How to Maximize Your IRA Investments

The Independent Press - 02/01/12
Money Matters
By Aaron Skloff

Q: Even though it is 2012, can we still contribute to Individual Retirement Accounts for 2011?

The Problem – Foregoing Financial Planning and Tax Planning Strategies for 2011
Assuming financial planning and tax planning strategies for 2011 ended on Dec. 31, 2011 is a completely logical assumption. Despite being a logical assumption it is also incorrect. Unfortunately, logical assumptions can sometimes harm your financial health.

The Solution - Utilizing Financial Planning and Tax Planning Strategies for 2011
One of the most powerful estate, financial, retirement and tax planning strategies is the use of the Individual Retirement Account (IRA). Fortunately, you can establish and contribute to an IRA for the tax year 2011 up until the time you file your 2011 taxes (with a deadline of April 17). If you have a Keogh or Simplified Employee Pension (SEP) IRA you can receive a filing extension, extending your contribution deadline to Oct. 15. Although the qualifications and contribution limits are straight forward, the type of IRA or IRAs you may qualify for requires a bit of research.

Qualifying for an IRA
Whether you earn over $1 million per year or absolutely no income you can still qualify for an IRA. Even a child who earns income delivering newspapers can qualify for an IRA. In order to qualify for an IRA as a non-earner, your spouse must generate earned income (note: alimony is an exception). Earned income includes salary, self-employed income and sales commissions. It does not include interest, dividends, pension income or social security income.

IRA Contribution Limits
Contributions are limited to the lesser of earned income or $5,000 (same for 2012) for those under the age of 50 or $6,000 (same for 2012) for those aged 50 and over. For example, a 65-year-old retired husband and 63-year-old semi-retired wife, who earns $12,000, could each contribute $6,000 to an IRA in 2011. As another example, a 12-year-old part-time newspaper deliverer, who earns $3,000, could only contribute $3,000.

Traditional IRA
Contributions are fully tax-deductible if you are ineligible to participate in an employer-sponsored retirement plan. Otherwise, the deduction begins to phase-out once your Modified Adjusted Gross Income (MAGI) exceeds $56,000 ($57,000 for 2012) for single filers or $90,000 ($91,000 for 2012) if both persons are covered and married filing jointly. With or without a deduction, earnings in a Traditional IRA are sheltered from taxes until they are withdrawn. Traditional IRAs provide powerful estate planning benefits, since the taxes on all capital gains, dividends and interest are deferred until assets are withdrawn. Withdrawals are generally not required until you reach age 70½, based on Required Minimum Distributions (RMDs) rules.

Roth IRA
Contributions are never deductible and eligibility begins to phase-out once your MAGI exceeds $107,000 ($110,000 fro 2012) for single filers or $169,000 ($173,000 for 2012) for those married filing jointly. The Roth IRA has a very important distinction from the Traditional IRA. Not only is income sheltered from taxation while in the Roth IRA, but withdrawals are tax free. A Traditional IRA is like ‘having your cake,’ while a Roth IRA is like ‘having your cake and eating it too.’ Roth IRAs provide powerful estate planning benefits, since the taxes on all capital gains, dividends and interest are tax free when assets are withdrawn. The original owner of a Roth IRA is not subject to RMD rules, further highlighting its estate planning benefits.

Action Step - Start Your IRA
Question not, ‘Should I start an IRA?’; question, ‘Which IRA should I start?’ With such liberal restrictions, most people qualify for an IRA. The government realizes Social Security and Medicare are broken, while the costs in retirement are ballooning. Thus, it has essentially given taxpayers a gift in the form of an IRA. Do not look a gift horse in the mouth – contribute to an IRA before the deadline and gain estate, financial, retirement and tax planning benefits.

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights, NJ. He can be contacted at www.skloff.com or 908-464-3060.

Retirement Savings Solutions for 2012

The Independent Press - 01/05/12
Money Matters
By Aaron Skloff

Q: We are ready to get serious about our retirement savings in 2012. What are the contribution limits for various retirement accounts in 2012?

The Problem – Lack of Retirement Savings
Most pre-retirees recognize they lack an adequate level of savings to enjoy a financially sound retirement. Even as public programs like Social Security and Medicare crumble, many pre-retirees are still hoping these programs will provide them an adequate means of retirement benefits. If these programs remain in existence over the next 20-30 years, they will likely provide a shrinking percentage of retirees’ actually needs. Responsible savers looking to build their own savings to pay for their own expenses in retirement face a big problem. The government places strict annual contribution limits on tax advantaged retirement savings vehicles.

The Solution - Take Advantage of Tax Advantaged Savings Vehicles
If you have an inadequate level of retirement savings now is the time to begin closing the gap between what you have and what you need. Ideally, utilize tax advantaged savings vehicles that provide a combination of immediate tax benefits and/or tax benefits for decades to come. Let’s look at some of the most common ones below.

Traditional and Roth 401(k), 403(b) and 457(b) Retirement Accounts
These are employer sponsored retirement accounts with generous employee contribution limits. Generally, you can contribute up to $17,000 (up from $16,500 in 2011) per year if you are less than 50 years old or up to $22,500 (up from $22,000 in 2011) if you are 50 years old or older. Additionally, many employers match contributions and/or provide profit sharing contributions.

The maximum contribution amount you and your employer (combined) can make per year is $50,000 (up from $49,000 in 2011), based on $250,000 (up from $245,000 in 2011) maximum considered compensation. The traditional 401(k) and 403(b) provide an immediate tax benefit and a deferral of income taxes, while the Roth versions forego the immediate tax benefit and provide tax free withdrawals.

Simplified Employee Pension Plan Accounts (SEPs)
SEPs are employer sponsored retirement plans with very generous employer contribution limits. Generally, employers can contribute up to 25% of an employee’s compensation. The maximum contribution an employer can make is $50,000 (up from $49,000 in 2011), based on $250,000 (up from $245,000 in 2011) maximum considered compensation.

Savings Incentive Match Plan for Employees (SIMPLE) IRA Accounts
SIMPLE plan accounts are employer sponsored retirement plans with generous employee contribution limits. Generally, you can contribute up to $11,500 (unchanged from 2011) per year if you are less than 50 years old or up to $14,000 (unchanged from 2011) if you are 50 years old or older. Additionally, employers are required to make contributions to your account on an elective or nonelective basis. The maximum elective match is 3% of compensation, not to exceed $11,500 (unchanged from 2011) if you are less than 50 years old or up to $14,000 (unchanged from 2011) if you are 50 years old or older. The nonelective contribution is 2% of compensation based on $250,000 (up from $245,000 in 2011) maximum considered compensation.

Traditional and Roth Individual Retirement Accounts (IRAs)
In lieu of or in addition to employer sponsored retirement plans, you can contribute to an IRA. You can contribute up to $5,000 (unchanged from 2011) per year if you are less than 50 years old or up to $6,000 (unchanged from 2011) if you are 50 years old or older. The Traditional IRA provides pre-tax or post tax contributions (based on your income and employer sponsored retirement plan status) and tax deferral. The traditional 401(k) and 403(b) provide an immediate tax benefit and a deferral of income taxes, while the Roth versions forego the immediate tax benefit and provide tax free withdrawals.

Action Steps
Boost your retirement savings with tax advantaged savings vehicles and gain tax benefits as you close your retirement savings gap. Don’t put off until tomorrow what you can do today.

Long Term Care University - Question of the Month

Long Term Care University - 12/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: We may wait to purchase long term care insurance. What should be our most important considerations?

The Problem – Determining Whether to Buy Long Term Care Insurance Now or Later
Waiting to purchase technology gadgets can often be advantageous. For example, the fancy computer that costs $1,000 today is likely to drop in price to $800 in a year or two. Delaying the purchase of long term care insurance, on the other hand, can often be disadvantageous – as outlined below. While any one item on the list below can increase the price of your policy, the combination of two or more items can have a multiplier effect on the price – possibly doubling the price of your policy.

1. If you already need long term care, insurance companies will consider you uninsurable and prohibit you from purchasing a policy.

2. If your health deteriorates, insurance companies will charge you 15%-75% more for the same level of coverage.

3. If long term care costs continue rising at the same pace, you will need to buy 5% more coverage each year you delay your purchase.

4. As you grow older insurance companies charge more for the same level of coverage.

5. Some states have minimum purchase requirements for their Partnership Programs (long term care insurance polices that protect assets away from Medicaid). Some states (e.g.: California, Connecticut and New York) increase their minimum purchase requirements by 5% each year, increasing the price by 5%.

6. Insurance companies regularly raise rates for new applicants, oftentimes 10%-30%.

Insurance Companies’ Cost of Waiting Tables are Dangerously Misleading. Many insurance companies’ quotations include a table entitled Cost of Waiting. Although the tables portray the price of policies and the cost of waiting, they rarely disclose the regular rate increases companies implement for new applicants of the same age. The table entitled Cost of Waiting Before Price Increase represents the price for $200 per day of care for 5 years, with 5% compound inflation protection, and a 90 day elimination period, for a 50-year-old husband and wife, per person. The table entitled Cost of Waiting After Price Increase represents the same benefits after the same insurance company raised rates for new applicants.

While the table entitled Cost of Waiting After Price Increase obviously reflects the higher prices, what is less obvious is the percentage change for various ages. For example, the new price for a 50-year-old is 17% higher than the old price. The new price for a 55-year-old is 25% higher than the old price. Lest we forget, the second table entitled Cost of Waiting After Price Increase dangerously assumes no further price increases – the same way the first table falsely assumed (in retrospect).

The Solution – Purchase Your Long Term Care Insurance Now and Assure You Pay the Lowest Price
Any of the six items listed above can lead to your paying significantly more for your policy. There is only one item that is certain on the list of six items; in one year’s time you will be one year older. Unfortunately, Mother Nature takes her toll on all of us; adding another item from the list of six that will add to the price of your policy. It is critical to know all six items on the list when purchasing a long term care insurance policy.

Action Step – Purchase Your Long Term Care Insurance Policy When You are Young and Healthy
Purchase your long term care insurance policy when you are young and healthy, assuring you will pay the lowest price possible.

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA) charter holder, Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a NJ based Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.

Skloff Financial Group Answers Question of the Month

The Independent Press - 12/07/11
Money Matters
By Aaron Skloff

Q: To save the company money, our employer recently discontinued our disability insurance benefit. Should we replace it with a disability insurance policy?

The Problem – Lost Income from Disabilities
Many employers are slashing benefits to save money. According to the Social Security Administration, approximately one-third of Americans entering the work force today (3 in 10) will become disabled before they retire. According to the American Payroll Association, 71 percent of American employees live paycheck to paycheck, without sufficient savings to cushion the financial impact of a disability. In financially tight times like these, the lack of a paycheck can force even financially stable households into financial instability.

A mere 10 percent of disabling accidents and illnesses are work related. The other 90 percent are not, which means Workers Compensation does not cover them. Although many people assume most disabilities are the result of accidents, the majority of disabilities are due to illnesses. The two most common reasons for new disability claims are musculoskeletal/connective tissue related (23 percent of claims) and cancer related (14 percent of claims).

Compounding the problem is the widely held belief that you will qualify for Social Security Disability Insurance benefits. You must be completely unable to work in any occupation, not just your own occupation, to qualify. This requirement eliminates 65 percent of applicants. Only 3 percent of approved applicants receive a monthly benefit over $2,000. The average monthly benefit is a mere $1,062.

The Solution - Individual Disability Insurance
Disability insurance provides a source of replacement income during your disability. It provides an income stream to partially replace the wages lost when you are unable to work for an extended period of time. Most policies limit coverage to 60 percent-70 percent of your previous income. State laws and insurance regulations are designed to discourage workers from realizing the same level of income while disabled. Disability insurance policies should be examined based on the six key criteria outlined below.

Elimination Period. The elimination period defines how long you will be precluded from receiving benefits. The longer the elimination period you choose, the lower the cost of your policy and the greater initial loss of income.

Benefit Period. The benefit period defines how long a benefit will be paid. A typical benefit period is through the age of 65. Coincidentally, this is the age at which many workers are eligible for full benefits under Social Security.

Inflation Protection. Inflation protection is a critical part of any policy. In order to keep up with the rising costs of living, most policies provide for cost of living adjustments. Foregoing this benefit may save you money today, but cost you dearly as your cost of living increases while your benefits do not.

Coverage of Partial Disabilities. When evaluating a disability insurance policy verify that the policy covers both partial and total disabilities. A non-severe (or partial) disability limits or prevents the amount or kind of work you can do; a severe disability (or total) disability prevents you from working altogether. According to the U.S. Census Bureau, 32 percent of disabilities are non-severe and 68 percent are severe.

Coverage for Own-Occupation. Seriously consider purchasing an own-occupation disability insurance policy. With this type of policy the insurance company does not penalize you for going back to work in a different occupation while on claim. With this type of policy if you have a sickness or injury and cannot perform your occupation, you will be considered totally disabled, even if you choose another occupation.

Action Steps . Protect your income through retirement with a disability insurance policy with: a short elimination period, long benefit period, inflation protection, coverage for partial disabilities and coverage for your own-occupation.

Long Term Care University - Question of the Month

Long Term Care University - 11/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: What is an elimination period? Are there different types of elimination periods?

The Problem – Determining What Elimination Period to Select
Most long term care insurance policies offer you the option to add an elimination period to your policy when applying. An elimination period is the waiting period from the time your care begins until the time the policy begins paying for your care. Fortunately, many consumers purchase an adequate amount of care per day (daily benefit) and an adequate amount of care over the life of their policy (total pool of money). Unfortunately, many consumers who do not select the appropriate elimination period are not prepared for their out-of-pocket costs during the elimination period they select – which can easily cost tens of thousands of dollars.

The Solution – Selecting the Appropriate Elimination Period
Specifically, an elimination period is the number of days you are responsible for paying for your long term care costs out of your own pocket. Most insurance companies count each day of service towards the elimination period. If you were well enough to skip a day of service, the number of days needed to meet your elimination period would be extended. Most insurance companies require you to meet the elimination period only once over the lifetime of the policy; even if you need benefits for two years, then need another three years of benefits 10 years later. When selecting an elimination period for your long term care insurance policy, understand how your policy defines ‘elimination period’. Let’s look at a number of definitions below.

Days of Service Elimination Period. This is the number of days that you must receive care before reimbursement begins. For each day you receive covered services (the type of care the policy would cover after the elimination period) the insurance company will credit one day towards satisfaction of the elimination period.

Days of Service Elimination Period with Enhanced Elimination Period Rider. This rider advances you through the elimination period quicker. If you receive care at least once during any seven calendar day period, seven days will be counted toward satisfying the elimination period.

Calendar Day Elimination Period. This is the number of days you must wait before the policy will begin paying for your care. Once you certify you need care, each day counts towards satisfying the elimination period, whether or not you receive care.

The Solution – Selecting the Appropriate Elimination Period
Like a deductible on an automobile or homeowners insurance policy, an elimination period on a long tem care insurance policy shifts the initial cost of a claim to you and away from the insurance company. Specifically, an elimination period is the number of days you are responsible for paying for your long term care costs out of your own pocket. Like an automobile or homeowners insurance policy the more risk the policyholder is willing to assume the lower the price of the insurance. With a long elimination period, you gain one big advantage – lower premiums.

