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REQUIRED MINIMUM DISTRIBUTIONS: The distribution may be required, but what if you don’t want to spend it?

When Congress first began writing legislation for tax-favored retirement plans in the 1970s, some of the provisions were likely based more on projections (guesses) than historical precedent or experience. This seems particularly true of the required minimum distribution (RMD) regulations which mandate that a certain percentage of retirement account accumulations must be withdrawn after the account holder reaches age 70½ (unless, in the case of an employer plan, a rank-and-file employee continues to work after that age).
As qualified retirement accounts, IRAs, SEPs, 401(k)s and the like were specifically intended to provide retirement income. And considering the tax-deferral features on deposits and accumulations, the Federal government certainly has an ongoing interest in eventually “recovering” these tax-deferrals during distribution. But why age 70½? As life expectancy continues to increase and general good health extends later in life, many qualified retirement account holders age 70½ or older may still be working, and/or may not want or need to take distributions from their accounts. For these individuals, liquidation from a retirement account will result in additional taxable income, and the funding of a new, non-qualified accumulation vehicle. Both facets of this distribution process could benefit from some forethought and planning.
The first issue to address in required mandatory distributions is the resulting taxable event. The entire distribution from qualified retirement plans (except amount attributable to after-tax contributions) is treated as taxable – there is no distinction between principal and earnings. As such, this additional income, whether spent or not, is taxed at the individual’s highest marginal tax rate. For individuals who are currently receiving income from other sources (wages, passive income, dividends, etc.), this means distributions from qualified plans may actually end up being taxed at a rate greater than the tax-deferral that was received when the money was deposited. While the taxability of qualified plan distributions is unavoidable, some individuals may want to consider ways to either offset the current taxation, or minimize the impact of future taxes on the distributed funds. For example…
Suppose a $24,000 RMD is required. This means an additional $24,000 must be reported as income. When making a required mandatory distribution that is not intended to be spent, the individual has to find a new place to hold and/or invest the $24,000 (or $24,000 minus the taxes due). Where should the money go?
If the retirement account had been invested in a financial product that delivered good returns over the years, the individual might choose to place the money in a similar product with non-qualified status. But depending on the type of account and the assets held in it, the new account may be subject to taxes on interest earnings, dividends, and short- and long-term capital gains. These annual taxes create an ongoing, compounding opportunity cost for holding the investment. Especially if these assets are intended to be held long-term, and perhaps intended to be part of an inheritance, the compounding opportunity costs may make the non-qualified version of this financial vehicle less attractive.
On the other hand, there are some financial transactions that have tax advantages. If the distribution were used to make mortgage payments on a second home or investment property, some of the reportable income from the distribution might be offset by a deduction for the interest portion of the mortgage payments. Using the $24,000 cited above to make a mortgage payment of $2,000 each month might not only reduce the tax on the distribution, but also secure a nice piece of real estate.
If these distributed-but-not-spent retirement account assets are earmarked to be part of an inheritance or estate plan, the annual distributions could be used to fund a tax-deferred annuity or buy life insurance. These insurance products have tax advantages and contractual guarantees that many people find valuable in ensuring a legacy for heirs.

HAVE YOU CONSIDERED A PLAN FOR YOUR DISTRIBUTIONS?

Selected FAQs about RMDs from the IRS
The Internal Revenue Service website (www.irs.gov) has an extensive listing of the regulations for Required Minimum Distributions, as well as additional publications available for download. A brief reading of these regulations – and the penalties for improper distributions – should prompt you to seek expert assistance. Here are a few Frequently Asked Questions regarding RMDs, direct from the IRS:

What types of retirement plans require minimum distributions?
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

When is the deadline for receiving a RMD from an IRA?
An account owner must take the first RMD for the year in which he or she turns 70½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.

How is the amount of the RMD calculated?
Generally, a RMD is calculated for each account by dividing the prior December 31st balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590, Individual Retirement Arrangements (IRAs). There are three separate tables:Uniform Lifetime Table is used by account owners who are unmarried or whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger; and
• The Single Life Expectancy Table is used by a beneficiary of an account.
• The Uniform Lifetime Table is used by account owners who are unmarried or whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger; and
• The Single Life Expectancy Table is used by a beneficiary of an account.

