1. Volume 6, Number 1
Quarterly Newsletter January 2012
Year IN REVIEW Depression, the Cold War, Vietnam,
the rise of global terrorism, and social Asset ClAss PerformAnCe: 2011
BY: Jon P. Yankee, MBa, CFP®
trends like Facebook and reality TV.
2011 – A Turbulent Year
2011 proved to be a microcosm
One of the most interesting things U.S. Fixed Income 7.84%
example of this odd – but important
about investing is the long-term dis- (Barclay Capital Aggregate Bond Index)
– investing lesson. If you had gone to
connect between world events and
sleep on January 1, awakened on De- International Fixed Income 4.47%
the behavior of investment markets.
cember 31 and immediately checked (JP Morgan GBI ex-US (Hedged) Index)
Every day, we hear that the markets
your U.S. stock portfolio, you would
went up or down as a result of this U.S. Equities, Large 2.11%
have seen the most boring possible (S&P 500 Index)
or that dramatic event or piece of
outcome: stocks basically unchanged
economic data in the news. But if Rip U.S. Equities, Small -4.18%
for the year. The S&P 500 index
Van Investor had fallen asleep at the (Russell 2000 Index)
finished the year exactly 0.03 points
start of the 20th century, and awak-
below its January 1, 2011 level. That International Equities, Large -14.82%
ened in December 1999, he would
translates to almost exactly a 0% total (MSCI EAFE Index)
have been startled to see that his
return. Add in dividends, and the
investment in the S&P 500 had gained International Equities, Small -14.38%
total return came to 2.11%.
more than 10% per year, on average, (S&P/Citigroup EPAC Ext. Mkt. Index)
during his 100-year nap. He might
That means it was a boring, uneventful Real Estate Investment Trusts (REITs) 8.28%
fairly have concluded that he had
year for investors, right? Remember all (NAREIT Equity Index)
slept through ten decades of happi-
the political bickering over raising the
ness and a sunny economic climate, Commodities/Natural Resources -13.32%
U.S. debt ceiling, when we worried
when in fact the century included (DJ UBS Commodities Index)
Continued Pg. 4
two horrible World Wars, the Great
MarJorie at a GlanCe 2012 will bring travel, a move, and a wedding….Son Doug and his
fiancée Kacie Davis will be married at the Lake Arrowhead Spa & Resort
BY: MarJorie l. Fox, JD, CFP®, aiF® in California on July 28th. David and I have had the pleasure of spend-
ing the past two Christmases with Doug, Kacie, and Kacie’s family in
As I turn 65, I am reminded of how the renowned Spanish artist Pablo Southern California. Our one and only is marrying one of seven, and
Picasso responded when asked why paintings from his later years were we couldn’t be happier!
alive and colorful, while paintings from his youth were formal and dark.
He said, “It takes a long time to become young.” Well, today I feel Later this year, David and I will be “migrating” from our home of 30 years
younger in attitude and outlook than I ever have. For this and much to a 19th floor condo at Midtown in the Reston Town Center. This may
more I am grateful to my family, faith, and friends, and to clients and be a temporary or a permanent move depending upon whether we
colleagues at FJY. decide to renovate or sell our home in Great Falls.
In case you are wondering, I fully intend to continue in my role at FJY for David and I will be visiting Apalachicola Florida and New Orleans in Feb-
the foreseeable future. I enjoy interacting with clients and colleagues ruary with the two couples we met on a Royal Canadian Pacific rail tour
and the challenges presented by the capital markets too much to retire in 2010, and with whom we traveled to France last summer. The six of
in the traditional sense. Nevertheless, after more than 25 years in prac- us will travel to Peru in October, and are already thinking about where
tice, and with Dan’s and Jon’s blessing, I am stepping back a bit from a we will go in 2013.
full-time workload. In fact the calendar already reflects my plans to be
out of the office the last week of each month. As I begin a new chapter in my life, I wish you health, happiness, and
prosperity in yours.