Based on a 90-day elimination period, you should clearly understand what your out-of-pocket costs may be. Let’s look at what your out-of-pocket costs may be based on receiving four days per week of care at a cost of $200 per day (increasing at 5% per year); with the elimination periods described above.

Action Step – Choose the Right Type of Elimination Period
Choose an elimination period based on what your can afford to pay on an out-of-pocket basis during the elimination period. Clearly understand what type of elimination period is written in your policy to avoid a costly surprise in the future.

Skloff Financial Group Answers Question of the Month

The Independent Press - 11/02/11
Money Matters
By Aaron Skloff

Q: With the end of the year quickly approaching, what are some important tax and financial planning measure we can take to reduce our taxes and improve our financial position?

The Problem – Year-End Financial Oversights and Mistakes
With so many gifts to purchase and holiday parties to attend, it is easy to forget important year-end tax and financial planning measures that can save you taxes or bear financial benefits for years to come.

The Solution - Take Action in the Next Two Months
Many tax and financial planning deadlines are based on a calendar cycle — do them after Dec. 31 and lose the benefit for that year. Outlined below are some of the most common oversights and mistakes to void before the year comes to a close.

Not Contributing to Your 401(k) or 403(b) and/or 457(b). Not only do you build your retirement nest egg, but you also gain a tax break by contributing to your employer’s retirement plan. Better yet, many employers will match your contributions. Unfortunately, there is a cap on contributions each year. For 2011, it is $16,500 for those under the age of 50 and $22,000 for those aged 50 and over. Additional contributions can be made with the “lifetime catch-up” with a 403(b) and a “double-limit catch-up” with a 457(b). Once you maximize your contribution you cannot make additional contributions to make up for under-contributing in previous years.

Not Timing Capital Gains and Losses. Capital gains and losses are classified as either short-term (less than one year) or long-term (more than one year). Long-term losses can only offset long-term gains and vice versa. Selling investments, like stocks, bonds, or mutual funds you have held for more than one year generates a 15% capital gains tax rate. Realizing a gain on investments held for less than one year could generate a 35% tax rate. Review your portfolio to maximize your gains and losses. Do not forget your gains are reported on your New Jersey state income tax filing.

Leaving Money in Your Flexible Spending Account. Many employees take advantage of their employer provided Section 125 pre-tax flexible spending account (FSA). Unfortunately, many employees leave balances in their accounts at year-end instead of spending them down. Many FSA’s have a ‘use it or lose it’ policy, and you could be wasting your hard earned savings by not spending down your balance. Make sure you pay your child‘s daycare bill, your dentist’s root canal bill and fill your medical cabinet before Dec. 31.

Paying the Alternative Minimum Tax. Also known as AMT, the alternative minimum tax is running rampant in New York and New Jersey. Instead of prepaying your state income taxes and real estate taxes pay them when they are due. Instead of exercising your incentive stock options early, exercise them when they are closer to their expiration date. Verify your municipal bonds and municipal bond funds holdings are exempt from AMT, as many are not exempt. Each of these measures could eliminate or mitigate your AMT exposure.

Forgetting to Take Your Required Minimum Distribution. Also know as RMD, required minimum distributions are necessary on traditional IRA accounts once you turn 70 1/2 years old (with certain exceptions) or if you inherit an IRA (with exceptions for spouses). If you have a 401(k) or 403(b) from a former employer and you are at least 70 1/2 years old, RMD applies as well. Forget to take your RMD and you can be subject to a 50 percent tax penalty.

Forgetting to Fund Your 529. . For 2011, the maximum contribution per person, per beneficiary, to a 529 higher education savings plan is $13,000. There is a special five-year pull-forward rule, allowing you to contribute $65,000 in a single year. Like a 401(k) or 403(b), once you maximize your contribution you cannot make additional contributions to make up for under contributing in previous years. Plan assets of up to $25,000 in the New Jersey 529 plan won’t be included in determining a beneficiary’s eligibility to receive financial aid awarded by the state of New Jersey.

Action Steps – Reduce Your Taxes and Improve Your Financial Position. Do not leave money on the table, pay more taxes than you need to pay or fail to meet your goals of funding a college education or a comfortable retirement. Avoiding the oversights and mistakes listed above can reap benefits for years to come.

Long Term Care University - Question of the Month

Long Term Care University - 10/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Has the Community Living Assistance Services and Support (CLASS) Act you published about on July 15, 2011 been canceled?

The Problem – The Holy Grail with Lots of Holes
The Community Living Assistance Services and Support (CLASS) Act was designed by the late Senator Edward Kennedy as a voluntary insurance program to help adults age 18 and over with disabilities pay for long term services and supports. In March 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act, establishing the CLASS program. According to a report by the U.S. Department of Health and Human Services, entitled “A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program”: “Almost seven out of ten people turning age 65 today will experience, at some point in their lives, functional disability and will need some paid or unpaid help with basic daily living activities. While most people who need long-term care are in their 70s and 80s, young people also can require care, with 40 percent of long-term care users today between the ages of 18 and 64.” “Medicare does not cover long-term care services.”

Like many group long term care insurance policies offered through businesses and the Federal Long Term Care Insurance Program, the CLASS Act would allow for participation without full underwriting (the process of reviewing medical and health related information to determine if an applicant presents an acceptable level of risk). According to my July 15, 2011 article:

“The CLASS program will be available on a guaranteed-issue basis to all actively working individuals who are at least 18 years old and not already receiving care in a facility. Since there are no underwriting requirements there be will be a significant number of high risk and/or disabled enrollees. This presents a good opportunity for enrollees with poor health and a tremendous liability for enrollees with average or good health. Healthy enrollees will likely need to subsidize enrollees with poor health, as premiums are likely to rise when those with poor health require long term care.”

The lack of full underwriting would have been a disaster to the CLASS Act. Without full underwriting the groups of people being insured are like a ticking time bomb. Sooner or later, the lack of underwriting will rear its ugly head in the form of higher than expected claims and blow up like a time bomb.

On October 14, 2011, Kathleen G. Sebelius, Secretary of the U.S. Department of Health and Human Services, said: “But despite our best analytical efforts, I do not see a viable path forward for CLASS implementation at this time.” Kathy J. Greenlee, Assistant Secretary for Aging at the U.S. Department of Health and Human Services and the Administrator of the CLASS Act, said: “We do not have a viable path forward. We will not be working further to implement the CLASS Act.” Maybe Ms. Sebelius and Ms. Greenlee read my article?

The Solution – Finding a Viable Alternative to the Canceled CLASS Act
As evidenced above, there are no free lunches when it comes to long term care insurance. Unlike many group long term care insurance policies, individual polices require an application and full underwriting by the insurance company. Although full underwriting may require the completion of a health release form or interview, it is a sound way of eliminating high risk policyholders. Those issued a policy by the insurance company know they are joining a pool of generally healthy people. A healthy group of people will likely have reasonable claims when they need long term care in the future, assuring the viability of the insurance.

Many individual long term care insurance policies are certified under Long Term Care Insurance Partnership Programs. Most states’ Long Term Care Partnership Programs allow long term care insurance policyholders to protect their assets from Medicaid on a Dollar for Dollar basis - for every dollar your policy pays in benefits, a dollar of assets is ignored by Medicaid. Some states, including New York, offer 100% Medicaid asset protection through Total Asset Protection – an unlimited amount of assets are ignored by Medicaid.

Action Step – Purchase Long Term Care Insurance from a Viable Source
You will probably pass out from a lack of oxygen if you wait for the U.S. government to introduce a viable long term care insurance program. Avoid the risks associated with group polices and their lax underwriting requirements. Instead, purchase an individual long term care insurance policy with full underwriting. You will pay full price for your lunch, but at least it will be there at lunchtime.

Skloff Financial Group Answers Question of the Month

The Independent Press - 10/05/11
Money Matters
By Aaron Skloff

Q: While we are familiar with asset allocation and portfolio diversification, we are not familiar with tax diversification? What is tax diversification and what advantages it may provide?

The Problem – Understanding Tax Diversification
Investments can reside in three types of accounts: taxable, tax free and tax deferred. Investments in taxable accounts generate tax obligations in the immediate tax year. Investments in tax free accounts do not generate tax obligations. Investments in tax deferred accounts generate tax obligations in future tax years.

The Solution - Tax Diversification
Investments can reside in three types of accounts: taxable, tax free and tax deferred. Investments in taxable accounts generate tax obligations in the immediate tax year. Investments in tax free accounts do not generate tax obligations. Investments in tax deferred accounts generate tax obligations in future tax years.

Basics of Tax Diversification. The basic premise of tax diversification is maintaining exposure to taxable, tax free and tax deferred accounts. Since the U.S. and various states Treasury departments refuse to publish future tax rates investors cannot plan with certainty what their future obligations may be, so they must diversify their tax risk. As recently as 1980, the top federal marginal income tax rate (TFMITR) was 70%. In all likelihood the government will be forced to battle the federal deficit by raising the TFMITR from its current 35% level.

Investments in taxable accounts that generate short-term capital gains are taxed at your income tax rate (top tax bracket is 35%), while those that generate long-term capital gains are generally taxed at a 15% rate. Investments in taxable accounts that generate dividends are generally taxed at a 15% rate, while those that generate interest are taxed at your income tax rate. Investments in tax free accounts do not generate taxes. Investments in tax deferred accounts could reduce your taxable income today and subject your investments to lower tax rates in the future (e.g.: during retirement).

Taxable Account Example. If you were paid $1,000 of salary and subsequently paid $350 in income taxes, you can invest $650 into a taxable account. If your investment earned a 6% interest rate each year for 12 years you would be left with $1,029 after taxes (based on a 35% tax rate).

Tax Free Account Example. If you were paid $1,000 of salary and subsequently paid $350 in income taxes, you can invest $650 into a tax free account (e.g.: Roth IRA, Roth 401(k), Roth 403(b), Roth 457(b) or 529). If your investment earned a 6% interest rate each year for 12 years you would be left with $1,308 after taxes (based on a 35% tax rate). Your account would be worth 27% more than the same investment in the taxable account – all attributable to the benefits of tax free investing.

Tax Deferred Account Example. If you were paid $1,000 of salary you can invest $1,000 into a tax deferred account (e.g.: 401(k), 403(b), 457(b), SEP IRA, Traditional IRA). If your investment earned a 6% interest rate each year for 12 years you would be left with $1,509 after taxes (based on a 35% tax rate today and a 25% tax rate upon withdrawal). Your account would be worth 47% more than the same investment in the taxable account – all attributable to the benefits of tax deferred investing and a lower tax rate upon withdrawal. Under most circumstances, you must begin taking Required Minimum Distributions (RMDs) from tax deferred accounts after you turn 70 ½ years old. Importantly, there are estate and financial planning strategies to avoid RMDs and the taxes on those withdrawals.

Action Steps. Tax Diversify. Diversify your investment accounts with the three types of accounts discussed above. Work closely with your Financial Advisor to design accounts to optimize return, risk and taxes. Also, work closely with your Financial Advisor to optimize taxes upon withdrawal.

Long Term Care University - Question of the Month

Long Term Care University - 09/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: What is an elimination period? What are the advantages and disadvantages of a short versus long elimination period?

Medicare Only Pays for Long Term Care under Limited Circumstances and for a Limited Number of Days
Many consumers incorrectly assume Medicare will always pay for the first 100 days of their long term care. According to the U.S. Department of Health and Human Services (U.S.D.H.H.S.), “Generally, Medicare doesn’t pay for long-term care.” Among the seven criteria Medicare requires that you meet to qualify for benefits, one clearly stands out. That one is a qualifying hospital stay. “This means an inpatient hospital stay of 3 consecutive days or more, starting with the day the hospital admits you as an inpatient, but not including the day you leave the hospital.” – U.S.D.H.H.S.

If you meet all of Medicare’s requirements, they will pay 100% of your first 20 days of care. Starting on day 21, you will pay $141.50 per day (increased each year based on inflation) through day 100. Medicare will not pay for your care after day 100. For those lucky enough (or unlucky enough, for that matter) to qualify for Medicare payments, Medicare pays for an average of 28 days.

With a zero or short elimination period, you gain three advantages: 1) Zero or low out-of-pocket costs when you care begins, 2) Higher probability the insurance company will pay all of your long term care costs (money in your pocket today versus some future date, when you may not need it) and 3) Zero or low probability you will need to liquidate assets (and have to pay the commissions, taxes and penalties associated with those liquidations) to pay for your care during your elimination period.

Based on the limited coverage Medicare provides to a select few, you should clearly understand what your out-of-pocket costs may be. Let’s look at what your out-of-pocket costs may be based on $200 per day of care (increasing at 5% per year); if you do not qualify for Medicare and need the care today, or in 15 years or in 30 years.

Action Step – Establish Savings for Your Elimination Period
Action Step – Establish Savings for Your Elimination Period Based on Medicare’s myriad of requirements to gain benefits, assume you will pay for your own care during your elimination period. Select an elimination period you are comfortable with and establish a savings account equal to your anticipated out-of-pocket costs.

Skloff Financial Group Answers Question of the Month

The Independent Press - 09/07/11
Money Matters
By Aaron Skloff

Q: My investment portfolio has declined significantly in the past few months. Are there any tax benefits owed to me?

The Problem – Underutilized Tax Breaks

Many taxpayers simply complain about paying taxes, yet never turn the tables on the IRS. With the simple tax strategy discussed below, you can lock in tax benefits now instead of waiting until the end of the year. By then, your portfolio may recover and all the anxiety you are feeling would have never generated a tangible benefit.

The Solution - Tax Loss Harvesting
When you sell investments, such as stocks, bonds or mutual funds at a gain, you generally pay taxes on the capital gains. When you sell at a loss you can force the IRS to give you a tax break.

Basics on Capital Gains and Losses. Short-term capital gains are gains on investments held for a year or less and are taxed at your income tax rate. Long-term capital gains are gains on investments held for more than one year and are either not taxed, if you are at or below the 15% income tax bracket, or are at a 15% rate. An unlimited amount of short-term gains can be offset with short term losses. An unlimited amount of long-term gains can be offset with long-term losses. Additionally, you can force the IRS to provide you a net $3,000 annual loss against your income. If you are in the top tax bracket of 35%, you can avoid paying $1,050 in income taxes.

So, what happens if you end up with a $36,000 net loss, for example? You can carry over the full $36,000 into next year to offset any gains next year. If you have no gains to offset you can take a $3,000 annual loss against your income for 12 years. Unfortunately, carryover losses die when you die. Fortunately, your heirs’ cost basis on your inherited portfolio is its market value when you passed away – not your cost basis. If they were to sell the portfolio immediately they would have no capital gains taxes, even if the portfolio had appreciated 1,000% from when you originally purchased the portfolio.

The Wash Sale. Like life, the timing of your transactions are everything. The IRS discourages you from locking in your losses and buying back the same or substantially identical investment through its wash sale rule. You have a wash sale if you sell stock at a loss, and buy the same or substantially identical securities within 30 days before or after the sale. The wash sale period for any sale at a loss totals 61 days: the day of the sale, the 30 days before the sale and the 30 days after the sale. Note: these are calendar days, not trading days.