Can an account owner just take a RMD from one account instead of separately from each account?
An IRA owner, after calculating the total amount s/he needs to take from the aggregate balances in his/her IRAs, can take that amount in any portions s/he chooses, from any one or more of the accounts. However, RMDs required from other types of retirement plans, such as 401(k), 403(b) and 457(b) plans, have to be taken separately from each account (e.g., if a person has one 401(k) plan which is twice as large as another 401(k) plan, the RMD for the first will be twice that of the second, and if s/he takes less than the required amount from the first, s/he cannot “make up for it” by taking more from the second.

What happens if a person does not take a RMD by the required deadline?
If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

      An ongoing philosophical debate in the financial services community is how financial professionals should be compensated, either by commissions or advisory fees. Both sides of the discussion raise some interesting issues. Those advocating a fee-based approach argue that the incentive of commissions for brokers and sales agents has the potential to cloud the assessment of any transaction. In contrast, those defending the commission-driven model assert there is greater incentive to actually implement and monitor financial transactions, while fee-based planners have little or no motivation to ensure that the customer actually follows through on the advice given.
Since both sides are fairly well-entrenched on philosophical grounds, it is perhaps surprising to read a practical, real-world perspective on how to obtain reliable financial advice, particularly in regard to life insurance.
Errold F. Moody, Jr., operates and maintains what he claims is “the largest and most comprehensive planning site on the Internet” (www.efmoody.com). For more than two decades, Moody’s major interest has been “individual fee financial planning.” It is Moody’s contention that the best way to retain the services of financial professionals is by paying for their advice as opposed to buying their products – except when it comes to life insurance.
Moody’s exception is because he observes that many fee-based planners don’t seem to know much about life insurance. Besides personal experience, he quotes a 1999 Journal of Financial Planning article which stated:

“…many planners were not looking at, or least not emphasizing enough, the entire area of risk management – not just life insurance, but also disability, health, long-term care and liability coverage.”

Moody follows with some commentary of his own. (As you read this, keep in mind that for the past 24 years, Moody has been a professor at the University of California, Berkeley and Irvine, taught classes for Professional Designations in Financial Planning, and from 1995-2004, he was an Insurance instructor for various licenses and continuing education programs.)

“Insurance is, in my mind, one of the most difficult of all planning areas. While it is easy to get information about mutual funds and other investments from the likes of Morningstar or Value Line, it is almost nigh on to impossible to obtain objective and intensive analysis of a life insurance product. Therefore, since the analysis is hard, and since very few planners have the capability to do such analysis, they simply have decided to effectively eliminate planning for that area in total. Therefore, while somebody may have limited the conflict of interest in regards to commission, they simply have paid an hourly or flat fee for an incompetent, unknowledgeable adviser who has effectively breached its [his/her] fiduciary obligation to a client.”

Thus, Moody concludes the only effective way to buy life insurance is from a knowledgeable agent.  Setting aside questions of compensation, the real issue is the financial professional’s knowledge of insurance, and ability to accurately transmit that information to the consumer, then deliver the appropriate products. Because of the variety and complexity of life insurance contracts, you need to work with someone who is immersed in the business. And the most likely “expert” is a life insurance agent, whether compensated by commissions or fees.

A typical method of monetizing real estate assets is taking a loan against the equity. But most monetizing strategies that involve conventional borrowing come with the obligation of regular scheduled repayments. A reverse mortgage is a unique monetization-by-borrowing agreement that offers flexible and deferred repayment options. Along with several other unique advantages, a reverse mortgage can be a very attractive asset for older individuals to monetize.
A reverse mortgage is a loan against the equity in a principal residence that provides you cash advances, but requires no mandatory monthly repayments during the life of the loan. Unlike a typical loan agreement, the cash flow is reversed – the bank is sending money to the homeowner, instead of the other way around. Hence, the “reverse” mortgage.
A reverse mortgage loan is not due and payable until the borrower ceases to occupy the home (i.e., the borrower sells, moves out permanently or passes away), at which time the balance of borrowed funds (including the accrued interest) is due. If there is any additional equity in the property, it remains with the homeowner or his/her beneficiaries. But while the house serves as collateral in a reverse mortgage, the lender has no recourse to demand additional repayment from any family member if there is not enough equity in the property to pay the loan in full; i.e., the borrower’s estate cannot be forced to pay the difference if the property’s value declines during the reverse mortgage.
Because the qualifications for entering into a reverse mortgage agreement are minimal, a reverse mortgage is one of the easiest monetizing strategies to execute. Applicants must be at least 62 years old, and the property in question must be the owner’s primary residence. The property does not have to be owned free and clear (although the reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds). There are no additional income, asset or credit requirements to qualify for a reverse mortgage.
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage monetization. The amount of reverse mortgage benefit available will depend on your age at the time you apply for the loan, the type of reverse mortgage program you choose, the value of your home, current interest rates, and in some cases, where you live.
The proceeds from a reverse mortgage are tax-free and, depending on the type of agreement, may be received as a lump sum, fixed monthly payments, a line of credit, or a combination of these options.
Coordinating a Reverse Mortgage to Maximize Your Financial “Big Picture”
From this general overview of reverse mortgages, it should be easy to see the attractiveness of reverse mortgages for older homeowners. For those with limited financial resources, a reverse mortgage monetizes what is often one their largest assets, which can provide either additional income or a greater measure of financial stability. Even those who don’t “need” to tap the equity in their principal residence may find reverse mortgages worthwhile, because of flexible terms, tax advantages, or the capability to maximize other financial objectives.
For example, the National Care Planning Council offers the following commentary on how a reverse mortgage might be used to enhance an estate plan (from www.longtermcarelink.net):

