and a portion is considered to be tax-free return of principal. The shorter the payout period, the greater the amount that can be excluded from tax.

Immediate annuities can be used in IRAs that require minimum distributions beginning at age 70 ½. These minimum distribution rates are designed to distribute out the entire balance of an IRA over a person’s lifetime. With longer lifespans, the tables the IRS uses for this calculation are fast becoming obsolete – and that raises the very real threat of outliving your IRA assets. However, if those assets are invested in an immediate annuity, a lifetime income stream can be assured and the IRS will accept that income stream amount as an acceptable minimum distribution.¹

So, does it make sense to annuitize? If you’re healthy, active and mature, an immediate annuity can potentially be a great income source for you. Before you arrange an annuity contract, talk to a financial advisor or insurance agent who understands these investments thoroughly, one who can explain your options.

These are the views of Peter Montoya Inc., and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations. ¹ irs.gov/publications/p590/ch01.html#d0e1252

PARTNERSHIP PLANS FOR LONG TERM CARE

Many states are assisting their residents to buy LTC insurance.

A helping hand for a pressing need. With the baby boom generation maturing, numerous studies and articles have pointed out the rising need for long term care. Some state governments have directly responded to it.

Now, many states have created partnership programs to encourage their residents to purchase LTC insurance coverage. It only makes sense: if more people opt to privately insure themselves, a state will face less of a burden and less liability when it comes to its own eldercare programs and eldercare costs.

How the partnership plans work. Essentially, these plans provide dollar-for-dollar asset protection when you buy an LTC policy. So for every dollar the policy pays out in benefits, you get an equal dollar amount in asset protection under a state’s Medicaid spend-down regulations.

What does this mean for you? It means that you are able to retain assets you would otherwise have to spend down before you could qualify for state Medicaid benefits.

These partnership plans let you protect an amount of funds equal to the amount the policy pays out in benefits and still qualify for state Medicaid assistance (as long as you have used up all policy benefits and still require long term care).

Typically, Medicaid kicks in only when you are destitute. But with these partnership programs, you don’t have to be destitute to receive state assistance, even if your need for care outlasts your LTC policy benefits.

With these programs in place, LTC insurance seems more and more attractive. That’s important, because it has never seemed as essential as it does today.

Does your LTC policy qualify for a partnership plan? You should find out if it does. Most LTC policies sold today do qualify for these partnership plans. A key factor is whether a policy has an age-related inflation protection benefit. In these policies, your daily or monthly LTC benefit amount is adjusted upward in response to inflation and increased cost of expenses. With these inflation-adjusted policies, your benefits typically go up each year, but your premiums may not.

There’s really not much incentive for state governments to partner with LTC policyholders whose policies aren’t inflation-adjusted. What would happen is that with each passing year, the odds would rise of the policyholder using up the whole LTC benefit and leaning on a state Medicaid program, so the state would be poised to pick up more and more of the cost of eldercare with the passage of time.

The Ohio example. Consider the State of Ohio’s Partnership for Long-Term Care Insurance, and the need it meets. In 2007, the average annual cost of a private or semi-private room in a nursing home exceeded $60,000 in Ohio, and the cost for a licensed, Medicare-certified home health aide was nearly $52,000 per year (for 50 hours of care per week).¹

Here’s the kind of difference the Ohio partnership plan could make for an Ohio resident. As an example, let’s say Mr. and Mrs. Jones in Toledo have a $100,000 LTC policy. Once they use up their $100,000 policy benefit, they have to spend down their assets to $2,250 before they can get state Medicaid benefits. But if they exhaust a $100,000 partnership policy, they can potentially qualify for Medicaid coverage and still hang on to $101,500 of their assets.²

In Ohio, if you bought your current LTC policy after August 12, 2002, your insurer must offer you the choice of exchanging it for a partnership-compatible policy. You have 90 days to decide if you want to do that.³ Ohio also offers state residents free, in-home long term care consultations.

What kind of long term care coverage do you have? Do you have a policy that is eligible for a partnership plan? Do you have any LTC policy at all? It is wise to look into this. It may be essential for your long-range financial well-being. I urge you to speak with a qualified insurance advisor or financial advisor today about long term care coverage, and these remarkably useful partnership plans.

These are the views of Peter Montoya Inc., and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations. ¹ ltc4me.ohio.gov/faq.aspx [8/08]

² ltc4me.ohio.gov/faq.aspx [8/08]

³ ltc4me.ohio.gov/faq.aspx [8/08]

(repost) THE STATE OF FANNIE MAE, FREDDIE MAC AND INDYMAC

Where things stood in mid-July.