Avoiding Wash Sales. One of the best ways to avoid the wash sale rule is to replace your investment with something similar versus the ‘same or substantially identical.’ For example, replacing one large company stock mutual fund with a different large company stock mutual fund can avoid a wash sale. This may be a good time to lock in losses, as many of the global financial markets have declined simultaneously over the last few months.

Often Overlooked. Most mutual funds pay dividends, interest and capital gains. If you reinvest any of these into the same mutual funds it will increase your cost basis. Including the full cost basis will reduce the capital gain upon sale and reduce the amount of capital loss required to offset the gains. Work closely with your accountant and financial advisor to determine your cost basis to avoid unnecessary taxes.

Action Steps. Take Your Losses While the Takings Good. The temporarily depressed financial markets are proving a limited opportunity to lock in capital losses. As markets can recuperate quickly, waiting can work to your disadvantage. Turn the last few months of anxiety into a tax benefit – take your losses while the takings good.

Long Term Care University - Question of the Month

Long Term Care University - 08/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for a shared care benefit. Can you explain what that means, what advantages it may provide and how the benefit differs between insurance companies?

The Problem – You or Your Partner Need More Care than Your Individual Policy Covers
Most long term care insurance policies are designed as individual policies that insure one person. Unfortunately, you may need more care than your individual policy covers.

For example, you and your spouse or partner each have a long term care (LTC) insurance policy with a $300 daily benefit and a five year benefit period, obligating the insurance company to pay $300 per day for five years, for a total of $547,500 per person. If you need the full $300 worth of care, or the full daily benefit, you will exhaust the policy benefits (pool of money) in five years. Unfortunately, you may need more than five years of care. In the event you need an additional two years of care at $300 per day, it will cost you $219,000 out of pocket. This example ignores the income taxes and early withdrawal penalties associated with the withdrawal of many retirement assets. It also ignores the devastating effects of inflation, which can wreak havoc on a lifetime of savings if your LTC insurance policy does not have inflation protection.

The Solution – Shared Care Benefit Policy
The shared care benefit policy provides you the ability to utilize your spouse’s or partner’s benefits when your own policy benefits have been exhausted or establishes a third pool of money either of you can access. In the example above, you can use the benefits of your spouse’s or partner’s policy or utilize the third pool of money and avoid $219,000 in long term care expenditures. The mere avoidance of this expenditure can mean the difference between a secure and an insecure retirement. All those assumptions are based on current dollars. If this example was 28 years in the future and the cost of care (along with your policy’s inflation protection) rose at 5% per year, the shared benefit policy would save you over $876,000 in expenditures.

Shared Care Benefit Policy
Some policies have a provision to protect the surviving spouse or partner. If one of you die, the survivor’s benefits will increase by the deceased spouse’s or partner’s remaining benefit. If you each have a policy covering $300 per day for five years and one of you die, the survivor will be left with a policy that covers $300 per day for 10 years – doubling the benefit period. If each of you maximized the benefits of your policy you would receive a combined $1,095,000 of care.

Shared Care Benefit Policy with a Third Pool of Money
Some policies establish a third pool of money either spouse or partner can use if either of you exhaust your individual pool of money. If you each have a policy covering $300 per day for five years or $547,500 and either of you exhaust your individual pool, either of you can utilize the third pool of money that would cover $300 per day for 2.5 years of care or $273,750. If each of you maximized the benefits of your policy you would receive a combined $1,368,750 of care.

Shared Care Benefit Policy with a Guarantee
Some polices have a provision to protect the spouse or partner whose policy has been depleted by the person receiving care. This protection is provided through a guarantee of additional benefits. If you each have a policy covering $300 per day for five years or $547,500 and either of you exhaust almost the entire $1,095,000 in combined care, the other person will have a guarantee of at least 50% of their original pool of money or $273,750. If each of you maximized the benefits of your policy you would receive approximately a combined $1,368,750 of care.

Action Step – Protect Yourself with a Shared Care Benefit Policy
Your benefits expire when you die, with an individual policy. Purchase a shared care benefit policy and gain the flexibility to pay for significantly more care than the amount of care provided by individual policies.

Skloff Financial Group Answers Question of the Month on Bond Portfolios

The Independent Press - 08/03/11
Money Matters
By Aaron Skloff

Q: Although my stock portfolio is globally diversified, my bond portfolio is exclusively invested in the U.S. What are the advantages and disadvantages of a globally diversified bond portfolio?

A: The Problem – A Geographically Concentrated Bond Portfolio.

Although the U.S. bond market is the largest in the world and deserves representation in many investors’ portfolios, record levels of federal debt combined with the risk of rising interest rates has increased the risk of U.S. bonds. Bond prices generally move in the opposite direction of interest rates. U.S. federal debt as a percentage of Gross Domestic Product (GDP) has risen from less than 33% in 1980 to approximately 100% today – levels not seen since the post World War II era. Investment concentration in any one country can wreak havoc on a portfolio.

The Solution - Globally Diversified Bond Portfolio.
The same way you would not invest your entire stock portfolio in one company (remember Enron and American International Group?) you would not invest your entire bond portfolio in one country – even if that country was the U.S. If the U.S. or any one country you were solely investing in experienced a severe economic downturn your investment portfolio could be irreparably damaged. The advantages of a global bond portfolio include potentially higher returns and potentially lower risk. The disadvantages of a global bond portfolio include potential currency fluctuations and potential political instability.

Advantage of Potentially Higher Returns. For the 10 year period ending June 30, 2011, the Barclays Capital Global Aggregate Bond Index (an unmanaged index of global investment-grade fixed-income securities) returned 7.4% annualized versus the Barclays Capital U.S. Aggregate Bond Index (an unmanaged index of U.S. investment grade fixed-income securities), which returned 5.7%. The outperformance of the Barclays Capital Global Aggregate Bond Index was due in part due to the long term trend of the weakening U.S. dollar and higher yields offered outside the U.S. Many international countries offer potentially higher returns due to faster economic growth, relative to the U.S. The market has historically demanded higher yields from foreign debt issuers than U.S. issuers, due to their perceived higher risk.

Advantage of Potentially Lower Risk. The U.S. weighting in the Barclays Capital Global Aggregate Bond Index has declined from approximately 50% in 2000 to approximately 37% in 2010. A bond portfolio with a U.S. weighting that is greater than 37% portfolio can be classified as riskier than a portfolio with a 37% weighting, relative to the Barclays Capital Global Aggregate Bond Index. If the U.S. experiences relatively higher inflation expectations, increased U.S. government debt levels and/or sustained account deficits, the U.S. dollar is likely to further decline. A portfolio of international bonds denominated in local currencies would likely protect the purchasing power of U.S. dollar investments.

Disadvantage of Currency Fluctuations. Although the U.S. dollar has been experiencing a decade long decline in value as other countries’ economies and currencies outperform the U.S., the trend could reverse. If the U.S. dollar were to appreciate, investments in international bonds denominated in local currencies would likely depreciate.

Disadvantage of Political Instability. Based on U.S. politicians’ approach to the 2011 federal debt ceiling, many investors would classify the U.S. as politically unstable. That said, the U.S has been as stable as the Rock of Gibraltar when compared to other countries over the last 50 years. For example, political instability in Russia and Argentina contributed to their defaults in 1998 and 2001, respectively. Of course, the outperformance of the Barclays Capital Global Aggregate Bond Index discussed above is net of any defaults and is presented in U.S. dollars.

Action Step - Globally Diversify Your Bond Portfolio.
A globally diversified bond portfolio can increase returns and reduce risk. With the U.S. facing political and economic uncertainty, a globally diversified bond portfolio can be a ballast in the storm.

Long Term Care University - Question of the Month

Long Term Care University - 07/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Can you explain what the Community Living Assistance Services and Support (CLASS) Act is, as well as the advantages and disadvantages of the program?

The Solution – Looking Before Leaping Into the CLASS Act
According to an April 29, 2011 article in The New York Times:

 “In recent months, Kathleen Sebelius, the secretary of health and human services, has said that it will be difficult to make the offering both affordable and actuarially sound without some alterations.”

 “Also, Ms. Sebelius or her successor could decide to shut down the program before it pays a dollar of claims and return any premium money to participants.”

 “Plenty of politicians are furious about the fact that something like this became law without the long-term numbers adding up.”

The CLASS program will be available on a guaranteed-issue basis to all actively working individuals who are at least 18 years old and not already receiving care in a facility. Since there are no underwriting requirements there be will be a significant number of high risk and/or disabled enrollees. This presents a good opportunity for enrollees with poor health and a tremendous liability for enrollees with average or good health. Healthy enrollees will likely need to subsidize enrollees with poor health, as premiums are likely to rise when those with poor health require long term care.

Before participants can even apply for benefits, they need to pay premiums into the program for five years and must earn wages for at least three of those five years. Thus, participants may need to pay for care out-of-pocket until the five-year vesting period is satisfied. Obviously, retirees and those close to retirement cannot even participate in the CLASS program. Employers can choose whether or not to offer the voluntary program.

The CLASS program’s benefits, which can be as low as $50 day per day, are inadequate for most long term care settings. The median cost of long term care in the U.S. in 2010 ranged from $152 per day at home to $206 per day in a nursing home. The median cost of long term care in New York State in 2010 ranged from $170 per day at home to $320 per day in a nursing home.

Unlike many traditional long term care insurance policies, the CLASS program is not approved under Long Term Care Insurance Partnership Programs. Most states’ Long Term Care Partnership Programs allow long term care insurance policyholders to protect their assets from Medicaid on a Dollar for Dollar basis - for every dollar your policy pays in benefits, a dollar of assets is ignored by Medicaid. Some states, including New York, offer 100% Medicaid asset protection through Total Asset Protection – an unlimited amount of assets are ignored by Medicaid.

You can apply for private long term care insurance, whether or not you have earned income. Unlike with the CLASS program, you may be eligible for benefits the day after you purchase your long term care insurance policy - depending upon the elimination period you selected. Since individual long term care insurance policies are underwritten (allowing insurers to deny applicants), most insurers offer spousal/partner discounts and/or good health discounts. These combined discounts can reduce premiums as much as 50%.

Action Step – Do Your Homework before Purchasing Long Term Care Insurance
Understand the advantages and disadvantages of a federal long term care program that has yet to be implemented and could be shut down after it has already been implemented. Remember, you must be working and contributing (not unemployed, retired, disabled, etc.) while you contribute to the federal program. A private long term care insurance policy used in conjunction with or separate from the federal program avoids many of the problems of the federal program.

What Are The Advantages of a 401(k) Rollover?

The Independent Press - 07/06/11
Money Matters
By Aaron Skloff

Q: I recently left my employer and am considering rolling over my 401(k) account to my Individual Retirement Account (IRA). What are the advantages of such a move?

A: The Problem – Not Understanding the Advantages of Rolling Over Your 401(k) Account to an IRA.

Withdrawing Your Assets. Under most circumstances, the IRS will treat assets you withdrawal from your 401(k) as income and tax it at your income tax rate. In addition to income taxes, the IRS will also assess you a 10% penalty if you are not at least 55 years old when you leave your company. The combination of income taxes and penalties could cut your assets almost in half.

Leaving Assets in Your 401(k) Account. Many 401(k) plans offer only 10-20 investment choices, with many of those choices limited to the 401(k) vendor’s proprietary target date funds. Many 401(k) plans prohibit you from moving your assets from one investment to another and then back to the original investment within a set number of days. Even if making those changes would be prudent and in your best financial interest, the plan can still prohibit such moves. Remember, we are talking about your hard earned savings.

The Solution - Understanding the Advantages of Rolling Over Your 401(k) Account to an IRA.
When you rollover your 401(k) assets to your IRA you avoid IRS income taxes and penalties. A 401(k) rollover is primarily accomplished through one of two scenarios, a rollover upon separation of service or an in service withdrawal.

401(k) Rollover upon Separation of Service. You can rollover your 401(k) assets to an IRA upon separation of service from your employer. If your former employer issues you a check directly, the withdrawal will generally be subject to 20% mandatory federal income tax withholding. This is in addition to any income taxes and penalties you may owe if the assets are not deposited into a qualified tax shelter (e.g.: IRA). If you execute the transaction as a trustee-to-trustee rollover you will avoid withholding, taxes and penalties.

In-Service Withdrawal while You are Still Employed. Many 401(k) plans allow you to rollover your 401(k) assets into your IRA while you are still employed with that same employer.

Investment Choices in Your IRA. Many investors are disappointed by both the risk profile and the performance of their 401(k) portfolios. Having an inappropriate portfolio risk profile is oftentimes attributed to a lack of investment vehicles required to design a proper asset allocation, which is the primary factor driving disappointing performance.

Many 401(k) plans lack important fund choices, such as: inflation protected bonds, international developed market bonds, emerging market bonds, high yield bonds, convertible bonds, mid-cap stocks and emerging market stocks. Although a limited number of 401(k) plans offer a smattering of these choices, investors are forced to pick the one or two funds the plan offers for that type of investment objective – even if those funds are mediocre. Compounding this problem, many plans have trading restrictions on how you can mange your own 401(k) account.

Once you rollover your assets to an IRA you have access to thousands of investment choices without trading restrictions. If you are not happy with the high yield bond funds you selected in your IRA you can change them to other high yield bond funds the very next day. Remember, we are talking about your hard earned savings.

After rolling over your 401(k) to an IRA consider having your Financial Advisor manage your account. Verify your Financial Advisor is an Investment Adviser Representative registered with a privately owned Registered Investment Advisory firm. Only a privately owned Registered Investment Advisory firm is legally obligated to accept fiduciary duty and place your interests before shareholders and any other party – without conflicts.

Action Steps - Rollover Your 401(k) Account to Your IRA.
Rollover your 401(k) account to your IRA and gain the freedom to select investments critical to building a well designed portfolio for your risk profile and eliminate trading restrictions detrimental to portfolio performance. Work closely with your Financial Advisor throughout and after the rollover process to avoid unnecessary taxes and optimization of portfolio risk and return.

Long Term Care University - Question of the Month

Long Term Care University - 06/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: We are considering removing the inflation protection feature before buying our long term care insurance policy. What are the advantages and disadvantages of purchasing polices with inflation protection?

The Problem – Determining Whether or Not to Purchase Inflation Protection
Most long term care insurance policies offer you the option to remove the inflation protection option from your policy when applying. Many consumers purchase an adequate amount of care per day (daily benefit) and an adequate amount of care over the life of their policy (total pool of money). Unfortunately, many consumers shortchange themselves when they either forgo the purchase of inflation protection or they purchase an inadequate level of inflation protection. A policy with adequate coverage today, which has inadequate or no inflation protection, simply cannot keep pace with the 5% compound price increases long term care service providers have been implementing.

The Solution – Purchasing Inflation Protection
Purchasing a policy with inflation protection reduces the risk that an adequate level of coverage today will become inadequate in the future.

Disadvantages of Inflation Protection
Higher cost is really the only disadvantage to purchasing a policy with inflation protection. This should come as no surprise to most consumers. If the insurance company has a growing responsibility they must charge more than a policy without a growing responsibility.

