Sunday, November 10, 2013

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Monday, November 4, 2013

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Sunday, October 28, 2012

Intra-Family Loans - Promissory Notes - Appraisal and Valuation

Basic Information

An intra-family loan is an estate-planning technique using a promissory note. The Internal Revenue Service sets forth rules that allow family members to make loans to other family members at lower interest rates than those charged by commercial lenders, without it being deemed a gift. The lender, usually a parent or grandparent, must charge interest to avoid making a gift to the borrower, but this interest rate may be very low (below market rate), with annual payments of interest only, as contrasted to monthly principal and interest payments. The loan can be structured as a "balloon balance note", meaning the borrower pays interest only during the term of the loan, and then repays the entire principal at the end of the term.

From a cash-flow point of view, an intra-family loan, using this structure can be beneficial for the borrower. Because it benefits the borrower, it is detrimental to the value of the lenders promissory note.

Types of Intra-Family Notes
• Loans to family members
• Installment sales to family members
• Self-canceling installment notes to family members

Intra-family loans create wealth shifting opportunities; wealth can be shifted from one family member to another family member, usually a child or grandchild, without incurring a tax liability. If the child or grandchild can earn a greater return on the amount borrowed than the low interest rate charged on the loan, he or she can keep the excess income with no gift taxes being paid. Wealth is transferred tax-free.

The required interest rate is set by the government monthly; it is called "AFR"--Applicable Federal Interest Rate. The actual interest rate used depends on the length of the loan; all of the current AFRs are very low compared to market interest rates.

Another benefit of intra-family loans is keeping the interest dollars paid within the family rather than paid to an outside party. The loan terms can be tailored to the specific needs of the family-member borrower; the repayment timing of the loan can be tailored to suit the borrower's needs.

Valuation and Discount Facts
The goal of "arm-length" promissory note investing is income generation and income maximization; the lower a promissory note's interests rate, the lower its market value. The appraised value of an intra-family loan note, using the IRS's Fair Market Value guidelines, is less than note's unpaid balance, or its face amount. The Fair Market Value of the note is a discounted value. The reason for this discount is the "AFR"-Applicable Federal Interest Rate, is a below market interest rate. To increase that rate to a market interest rate requires applying a discount to the note's value.

Conclusion: The (AFR) Applicable Federal Rate is a below market rate that devalues the note.

Benefits of a Fair Market Value Appraisal
You, your family, or an estate may own a private party promissory note that is not worth its face value. You may not be aware the note can provide a tax deduction. Depending on the size and the complexity of the individual note, the cost of the appraisal report will typically be between $400.00 and $1,800.00. Paying for an appraisal report may initially seem costly, but, it may result in a very meaningful tax savings. The cost of the appraisal can be viewed as an excellent investment; the tax saving can far exceeds the cost of the appraisal.

The value of a promissory note using the Applicable Federal Interest Rates (AFR) must be discounted to make its yield comparable to a similar promissory note having a market interest rate.

Disclaimer: Information is not advice. This article is for your information; it is not financial, legal or tax advice. The information and opinions provided are based on my own research and experience. Always consult a tax expert and valuation expert for your advice

Lawrence Tepper specializes in:
National Valuation and Appraisal Services That Serve Your Needs
Promissory Notes, Debt Instruments, LLC's Appraised & Valued
Expert Consulting Services

Law Degree /Accounting Minor University of Denver
Colorado Real Estate Broker-- Promissory Notes Specialization
Certified Commercial Investment Member From National Assoc. Realtors (CCIM)

35 + years of appraisal and valuation for Attorneys, CPA's, Estates, Trusts, Administrators, and Financial-Investment Advisors.

Sunday, October 21, 2012

Will IBMs Watson Cause Job Losses In the Financial Planning Sector?

The other day, I was talking to an individual who just got a new job. They will be working in the financial planning sector as a financial investment advisor. I don't envy them because I realize all the ongoing education and testing requires just to get the license and to maintain it - and that's before you get a single customer. As I got to talking to them about asset allocation and diversifying of investment portfolios, they explained to me that the firm they had signed up with had all of that under control.

All they had to do was ask the customer or client various questions and plug them into the "investment diversity decision matrix," I guess you'd call it. Well, if that's so, then why and Earth would anyone need a financial planning investment advisor? I mean a computer can do all that. Actually it already is in this case. All the financial advisor has to do is go out and get the clients, bring them into the office, ask them some questions, have them fill out forms, find out their risk level, amount of assets, projected age of retirement, and how much money they have to invest today.

Trust me when I tell you that a computer can do that. Not only can a computer give you the right answer, but it already has the right questions figured into the process. Do you remember when the IBM Watson supercomputer (well almost a supercomputer) beat the best humans on the planet in Jeopardy? Now they have this computer system diagnosing diseases based on symptoms, genetics, family history, age, diet, and where they live in case they happen to live in a cluster known for such health ailments. Well, if it can do all that - it could certainly figure out a balanced portfolio for each and every individual that signs up.