When tax-free monies from a reverse mortgage are used for the purpose of funding insurance products, it gives homeowners, particularly those with substantial equity built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value. If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited) income stream of the borrower. When the insurance policy pays the benefits to the heirs, they receive tax-free dollars. Upon the sale of the property, any equity over the reverse mortgage loan amount will be subject to estate taxes, but ultimately, still revert to the heirs. With the unknown nature of the future real estate markets, the use of a reverse mortgage provides for greater control of the legacy assets by the senior homeowner.

A reverse mortgage can be an excellent monetization strategy for home equity, especially if the decision is part of a coordinated plan to maximize the value of other assets as well. Even if the property in question is considered a valuable inheritance asset, it may be possible to not only monetize the home under favorable terms today, but also ensure that it returns to the estate for future generations.
Note: This type of comprehensive planning is not a one-size-fits-all program. Tax, insurance and legal questions are best addressed by experienced professionals, and it is strongly recommended that you seek expert assistance when considering a reverse mortgage and any other related financial transactions. (In fact, FHA requires reverse mortgage borrowers to participate in a Credit Counseling session with an approved counselor early in the application process. When applicants complete this counseling, they receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.)

“The problem is that no matter what you think of insurance, past problems, future difficulties, etc., risk management still is a mandatory element of financial planning.”
- Errold Moody

IF YOU WANT TO MAXIMIZE YOUR ABILITY TO OPTIMIZE A REVERSE MORTGAGE IN THE FUTURE, LAY THE FOUNDATION TODAY BY REASSESSING OR RESTRUCTURING YOUR LONG-TERM PLANS.

      As a parent, spouse, employee, you have a unique human life value to others. While much of the value you bring into these relationships may not be financial, or even financially quantifiable, a life insurance policy allows you to monetize your human life value when you are no longer there in person. When you obtain life insurance, you have monetized yourself.
The group, Financial & Tax Fraud Education Associates, is a non-profit organization that operates a website (www.quatloos.com) devoted to exposing fraudulent business financial and taxation practices. In the middle of a commentary on the potential abuses in life settlements (agreements where a private investor buys an existing life insurance policy from the insured in exchange for becoming the beneficiary), are several interesting comments on the “hidden asset” of insurability.

(W)ealthy people have a hidden asset, which is their insurability. The [homeless person] at the bus station can’t qualify for $5 million in life insurance, but many affluent and nearly affluent Americans can. Whether buying a lot of insurance makes financial sense for a person depends on a lot of factors, including their age, health, and what the internal rate of return will be. But when it does make sense, wealthy people should be taking advantage of their large insurable interest by purchasing as much life insurance as they can reasonably afford so as to either pay estate taxes or to further grow their estate (income tax free) for their children.

This comment reflects the philosophy of coordinating the monetization of assets concept mentioned in the previous article. The author further states that monetizing one’s life is even worth borrowing for…

     If the wealthy people were really smart, they would simply buy as much life insurance as they could and hold it until their deaths. If they didn’t have the cash on hand to buy it, they could always use the services of many lenders who are willing to finance the premiums with the loans being paid out of the policy proceeds at death.

Most people might not think of borrowing to obtain life insurance, but borrowing is certainly a monetization strategy, and for some people, the benefit of monetizing their human life value/insurability may outweigh the cost of borrowing.