Advantages of Inflation Protection
If long term care expenses continue to grow at the same 5% compound rate and you purchase a policy with no inflation protection and you need long term care, your benefits are very likely to be inadequate. If you purchase a policy with Consumer Price Index (CPI) compound inflation protection and you need long care, your benefits are likely to be inadequate. If you purchase a policy with 3% compound inflation protection and you need long term care, your benefits are likely to be inadequate. If you purchase a policy with 5% compound inflation protection and you need long term care, your benefits are very likely to be adequate.

Let’s look at an example of four policies with the same initial daily benefit and the same initial pool of money: one policy has no inflation protection, another has CPI compound inflation protection (with a 2% estimated growth rate), another has 3% compound inflation protection and another has 5% compound inflation protection. Although they all begin with the same adequate level of coverage, only the 5% compound inflation protection policy grows at the same pace as the actual cost of care, as seen below.

Often Overlooked – Partnership Program and CPI Inflation
Most consumers must purchase a long term care insurance policy with inflation protection or the policy cannot be certified under the Partnership Program – the program that allows you to protect your assets away from Medicaid. Although the table above assumes a 2% compound growth rate as an estimate of CPI, actual CPI could be negative (as it has been in the recent past), zero, 1%, 2% or more than 2%. Some insurance companies that offer CPI inflation protection will not reduce your benefits even if CPI is actually negative. With CPI inflation protection, your benefits may not keep up with the rising costs of long term care.

Action Step – Protect Yourself with Inflation Protection
When you purchase a long term care insurance policy with inflation protection you protect yourself from the rising cost of long term care. Be sure your policy benefits increase as the cost of long term care increases or be prepared to spend significantly more out of your own pocket.

Skloff Financial Group Question of the Month

The Independent Press - 06/01/11
Money Matters
By Aaron Skloff

Q: Changes to our employers’ retirement plans are making saving for retirement more difficult. Which retirement savings vehicles should we consider using?

A: The Problem – Leaving Matters in the Hands of Your Employer. Many companies have discontinued offering pension plans to their employees. With so many states and municipalities financially stretched to the breaking point, even public school districts are considering the formerly unthinkable, discontinuing their pension plans.

The Solution – Taking Matters Into Your Own Hands. Many employers have substituted their pension plans (defined benefit plans) with 401(k), 403(b) and 457(b) plans (defined contribution plans). While contributions to pension plans are primarily made by the employer, contributions to these plans can be made by both you and your employer. Like pension plans, some of the greatest benefits of pension plans are the tax benefits — including pre-tax contributions and tax deferral of capital gains, dividends and interest inside plans. Take the time to understand what retirement plans your employer offers and embrace the plans.

401(k) Plans. If your employer offers a 401(k) plan you can contribute up $16,500 per year or $22,000 if you are 50 years of age or older. Through a combination of your own contributions and contributions by your employer, total contributions can reach $49,000 or $54,500 if you are 50 years of age or older. Ask your employer if they offer a matching program. This equates to a 100% guaranteed return on your investments. Even if making contributions to your plan is a financial stretch a times, at the very least maximize your employer’s match.

403(b) Plans. If your employer offers a 403(b) plan your can contribute up $16,500 per year or $22,000 if you are 50 years of age or older. If your have 15 or more years of service with a qualified organization, you can also contribute up to $3,000 per year, up to a lifetime catch-up limit of $15,000 (based on the Lifetime Catch-up or “15-year rule”).

457(b) Plans. If your employer offers a 457(b) plan you can contribute up $16,500 per year or $22,000 if you are 50 years of age or older. If you did not contribute the maximum amount to a 457(b) plan or another Workplace Savings Plan subject to Workplace Savings Plan coordination rules, you may be able to contribute up to $33,000 for up to three years (based on the Double Limit Catch-Up or “Special Section 457(b) Catch-up”).

Fortunately, many public school districts offer both 403(b) and 457(b) plans. If you work for a qualifying employer you may be able to simultaneously maximize your contributions to 403(b) and 457(b) plans.

Individual Retirement Accounts. In addition to or in lieu of employer sponsored retirement plans you and your spouse can each contribute to an Individual Retirement Account (IRA) – even if your spouse does not earn a salary. You and your spouse can each contribute up to $5,000 per year or $6,000 for each person who is 50 years of age or older.

Action Steps: Don’t let changes by your employer determine your retirement security. Take matters into your own hands and save aggressively in your employer’s retirement plan and an IRA.

Long Term Care University - Question of the Month

Long Term Care University - 05/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Once my benefits begin, will they run out at the end of the number of years or benefit multiplier I choose for my long term care insurance policy?

The Problem – Benefits Limited to a Set Number of Years or Benefit Period
Most long term care insurance policies require you to purchase a set number of benefit years. An incorrect assumption is that your benefits run out after that set number of years – even if there is still money left in your benefit pool.

The Solution – Benefits Limited to the Money in Your Benefit Pool, Not Necessarily to a Set Number of Years
Long term care insurance policy benefits are based on the value of your policy’s benefit pool (sometimes called a personal benefit account). The benefit pool can be calculated by multiplying the daily or monthly benefit amount by the number of years (sometimes called a benefit period or benefit multiplier). For example, if you chose a $200 daily benefit or a $6,000 monthly benefit and a five year benefit period (benefit multiplier) your benefit pool (personal benefit account) would equal $365,000.

Daily or Monthly Benefit Amount Benefit Period or Benefit Multiplier Benefit Pool or Personal Benefit Account

$200 Per Day or $6,000 Per Month X 5 Years = $365,000

The Benefit Pool is Similar to a Savings Account, Available until You Deplete the Balance
Your benefit pool is similar to a savings account that is accessible through an A.T.M. machine. Like an A.T.M. machine, your long term care insurance policy has a daily or monthly withdrawal (reimbursement) limit. Like your savings account, your benefit pool is available to you until you deplete all the money.

Using the example above, if you use the full $200 daily benefit or $6,000 monthly benefit every day or every month your $365,000 benefit pool will be depleted in five years. If you only use 50% of your available benefit ($100 per day or $3,000 per month) your $365,000 benefit pool will be depleted in 10 years. If you only use 25% of your available benefit ($50 per day or $1,500 per month) your $365,000 benefit pool will be depleted in 20 years.

Long Term care Insurance Benefits Do Not Expire at the End of the Benefit Period, They Expire When the Benefits are Depleted

Using Benefits at $200 Per Day or $6,000 Per Month Benefit Pool Lasts 5 Years

Using Benefits at $100 Per Day or $3,000 Per Month Benefit Pool Lasts 10 Years

Using Benefits at $50 Per Day or $1,500 Per Month Benefit Pool Lasts 20 Years

The Benefit Pool is Similar to a Savings Account, Growing Even as You Deplete the Balance
In the example above, the long term care insurance policy did not include inflation protection. If the policy had 5% compound inflation protection the remaining balance of the benefit pool would continue to grow even as the benefit pool is being depleted. While using the benefits of your policy reduces the benefit pool, the 5% compound inflation protection simultaneously replenishes some of those benefits. Like a savings account, you continue to earn interest on the balance of the account even as your make withdrawals – until you deplete the entire balance.

Action Step – Think of Your Long Term Care Insurance Benefit Pool Like a Savings Account
Treat your long term care insurance benefit pool like a savings account. Rather than worrying about your benefits expiring at the end of your policy’s benefit period (five years, for example), know the benefits will last as long as you have a balance in your benefit pool. Like a savings account, your benefit pool does not have an expiration date.

Long Term Care University - Question of the Month

Long Term Care University - 04/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Can we pay for our long term care insurance polices on a tax free basis?

The Problem - Paying for Long Term Care Insurance with After Tax Dollars
The Internal Revenue Code is loaded with tax benefits to encourage you to save for retirement through vehicles like 401(k) plans and Individual Retirement Accounts (IRAs). Unfortunately, paying for long term care insurance on a tax free basis is much less understood.

The Solution – Paying for Long Term Care Insurance on a Tax Free Basis
While companies have many ways to pay for long term care insurance on a tax free basis, individuals have fewer choices. Let’s look at the tax benefits of paying on an after tax versus tax free basis, then two solutions to pay on a tax free basis.

Paying for Long Term Care Insurance with After Tax Dollars Paying for Long Term Care Insurance on a Tax Free Basis

Income__________________________________________$1,200 Income________________________________________$1,200

Less 35% Federal Income Tax_____________________($420) _____________________________________________________

Available to Pay Long Term Care Insurance_________$780 Available to Pay Long Term Care Insurance_________$1,200

Health Savings Account (HSA) Allows You to Pay Your Long Term Care Insurance on a Tax Free Basis
An HSA is a tax-advantaged savings account tied to a high deductible health insurance plan that is increasingly becoming more common with employers. Contributions to your HSA are made on a pre-tax basis, while withdrawals for qualified medical expenses are made tax free. Just as importantly, any growth (interest, dividends, capital gains, etc.) inside an HSA is tax free if withdrawals are used for qualified medical expenses. Tax-qualified long term care insurance premiums are a qualified medical expense. The maximum amount of premium you can pay on a tax free basis is indicated in the table below.

Age at End of Taxable Year Premium Limit Amount for 2011

40 or less_____________________________________$340

41 through 50_________________________________$640

51 through 60_________________________________$1,270

61 through 70_________________________________$3,390

71 and older___________________________________$4,240

Certain Withdrawals from Retirement Plans Allow You to Pay Your Long Term Care Insurance on a Tax Free Basis
Qualified public safety employee pension distributions from an eligible retirement plan used to pay for qualified health insurance premiums are tax free, up to a maximum exclusion of $3,000 annually. A qualified public safety employee is an employee of a State or political subdivision of a State if the employee provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision.

An eligible retirement plan includes a governmental qualified retirement or annuity plan, 403(b) annuity, or 457 plan. The tax free exclusion applies with respect to eligible retired public safety officers who make an election to have qualified health insurance premiums (including long term care insurance) deducted from amounts distributed from an eligible retirement plan and paid directly to the insurer.

Action Step –Pay for Your Long Term Care Insurance Policies on a Tax Free Basis
Instead of the government taking advantage of you, take advantage of the government. Follow the guidelines above and force the government to effectively pay up to 35% of your long term care insurance policy. If federal income tax rates increase on January 1, 2013 (as expected), the benefits of paying for your long term care insurance policy on a tax free basis will become even more valuable.

Long Term Care University - Question of the Month

Long Term Care University - 03/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: We are concerned about the exorbitant costs for long term care. Should we invest or insure for our long term care costs?

The Problem – Paying for Long Term Care
According to the U.S. Department of Health and Human Services, 7 in 10 people over the age of 65 will require long term care. This compares to a 1 in 340 chance of a major auto accident and a 1 in 1,200 chance of a total loss from a fire. About half the people reaching the age of 65 are expected to enter a nursing home at least once in their lifetime.

If you are a 55-year-old New Jersey (and many other states around the country) resident today, expect to pay over $300,000 for one year of nursing home care when you are likely to need it 25 years from now at the age of 80. Based on the average nursing home stay, total costs are expected to reach $1.3 million per person — easily wiping out a lifetime of savings for many families.

The Solution – Invest or Insure for Your Future Long Term Care Costs
When preparing for your long term care costs, you should understand the advantages and disadvantages of investing versus insuring for your long term care costs. Let’s compare two 55-year-old couples: the Millers choose to invest for their long term care costs, while the Smiths choose to insure. Unfortunately, each couple will likely need long term care for 5 years in a combination of locations; including their own home and an assisted living facility. The only saving grace is that their costs may only run at $200 per day (in current dollars).

Invest for Your Long Term Care Costs. If the Millers each invest $1,680 for one year and earn 7% (before taxes), they will immediately have a combined $3,360 available for long term care costs. If they each invest $1,680 for 25 years and earn 7% per year (before taxes), they will have a combined $212,517 available for long term care costs. Their estate would be protected by $212,517 (before taxes) if they need long term care. Unfortunately, investments provide a fraction of the leverage insurance provides. See the chart below.

Insure for Your Long Term Care Costs. The Smiths choose to purchase a long term care insurance policy with a $200 per day benefit; five year benefit multiplier and 5% compound inflation protection. After the Smiths each pay $1,680 for one year, they will immediately have a combined $730,000 (tax free) available for long term care costs. The Smiths gain over 217 times leverage (217.26 X $3,360 = $730,000), with leverage defined as long term care insurance benefits divided by premiums paid. If they each pay $1,680 for 25 years, they will have a combined $2.4 million (tax free) available for long term care costs. The Smiths still gain over 28 times leverage (28.03 X $3,360 X 25 = $2.4 million) after 25 years of payments. Their estate would be protected by $2.4 million (tax free) if they need long term care. See the chart below.

Partnership Programs. Through the New Jersey Long Term Care Partnership Program (and programs similar to it throughout the U.S.), long term care insurance policyholders can protect assets away from Medicaid on a Dollar for Dollar basis - for every dollar your policy pays in benefits, a dollar of your assets is ignored by Medicaid. With a Partnership policy, The Smiths double their estate protection ($2.4 million paid by the insurance company + $2.4 million protected away from Medicaid). Some states, including New York, offer 100% Medicaid asset protection through Total Asset Protection – an unlimited amount of assets are ignored by Medicaid.

Action Step – Insure Instead of Invest for Your Long Term Care Costs
Like automobile insurance or homeowners insurance, (which most people would never even consider going without), long term care insurance provides significantly more benefits for the same dollars when compared to an investment portfolio. Purchase a long term care insurance policy and protect your assets and your estate.

Skloff Has Answer on Employee Stock Options

The Independent Press - 03/02/11
Money Matters
By Aaron Skloff

Q: What are the new federal and state estate and gift tax laws?

A: The federal estate tax and gift tax exemption limits have been temporarily set at $5 million each, for 2011 and 2012. Amounts above that are subject to a federal estate or gift tax rate of 35%. The federal estate exemption amount is indexed for inflation from 2010, but does not start until 2012. In 2013, the federal estate tax exemption drops to $1 million as the federal estate tax rate jumps to 55%.

In addition to federal taxes, a number of states (including New Jersey), assess estate or inheritance taxes on assets below $5 million. New Jersey is one of the most abusive states in the country, with a mere $675,000 state estate tax exemption and startling high 16% maximum state estate tax rate.

Let’s look at an example where Logan has $5 million in assets and his wife Madison has $5 million in assets. If Logan passes away and Madison inherits $5 million in assets, Madison will have a total of $10 million in assets. If Madison passes away with $10 million in assets, her estate will be exempt from federal estate taxes.

Unfortunately, states like New Jersey still want their pound of flesh in the form of state estate taxes. Although Logan can leave his full $5 million to his spouse Madison free of state estate taxes due to an unlimited spousal exemption, Madison’s estate will only have a $675,000 state estate tax emption. New Jersey’s abusive tax code and lack of “portability” would subject the $9.325 million balance to its state estate tax.

One powerful tool to mitigate federal and state estate taxes is the Credit Shelter Trust (CST). The CST, sometimes called a bypass trust allows each spouse to take advantage of his or her full federal or state estate tax exemptions. The trust comes alive, as defined by the wills, when the first spouse passes. To maximize the tax benefits, the wills dictate the funding of the CST at the maximum amount permitted by the exemptions in that year.