(article written in mid-July)

Fannie Mae, Freddie Mac: stocks rise, concerns ease. Fannie Mae and Freddie Mac shares rose on July 17 and July 18 after falling 60% in the previous five trading days.¹ Though their shares were still down more than 70% for 2008 through the end of last week, the federal government proposal to inject taxpayer money into both companies via the purchase of newly issued stock helped their fortunes in the market.¹

The concern last week was that Fannie Mae and Freddie Mac were heading toward collapse. Both government-sponsored firms convert mortgages sold by banks into bonds sold to investors, a process that brings liquidity to home loan companies. Last week, the Federal Reserve offered Fannie Mae and Freddie Mac access to its emergency cash, and on July 13, the Treasury Department said it would temporarily raise its line of credit to them and make an unprecedented equity investment in them if necessary. Both mortgage giants welcomed the assistance but publicly maintained that they were adequately capitalized.

As Fannie and Freddie guarantee about half of America’s residential mortgages, anything like failure would be disastrous for the housing market and the economy. Since July 2007, both firms have lost a total of $11 billion.²

But last week, things looked more optimistic. Securities and Exchange Commission chairman Christopher Cox pledged that the SEC would tighten regulations concerning short sales of major financial stocks. Consequently, the value of Fannie Mae shares had almost doubled by Friday, and Freddie Mac shares have risen 80%.³ Friday, Freddie Mac announced that it had registered its stock with the SEC in order to generate $5.5 billion through the sale of common and preferred shares. (Fannie Mae registered its stock with the SEC in 2003.)³

IndyMac: the FDIC restores control. At the start of July, officials at the bank spun off from Countrywide Financial insisted it would not collapse, despite its specialty of originating (and selling) stated-income loans, jumbo mortgages and sub-prime loans.⁴ On July 11, federal regulators took IndyMac over. Over 200,000 IndyMac depositors were covered by federal insurance (up to $100,000 of their account balances); 10,000 more IndyMac clients had $1 billion of uninsured deposits, making them eligible to receive 50 cents on the dollar for deposits above $100,000, with the possibility of recouping more after IndyMac is sold.⁵ IndyMac clients with joint accounts or retirement accounts could immediately withdraw sums of greater than $100,000.⁶

Last week, a few IndyMac customers found that other banks wouldn’t take their cashier’s checks, or were told the checks would take weeks to clear. That wasn’t true. Under federal law, other banks must make IndyMac cashier’s check deposits of up to $5,000 available for withdrawal in one business day. But, cashier’s checks for more than $5,000 can be subject to a hold of as long as nine business days.⁶

For the record, if you are an IndyMac customer and you are having problems with a check, you may contact the FDIC toll free at 1-866-806-5919. If you have other banking issues concerning IndyMac, you may call the Federal Office of Thrift Supervision at 1-800-842-6929.⁶

A word about SIPC coverage. You know what the FDIC does for troubled banks, but as an investor, you may be wondering if there is any protection in case something happens with your investments. Did you know that the Securities Investor Protection Corporation (SIPC) offers coverage for your investment accounts?

Should a broker/dealer fail or have to liquidate assets, SIPC coverage kicks in (provided that broker/dealer is an SIPC member; nearly all are). The coverage doesn’t protect against market risk or market downturn; it simply covers the value of the securities. It is limited to $500,000 per client, including up to $100,000 for cash.⁷ General creditors of the broker/dealer cannot share in these distributions. Also, many investment broker/dealers have put what is termed “excess SIPC” coverage in place, for those statistically small chances in which the SIPC coverage would not be able to settle a claim against the broker/dealer.

SIPC coverage does not cover all types of investments. Coverage generally applies to stocks, bonds, mutual fund and other investment company shares, notes, and other registered securities. But it does not apply to commodity futures contracts, commodity options, currency or fixed annuity contracts.⁷

Do you have some questions? Maybe this article made you think about the state of your investments and savings – where you have invested, where you have your money today. If you have questions regarding your finances, now is an excellent time to speak with a qualified financial advisor.

These are the views of Peter Montoya Inc., not and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations. ¹ bloomberg.com/apps/news?pid=20601087&sid=aQKmgV2qfzTc&refer=home [7/18/08]

² business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4345872.ece [7/18/08]

³ money.cnn.com/2008/07/18/news/freddie_bounceback.fortune/ [7/18/2008]

³ money.cnn.com/2008/07/18/news/freddie_bounceback.fortune/ [7/18/2008]

⁴ latimes.com/business/la-fi-indymac1-2008jul01,0,2858219.story [7/1/08]

⁵ bloomberg.com/apps/news?pid=20601087&sid=asHgTtu1PNx4&refer=home [7/17/08]

⁶ money.cnn.com/news/newsfeeds/articles/apwire/f38c855e00512869896951adc357148a.htm [7/17/08]

⁶ money.cnn.com/news/newsfeeds/articles/apwire/f38c855e00512869896951adc357148a.htm [7/17/08]

⁷ finra.org/InvestorInformation/InvestorProtection/SIPCProtection/index.htm [7/18/08]

⁷ finra.org/InvestorInformation/InvestorProtection/SIPCProtection/index.htm [7/18/08]

HAVE YOU CONSIDERED CHARITABLE GIFTING?