HAVE YOU MONETIZED YOUR GREATEST ASSET?

The Non-Monetized Business Owner
     A business owner has invested a lifetime of work to develop a going concern to provide wealth and security for his family. Suppose that in addition to delivering a high six-figure annual income, the business owns real assets such as land, buildings, equipment, and licenses valued at $5 million. 
     As age 70 approaches, the business owner realizes he may not want to continue working, or that his declining health may not allow him to. Yet, if he simply stops working tomorrow and closes the business, what happens to all the value he has created? The annual income stops, and although he still owns the real assets, they aren’t money – they aren’t liquid, they can’t be spent. It might be possible to sell the business assets piecemeal, but the money received will probably be far less than the value of the assets if the business were still in operation. If the owner doesn’t find a way to profitably monetize his business, he may be forced to continue working, or forfeit much of the material value he has developed.

The Non-Monetized Homeowner
     Thirty years ago, a couple found a great deal on a beach house in an exclusive area. Over the years, the property has been a sanctuary and gathering place for the couple, their children and grandchildren, a place of great times and wonderful memories. Even with the recent downturn in home prices, the beach home is valued far in excess of the initial purchase price. It is a prized family asset.
     But Mom and Dad are looking to retire, and while the beach house looks great on their balance sheet, the couple’s primary concern is income. The children would like to keep the property in the family, but don’t have the ability to monetize the house (i.e., buy it from the parents), so the prized family asset may have to be sold. 

The Non-Monetized Accumulation Plan
     Over her working lifetime, a book editor has acquired some interesting assets: The rights to a percentage of ongoing royalties from the works of several authors, as well as stock ownership in a privately held publishing company. While both of these assets provide a modest income stream (from book sales and dividends), the editor wants to relocate and needs a large down payment to invest in a condo development.
     Because of the unique nature of these assets, the editor’s assets cannot be easily liquidated like a publicly traded stock, bond or mutual fund. Even though they may have a history of profitability and provide some steady income, she faces a challenge in monetizing them for their total value.  

Optimal Retirement Planning: Coordinated Selling and Borrowing
     As you can see, non-monetized assets can be a detriment to fully maximizing your financial options, both now and in retirement. A conventional response within the financial services industry to this dilemma has been: If you are focused on retirement, don’t hold non-monetizeable assets!Instead, accumulate paper assets like stocks, bonds and mutual funds, ones that can be easily converted to cash. Simplify your planning by segregating your retirement into specific tax-favored vehicles like IRAs, 401(k)s, etc.
     But consider the examples above. Would the business owner think he was better off if he had not developed his business? Would the couple rather not have purchased the beach house? Should the editor have refused the royalty and ownership assets? No. These assets, while not fully monetized, are valuable. Rather than abandoning or ignoring these assets, a better approach is to find creative ways to combine and integrate both monetized and non-monetized assets, both now and in the future.
     Competent financial professionals can provide concepts and procedures to determine when and how to monetize assets, whether they should be sold, or what type of collateral they could provide if used for borrowing. This paradigm of asset coordination is the basis for business transfer strategies, such as buy-sell agreements and stock purchase plans. It’s also a key element in estate planning, determining which assets should be liquidated while others are preserved for heirs. And it’s also essential for individuals who want to maximize their lifestyle opportunities in retirement.
     Some of these monetization strategies may appear complex; they may require the establishment of separate legal entities (like a trust or corporation), contain special agreements, and include the repositioning of assets into new vehicles (such as annuities or life insurance). Evaluated as individual transactions, some might wonder if these items are necessary, and whether they are worth the cost. But the key is to evaluate the big picture for the benefits, because a coordinated plan is designed to deliver results greater than the sum of the individual pieces.
     For example, suppose that distributions from a simple accumulation plan containing $1 million project an annual income of $50,000. In comparison, suppose $100,000 of the $1 million was allocated to obtain a life insurance policy equal to an amount of $200,000 received in a reverse mortgage. When combined, the remaining accumulation and home equity can provide a greater retirement income, while the life insurance ensures the home equity due to the bank will be repaid, allowing the heirs to inherit the house. In this instance, coordinating three items (the accumulation account, home equity and life insurance) results in a better monetization of the home and greater income.       
     Personal discipline is probably the key element in acquiring assets. Anyone who develop their skills, works responsibly and lives within their means can save for retirement. But to fully realize – and enjoy – your efforts, you may want to consider working with professionals to help you fully monetize your financial potential. 