Fortunately, the new (and temporary) federal gift tax law allows each person to make tax free gifts up to $5 million. With the exception of Tennessee and Connecticut, no other state imposes gift taxes. But, with states in financial dire straits it will not be long before they implement more draconian tax laws. Gifting provides great opportunities to reduce the size of your estate and likely avoid future tax increases. Unfortunately, some assets such as: ownership in closely held businesses, 401(k)s, IRAs, and residences present obstacles to gifting.

Another powerful tool to mitigate federal and state estate taxes is the Irrevocable Life Insurance Trust (ILIT). While the beneficiaries of life insurance polices are not subject to taxation, the owner’s estate could be – as life insurance is added to the estate’s value. An estate that would normally be exempt from both federal and state estate taxes could be become subject to both when life insurance proceeds are included.

With the ILIT, the trust is the beneficiary of the life insurance proceeds, not your estate. Once the ILIT is established, the trust can purchase life insurance policy on your behalf, with the trust stipulating who will receive the assets and under what conditions.

Action Steps: Work closely with your Financial Advisor to eliminate or mitigate taxes and maximize your wealth.

Long Term Care University - Question of the Month

Long Term Care University - 02/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching provide a marital or partner discount and a couples discount. Can you explain what that means and what advantages it may provide?

The Problem – Foregoing Discounts
With so many purchase options to choose from, it is easy to overlook very valuable discounts when you apply for long term care insurance.

The Solution – Take Advantage of Every Discount Available
Marital or Partner Discount. Many long term care insurance companies will provide you a 10%-15% discount if you are married or have a partner and only one of you purchases a policy. While the definition of married is universal, the definition of a partner can vary by company. You may need to meet the following criteria to qualify for a partner discount: Two people who, at the time of application:

Two people who, at the time of application:

• Are named in a valid Certificate of License of Civil Union issued by your state; OR

• Are and have been living together for the past three consecutive years in a committed relationship as partners or family members; AND

- are committed to sharing basic living expenses; AND

- are not married to each other, or to anyone else; AND

- if related, must belong to the same generation of the same family (e.g.: brothers, sisters, cousins)

Marital or Partner Discount. Many long term care insurance companies will provide each spouse or partner a 25%-40% discount if you are married or have a partner and each of you purchases a policy. Let’s look at an example of a 50 year old husband and wife who each purchase a policy with benefits as follow: 1) $200 per day benefit, 2) 3 year benefit period, 3) 5% compound inflation protection and 4) 90 day elimination period. They were each able to obtain a 10% preferred health discount.

Often Overlooked. Most companies have modest minimum purchase requirements. If your spouse or partner already has a long term care insurance policy, consider purchasing a supplemental policy. The discounts you gain with the purchase of two policies may more than offset the price of a second policy.

Action Step – Take Advantage of Every Discount Available
Understand the discounts available to you if you are married or have a partner. You would still qualify for a marital discount, even if you have not spoken with an estranged spouse for 10 years. Consider purchasing two policies, even if the second policy is a nominal amount – the discounts you gain with the purchase of two policies may more than offset the price of a second policy.

Skloff Has Answer on Employee Stock Options

The Independent Press - 02/02/11
Money Matters
By Aaron Skloff

Q: My employer has awarded me numerous stock options over the years. When can I exercise these employee stock options and what are the tax ramifications?

A: The Problem. Many employers award stock options to attract and retain employees. Unfortunately, many employees do not truly understand the different types of options they are awarded and the tax ramifications associated with them.

The Solution – Understanding Employee Stock Options. An employee stock option is a right, but not a requirement, to purchase a stock at a specific price and specific time. Before you can exercise your options they must vest. Vesting is the right to buy shares from your employer over a set period of time, as defined in your grant agreement, before the options expire.

Not all employee stock options are created equal. Those differences could leave you quite wealthy and the I.R.S. disappointed or leave you somewhat wealthy and the I.R.S. happy. Let’s look at both types of options.

Incentive Stock Options (ISOs)
In general, you do not have to pay taxes on Incentive Stock Options (ISOs) when they are exercised. You are subject to the 15% maximum capital gains tax rate instead of the maximum 35% maximum income tax rate (sorry I.R.S.) if you sell the ISO shares more than two years after the options grant date and more than one year after you bought the stock shares by exercising your ISOs.

Nonqualified Stock Options (NQSOs)
In general, you pay taxes when you exercise your option. The amount of tax owed is based on your gain, the difference between your option’s exercise price and the price of the stock when you exercise your shares.

At this point, you can sell the stock. If you sell the stock in one year or less you can be subject to the 35% maximum short term capital gains rate (equal to the maximum income tax rate).

ISOs are generally more attractive than NQSOs, since they do not generate taxes when they are exercised. That said, the two year wait might occur when the stock price is in a downward spiral. Don’t Let the Tax Tail Wag the Investment Dog. Although tax management is critical, it is not paramount to maximizing profit.

Often Overlooked
Many stock option plans have clear language defining your rights about exercising your options upon termination from the company. Severance from a job can be an emotional time, when you may overlook a material part of your wealth – your employee stock options.

Long Term Care University - Question of the Month

Long Term Care University - 01/15/11
Research
By Aaron Skloff, AIF, CFA, MBA

Q: How do I qualify for benefits from my long term care insurance policy?

The Problem – Tall Tales of Insurance Companies Denying Benefits to Long Term Care Insurance Policyholders
Tall tales about long term care insurance companies denying their policyholders benefits seem to live on forever. Tales about policyholders who paid for 20 or 30 years without ever submitting a claim, but who are denied benefits when they finally submit their first claim float around the internet – oftentimes written by third parties who are not privy to all the facts.

The Solution – Facts about Qualifying for Long Term Care Insurance Benefits
Most long term care policies clearly state that you qualify for benefits if you need substantial assistance with two or more of the six activities of daily living (ADLs): 1) Bathing, 2) Continence, 3) Dressing, 4) Eating, 5) Toileting, 6) Transferring OR

You have a severe cognitive impairment, such as: dementia, Alzheimer’s disease, short or long term memory loss, poor orientation of people, places or time, poor deductive or abstract reasoning, or poor judgment of safe or unsafe situations AND

Your care is expected to last at least 90 days AND

Your physician, a nurse, licensed social worker or care coordinator certifies from time to time that you need regular assistance for the care described above. Most long term care insurance companies will require a plan of care to be developed consistent with your needs.

Before purchasing a long term care insurance policy verify the triggers (ADLs or severe cognitive impairment) are clearly defined. Some policies require three or more triggers, which is great…for the insurance company, not policyholders. Some polices require the insurance company’s physician to determine if you are eligible for benefits; which is again great for the insurance company, not policyholders.

Elimination Period Could Delay Your Payments
Some long term care insurance policies include an elimination period. An elimination period operates like a deductible on your homeowners insurance policy – where you absorb some of the costs to keep the premiums down. The longer your elimination period, the longer you pay for your care on your own. With most insurers, if you submit a claim and your policy has a 90 day elimination period, the insurer will require you to submit proof that you received 90 days of care before paying your claim.

Long Term Care Insurance Companies Approve the Vast Majority of Claims They Receive
The two largest long term care insurance companies, Genworth and John Hancock, each have approximately 95% claims approval rates. In the case of John Hancock, the main reason for denials is that the policyholder is not yet eligible for benefits (e.g.: unable to perform one activity of daily living instead of the two required by the policy).

Action Step – Understand Your Long Term Care Insurance Payment Options
Understand your policy’s requirements to qualify for benefits before making a purchase. Avoid an elimination period or select one that you are comfortable with, as the longer you wait the more expenses you will pay from your own resources. Learn about your insurer’s claims approval rate before purchasing a policy.

Skloff Financial Group Question of the Month

The Independent Press - 01/05/11
Money Matters
By Aaron Skloff

Q: Can I turn the tables on Wall Street and profit from its greed? What are my options with options?

A: Many Wall Street firms are driven by greed — to the detriment of clients, shareholders and other stakeholders.

The solution is covered call writing which turns the tables on Wall Street’s greed, generates a stream of income and protects your portfolio — all at the same time.taxes.

With this strategy, named covered call writing, you sell (or write) the option for someone to buy a stock you already own for a set price (called a strike price) in the future. Covered call writing is considered to be even more conservative than simply owning a stock outright, as your risk is actually reduced by the amount you receive (called a premium) when you sell a call.

Let’s Look at an Example
On January 3, 2011, you write one ABC December 60 call (each call represents 100 shares of stock) at a premium of $4, covered by 100 shares of ABC stock you bought for $50 per share (for a total investment of $5,000). For ease of discussion, transaction costs will be excluded in the examples below.

Stream of Income
When you write the one ABC December 60 call you receive $400; equal to $4 times the 100 shares of underlying stock the one option represents. That $400 provides you an 8% return on your $5,000 investment.

If ABC Advances to $60 on July 1 and your stock is called away from you, you would be forced to sell your initial $5,000 investment for $6,000, generating a $1,000 profit or a 20% return.

Your return would have been 20% (before dividends) if you simply invested $5,000 at the beginning of the year, held it throughout the year and sold it for $6,000 at the end of the year. Since it only took half of a year to generate a 20% return, your annualized return is 40%.

If your ABC stock paid you $100 in dividends on your $5,000 investment, you would earn another 2%. Remember, if you collect 2% over the course of six months, your annualized return is 4%. This brings the annualized return on your investment to 44%.

Don’t forget about the premium you receive when you wrote the call. In the example above, the $400 you receive provided you an 8% return over six months on your $5,000 investment, for an annualized return of 16%. This brings the total annualized return on your investment to 60%.

Often Overlooked
Let’s assume ABC stock declines to $40 in a year’s time and you sell the stock for a 20% loss. Offsetting your loss would be the 8% return you generated from the covered call you wrote and the full year’s 4% dividend – providing you an 8% net loss. Thus, covered call writing is considered to be even more conservative than simply owning a stock outright, as your risk is actually reduced by the amount you receive (called a premium) when you sell a call.

Long Term Care University - Question of the Month

Long Term Care University - 12/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Rather than paying for our long term care insurance premiums throughout the life of our policies, can we choose limited payment options? What advantages might we gain from limited payment options?

The Problem – Paying Long Term Care Insurance Premiums Throughout the Life Of Your Policy
Most policies are designed with a waiver of premium benefit that allows you to stop paying for your policy any month you receive benefits. But, that could mean 10, 25 or even 50 years of payments before you receive benefits and your premiums are waived. You will make many of those payments while you are retired, when your income is generally lower than before you retired.

The Solution – Paying Long Term Care Insurance Premiums Using Limited Pay Options
With a limited pay option, you pay your long term care insurance premiums over a limited period of time. Limited pay options mitigate two risks of polices you pay throughout the life of your policy.

1) Financial Strain of Premium Payments After Retirement. Your income is likely to decline when you retire. Without a well designed budget, your long term care insurance premium payments could cause a financial strain. That strain could be so great, you may consider dropping your policy and forfeiting the valuable benefits you paid for over the previous 10 or 20 years. With a limited pay option you can complete your payments before retirement, at the time you retire or shortly thereafter.

2) Premium Rate Increases. Most long term care insurance polices include provisions that allow the insurance company to increase the rates your pay if the insurance company receives an approval from the Insurance Commission (of the State where your policy was purchased) to do so. With a limited pay option your rates can not be increased after your final payment.

The following are the two most common limited pay options available from most long term care insurance companies.

1) 10-Pay. This option allows you to pay your premiums over a period of 10 years, at which time your policy is paid up. You may choose this option if you are concerned about either or both of the two risks discussed above.

2) Pay-To-65. This option allows you to pay your premiums until you reach the age of 65, at which time your policy is paid up. Again, you may choose this option if you are concerned about either or both of the two risks discussed above.

Numbers Speak Louder than Words – Projected Long Term Care Insurance Premiums
The following table provides an example of premiums that a healthy, 50-year old husband and wife would each pay for a Lifetime Payment Option, a Pay-To-65 Option and a 10-Pay Option. Each policy is based on benefits of: $200 per day of care, 5% compound inflation protection, a 90-day elimination period and a 1,095 (3 years) benefit multiplier.

Based on the example above, the projected annual premiums are highest with the 10-Pay Option, at $3,586.10. But, the 10-Pay Option has the lowest cumulative payments, at $35,861.00, for most married people (needing benefits after the age of 79). Note: for a 65-year-old married couple, there is a: 70% chance each spouse will need long term care, 92% chance at least one spouse will live to age 80, 57% chance one spouse will live to age 90 and an 11% chance one spouse will live to age 100.

Action Step – Understand Your Long Term Care Insurance Payment Options
Choose a limited pay option and mitigate the risks of financial strain and premium rate increases, while potentially saving money over the life of your policy.

Skloff Financial Group Question of the Month

The Independent Press - 12/01/10
Money Matters
By Aaron Skloff

Q: With the holiday season upon us, we were thinking about giving our children a more lasting gift than the typical gift of toys. What benefits might we and our children gain by contributing to a 529 savings plan?

The Problem – Finding a Lasting Holiday Gift
While giving countless toys that will surely be forgotten in the course of days or weeks is easy, finding The Gift That Keeps on Giving is harder than it seems.

The Solution – 529 Savings Plan - The Gift That Keeps on Giving
A 529 savings plan can truly improve a child’s entire life. When you contribute to a 529 savings plan you give a precious and powerful gift – funding for a higher education. Clearly, Congress agrees. Congress established Section 529 of the tax code so savings used for qualified higher education expenses at an accredited education institution would be free from taxes. Qualified expenses include tuition and fees, books, equipment and supplies required for a student’s field of study, and room and board.

529 Savings Plan Basics
The current contribution limit per year is $13,000 per beneficiary – that is $26,000 for a husband and wife per beneficiary. A single contribution, totaling $65,000 per beneficiary, is permitted as long as no further contributions are made by that contributor (donor) to the same beneficiary until the sixth year. Interest, dividends and capital gains that you earn inside the 529 savings plan are all free of taxes. If the savings are used for higher education the entire amount can be withdrawn free of taxes. If the savings are used for other purposes the profits are taxed and assessed a 10% penalty. If a student is fortunate enough to receive a scholarship, there are no penalties on withdrawals of the same amount.

529 Savings Plan Estate Planning Benefits
529 savings plans are one of the most powerful, lowest cost estate planning vehicles. Contributions made to a 529 are removed from your estate. Unlike most solutions that remove assets from estates and leave little control over investments and beneficiaries, the 529 allows owners to change investments and beneficiaries every year. Because 529 owners can name a successor to the account when they pass away, a 529 can be used for multiple generations.

Just imagine a grandmother and grandfather who strongly believe in education. Each makes $65,000 contributions as follows: each other’s 529, four children, 16 grandchildren, 64 great-grandchildren and even their gardener’s three children. In total, they contribute over $5.8 million and instantly remove the same amount from their estate.

Long Term Care University - Question of the Month

Long Term Care University - 11/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Since purchasing long term care insurance is such an important financial decision for us, it is critical to understand the industry’s claims paying history. What important factors should we know about the industry’s claims paying history?

The Problem – Concerns About Long Term Care Insurance Claims Approvals
With virtually every type of insurance you are concerned about your claims being denied. Even with something as simple as life insurance, your claim can be denied if you commit suicide in the first two years of your policy. Every now and then reputable periodicals, like The New York Times, will run stories questioning the merits of insurance – I guess controversy sells.