Quick Planning Question:
DiD you know that using a creDit carD is safer
than using a Debit carD?
2. Bush tax Cuts: What • A lowering of individual income tax
capital gains has been 0% for individuals in the
10% and 15% income tax brackets, and 15%
haPPens When theY rates from 15%, 28%, 31%, 36%, and 39.6%
to 10%, 15%, 25%, 28%, 33%, and 35%.
for everyone else. However, those rates were
scheduled to expire at the end of 2010, as
exPire? • A doubling of the child tax credit explained above, with the result that in 2011
By: Carol Mount, CPA from $500 to $1,000. the long-term capital gains tax rate would have
• A gradual reduction in estate taxes, risen to 20% (10% for taxpayers in the 15%
2011 has been a year of legislative stalemate, culminating in a one-year repeal in 2010 (but tax bracket) if Congress had not acted. The
uncertainty, and overwhelming concern reinstatement in 2011). new legislation forestalls these increases by
about the budget deficit. One thing is certain extending the 0% and 15% long-term capital
however; without major, new legislation, the But the crucial element of the 2001 tax cuts, gains tax rates for two years (through 2012).
so-called Bush-era tax cuts are set to expire at least for current purposes, is that they were
at the end of 2012. But what, exactly, are the temporary; set to expire at the end of 2010 Tax Relief Act of 2010 extends lower rates
Bush tax cuts and what happens when they unless Congress acted to extend them. for qualified dividends for two years
expire at the end of 2012? Here’s a primer. Since 2003, “qualified dividends” have been
The 2003 legislation (JGTRRA) accelerated taxed at the same low tax rates that apply to
Bush tax-cut legislation certain tax changes passed in EGTRRA, but the long-term capital gains. For dividend income
The Bush tax cuts refer primarily to tax changes centerpiece of the law was a cut in the top falling in the higher tax brackets, the rate is
in two major pieces of legislation back in capital gains rate from 20% to 15% and a cut 15%. In the first two brackets (where ordinary
2001 and 2003: the Economic Growth and in the top individual rate on dividends from income is taxed at 10% and 15% rates), the
Tax Relief Reconciliation Act of 2001 (EGTRRA) 35% to 15%. Under the 2003 legislation, the dividend rate is 0%. The low rates for quali-
and the Jobs and Growth Tax Relief Reconcilia- capital gains and dividends cuts were set to fied dividends, like the other Bush tax cuts,
tion Act of 2003 (JGTRRA). These tax changes expire after 2008, but they were later extend- were scheduled to expire at the end of 2010.
were set to expire at the end of 2010. ed for two additional years (until 2010). If Congress had not acted, beginning in 2011
However, the Tax Relief Act of 2010 extended taxes on dividends would have returned to
certain provisions as described below. The So when people talk about the “Bush tax the rates that were in effect before 2001, and
details of EGTRRA and JGTRRA are as follows: cuts,” they are referring, for the most part, to all dividend income received in 2011 would
The 2001 legislation (EGTRRA) was a 10-year the provisions in the 2001 and 2003 Acts that have been taxed as ordinary income. Since
$1.35 billion tax cut package that was the lowered individual income tax rates and cut the top income tax rate was scheduled to
largest tax cut since 1981. Key elements of the top rates on capital gains and dividends. return to 39.6%, individuals could have paid
EGTRRA included: as much as a 39.6% tax on dividends.
Tax Relief Act of 2010 extends lower The new legislation prevents that from hap-
rates for all taxpayers for two years pening by continuing the tax regime in effect
Over the past several years, a lot of for qualified dividends (i.e., treatment as long-
2011 PLAN LIMITS political energy has been expended
on whether the favorable individual
term capital gains, subject to a 0% tax rate for
individuals in the 10% and 15% tax brackets
income tax rates should be extended and a 15% tax rate for other taxpayers) for
401(k), 403(b), 457 Deferral $17,000 to some or all taxpayers. The Tax Relief two years—through 2012.
