Summer 2001 Newsletter
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The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law on June 7, 2001, provides for the repeal of the estate and generation-skipping transfer tax in the year 2010. Until that time, the estate tax exclusion will increase from the current $675,000 to $1,000,000 in 2002, $1,500,000 in 2004, $2,000,000 in 2006, and $3,500,000 in 2009. In addition, the maximum estate and gift tax rates will be reduced from the current 55% to 50% in 2002, 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006, 45% in 2007, and to the top individual income tax rate in 2010 (for gift taxes only). The rule providing that inherited assets receive a step-up in basis to the market value at the date of the decedentís death will be repealed when the estate tax is repealed. At that time, inherited property will generally have a basis equal to the lesser of the decedentís adjusted basis or the propertyís fair market value at the date of the decedentís death.
Even though the estate tax will be repealed in 2010, the gift tax on gifts made during your lifetime will remain. The lifetime gift exemption will increase to $1,000,000 in 2002 and will remain at that level.
Since the estate tax wonít be eliminated for over eight years, you probably donít want to undo any strategies already in place. In fact, your estate plan will need to consider strategies to deal with estate taxes in the event you die before 2010. Additionally, the Act contains a "sunset" provision stating that for tax years after 2010, the 2001 tax law will come back into effect unless further congressional action is taken.
While reducing estate taxes is a major estate planning goal, keep in mind that you also want to ensure that your estate is distributed to your chosen heirs. Keep these points in mind:
The eventual repeal of the estate tax has not eliminated the need for estate planning. For a more detailed discussion of these issues or if youíd like help, please call us at (800) 878-4036.
In January 2001, the Treasury Department released new proposed regulations concerning required minimum distributions from individual retirement accounts (IRAs) and employer-sponsored 401(k), 403(b), and 457 deferred-compensation plans. Although the rules are scheduled to become effective on January 1, 2002, the Treasury Department has indicated that they can be used retroactively to the beginning of 2001. However, if you prefer, you can still use the old rules for distributions made in 2001.
The new rules simplify the calculation of required minimum distributions and give account owners more flexibility. To understand the significance of the new rules, you need to remember a couple of basic points about the old rules. Under the old rules, you needed to decide two things by April 1 of the year after you turned 70 Ĺ Ė who your beneficiary was and which of three methods you were going to use to calculate distributions. These two decisions significantly impacted the amount you were required to withdraw each year and, once made, were irrevocable.
The new rules simplify distributions as follows:
This table is used regardless of who your beneficiary is (one exception is noted in the next paragraph). These new distribution rules are expected to reduce the required minimum distribution amount for the vast majority of taxpayers.
For years, we have heard that our personal savings rate is dismally low. And in fact, as the graph below shows, the personal savings rate as a percentage of disposable income has been significantly declining since 1992, actually turning slightly negative in 2000. How concerned should we be by this trend?
While this measure of savings is the most widely quoted, it is often criticized since it reports the percentage of disposable income set aside for saving. It does not record any increases or decreases in total wealth, such as gains in investments and real estate.
Yet even studies that have attempted to take capital gains into account have shown significant declines in the personal savings rate. One study found that the personal savings rate, including capital gains, decreased from a little over 12% in 1993 to approximately 7% in 2000 (Source: AARP Research Study, March 2000).
So why has personal savings decreased so significantly? Several possible causes have been suggested:
Whatever the cause, this long-term trend is distributing since the baby boomer generation is the first generation that will have to finance a significant portion of its own retirement. Two major trends will cause this generation to need more in the way of personal savings:
On an individual level, the decline in the personal savings rate should serve as a wake-up call to assess your progress toward your retirement goals.
To achieve your financial goals, you need to find ways to increase your net worth, which can be accomplished by increasing your assets and/or decreasing your debts. These five basic tips can help:
Convertible bonds are a hybrid investment, combining features of both bonds and stocks. Like all bonds, convertibles pay a fixed interest rate for the bondís life, with the principal returned at the end of the bondís term. However, convertible bonds can also be exchanged for a specific number of shares of the issuing companyís common stock.
The bondís interest payments are typically higher than the dividends paid on the common stock, although the interest rate is usually lower than that on nonconvertible bonds. However, the ability to convert to common shares allows investors to participate in share price increases without as much exposure to share price decreases. Convertibles do not decline as much as the common shares because the bond retains a market value equal to comparable bonds paying the same yield.
When issued, the value of the convertible bonds exceeds the price of the common shares by an amount known as the conversion premium, which changes as the stock price changes. If the stock is selling below the conversion equivalent, there is no financial incentive to convert the bond, so the bondís price will be primarily determined by factors affecting bonds. Once the stockís price rises enough to provide a profit converting the bond, the stockís value will significantly affect the convertibleís market value.
Most convertibles can be called back by the issuer at a specific price. These call provisions are typically used by the issuer to force investors to convert the bond to common stock, so that the debt obligation can be eliminated.
Since they are a hybrid investment, convertible bonds can be difficult investments to evaluate. You should consider bond and stock pricing, current interest rates, the probability of a bond call, the convertibleís yield advantage over common stock, the fixed-income value of the convertible, and the volatility of the underlying stock. Please call us at (800) 878-4036 if youíd like to discuss convertible bonds in more detail.
You may not be aware of all our services, so we are including a basic list:
We offer knowledge and experience with the services listed above. In addition, we would be happy to meet with any of your family, friends, or colleagues who need help in any of these areas. If you have questions about any of these services or would like more detailed information, please do not hesitate to call us at (800) 878-4036.
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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