On March 26, 2007, The New York Times published an article entitled, “Aged, Frail and Denied Care by Their Insurers”. The article stated, “In 2003, a subsidiary of Conseco, Bankers Life and Casualty, sent an 85-year-old woman suffering from dementia the wrong form to fill out, according to a lawsuit, then denied her claim because of improper paperwork. Last year, according to another pending suit, the insurer Penn Treaty American decided that a 92-year-old man had so improved that he should leave his nursing home despite his forgetfulness, anxiety and doctor’s orders to seek continued care.” It is enough to scare you away from purchasing long term care insurance, unless you continue reading this article.

The Solution – Facts About Long Term Care Insurance Approvals
In April 2010, the U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation Office of Disability, Aging and Long-Term Care Policy completed a study entitled, “National Long-Term Care Insurance Claims Decision Study: An Empirical Analysis of the Appropriateness of Claims Adjudication Decisions and Payments”. The study was based on a significant number of claims for analysis from the seven largest long term care insurance carriers, comprising over 70% of in-force claims on tax qualified policies. Tax qualified polices have standard language and criteria used when adjudicating these types of policies -- criteria are more uniform and verifiable. The auditors in the study above concluded that they would have approved 5% fewer cases than the insurance carriers actually approved.

Long term care insurance companies approve the vast majority of claims they receive. The two largest long term care insurance companies, Genworth and John Hancock, each have approximately 95% claims approval rates. In the case of John Hancock, the main reason for denials is that the policyholder is not yet eligible for benefits (e.g.: unable to perform one activity of daily living instead of the two required by the policy). According to the California State University Emeritus and Retired Faculty Association (CSU-ERFA), the CalPERS LTC Program approved approximately 91% of claims (from the Program inception through December 31, 2006). The ratio of complaints to policyholders is also important – the lower the ratio, the better. According to The New York Times article, Conseco received more than one complaint regarding long term care insurance for every 383 such policyholders, versus Genworth’s one complaint for every 12,434 policyholders (according to data from the insurance commissioners’ association).

Understand What Is Required to Have Your Claims Approved
Most long term care insurance policies require your inability to perform two or more of your six activities of daily living (bathing, dressing, eating, transferring, continence and toileting) or severe cognitive impairment to approve your claims. Unfortunately, many policies require your inability to perform three or more activities of daily living – making it more difficult to have your claims approved. Clearly understand what your policy covers. A “facilities plan" provides benefits only in nursing homes, assisted living facilities, and residential care facilities, while a "comprehensive plan" provides benefits in home and community care settings. Understand the benefits of your policy before purchasing it.

Action Step – Understand the Facts About Long Term Care Insurance Claims Approvals
Although the vast majority of claims across the industry are approved, choose a company with a good claims approval history before purchasing your long term care insurance policy.

Question of the Month:How Should You Handle a Partner’s Death?

The Independent Press - 11/03/10
Money Matters
By Aaron Skloff

Q: What happens to my partner’s ownership stake in our company if he passes away?

A: Without a plan the remaining owners must contemplate a number of potential problems. The deceased’s heirs may or may not retain their ownership in the company. If the heirs retain their ownership they may demand a more active role in decisions in the business or they may remain passive, but expect the company to provide them an income. The heirs may sell their ownership at the highest price they can obtain, even if the buyer is a competitor. Any of these outcomes could result in poor employee morale, customer attrition or complete implosion of the business.

The solution is a buy-sell agreement. With a buy-sell agreement, the company must buy the deceased’s ownership stake in the company at a predetermined value. Upon purchase, the remaining owners maintain control of the company and the deceased’s heirs are fully compensated. But, paying the heirs is easier said than done. The following are the most common solutions for the company.

1. Pay Cash. The company can simply pay the heirs cash for the outstanding stake, but it could take some time to raise the money. Balancing the business’ need to retain liquidity and the estate taxes the heirs may need to pay within nine months of the death, can present a host of problems.

2. Pay in Installments. The company can pay the heirs in installments. The heirs would then have to rely upon the success of the business well into the future, or risk a disruption or discontinuation of their installments.

3. Get a Loan. The company can obtain a loan to pay the heirs, but regular principal and interest payments may not be feasible through difficult economic times.

4. Insure Each Owner’s Life. With a stock redemption agreement, the company owns life insurance policies on the lives of each owner. When an owner passes away the company buys the deceased’s ownership in the company with the proceeds from the life insurance.

If a stock redemption agreement funded with life insurance is the solution the company utilizes, the company must then determine what type of life insurance policy to purchase. Although more expensive than other types of life insurance, permanent life insurance guarantees the proceeds will be paid no matter how long the owners live. Although less expensive than other types of life insurance, term life insurance cannot guarantee the proceeds no matter how long the owners live. By definition, term life insurance only covers a set term.

Work closely with your Financial Advisor to determine if a buy-sell agreement is appropriate for your business. If so, collectively determine if a stock redemption agreement funded with life insurance is the best solution. If so, collectively determine what type of life insurance is most appropriate.

Long Term Care University - Question of the Month

Long Term Care University - 10/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for a restoration of benefits. Can you explain what that means and what advantages it may provide?

The Problem – Your Long Term Care Insurance Claim Exhausts a Significant Portion of Your Policy’s Benefits, You Recover and Now Only Have a Modest Amount of Benefits Remaining for Future Long Term Care Insurance Claims
Most long term care insurance policies behave like a savings account that only permits withdrawals. When the insurance company pays your claim it reduces your pool of money (savings account), leaving less money available for future claims. One expensive claim can exhaust the majority of your benefits, leaving you with a fraction of the benefits you would have had otherwise.

The Solution – Restoration of Benefits
Some long term care insurance policies include or provide the option to add a restoration of benefits. If you receive benefits from your pool of money, and then recover and are no longer eligible for benefits for a period of time (180 days with many companies) while your policy is in force, your pool of money will be completely restored to the amount that would have applied if no benefits had been paid. That’s like a savings account that replenishes itself if you need to take money out for an emergency. Some companies do not even place a limit on the number of times your benefits can be restored to the full value, as illustrated below.

Action Step – Protect Yourself with a Policy that Covers Both Informal and Formal Home Care
When you purchase a long term care insurance policy with restoration of benefits you gain the right to have the benefits you exhaust restored if you no longer need them for a short period of time (often 180 days). As seen above, this feature can greatly increase the total amount of care for which your policy can pay.

Question of the Month: Do Women Face Unique Challenges with Finances?

The Independent Press - 10/06/10
Money Matters
By Aaron Skloff

Q: With the end of the year quickly approaching, what are some important tax and financial planning measure we can take to reduce our taxes and improve our financial position?

The Problem - Year-End Financial Oversights and Mistakes. It is easy to forget important year-end tax and financial planning measures that can save you taxes or bear financial benefits for years to come.

The Solution: Take Action in the Next Three Months. Many tax and financial planning deadlines are based on a calendar cycle – do them after Dec. 31 and lose the benefit for that year. Outlined below are some of the most common oversights and mistakes to avoid before end of the year.

1. Not Contributing to Your 401(k) or 403(b) and/or 457(b). Not only do you build your retirement nest egg, but you also gain a tax break by contributing to your employer’s retirement plan. Better yet, many employers will match your contributions.

2. Not Timing Capital Gains and Losses. Capital gains and losses are classified as either short-term (less than one year) or long-term (more than one year). Long-term losses can only offset long-term gains, and vice versa. Selling investments, like stocks, bonds, or mutual funds you have held for more than one year generates a 15% capital gains tax rate. Realizing a gain on investments held for less than one year could generate a 35% tax rate. This is expected to increase in 2011. Do not forget your gains are reported on your New Jersey state income tax filing.

3. Leaving Money in Your Flexible Spending Account. Unfortunately, many employees leave balances in their accounts at year-end instead of spending them down. Make sure you pay your child day care bill, your dentist’s root canal bill and fill your medical cabinet before Dec. 31.

4. Paying the Alternative Minimum Tax. Also known as AMT, the alternative minimum tax is running rampant in New York and New Jersey. Instead of prepaying your state income taxes and real estate taxes pay them when they are due. Instead of exercising your incentive stock options early exercise them when they are closer to their expiration date. Verify your municipal bonds and municipal bond funds holdings are exempt from AMT, as many are not exempt. Each of these measures could eliminate or mitigate your AMT exposure.

5. Forgetting to Take Your Required Minimum Distribution. Also know as RMD, required minimum distributions are necessary on traditional IRA accounts once you turn 70 ½ years old (with certain exceptions) or if you inherit an IRA (with exceptions for spouses). Forget to take your RMD and you can be subject to a 50% tax penalty.

6. Forgetting to Fund Your 529. For 2010, the maximum contribution per person, per beneficiary, to a 529 higher education savings plan is $13,000. Note: plan assets of up to $25,000 in the New Jersey 529 plan won’t be included in determining a beneficiary’s eligibility to receive financial aid awarded by the state of New Jersey.

Action Steps - Reduce Your Taxes and Improve Your Financial Position. Do not leave money on the table, pay more taxes than you need to pay or fail to meet your goals of funding a college education or a comfortable retirement. Avoiding the oversights and mistakes listed above can reap benefits for years to come.

Long Term Care University - Question of the Month

Long Term Care University - 09/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q:Some of the long term care insurance policies I am researching cover informal and formal care in my home. Can you explain what that means and what advantages it may provide?

The Problem – Home Care Coverage Limited to High Priced Licensed or Certified Providers
Most long term care insurance policies place limitations on who can provide long term care in your home. Most require the provider to be a licensed: Registered Nurse, Licensed Practical Nurse, Licensed Vocational Nurse, Physical Therapist, Occupational Therapist, Speech Therapist, Respiratory Therapist, Medical Social Worker or Registered Dietician; or a licensed or certified Home Health Aide, Nurse Aide or equivalent.

Policies that require licensed or certified home health care providers limit which providers you can utilize for your home care. Licensed or certified providers can be much more expensive than unlicensed or uncertified providers. Licensed or certified providers can drain you policy’s pool of money much quicker than unlicensed or uncertified providers.

The Solution – Informal Home Care Coverage
Informal Home Care Coverage. Some long term care insurance policies cover home care from licensed or certified providers and informal caregivers, such as friends or neighbors. The informal caregiver may be member of your church or temple. The informal caregiver can prepare meals, clean house, make minor safety-related repairs, take out trash, complete household chores and other services that can help you maintain a better quality of life.

Let’s look at an example of two policies with the same pool of money; one that covers both informal care and formal care and another that only covers formal care – where the informal care costs half as much as the formal care. Because informal care costs half as much as formal care the policy that covers informal care allows your benefits to last twice as long, as seen below.

Policy Covering Only Formal Care________________________Policy Covering Informal and Formal Care

Pool of Money________________________$200,000___________Pool of Money__________________________$200,000_______

Divided by Monthly Cost of Formal Care_$5,000_____________Divided by Monthyl Cost of Informal Care_$2,500________

Benefits Last__________________________3 Years, 4 Months___Benefits Last___________________________6 Years, 8 Months_

Importance of Home Care Benefits
In a recent study conducted by one of the largest long term care insurance companies, 73% of its initial benefit claims were for home care. Nearly 70% of the people who began receiving home care under the company's policies stayed at home throughout the time they needed care. When purchasing long term care insurance verify that the policy covers home care.

Action Step – Protect Yourself with a Policy that Covers Both Informal and Formal Home Care
When you purchase a long term care insurance policy that covers both informal and formal care you gain the flexibility to use licensed or certified providers and informal caregivers, such as friends and neighbors. In addition to a wider number of care provider choices, a policy that covers both informal and formal care can make your benefits last much longer.

Skloff Question of the Month: Do Women Face Unique Challenges with Finances?

The Independent Press - 09/01/10
Money Matters
By Aaron Skloff

Q: Do women face unique challenges and opportunities with their finances?

A: Yes. The Problem: Many women are remaining single, marrying later in life, getting divorced more frequently and outliving their spouses by an average of seven years. Due to these factors, almost 90% of all women will end up managing their finances alone at some point in their lives, according to the National Center for Women and Retirement Research. Unfortunately, the first time that many women become truly involved with their financial matters is during a crisis, such as a spouse’s death or divorce.

When surveyed, 37% of women thought they would need to financially support an adult child and 38% thought they would need to financially support aging parents. More than 70% of Baby Boomers have at least one living parent. The Sandwich Generation, as they are called, care for their aging parents while supporting their own children, is often stretched to the point of snapping.

The Solution. Fully understand your family’s finances or your own if you are single. This includes your sources of income and expenses as well as your assets and liabilities. Gain an understanding of your employee benefits.

This includes pensions, 401(k)s, 403(b)s, health insurance, life insurance and long term care insurance. Review your tax situation. This includes preparing for tax obligations and developing avoidance and mitigation strategies. Review your estate plan to protect your family and avoid estate taxes. This includes updating your will, living will, power of attorney and trusts.

One of the most important goals for many women is retirement. Since women often assume the caretaking responsibilities for children, aging parents and infirmed spouses, their long term salaries, employee retiree benefits and Social Security benefits are compromised. Make sure you are saving and investing enough to meet your short and long term goals.

Married women need to learn more about their money, where it is invested and why it is invested as such. Risk diversification is widely recognized by finance academics and practitioners as the most important risk management technique.

Too many women rely upon their spouse, loved ones and friends to guide their financial matters. Some rely upon Financial Advisors who are not obligated by law to place clients’ interests before every other party, including the shareholders of their investment firm.

While all of these sources of guidance may have the best intentions, none have the experience, licenses and legal obligations required for such an important matter. Ideally, seek guidance from a Financial Advisor who is obligated by law to place clients’ interests before every other party, including the shareholders of their investment firm – this is called true fiduciary duty.

Another important goal for many women is having sufficient resources to meet health care costs in retirement.

A recent study showed that a 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout retirement, not including nursing-home care. That estimate is 56% higher than in 2002, when the calculated retiree health care costs were $160,000.

Although the average stay in a nursing facility is 2.5 years, it is longer for women. This translates to approximately $210,000, based on the average stay and the national daily rate for a private nursing home room. The average length of time for home care services is 3.6 years.

Action Step: Develop a clear actionable financial plan that addresses your most important goals.

Optimize tax advantaged investment vehicles and maximize tax deferred and tax free retirement accounts.

Devote the ongoing time and resources needed to address your finances or seek guidance from a Financial Advisor who is obligated by law to place clients’ interests before every other party, including shareholders of their investment firm.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights,NJ. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 08/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: What are the Top 6 most Frequently Asked Questions (FAQs) about the New York State Partnership for Long Term Care ?

The Problem – Understanding the New York State Partnership for Long Term Care (NYSPLTC)
Most long term care (LTC) insurance policies provide a limited amount of benefits. Even lifetime benefit policies generally have a daily, monthly or annual limit. The cost of long term care after a policy has been exhausted can be financially devastating for you and your family. To compound the problem, assistance in the form of Medicaid is generally limited to the impoverished.

The Solution – The New York State Partnership for Long Term Care (NYSPLTC)
With a NYSPLTC insurance policy, after you have used all the benefits of your policy you can apply for Medicaid with complete ‘asset disregard’. This allows you to keep assets that would otherwise be disallowed. New York is one of only two states in the entire U.S. that permits Total Asset policies that provide unlimited asset protection from Medicaid. Furthermore, there is no ‘look-back’ period.