401(k), 403(b), 457 Catch Up $5,500 Act of 2010 settles the issue by ex-
Maximum Compensation $250,000 tending the lower rates for all taxpay- Other provisions in the Tax Relief Act of
DC Plan 415 Contribution Limit $50,000 ers. Under the law, the rates that have 2010
Social Security Wage Base $110,100 been in effect in recent years—10%, Besides extending the Bush tax cuts, the Tax
SIMPLE Deferral Limit $11,500 15%, 25%, 28%, 33%, and 35%—will Relief Act of 2010 included the following
SIMPLE Catch Up $2,500 remain in place. However, the exten- provisions affecting taxpayers:
HCE Compensation Determination $115,000 sion is only for two years—through • Repeal of personal exemption phase-out for
Top-Heavy Key Employee $165,000 2012. After 2012, the rates will revert higher-income taxpayers (through 2012)
Defined Benefit 415 Limit $200,000 to 15%, 28%, 31%, 36%, and 39.6%.
Traditional/Roth IRA $5,000
Traditional/Roth IRA Catch-up $1,000 Tax Relief Act of 2010 extends lower
SEP Minimum Contribution $550 capital gains rates for two years Continued Pg. 4
Since 2008, the tax rate on long-term
3. toP 10 estate PlanninG Mistakes - Part 1 with the wishes of the client. In some cases, the retirement plans are a
critical part of the estate plan and in other cases they are only a small
By: Burton Mitchell and Jill Henderson
piece. Either way, an incorrect beneficiary designation, or no beneficiary
This article was first published as a two-part series by the Elite Advisor Forum, a publica- designation at all, is a problem in the event of a death. The clients often
tion of CEG Worldwide and SourceMedia, and is reprinted with permission. need assistance completing these forms. Most importantly, the client
should obtain written confirmation of the designations from the retire-
When we review estate plans, there are some common mistakes we ment plan administrator and should provide a copy of that confirmation
come across. You may think some of these are obvious, but we have to their estate planning attorney. The written confirmation ensures that
seen them enough to assure you that they are not. Here is our list of the both the client completed the form properly and that the retirement
10 mistakes we see most often. plan administrator processed the form correctly.
In the event of a marriage or divorce, new beneficiary designation forms
1. Skipping the basics. With the increase in the gift and estate tax must be completed. Forgetting to complete new forms when the marital
exemptions to $5,000,000, which under current law is in effect through status changes can result in the wrong person receiving the retirement
December 31, 2012, we are experiencing a renewed interest from cli- plan.
ents in estate tax planning. Many clients are intrigued by the idea of using In addition to making sure the beneficiary designations are correct, the
their $5 million lifetime gift tax exemption (or a portion of it) to transfer income and estate tax aspects of retirement plans need to be consid-
wealth to their children now. Is this a good idea? In many cases it is, but ered. If the beneficiary is a trust, will the retirement plan proceeds be
first things first. held in a “conduit trust” to extend the period of time over which the
The best made estate plan is built from the ground up, so make sure the beneficiary will receive distributions? For the clients who are charitably
basic estate plan is in place before diving into the more complex, and inclined, should the beneficiary of the retirement plan be a charity?
often irrevocable, estate planning. Why is this important? The process These income tax aspects should be considered. With respect to estate
of planning the basic documents, such as the Will and revocable living taxes, the living trust should be reviewed to ensure that the right party is
trust, should uncover most issues. That process is the time to review the paying any estate taxes related to a retirement plan.
client’s financial picture and family dynamics, which is an essential con- Also, since the retirement plans pass outside of a living trust, this must
sideration in any estate plan. If the basics are skipped, you increase the be considered in the drafting. If the bulk of a client’s net worth is in a
likelihood of missed issues or oversights. Typically, the more advanced retirement plan, then the desired result may not be obtained under the
estate tax planning involves irrevocable steps that cannot be easily living trust. While this sounds obvious, it is easy to overlook if focused on
undone, if at all. drafting the estate plan.
