Stewart Welch Videos


Wednesday, March 24, 2010

Family Gifts Can Be Taxing - Stewart Welch

A friend once called me with concern over a gift his parents made to his sister. His parents had given her $150,000 worth of stock to purchase a home. She then sold the stock and bought the home. The parents didn’t see anything wrong with this. After all, it is their money and they should be able to do with it what they please, Right? What they did not understand was that they created two potential tax issues. First, when the daughter sold the stock, she created a ‘realized’ gain and owes substantial capital gains taxes. Second, the gift created potential gift taxes that would be owed by the parents. To avoid this the parents must file a gift tax return and use a portion of their Lifetime Exemption Amount. The point is that care needs to be taken when making gifts to family members. It is possible to make ‘gifts’ even when you did not intend to do so. Let’s look at some typical examples:

· You add your child’s name to your savings or checking account. This is considered a gift the moment your child makes a withdrawal. If the withdrawal exceeds the allowed Annual Gift Tax Exclusion ($13,000 for 2010) it will be considered a taxable gift.
· You want to be certain that a particular person receives a specific piece of real estate at your death. Your solution is to add their name to the deed. When the deed is executed, you have just made a gift for gift tax purposes.
· You decide to buy a security such as a stock, bond or limited partnership interest and do so in both your name and someone else’s name. As soon as you designate the joint owner, a gift is deemed to have occurred.

Under each of the preceding examples where you created a joint ownership arrangement, at your death the entire value of the property is included in your estate. This is because you provided all of the financial consideration.

· If you guarantee a loan for someone else, you could end up being deemed to have made a gift for gift tax purposes. Assume that your child wants to start a business with start up costs of $95,000. Your child has no money or collateral with which to obtain a loan from the bank. You agree to guarantee the loan at the bank. By doing so, you have created a potential gift. The Internal Revenue Service has indicated that no gift is imputed unless there is an actual default on the loan that requires you to satisfy the debt for the benefit of your child. If this occurs, you are deemed to have made a gift for the full-unpaid balance of the loan less any repayments to you by your child.

Providing loan guarantees can also create negative estate tax results. If you’re involved in this type of situation, proceed with caution and get competent legal advice.

Portions of this article were excerpted (or modified) from Mr. Welch’s book, J.K. Lasser's New Rules for Estate and Tax Planning.

Monday, March 15, 2010

Searching for Income - Convertible Bonds

In response to the economic crisis that began in 2007, the Federal Reserve has purposefully driven interest rates down in order to stimulate our economy. This artificially low interest rate environment has wreaked havoc on retirees who are dependant on interest from their investments to pay their bills and run their retirement lifestyle. As a result, retirees are constantly scanning the investment horizon in search for higher returns. One investment vehicle that has garnered attention is the convertible bond. A convertible bond is a bond issued by a publicly traded corporation that gives the bondholder the option to convert the bond to a certain number of shares of the corporation’s common stock at a specific price. Convertible bondholders are essentially creditors of the issuing company who have the right to become owners.

Convertible bonds are not a new investment product and, in fact, became popular in the latter part of the 19th century when the railroad and telephone companies used them as a means of financing their expansion. One of their primary advantages includes the ability to capture additional profits should the stock price rise above the conversion price. If the stock does poorly, you have the safety of owning a bond and collecting interest. As with all financial products, advantages come at a price. You will receive a lower yield than you would for a comparable non-convertible bond, so if you never convert to shares of stock, you have earned a sub-par return. Also, many convertible bonds are callable at the option of the issuing company at a price that effectively limits your profit potential should the stock price rise significantly.

Analyzing which convertible bonds to purchase is a daunting task for most investors since it requires an in-depth understanding of bonds, stocks and corporate analysis. Your best bet is a convertible bond fund run by an experienced money manager. Consider no-load Vanguard Convertible Securities (VCVSX) run by manager Larry Keele, whose fund currently yields 3.8%. Convertible bond pioneer, John Calamos, along with his nephew, Nick Calamos, manage the Calamos Convertible fund (CCVIX), which currently yields approximately 3.1%. This load fund can be purchased on a no-load basis through Charles Schwab & Company.

Are convertible bonds or bond funds an appropriate investment for the individual investor? Sometimes referred to as ‘chicken stocks’, convertible bonds can provide risk adverse investors a way to participate in the often volatile stock market while reducing risk. However, the risk profile for convertible securities more closely resembles stocks. Take a look at the recent stock market extreme volatility for calendar years 2008 and 2009. For 2008, the stock market was down 37%. Vanguard’s and Calamos’ convertible bond funds were down 29.79% and 25.88% respectively. In 2009, the stock market rose 27% and these funds also rose 40% and 34% respectively. Convertible bonds are not for everybody but they are a valuable investment tool to add to your toolbox. Based on the recent stock market run-up since the March 9, 2009 lows, a lot of the short-term profit potential may have been wrung out of this strategy, so consider waiting on a market pull-back or plan on a long-term investment.