Question 1. Will my NYSPLTC policy pay for long term care both inside and outside of New York?
Answer 1. Yes. NYSPLTC policies will pay for long term care both inside and outside of New York.

Questions 2. After using up my NYSPLTC policy’s benefits, will New York Medicaid pay for my LTC in another state?
Answer 2. No. You must be a New York resident to purchase and receive New York Medicaid benefits. But, you can buy a NYSPLTC policy, move to Florida or any other state, use up your policy’s benefits over a number of years in Florida or any another state, then return to New York to receive a lifetime of long term care paid by Medicaid – while protecting an unlimited amount of your assets.

Question 3. Which of my assets are not protected under the NYSPLTC Total Asset 50 or Total Asset 100 programs?
Answer 3. None. An unlimited amount of your assets are protected under either the Total Asset 50 (often referred to as 3/6/50) or the Total Asset 100 (often referred to as 4/4/100) programs. This includes your cash, savings accounts, investments accounts, 401(k)s, 403(b)s, 457(b)s, 529s, IRAs, homes, art collections, inheritances, lottery winnings – literally, unlimited asset protection.

Question 4. Are my assets protected outside of New York?
Answer 4. Yes. An unlimited amount of your assets are protected both inside and outside of New York. For example; this includes your condominium in New York, NY, house in Westchester, NY and vacation homes in Naples, FL, Maui, HI and San Diego, CA.

Question 5. What key benefits must be included in a NYSPLTC policy versus a non-NYSPLTC policy?
Answer 5. A NYSPLTC insurance policy must cover your long term costs in a nursing home and your own home versus many policies that only cover care in a facility (e.g.: only a nursing home). A NYSPLTC Total Asset 100 insurance policy must provide minimum daily benefits of $229 in 2010 ($241 in 2011) in both a nursing facility and your own home. A NYSPLTC Total Asset 50 insurance policy must provide minimum daily benefits of $229 in 2010 ($241 in 2011) in a nursing facility and $115 in 2010 ($121 in 2011) in your own home. The minimum annual Nursing Home Care Bed Reservation benefit for a NYSPLTC policy is 20 days.

Question 6. Are there any risks if I delay purchasing a NYSPLTC policy?
Answer 6. Yes. Since NYSPLTC polices require 5% greater benefits each year, delaying your purchase means buying 5% greater coverage each year (e.g.: $241 in 2011 versus $229 in 2010). Insurers increase pricing on new policies for older applicants, reflecting the higher probability that you will need long term care sooner. The combination of these two factors can add greatly to the cost of a policy. Independent of your birthday, insurance companies can (and often do) raise rates for new applicants, subject to approval from the New York State Insurance Department. Lastly, your health is likely to deteriorate over time, placing you in a higher price health class or entirely disqualifying you from purchasing long term care insurance.

Action Step – Purchase a New York State Partnership for Long Term Care (NYSPLTC) Total Asset 50 or Total Asset 100 Policy
With a NYSPLTC policy you gain the safety of long term care insurance and the peace of mind provided by unlimited asset protection.

Question of the Month:Can Families Inherit a Traditional IRA?

The Independent Press - 08/04/10
Money Matters
By Aaron Skloff

Q: Can my family inherit my Traditional Individual Retirement Account (IRA)? If so, are there any advantages to avoiding withdrawals from my IRA?

A: Yes and Yes. The Problem. If you do not properly designate your family as the beneficiaries, your IRA could be destroyed by taxes. Like most good things, avoiding withdrawals from your IRA must come to an end at some point. The IRS mandates Required Minimum Distributions (RMDs) each year once you turn 70 ½ years old. This forces you to take withdrawals from your IRA. Forget to take them and you could pay stiff 50% penalties on the amount that should have been withdrawn.

The Solution. Naming your family as the designated beneficiaries with your IRA custodian allows your family to inherit your IRA and simultaneously take advantage of a Stretch IRA. A Stretch IRA is not a different type of IRA, but simply a strategy of “stretching” the tax sheltering benefits of an IRA beyond your own life. If you withdrawal only RMDs you will leave the largest amount possible from your IRA to your family.

Let’s look at an example of a $300,000 IRA that grows and stretches into $2,139,189 over three generations, based on a 7% annual rate of return. Harvey (age 70) names his wife Myrna as his sole beneficiary and over two years takes RMDs of $22,649 until passing away at age 71. Myrna (age 66) treats Harvey’s IRA as her own, names her son Marc as her sole beneficiary and over eight years takes RMDs of $156,123, until passing away at age 77. Myrna is able to treat Harvey’s IRA as her own because she is his spouse. Once it becomes her own IRA she is able to delay RMDs until she turns 70 ½ years old.

Marc (age 53) maintains the account as an Inherited IRA, names his son Logan as his sole beneficiary and takes RMDs of $933,576 (based on his own life expectancy of 32 years) over the course of 23 years, until passing away at age 75. Marc is only able to treat Myrna’s IRA as an Inherited IRA (unless he disclaims ownership within nine months of Myrna’s death) versus treating it as his own (an exception reserved solely for spouses).

Logan (age 41) takes RMDs of $1,026,841 (based on Marc’s remaining life expectancy until assets are divested) over the course of nine years. Logan takes RMDs for nine years because his father Marc had taken RMDs for only 23 of his 32-year life expectancy (32-23 = 9). In total, RMDs total $2,139,189 over three generations.

Albert Einstein and the Stretch IRA. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t...pays it.” Compounding allows an investor to earn interest on interest. At a 7% compound interest rate your investment will double its value in approximately 10 years.

Since Einstein’s statement, the introduction of the IRA allows you to realize compound interest in a tax shelter that can stretch over multiple generations. Importantly, earning 7% interest in an IRA is equivalent to earning approximately 11% interest in a taxable account and paying taxes at a 35% federal income tax rate.

Avoiding IRA Withdrawals. All too often investors look at their IRA as a piggy bank, breaking it open whenever unexpected expenses arise. Besides a 10% penalty for withdrawals (under most circumstances) before the age of 59 ½ and income taxes, withdrawals from your IRA are difficult to replace due to IRS mandated annual contribution limits. Even if you skip an annual contribution one year you can never make a contribution greater than the current year’s limit. For example, if you are 60 years old and withdraw $15,000 from you IRA in 2010, you can only contribute $6,000 to your IRA – even if you skipped your $6,000 contribution in 2009.

Action Step: Delay withdrawals from your IRA until required by the IRS, designate appropriate beneficiaries and instruct the beneficiaries to withdrawal at the pace required by the IRS and your family can reap the befits of your IRA over multiple generations. Establish an IRA as early as you can and let the compounding and tax sheltering begin.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 07/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some insurance companies offer Partnership Qualified long term care insurance policies. Can you explain what that means, what advantages it may provide and if the California Partnership for Long Term Care is unique?

The Problem – Limited Benefits and Limited Medicaid
Most long term care (LTC) insurance policies provide a limited amount of benefits. Even lifetime benefit policies generally have a daily, monthly or annual limit. The cost of long term care after a policy has been exhausted can be financially devastating for you and your family. To compound the problem, assistance in the form of Medicaid is generally limited to the impoverished.

The Solution – Partnership Qualified Long Term Care Insurance Policies
The Partnership Program is based on the Robert Wood Johnson Foundation program called the Program to Promote Long Term Care Insurance for the Elderly, initiated in 1987. Today, a Partnership Program is a “partnership” between a state, an insurance company and state residents who buy long term care Partnership policies. With a Partnership Qualified policy you can apply for Medicaid with ‘asset disregard’. This allows you to keep assets that would otherwise be disallowed. In almost all states that have Partnership Programs, the amount of assets Medicaid will disregard is equal to the amount of the benefits you actually receive under your LTC Partnership Qualified policy. This type of disregard is often referred to as Dollar for Dollar.

The California Partnership for Long Term Care
Let’s say you are a California (CA) resident who purchases $251,850 (the average rate of a private nursing room for an average three year stay in CA in 2010) worth of insurance through a California Partnership for LTC Qualified policy. When the care is needed, the policy actually pays for $1.2 million of care (due to inflation protection). Under the CA Partnership Program you would then have $1.2 million of assets protected from Medi-Cal (Medicaid). Thus, the California Partnership for Long Term Care provides Dollar for Dollar asset protection. However, your income is considered in determining your eligibility for Medicaid.

The California Partnership for Long Term Care has minimum criteria, designed in part to protect the policyholder and in part to protect the state’s Medicaid program. Let us not forget, this is a Partnership Program. Policy benefits must increase at a 5% compound inflation protection rate for persons under the age of 70. If you are 70 years of age or older you can choose between a 5% compound inflation protection rate and a 5% simple inflation protection rate. By increasing at only a 5% simple inflation protection rate you could deplete your benefits much faster than a policy that increases at a 5% compound inflation protection rate and reduce the amount of assets protected from Medi-Cal (Medicaid).

Example 1. You purchase a policy with 730 days of care that initially meets the Program requirements, but you use 100 days for home care – leaving you with 630 days. As 630 days is less than the 730 day requirement as of the day you enter a nursing home, this policy would be become disqualified under the Program.

California Partnership for Long Term Care policies must cover at least 70% of the average daily private pay rate in a California Nursing Home (70% of $230 is $160), at least 70% of that amount in a Residential Care Facility or Assisted Living Facility (70% of $160 is $112) and at least 50% of that amount in your home or for community care in the form of a monthly benefit (50% of $160 is $80, multiplied by 30 days is $2,400). The key criteria of the California Partnership for LTC are listed below.

Nursing Home Min Daily Benefit 2010 Residential Care Facility Min Daily Benefit 2010 Home/Community Min Mo Benefit2010

$160______________________________ $112______________________________________ $2,400

Below Age 70 Min Inflation Protection=5% Compound, Age 70 & Over Min Inflation Protection=5% Simple

Often Overlooked – Powerful Benefit of the California Partnership for Long Term Care
The California Partnership for Long Term Care requires that a Care Management Provider Agency, approved by the CA Department of Health Care Services and independent from the insurer, provide care coordination for Partnership policyholders.

Action Step – Purchase a California Partnership for Long Term Care Insurance Policy
When you purchase a California Long Term Care Partnership Qualified policy, you gain the safety of long term care insurance and the peace of mind provided by asset protection.

Question of the Month:Can I Boost My 401(k)?

The Independent Press - 07/07/10
Money Matters
By Aaron Skloff

Q: My husband of 20 years passed away earlier this year. Even though we updated our wills just before his passing, his ex-wife now claims she owns all the assets in his IRAs and 401(k)s, totaling $3 million. Is that legal?

A: Yes. Many people update their estate planning documents every three to five years, yet overlook one of the most important documents — the beneficiary designation form for their IRAs, 401(k)s and other retirement accounts. Unlike most assets, where beneficiaries are determined by your will, retirement account beneficiaries are determined by that specific account’s beneficiary designation form.

Independent of your intentions, such as seeing the assets distributed to your wife and children, custodians of retirement accounts must follow the directions of the beneficiary designation form – even if that means $3 million of the assets legally go to an ex-wife from 20 years ago.

The Solution. Diligently Designate Beneficiaries. Upon establishing or transferring a retirement account, diligently designate your primary and contingent beneficiaries. Primary beneficiaries are the first in line to receive your retirement account assets if you pass away.

If you do not specify what percentage each beneficiary should receive, many retirement account custodians will evenly distribute your assets between all the listed primary beneficiaries — even if your intent was for the first of two beneficiaries to receive 75% and the second to receive 25%. Some retirement account custodians will simply distribute 100% of the assets to the first beneficiary listed, ignoring the other beneficiaries listed.

Review your beneficiary designations annually and during important changes in your life. A short list of those changes include: the adoption or birth of a child, divorce, the transition of beneficiary from a minor to one of majority, marriage, inheritance, death and/or change in financial situation.

Update your beneficiaries accordingly.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 06/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Can the purchase of a long term care insurance policy qualify me for the Massachusetts MassHealth (Medicaid) Program? If so, are there any requirements?

The Solution – MassHealth (Medicaid) Program
If you receive MassHealth (Medicaid) benefits and have a long term care insurance policy that meets certain requirements, you might be exempt from some MassHealth eligibility and recovery rules. These rules determine:

1. Whether your home will need to be sold in order for you to become eligible for MassHealth benefits and

2. Whether you or your estate may need to repay MassHealth for any of the long term care expenses it paid on your behalf

Massachusetts is the only state in the entire U.S. that specifically protects your home from Medicaid nursing home liens and estate recovery if you meet the requirements below. Many states have adopted Dollar for Dollar Partnership Programs; where in most states for every dollar that your qualifying long term care insurance policy pays in benefits, a dollar of assets is protected from Medicaid. In those states your policy may ultimately pay $300,000 in benefits and protect $300,000 in assets. In Massachusetts, your policy may ultimately pay $100,000 in benefits and protect your $400,000 home.

MassHealth Qualifying Long Term Care Insurance Policies
Your long term care insurance policy must meet minimum requirements as of the day you enter a nursing home in order for you to qualify for the MassHealth eligibility and recovery exemptions. Specifically, your policy must meet the following requirements when you enter the nursing home:

1. Have enough benefits to cover nursing home care for at least 730 days (two years) and

2. Have benefits of at least $125 per day for nursing home care and

3. Not require an elimination period of more than 365 days, or in lieu of a waiting period a deductible of more than $54,750

Often Overlooked - Policy Benefits Can Change from Initial Purchase
Changes in policy benefits can turn a policy that initially qualified under the Program into a disqualifying policy and vice versa.

Example 2. You purchase a policy with a $100 per day benefit that does not initially meet the Program requirements, but your policy includes an inflation protection rider. By the time you need nursing home care the daily benefit has risen to $130. As $130 per day is greater than or equal to the $125 per day minimum requirement as of the day you enter a nursing home, this policy would become qualified under the Program.

Action Step – Purchase a Long Term Care Insurance Policy that Meets MassHealth (Medicaid) Program Requirements
When you purchase a policy that meets the MassHealth (Medicaid) Program requirements you gain all the benefits of a traditional long term are insurance policy plus your home is protected.

Question of the Month:Can I Boost My 401(k)?

The Independent Press - 06/02/10
Money Matters
By Aaron Skloff

Q: Can gaining help with my 401(k) really improve my performance and optimize my risk?

A: Yes. In a recent study based on nearly 400,000 401(k) participants, the average participant who did not seek help fared poorly in comparison to those who did seek help. On average, the median annual return for participants who did not seek help was almost 2% worse (net of fees) than participants who did seek help. Note: The study included one bull market year (2006), one mixed market year (2007) and one bear market year (2008).

The primary reasons for the poorer performance among participants not seeking help are:

— Inappropriate Risk Levels. In many cases, participants far from retirement were invested too conservatively while those close to retirement were invested too aggressively.

— Inefficient Portfolios. In many cases, participants not seeking help are not being compensated for the risk they take.

To quantify the impact, let’s look at an example after 40 years, where each makes a lump sum contribution of $10,000 at age 25. Based on median returns of approximately 6%, a participant seeking help could have 103% more money ($105,800) than a participant not seeking help. Participants seeking help outperform participants not seeking help 88% of the time.