The more advanced estate tax planning should be pursued in many
cases, but it is important to slow down the pace if necessary and get 4. Overlooking the impact of federal and state estate tax. We all know
the basics in place. A thoughtful plan is a more efficient and accurate there is a federal estate tax and we advise our clients about the current
plan. federal estate tax exemption and how it impacts them given their net
worth. The federal estate tax exemption is not likely to be overlooked.
2. Skepticism about life insurance. It is fairly common for clients to be However, what can be overlooked is what the estate plan says about
hesitant about incorporating life insurance into their estate plan. Often payment of estate tax. Suppose there is a piece of real property held in
clients have a negative view toward life insurance, because they are dis- joint tenancy. What does the living trust say about payment of the estate
trustful of life insurance agents and do not see the value in paying pre- taxes on that joint tenancy asset? If it is supposed to be paid by the
miums on a policy that may never may pay or on paying large premiums joint tenant, how will the trustee collect the estate taxes from that joint
over a potentially long period of time. However, there are many situa- tenant? If there are specific distributions to be made to individuals, does
tions where life insurance is an invaluable aspect of an estate plan and, if the estate plan address whether or not those distributions are made
properly explained to the client, can alleviate the client’s hesitation. free of estate tax? There are real economic consequences that result
For example, a term life insurance policy is a relatively inexpensive way from these issues, so the boilerplate estate tax provisions need to be
to provide a non-working or lower income earning spouse with comfort reviewed in each case to ensure the correct result.
that they would not have to sell the family residence or dramatically In addition to the federal estate tax, some states have a state estate tax.
change his or her lifestyle in the event of the death of the higher earn- We no longer have a state estate tax in California, but that does not mean
ing spouse. A “second to die” policy can provide the liquidity needed we can ignore the issue for our clients. If a client owns real property in
to pay estate taxes, so the beneficiaries do not have to sell assets they another state, we must evaluate if that state has an estate tax and how it
may prefer to retain. The use of an irrevocable life insurance trust should would apply to our clients.
always be considered, although it may not always be necessary.
Burton A. Mitchell is the chairman of the Taxation, Trusts & Estates Department at Jeffer
Mangels Butler & Mitchell LLP and a prominent tax and estate planning attorney in Los
3. Ignoring the retirement plan coordination. In every estate plan, the Angeles. Contact Burton at 310.201.3562 or BAM@jmbm.com
beneficiary designations for the retirement plans must be coordinated
4. want to time income recognition so that year- 8.5% this month, its lowest level in three years.
end bonuses would be paid prior to 2013. Factory output is rising, consumer spending has
Similarly, taxpayers may want to realize capital been surprisingly strong, and for the first time in
gain income prior to 2013 and/or consider decades, the U.S. is a net energy exporter.
other changes in their investment strategy. High
1925 Isaac Newton Square net-worth individuals may want to consider Profits, economic growth, and jobs are ulti-
Suite 400 substantial gifting through 2012. Due to the mately created by the ingenuity and hard work
Reston, Virginia 20190 complexity of these matters, taxpayers should of millions (or, globally, billions) of people. Rip
consult with professional advisors regarding Van Investor would have told you that this drive
1.703.889.1111 phone
their particular situation. and initiative was the really big story of the
1.877.395.7795 toll free 20th century, more important than the wars,
1.866.366.9233 fax Carol Mount, Tax Manager at Halt, Buzas & Powell, has been recessions, and political bickering. All he had
practicing tax and accounting in Washington DC for over 20
to do is see that his horse and buggy had been
years. Contact Carol at 703.836.1350.
replaced by a Lexus, the telegraph he wanted
www.fjyfinancial.com to send could be handled via e-mail, and see
Year in review: ConT the planes overhead outrun the birds in the sky.