AS AN INDIVIDUAL…
     DOES YOUR FINANCIAL SITUATION INCLUDE NON-MONETIZED
     ASSETS? DO YOU HAVE A PLAN TO MONETIZE THEM?

IF YOU ARE A BUSINESS OWNER…
     DO YOU KNOW HOW YOU WILL YOU MONETIZE THE VALUE OF YOUR
     BUSINESS IN THE FUTURE?

FROM 107 TO 1,124 IN 32 YEARS.
Should you be impressed?

 The following factoid was part of the August 22, 2011, edition of “By the Numbers,” an online business news digest:

On August 13, 1979 (i.e., 32 years ago), Business-Week’s cover story was titled “The Death of Equities.”  The S&P 500 closed at 107 on 8/13/79.  The index closed at 1,124 on 8/19/11 (source: BusinessWeek).

 Some interesting facts, yes? But how should we interpret them? Here’s a possible response: Left for dead 32 years ago, the stock market has proven a resilient and profitable investment over the long run. Another implication might be that just as the pessimists were wrong three decades ago, today’s stock market pessimists could be wrong as well. It’s pretty clear, isn’t it?  

Well, sort of. The factoid above was just three short sentences. It is concise, and after all, growing from just above 100 to over 1,100 represents substantial growth, doesn’t it? Maybe there’s more to the story.

For example…if you do the math, the growth of 107 to 1,124 over 32 years works out to an average annual increase of approximately 7.6%. While that number isn’t bad, it is probably not what many would consider a “substantial” above-average long-term rate of return.

If those calculations diminish the factoid’s impact a bit, an assessment of the S&P’s performance might be even less enthusiastic when some other historical details are brought to light. Using an interactive website, it was possible to create a mountain chart illustration specifically reflecting the index’s 32-year performance from August 1979 to August 2011. See the graph below.

 Several things jump out. The S&P’s price today is lower than it was in November 2000, which means the average annual return for the past decade has been slightly negative. And although the 10-year numbers are flat, the degree of fluctuation during the decade has been significant. Looking at the long-term history, the index appears to record two distinct periods: The first is characterized by a steady upward climb above 1,400 over 20 years, while the second era is marked by steep peaks and valleys.

As you dig deeper into the numbers, has your assessment of the initial 107-to-1,124 statement changed? Probably. But

besides changing your perspective on past performance, how would you use this information to make a decision about future investment opportunities in the S&P? Is the future going to be one of continued volatility or is the index about to enter another unique period of steady results? If so, is it possible that the next trend may be steadily downward? Those are questions that probably can’t be answered without conducting even further research.

The Information Age makes a sea of facts readily available to everyone. The crucial factor in making informed financial decisions isn’t just getting the information. Rather, it is knowing how to evaluate the data, and determine which facts are relevant to your situation.

•  WHO HELPS YOU EVALUATE THE FINANCIAL FACTS OF YOUR LIFE?
•  DO YOU KNOW (AND UNDERSTAND) THE CRITERIA?
•  IS IT TIME FOR ANOTHER ASSESSMENT? 

Working from a list that appeared in a Saturday, July 2, 2011, Wall Street Journal article, here are essential personal and financial documents that should be readily accessible by you or your heirs in an eldercare situation. Your personal circumstances might not require having every item listed here, but the categories reflect the range of issues relevant to caring for an aging parent. Consolidating and organizing this information is not only a great benefit to you while you’re living, it is also invaluable for your heirs. 

By the way:

While having original documents and physical copies collected in one file cabinet is a fundamental of good financial organization, maintaining an electronic back-up file, such as the online data storage programs offered by many financial institutions, is a superb secondary location for the same documents. Check with one of your financial professionals to see if they offer this service.