Stewart Welch

Monday, March 8, 2010

Hop on the Bus for Free Financial Advice - Stewart Welch

Last week I discussed the importance of being prepared for the unexpected, specifically for incapacity. Another threat looming large is the dismal economy we currently face where layoffs continue to plague workers across the country. If you have money in the bank and a secure job, consider yourself lucky. Most Americans have little or no savings and are therefore unprepared for just about any hiccup in their financial lives. Well, help is on the way, again. Last year, three organizations joined forces to provide consumers with basic advice on personal finances. The Consumer Education Foundation of The National Association of Personal Financial Advisors (NAPFA), TD Ameritrade Institutional and Kiplinger’s Personal Finance magazine have developed a bus tour across America and are offering you free access to professional financial advisors to answer your most urgent financial questions.

The program is called Your Money Bus Tour and will be coming to the Metro Birmingham area this coming Wednesday. The bus will park at the Hoover Library where Hoover Mayor Tony Petelos will kick off the event at 11:30 a.m. and Director of the Alabama Securities Commission, Joe Borg will offer tips for consumers. The kickoff will be held in the café area of the library.

You’ll are going to have an opportunity to meet one-on-one with a financial advisor from NAPFA. These advisors are volunteering their time and typically charge a minimum of $150 per hour for their consulting services. This is a true community services outreach program, not a sales promotion. Each attendee will receive a free Financial Tool Kit. The services are free and it is an excellent opportunity for you to get a head start on your finances for 2010. While you are welcome to ‘show up’ for the event, it would be best to make an appointment which you can do on line at Appointments begin at 9 a.m. with the last appointment at 6:45 p.m.

Anytime you meet with a professional advisor, whether it is a financial advisor, attorney, accountant or banker, it pays to be prepared. By doing so, you make the most of your time and their time as well. This is especially important at this event since the advisors are expected to handle a large number of appointments throughout the day. Here are a few tips to help you prepare for meeting with one of the volunteer advisors:

Make a list of what you own and what you owe. Known as a financial statement, this provides a quick reference to your advisor (and you), where you stand financially.
Develop a simple budget. Your budget will outline your monthly income and expenses. Your advisor can use this to quickly identify where problems are occurring and offer some easy-to-follow steps you can take to get you back on track.
Documents you’ll need to bring with you. Credit card statements and any loan agreements such as an auto loan will help your advisor understand not only how much you owe but what interest rate you are paying and terms of loan agreements.

If you would like a free form you can use to list your assets and liabilities or complete a budget, go to the Resource Center at, click on ‘Links’, then either Asset/Liability Review or Detailed Budget.

Monday, March 1, 2010

Estate Planning: Preparing for the Unexpected

All of us know of someone who has become incapacitated and unable to tend to their financial affairs. However, most people don’t realize that without proper advance planning, this situation can quickly turn into a nightmare. For example, assume that you are married and your husband is left mentally incapacitated as a result of a stroke. You own your home jointly and he owns $250,000 in stocks in his name. You need access to cash for special medical treatments so you plan to sell his stocks, right? Wrong! You do not have the legal right to sell his stocks and since he cannot give you permission, your only alternative is a potentially lengthy and expensive legal process to gain access to his assets…if the court grants you access.

The best defense is to prepare now for the possibility that you may become incapacitated in the future. There are four legal documents that you should consider.

1. Durable power of attorney. With this document, you appoint another person to be your 'attorney-in-fact', giving that person the responsibility of making financial decisions on your behalf. You may choose language that provides very broad or narrow powers. For instance, the document can be drafted to allow your attorney-in-fact to act on your behalf only if you are incapacitated (springing power) or it can allow your attorney-in-fact to act on your behalf at any time (general power). Your attorney or financial advisor can advise you which document will be best for you.
2. Revocable living trust. With this strategy, you set up a trust that is revocable (you can terminate it anytime) and transfer title to your assets to the trust. Typically you will be your own trustee, but will also name a successor trustee should you become incapacitated or die. This allows you, not the courts, to control who will continue to manage your financial affairs should you be unable to do so. The revocable living trust also protects your privacy whereas court proceedings may not. However, because of the cost and complexity of this trust, I only recommend it in special situations. For example, I had a client whose relatives threatened to have her declared incompetent and themselves declared trustee for her money as well as her legal guardian. As a safeguard, we used the revocable living trust to make certain that, regardless of the outcome, my client could decide who took control.
3. Healthcare proxy. Similar to the durable power of attorney, the healthcare proxy allows you to appoint the person who will be responsible for making healthcare decisions for you should you be unable to do so.
4. Advanced healthcare directive. With this document, you indicate the level of life-prolonging procedures, pain treatment, etc. that you wish should you be terminally ill and unable to communicate your desires. In Alabama, our legislature has drafted a document that combines the healthcare proxy and advanced healthcare directive. You can receive a copy by visiting the Resource Center at; click on ‘Links’; then click on “Living Will- State by State” .

As you read this column, I urge you to look beyond your own situation and send a copy of this column to friends and family members who may benefit from this advice.