that the United States government was teeter- The same hidden underlying force that powers
Bush Tax CuTs: ConT ing on the brink of default? Or how the S&P the markets has taken the human species from
•Repeal of 3% itemized deduction credit evaluators stripped the nation of its AAA cave dwellings to a modern electronic age
phase-out for higher-income taxpayers rating? Yet somehow, despite the best efforts that is still, admittedly, far from perfect. World
(through 2012) of our politicians, a broad index of U.S. govern- events have become more complicated, more
• Expanded child credit and dependent ment bonds gained 7.84% for the year. interesting, sometimes more disturbing, so
care credit (through 2012) much so that it takes a bit of perspective to see
• Marriage penalty relief (through 2012) All year long, we heard one gloomy report af- the long-term trend behind the scary headlines.
• Expanded education benefits and loan ter another on housing and real estate, yet the
interest provisions (through 2012) NAREIT index for commercial real estate gained The major U.S. market indices avoided a down-
• Energy-efficient improvement credit 8.28% for the year. In 2011, we watched the turn in 2011 after two strong recovery years.
(through 2011 only) European Union teeter on the edge of col- Those who bailed out after the market took any
• Alternative minimum tax (AMT) “patch” lapse, the sovereign debt contagion spreading of its many tumbles would have risked missing
(through 2011 only) from Greece to Spain and (gulp!) Italy. Yet the the year’s many improbable, unpredictable
• “Bonus” depreciation and expanded international EAFE index of developed foreign recoveries. Rip Van Investor came out all right
Section 179 expensing of property markets closed the year with a quarterly GAIN – and suffered a lot less anxiety than the rest of
(through 2012) of 2.86%. us.
• Temporary payroll tax cut (for 2011
only)(new legislation is pending)
• Gift and estate tax exclusion of
Amid the Arab Spring uprisings, constant ten- fJY Advisors
& stAff
sions over the nuclear program in Iran, the ter-
$5,000,000 (through 2012) rible tsunami and nuclear catastrophe in Japan,
and the recent unpredictable regime change in
Beyond 2012
Absent legislation to the contrary, the
nuclear-armed North Korea, it seemed like ev- Marjorie l. fox
ery other week there was a reason for investors sr. FinanCial aDvisor
Bush tax cuts and other tax provisions to believe that the markets would finish 2011
included in the Tax Relief Act of 2010 well below their pre-crisis levels.
Daniel D. joss
will expire on 12/31/2012. This means sr. FinanCial aDvisor
that higher tax rates and less favorable tax It is true that portfolios that held foreign stocks jon P yankee
.
treatment will go into effect in 2013. In would have shown overall losses for the year. sr. FinanCial aDvisor
addition, certain provisions of the 2010 But the bigger picture, here in the U.S., is: Why
Health Care Act will be implemented in laurie a. belew
is there such a broken connection between sr. FinanCial aDvisor
2013 including a new 3.8% Medicare tax tragedy, political turmoil, and scary headlines,
on net investment income for higher-in- on the one side, and market returns on the tess l. Downing
come taxpayers and a 0.9% Medicare tax other? The answer may be that the underlying FinanCial aDvisor
on wages and self-employment income
for higher-income taxpayers. (Other
forces driving our economic growth are more lisa j. crafforD
stable than the headlines suggest. Quietly, oFFiCe ManaGer
provisions of the 2010 Health Care Act despite the best (or worst) efforts of Con-
are beyond the scope of this article.) As gress, the U.S. unemployment rate has steadily
sally M. yankee
a result, where possible, taxpayers may aDMinistrative assistant
declined from over 10% at the peak down to
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future
performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated
historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions
or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment
advice from Fox, Joss & Yankee, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/
she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for
review upon request.
Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction
and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance
results. It should not be assumed that your account holdings correspond directly to any comparative indices.