Marriage and Divorce:

• Marriage license(s)
• Divorce papers

Health Care History and Instructions:

• Personal and family medical histories
• Durable health-care power of attorney
• Authorization to release health-care information
• Living Will
• Do-not-resuscitate instructions  

Proof of ownership:

• Housing, land and cemetery deeds
• Escrow mortgage accounts
• Proof of loans made and debts owed
• Vehicle titles
• Stock certificates, savings bonds & brokerage accounts
• Partnership and corporate operating agreements
• Tax returns

Life insurance and retirement:

• Life insurance policies
• Individual retirement accounts
• 401(k) accounts
• Pension documents
• Annuity contracts

Bank Accounts:

• List of bank accounts
• List of all user names and passwords
• List of safe-deposit boxes

The Essentials:

• Will
• Letters of instruction
• Trust documents

     Want to forecast the future? Look for the demographics. They are huge indicators of long-term trends, and once in place, they tend to change very slowly. In developed countries, a pre-dominant demographic trend is the combination of falling birthrates and aging populations. These two trends are already in place, and the impact of these factors is inexorably working to change social and financial paradigms.
     One of these areas of predictable change is the increasing number of children caring for elderly parents. As the combination of longer life expectancies and declining populations puts a greater strain on government-sponsored social safety-net programs, the default response will be placing a greater burden on children to care for their parents.
     This change is not only foreseeable, but already gaining momentum. Data complied by the National Alliance for Caregiving from the U.S. Health and Retirement Study is telling. Look at the differences between 1994 and 2008:

Percentage of men and women providing care for an aging parent:
                   1994      2008
Men             3%         17%
Women        9%        28%

     When almost 3 in 10 women are caring for an aging parent, it is a significant statistical trend. And the statistics also show clear correlations to changing social and financial dynamics.
     Citing the same report, a June 14, 2011, Wall Street Journal article by Kelly Greene (“Toll of Caring for Elderly Increases”) notes that “the steep rise in people caring for elderly parents is taking a toll on the health and finances of many baby boomers.”
     Among the workers over age 50, those who work and provide care for a parent at the same time are more likely to experience poor health, stress, depression and chronic disease. The report indicates these health problems are principally “a result of their focus on caring for others.”
     One of the prominent sources of stress is financial cost to children when they become caregivers. A June, 2011 report, Study of Caregiving Costs to Working Caregivers, by MetLife’s Mature Market Institute, put this cost at over $300,000 per person over age 50 if they are taking care of elder family members. This number reflects lost wages, pensions, and Social Security benefits over their lifetime, due primarily to a reduction in working hours, or leaving the work force entirely early to care for a parent.
     As the numbers above indicate, there is a disparity between men and women as to who is most likely to be a caregiver. The Metlife study found that daughters were more likely to provide basic care while sons were more likely to give financial assistance.
     Since they are often the ones providing day-to-day hands-on assistance, women are also the ones who are more likely to leave the workforce, and experience the greatest financial loss. The study broke down the financial losses as follows:

 $142,693  in lost wages
 $131,351  lost in Social Security
   $50,000  lost in pension benefits or matching contributions to
                     defined-benefit plans.
 $324,044 Total

     It’s important to note that these numbers are simple aggregates. They don’t factor the accompanying lost opportunity cost (LOC) that results. For example, what would the $50,000 lost in pension benefits or matching contributions be worth after being invested for 15 or 20 years? The number and time period used to calculate the LOC is arbitrary, but even a conservative factor could easily forecast a financial loss approaching $1 million.

Appropriate Responses
     The math of taking caring of an aging parent looks ugly. But when it comes to family, financial sacrifice isn’t going to keep most children from doing the responsible and loving thing by caring for their parents. And the social value of maintaining these family ties far outweighs most financial considerations; placing the full responsibility for eldercare on strangers isn’t usually the best for children or parents. But that doesn’t mean parents or their children should ignore the financial consequences. Good financial decisions can improve many caregiving situations.
For parents who recognize either the likelihood or desirability of having their children be caregivers, any preparation will be helpful. This often starts with simply organizing your financial affairs, then educating your children about your wishes and available assets. For some, this preparation might include rethinking Long-Term Care insurance, or redirecting current savings allocations.
We live in a mobile society, but proximity is a critical issue in caregiving. It’s hard to be a personal caregiver for Dad when he lives in Florida and you live in Illinois. One of the greatest financial upheavals in caring for an elderly parent can be determining where it will take place. Will her daughter leave her job to come live with Mom? Or will Mom move and live with her daughter (and family)? Selling a house, leaving a job, putting an addition on an existing home – these are big financial decisions. If such a move is on your horizon, it might affect your saving priorities and accumulation strategies.
The rising trend of adult children caring for aging parents almost requires a multi-generational approach to financial decision-making – for parents and their children. In many ways, the necessity to integrate the financial objectives of several families that share common bonds can result in greater benefits for all, as the whole performs better than the sum of the parts. Although there are certainly costs associated with the decision to care for aging parents, there may also be significant opportunities.