Could it make the world a better place? Could it make sense financially?

A gift to charity may prove to be a great financial favor to you. Some charitable gifting methods offer you notable tax advantages. Here’s a brief look at some popular options.

Charitable remainder trusts (CRTs). These trusts can be useful estate planning tools. People with highly appreciated assets – such as stocks or real estate – are often hesitant to sell those assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Could the CRT offer a solution to this problem?

CRTs are tax-exempt trusts. In transferring highly appreciated assets into a CRT, you get: a) a tax deduction for the present value of your future charitable gift, b) income payments from the CRT for up to 20 years, and c) tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift, and you can exclude an otherwise taxable asset from your estate.¹

After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice. (What about your heirs? You can structure a CRT in conjunction with an irrevocable life insurance trust so that they are not disinherited as a result.)¹

A charitable remainder annuity trust (CRAT) pays out a fixed income based on a percentage of the initial fair market value of the asset(s) placed in the trust. In a charitable remainder unitrust (CRUT), income from the trust can increase as the trust assets grow with time.²

Charitable lead trusts (CLTs). This is the inverse of a CRT. You transfer assets to the CLT, and it periodically pays a percentage of the value of the trust assets to the charity. At the end of the trust term, your heirs receive the assets within the trust. You don’t get an income tax deduction by creating a CLT, but your gift or estate tax could be markedly reduced.³

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors. (The concept has been around since the mid-1800s.) Basically, you donate money to a university or charity in exchange for a flow of income. You (and optionally, your spouse) receive lifelong annuity payments. After you pass away, the balance of the money you have donated goes to the charity. You can also claim a charitable deduction on your income tax return in the year you make the gift.⁴

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are unitized and “pooled” with the assets of other donors. So essentially, you are buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment varies from year to year.

Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. As just interest and dividends are paid out of a pooled income fund, it is possible to shield the whole gain from, say, a highly appreciated stock through such a fund. You get an immediate income tax deduction for a portion of the gift, which can be spread over a few consecutive tax years. Also, the balance of the assets left to the charity at your death may be greater than if a charitable gift annuity is used. Another nice option: you can put more assets in the fund over time, whereas a charitable gift annuity is based on one lump sum gift.⁵

Donor advised funds. A DAF is a variation on the “family foundation” concept. Unlike a private foundation, it is not subject to excise taxes, and it does not require employees and lawyers to implement and administer. You establish a DAF with a lump sum gift to a public charity. The gift becomes property of the charity, which manages the assets. (You can continue to contribute to the fund.) Each year, the charity determines the percentage of the value of the fund which will become available for grants or other programs. You advise the charity how to spend the money. DAF contributions are tax-deductible in the year that they are made. You may avoid capital gains taxes and estate taxes on the gift, and the assets may grow tax-free.⁶

Scholarships. These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and your advisor can work directly with a school to create one.

Life insurance and life estate gifts. Some people have unwanted or inadequate life insurance policies that may end up increasing the size of their taxable estates. In such cases, a policyholder may elect to donate their policy to charity. By doing this, the donor reduces the size of his or her taxable estate and enjoys a current tax deduction for the amount of the cash value in the policy. The charity can receive a large gift at the donor’s death, or they can tap into the cash value of the policy to meet current needs.⁷

Life estate gifts are an interesting option allowing you to gift real estate to a charity, university, or other non-profit – even while you live there. You can take a tax deduction based on the value of property, avoid capital gains tax, and live on the property for the rest of your life.⁸ (If somehow you can’t remain at that residence, the charity may opt to lease or sell it. You can gift all of a property or just some of a property as appropriate.)⁹

Give carefully. If you are thinking about making a charitable gift, remember that the amount of your tax deduction will ultimately depend on the kind of assets you contribute, and the variables of your individual tax situation. Remember also that some charitable gifts are irrevocable. Be sure to consult qualified financial, legal and tax advisors for more information before you decide if, when and how to give.

These are the views of Peter Montoya, Inc., and should not be construed as investment or tax advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Citations. ¹ library.findlaw.com/1997/Dec/1/128372.html

² giving.mit.edu/ways/planning/trusts/index.html

³ 360financialliteracy.org/Life+Stages/Retirement/Articles/Charitable+giving/Charitable+giving.htm

⁴ plan.gs/CategoryDetailList.do?orgId=327&categoryId=228

⁵ cmu.edu/giving/planned/pooled.shtml

⁶ worldlawdirect.com/article/570/What_are_donor_advised_funds.html

⁷ younglife.org/Giving/LifeIns.htm

⁸ purdue.edu/udo/planned_giving/life_estate_gift.shtml

⁹ ucsf.edu/support/trustsandbequests/realEstate.htm