There was an interesting YouTube video titled; "IBM Watson-Introduction and Future Applications," which was published on Aug 2, 2012 and the description stated; "David McQueeney of IBM at EDGE 2012 speaking on IBM Watson System, its architecture, functionality, performance and future applications.

In this video it noted that their system was in fact being used in the financial sector, and they had a special advisor to the IBM Watson innovation team. What I'm telling you is; this potentially eventuality that I've described above is not only coming, it seems it is already here. Yes it's true that humans probably want their own human investment advisor to help them, but in the future that may not be necessary.

In fact, everyone may be able to get financial planning advice even if they have very little to invest and no investment advisor would care to set up an appointment to talk with them. Now they would be able to get that planning by merely plugging in their information into a computer - and then waiting .00256432761 seconds for the best answer along with Watson's new list of questions and answers. Do you see that point? Indeed I hope you will please consider all this and think on it.

Sunday, October 14, 2012

Legacy Pension Costs Killing Earnings - A Problem for Multinational Corporations Considered

Not long ago, I was listening to CNBC and they were interviewing a union representative who claimed that their company had wronged the employees by not funding the pension in over three years. It turns out that the company had emerged from bankruptcy and could not make those contributions because they were not profitable yet. They had previously given into union demands, and there just wasn't any money left over. Okay so let's talk about all this shall we?

What happens when the legacy costs exceed the profit of the company? Those legacy costs should be attributed to past periods, not to the current quarter of earnings. To do anything else with them would be disingenuous and really bad accounting. Nevertheless, the money has to come from somewhere, and in despite what you might think, it doesn't grow on trees, although we have many socialist left-leaning politicians which would have you believe otherwise.

Manufacturing (dot) net surely had an interesting article, similar to one I'd recently read in CFO magazine on how to account for legacy pension costs. This newest article was titled; "Boeing Considering How To Account For Pensions," published on November 13, 2012, which noted that the Boeing Company was;

"Studying different ways to account for pension expenses, which reduced the aerospace company's 3rd quarter earnings," and that; "The options under review include changing to mark-to-market accounting, which would take into consideration changes in the value of pension assets and obligations. It could, however, introduce more swings in earnings reports because the current accounting method spreads out gains and losses from assets over several years."

Okay so, not only does this effect manufacturing businesses and make it a nightmare for that sector, but we already know the challenges it is causing in the public sector for municipalities, states, military, and the Federal Government. And not just here, think about the aging populations of Japan and Europe too? This demographic problem is exacerbating the challenges. People are living longer, and health care costs keep increasing, and so to do all the legacy costs.

If someone retires at age 60, but lives to be 100 years old, they will be taking money out for 40 additional years, there's a good chance they didn't even work that long. Consider if you will the reality that Social Security when it first came into fruition was only $1700 per person per lifetime. Today, people are getting that much every month, and for as much as 40 or more years. Worse, back then there were 17.1 people paying in for every person collecting the money. Today, we can move that decimal point over, and there are only 1.7 people working for every person taking out.

Boy, I hate to use a socialist left-leaning phrase here, but quite frankly; that's just unsustainable.

Indeed, it is my sincere hope that you will please consider all this and think on it.

Sunday, October 7, 2012

What Is a Segregated Fund and Why You Should Choose Them for Your Estate Planning

A segregated fund is an annuity issued by an insurance company. They are similar to a mutual fund except for the fact that they come with capital or income guarantees as well as other substantial benefits. The term segregated means the issuing company must keep the premiums separated from other funds they are holding.

Like mutual funds "seg" funds have various fee options such as Deferred Service Charges (Back End fees that usually decrease over time), Low load and Front End Load fees. Typically the MERs (Management Expense Ratios) are slightly higher than the equivalent mutual fund to cover the companies risk in offering the guarantees. Some issuing companies also offer automatic re-balancing services.

Some of the key benefits of seg funds are as follows:

• Maturity benefit guarantees- At the maturity date of the contract a specified percentage of the premium is guaranteed to the account holder. Usually 75-100%. In other words if the market plummets just before your maturity date you will be guaranteed 75-100% of your premiums back even if the market value is zero. This essentially limits your risk to 25% of your capital where as in a mutual fund the risk is 100%.

• Death benefit guarantees- At the death of the account holder a specified percentage of the premium is guaranteed to the beneficiary regardless of the market value of the account, unless of course the market value is higher. This would be a great advantage if you are using a leveraged strategy especially if you chose the 100% death benefit option. Your entire loan would be covered regardless of the market value of the account at the time. A definite advantage from your beneficiaries point of view.

• You can name a beneficiary.

• Proceeds from a death claim are treated like an insurance policy. They by-pass the estate and go directly to the named beneficiary there by side stepping probate and estate fees. Since the proceeds go directly to the beneficiary you have the advantage of increased privacy and control over your estate.

• They have potential creditor protection.

• They now have an option of providing guaranteed income for life. This feature can provide an income bonus if you defer the start date of your retirement withdrawals. The withdrawal benefit can increase with age.

As with any portfolio you should diversify your assets through a range of investments and products. I believe the estate planning benefits of seg funds make them worthy of being an important part of your plan.