• AS A PARENT OR A CHILD, IS CAREGIVING IN YOUR FUTURE?
• WOULDN’T NOW BE A GREAT TIME TO SEE HOW INTER-GENERATIONAL STRATEGIES COULD HELP?

There’s a long-standing guideline for individual investors that says you should never buy a particular financial instrument purely for its tax-favored status – the underlying investment opportunity needs to make sense apart from its tax treatment. However, this does not mean you can ignore the tax consequences when you evaluate a potential investment, because taxes can significantly impact overall returns. As more sophisticated investment vehicles have become available to a larger segment of individual investors, this issue has grown in importance.
A June 25, 2011, article from the Wall Street Journal titled “Extreme Tax Frustration” detailed some of the new and often unanticipated tax issues arising from exchange-traded funds that include commodities in their portfolios. An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
Some investors find that ETFs can be an effective way to invest in specific market sectors, with the attraction of portfolio diversification similar to mutual funds or other pooled investments. However, depending on the types of investments held by an ETF, how these investments are titled, and how profits are distributed, the tax treatment can be dramatically different. Here is an example from the WSJ article:
Holders of gold stocks in a mutual fund would pay tax on long-term capital gains (those held longer than a year) of 15%. In contrast, shareholders of gold held in an ETF would be taxed at one’s marginal income tax rate, such as 28%, because the ETF is considered to have direct ownership of gold, and all profits are passed through the fund directly to shareholders as regular income.
Since many ETFs are structured as partnerships, this tax information is not reported to shareholders on a simple Form 1099, but instead on a Schedule K-1, which details the ETF’s income, deductions, credits, etc., and the percentage of profit or loss apportioned to the shareholder/partner. K-1s may be lengthy and complex, which adds significant cost to professional tax return preparation, as well as increasing the possibility of mistakes.
     The prospect of higher tax rates and increased return preparation costs that may accompany the purchase of shares in some ETFs should certainly be among the issues considered by individual investors. As Laura Sanders wrote in the WSJ article, “The old adage ‘know what you own’ may not be enough. You also need to know what you’ll owe.”
     But what about financial vehicles in which you aren’t sure of the tax consequences?
     A “structured product” is the generic term for sophisticated financial instruments that feature investments whose performance is in some way guaranteed or completed by linking it to a pre-determined index or other security.
     A “reverse convertible” is an example of a structured product, popular with some investors because of its potential for high yields. Here is a brief description of a reverse convertible, provided by FINRA, the Financial Industry Regulatory Authority, the regulatory agency that protects investors:

“A reverse convertible is a structured product that generally consists of a high-yield, short-term note of the issuer that is linked to the performance of an unrelated reference asset—often a single stock but sometimes a basket of stocks, an index or some other asset. The product works like a package of financial instruments that typically has two components:
 
• a debt instrument (usually a note and often called the ‘wrapper’) that pays an above-market coupon (on a monthly or quarterly basis); and

• a derivative, in the form of a put option, that gives the issuer the right to repay principal to the investor in the form of a set amount of the underlying asset, rather than cash, if the price of the underlying asset dips below a predetermined price (often referred to as the “knock-in” level).”

Sounds complicated, doesn’t it? That’s because structured products are complicated. But what’s even more confounding is FINRA’s commentary on the tax treatment of these financial instruments, from the Authority’s website (www.finra.org), updated on July 29, 2011,…

“The tax treatment of reverse convertibles is complicated and uncertain. Investors should consult with their tax advisors and read the tax risk disclosures in their prospectuses and other offering documents. Although these documents typically provide instructions on how investors should treat reverse convertibles on their tax returns, there is no guarantee that the IRS or a court would agree with that tax treatment. Little guidance in the way of court decisions or published IRS rulings has been issued on this topic. When considering the tax consequences of any investment, you may want to consult with a tax advisor.”

Note that FINRA is not questioning the integrity of structured products in general or reverse convertibles in particular. The performance of these products will vary greatly depending on their structure and investment specifics, but in general, structured products are legitimate financial instruments that may provide real financial benefits to consumers. The challenge is that the complexity of the product leads to uncertainties as to their proper tax treatment.

• DO YOU KNOW WHAT YOU OWE AS A RESULT OF YOUR INVESTMENTS?

• INCLUDING TAXES, ARE YOU ABLE
TO CALCULATE THE TRUE COST AND REAL RETURN OF YOUR FINANCIAL DECISIONS?