When seeking help, verify the information is coming from a reputable and unbiased source. Many ‘Financial Advisors’ responsible for providing help on your 401(k) plan are not qualified. Few have a graduate degree in finance and/or a certification in portfolio management, such as the Chartered Financial Analyst (CFA). Few have formal training and experience in portfolio construction and risk control.

To make matters worse, even fewer will accept true fiduciary duty. True fiduciary duty legally obligates the provider of help to place the participant’s interests before any other party: the provider of help, the provider’s employer or the shareholders of the employer.

Unfortunately, many of the largest wealth and investment management companies are publicly traded companies owned by shareholders. And, like all publicly traded companies, they must act in the best interest of their shareholders — not their clients. A privately owned Registered Investment Advisor (RIA) is legally obligated to accept true fiduciary duty, without conflicts.

Remember, this is your life savings not an experiment for the inexperienced. Work closely with a credentialed, experienced Financial Advisor affiliated with a privately owned RIA, legally obligated to accept true fiduciary duty, without conflicts.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 05/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: We have family throughout the U.S. What federal and state tax benefits are available for long term care insurance?

The Problem – Foregoing Federal and State Tax Benefits
Too many long term care insurance policyholders forego valuable federal and state tax benefits because they simply do not know of their existence. As many policies are paid over a lifetime, foregone tax benefits could total thousands of dollars.

The Solution – Utilizing Federal and State Tax Benefits
Federal Tax Benefits. You can add the tax qualified long term care insurance premiums (limited to the chart below) to other medical expenses. Amounts in excess of 7.5% of adjusted gross income (AGI) can be itemized as a medical expense deduction on Schedule A of Form 1040 of your federal income tax return. Tax qualified long term care insurance premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amounts listed below.

Age Before the Close of the Taxable Year Premium Deduction Limit 2010

40 or less_____________________________________$330

More than 40 but not more than 50_____________$620

More than 50 but not more than 60 _____________$1,230

More than 60 but not more than 70______________$3,290

More than 70___________________________________$4,110

State Tax Benefits. In addition to the federal tax benefits, 29 states and the District of Columbia offer tax deductions and/or credits for policyholders with qualified policies. Some states disallow simultaneous federal and state deductions. The details by state are listed below.

Action Step – Utilize Your Federal and State Tax Benefits
As this is not tax advice, work closely with your tax advisor to utilize every federal and state tax benefit available to you.

Question of the Month:Long-Term Care Issues

The Independent Press - 05/05/10
Money Matters
By Aaron Skloff

Q: If I purchase a life insurance policy or annuity with built-in long-term care insurance benefits do I gain any tax benefits? What are the advantages and disadvantages of such a solution?

A: Yes. Like a homeowner’s insurance policy, a traditional long-term care insurance policy provides no benefit unless you have a claim. Some long-term care insurance purchasers are uncomfortable with purchasing a policy, never needing care and never gaining any benefit from the policy. A new law may address this concern.

Effective Jan.1, 2010, the Pension Protection Act (PPA) of 2006 permits tax free distributions from various insurance products to pay for long-term care insurance. In order to seize the opportunity, insurance companies have introduced ‘hybrid’ insurance products, like life insurance/long term care insurance and annuities/long term care insurance.

Prior to the new law, withdrawals of cash value or accumulated value to pay for long-term care insurance could be taxable. With the new law, these withdrawals are no longer taxable.

But, just because these hybrid products are available does not necessarily mean they are right for you. A traditional long-term care insurance policy may still be the right solution. As is oftentimes the case with hybrid financial products, you end up with mediocre benefits all around.

Often overlooked, for those concerned about paying for insurance and not receiving any benefits, some traditional long-term care insurance policies provide for a 100% return of premium (paid to your heirs) if you pass away without using your long term care benefits.

Action Step: Often overlooked, for those concerned about paying for insurance and not receiving any benefits, some traditional long-term care insurance policies provide for a 100% return of premium (paid to your heirs) if you pass away without using your long term care benefits.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 04/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: What happens if I pay for long term care insurance for the rest of my life, pass away, and never use the benefits of my policy? Will my heirs receive a fund of the premiums I paid?

The Problem – Paying Your Premium and Never Using the Benefits
That’s a good problem to have. It’s like paying your homeowners insurance for 50 years and never seeing your house burn down. Like all insurance, you hope you never need the benefits of the policy. The idea of peacefully going to sleep at the age of 95 and never waking up again, without ever needing long term care, is a dream come true for many people. But, you may prefer receiving some benefit from long term care insurance – even if the benefit goes to your heirs.

The Solution – Return of Premium Benefit
Return of Premium. Some long term care insurance policies include or provide the option to add a return of premium benefit. The insurance company pays you heirs all the premium payments you have made, less any long term care benefits paid against the policy. Some return of premium benefits are included in the policy if you pass away prior to age 65.

Enhanced Return of Premium. Some long term care insurance policies allow you to purchase a rider that enhances your built-in return of premium benefit, beyond the age of 65. With the enhanced return of premium benefit, your heirs receive a benefit equal to your total premiums paid, less any long term care benefits paid against the policy, regardless of your age.

Let’s look at an example. You pay $2,000 each year for 30 years, for a total of $60,000. You are fortunate, because you pass away without ever having used the policy. You heirs are also fortunate, as they will receive a check from the insurance company for $60,000.

Graded Return of Premium. Some long term care insurance policies allow you to purchase a rider that will return a percentage of your premium paid, less any claims paid against the policy. The percentage is dependent upon your age when you pass away. It starts at 100% and begins decreasing by 10% each year after the age of 65, until at age 75, when the percentage decreases to zero.

10-Year Return of Premium. Some long term care insurance policies allow you to purchase a rider that will return all of your premiums paid, less any claims paid against the policy. If you have been insured for at least 10 years when you pass away, and you have never filed a claim, the insurance company will return your full premium paid. If you have filed a claim, the insurance company will return your premium paid less any claims paid against the policy.

Action Step – Protect Yourself with a Return of Premium Benefit
When you purchase a long term care insurance policy with a return of premium benefit you remove any risk of not gaining any benefits from the policy – even if it is your heirs who reap the benefits.

Question of the Month:Is Estate Tax Repeal a Good Thing?

The Independent Press - 04/07/10
Money Matters
By Aaron Skloff

Q: The federal estate tax has been repealed for 2010. That’s great news for everyone, right?

A: Wrong. In 2009, each person was provided a $3.5 million federal estate tax exemption. For 2010, the federal estate tax has been repealed and replaced with a federal capital gains tax. The federal capital gains tax exemption for an estate is $1.3 million. An estimated 40,000 heirs that would not have been affect in 2009, will be affected in 2010. That is not good news for everyone.

One solution to this problem is obtaining detailed records. In the case of stock, many investors accumulate a large number of shares through splits, dividend reinvestment and subsequent purchases. Obtaining detailed records can prove you have the correct cost basis and tax obligation, in the event of an audit.

Another solution is simply removing assets from your estate. The easiest solution is gifting. You can gift $13,000 per year to as many people as you want, without incurring any reporting obligations or gift taxes.

There are also a host of trusts that remove assets from your estate, avoiding future estate taxes and capital gains taxes. Congress is well aware of these tools and is evaluating stricter guidelines for those who wait to implement these powerful tools. While Congress appears too busy to address this now, deadlines may be closer than you think.

State Estate Taxes. Lest we forget, state estate taxes are very much alive. Despite the temporary disappearance of federal estate taxes, many states have retained draconian state estate taxes, For example, New Jersey has a mere $675,000 state estate tax exemption.

Things could get ugly in 2011. In 2011, the federal estate tax exemption returns with a relatively modest amount, $1 million. To add insult to injury, the maximum federal estate tax rate jumps to an exorbitant 55%. This compares to 2009, when the federal estate tax exemption was $3.5 million and the federal estate tax rate was 45%.

Action Step: Work closely with your estate attorney and financial advisor to establish an estate plan that maximizes current and future changes. Be sure to explore all estate and tax planning tools for your particular circumstance – no two people are the same.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 03/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for a survivorship benefit. Can you explain what that means and what advantages it may provide?

The Problem – Paying Your Premium When Your Spouse or Partner Passes Away
Few long term care insurance policies are designed with a survivorship benefit. Without this benefit, when your spouse or partner passes away and your budget is pushed to the limit you will be required to make your premium payments. If your spouse or partner is the primary wage earner or their retirement income is your primary source of income, their passing could present a financial hardship in paying for your policy. Placed in this financial hardship, you may have to forego paying your policy and your policy could be cancelled.

The Solution – Survivorship Benefit
10 Year Survivorship Benefit. Some long term care insurance policies include or provide the option to add a 10 year survivorship benefit. The insurance company permanently waives the premium for the surviving spouse or partner when the other spouse or partner passes away. The waiver begins after you have satisfied the conditions of the policy. The benefit is based on three key criteria:

1) You each continuously had long term care insurance coverage in force on the date of death

2) You each had your policies in force for at least 10 years

3) Neither of you were paid benefits for the first 10 years of the policy

The survivorship benefit can be a tremendous saving grace if upon your spouse or partner’s death your long term care insurance premiums would become a budget buster.

Seven Year Survivorship Benefit. Some long term care insurance policies include or provide the option to add a seven year survivorship benefit. The insurance company permanently waives the premium for the surviving spouse or partner when the other spouse or partner passes away. The same key criteria apply as the basic version, but with the basic version you must wait 43% longer for the benefit to be utilized.

Often Overlooked. Remember to terminate the survivorship benefit if your relationship ends due to divorce, death or final separation.

Action Step – Protect Yourself with a Survivorship Benefit
When you purchase a long term care insurance policy with a survivorship benefit you remove an important financial and psychological burden of long term care – the cost of the policy when your spouse or partner passes away.

Long Term Care University - Question of the Month

Long Term Care University - 02/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for a waiver of premium or joint waiver of premium benefit. Can you explain what that means and what advantages it may provide?

The Problem – Waiver of Premium and Joint Waiver of Premium Benefit
Waiver of Premium. Some long term care insurance policies include or provide the option to add a waiver of premium benefit. The insurance company waives the premium payments each month you are receiving care (as defined by the policy). The waiver begins after you have satisfied the elimination period of the policy (if the policy has an elimination period). Most waiver of premium benefits apply to care you receive in a nursing facility, assisted living facility or in your home. When evaluating the waiver of premium benefit verify that the waiver applies to all three locations.

Pay close attention to what portion of the premium is waived. Ideally, the entire premium for the policy and all riders (attachments) will be waived. Some long term care insurance companies will refund a pro-rated portion of premiums paid in advance. So, if you pay your annual premium on January 1st and begin receiving care on July 1st, the insurance company will refund 50% of your annual premium (assuming you have met the elimination period).

The waiver of premium benefit can be a tremendous saving grace if your long term care expenses exceed the benefits provided by your long term care insurance policy.

Let’s look at an example of the waiver of premium. Your budget allows you to pay your $300 monthly long term care insurance premium. Unfortunately, you wind up needing care that exceeds your policy’s benefits by $300 per month. The waiver of premium benefit will allow you to stop paying your $300 monthly premium – leaving you with a balanced budget.

Joint Waiver of Premium. Some long term care insurance policies include or provide the option to add a joint waiver of premium benefit. The insurance company waives the premium payments each month you or your spouse or partner are receiving care (as defined by the policy). The waivers begin after you or your spouse has satisfied the elimination period of the policy (if the policy has an elimination period).

The joint waiver of premium benefit can relieve you of one more financial obligation associated with your spouse’s long term care expenses. Your spouse may be able to take more time off from work, knowing their premium payments will be waived – the same way your premium payments are waived.

Action Step – Protect Yourself with a Waiver of Premium or Joint Waiver of Premium Benefit
When you purchase a long term care insurance policy with a waiver of premium or a joint waiver of premium benefit you remove an important financial and psychological burden of long term care – the cost of the policy or policies when you receive care or your spouse receives care.

Question of the Month:Are IRAs Reversible?

The Independent Press - 02/03/10
Money Matters
By Aaron Skloff

Q: After evaluating all the pros and cons, we finally decided to convert our Traditional IRAs to Roth IRAs. Can we reverse the conversion and its tax implications if the financial markets drop?

The same way the IRS permits you to convert all or a portion of your Traditional IRAs to Roth IRAs, the IRS also permits you to reverse all or a portion of the conversion through a “recharacterization”. When you recharacterize you reverse the conversion and its full tax implications.

The deadline for recharacterizing is the extended due date of your tax return for the year of the contribution or conversion. This would be April 15, 2011 or October 15, 2011 with an extension.

Ideally, you would reconvert the assets again at their depressed valuation. If only it were that simple. Remember, we are talking about the IRS. You cannot convert, recharacterize, and then reconvert to a Roth IRA within the same tax year. If you convert and then recharacterize, you may not reconvert back to a Roth IRA before the later of:

1) The taxable year following the taxable year in which the amount was initially converted to a Roth IRA or

2) The end of the 30-day period, beginning on the day you recharacterized from the Roth IRA to the Traditional IRA

If your Traditional IRA holds very volatile securities, consider converting just those securities into their own Roth IRAs. In the event those securities decline in value it will reduce your headaches if you choose to recharacterize just those Roth IRAs. In the event those securities increase in value you do not have to do anything.

For example, let’s say you have a Traditional IRA that holds one stock, Google. As Google is a very volatile stock, consider converting that Traditional IRA into its own Roth IRA. If Google drops, recharacterize the Roth IRA that holds solely Google. If it rises, do nothing.

Work Closely with Your CPA and Financial Advisor. Work closely with your CPA and Financial Advisor, when considering Roth IRA conversions and/or recharacterizations. Conversions and recharacterizations can have significant impacts on your income and your estate’s taxes.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908-464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 01/15/10
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for a monthly home care maximum benefit instead of a daily home care maximum benefit. Can you explain what that means and what advantages it may provide?

The Problem – Daily Home Care Maximum Benefit
Most long term care insurance policies are designed with a daily home care maximum benefit. Unfortunately, you may need more care than a daily home care maximum benefit will reimburse on any given day. Fluctuating expenses are quite common with home based long term care.

For example, after an outpatient procedure, your physician recommends you have your home health aide stays in your home 24 hours a day for two consecutive days. Your physician also recommends that the home health aide stay in your home from the time you go to bed at night until the time you wake in the morning for three consecutive days.

While the normal hourly rate for your home health aide is $25, shifts requiring more than six consecutive hours or overnight stays have additional fees. Although your long term care insurance policy’s daily home care maximum benefit of $200 per day is sufficient for most days, the costs of long shifts and overnight stays drives your costs well above the $200 daily limit – leaving you with significant out of pocket costs.

The Solution – Monthly Home Care Maximum Benefit
Some long term care insurance policies are designed with or provide the option to add a monthly home care maximum benefit. With this benefit you can convert to a monthly home care maximum benefit equal to 31 times the daily maximum benefit. This applies to the combined total of all expenses incurred during any one calendar month. Instead of a $200 daily benefit you would have a $6,200 monthly benefit. This gives you greater flexibility in managing your home health care expenses. Let’s use the example above to see the outcomes of a daily home care maximum benefit versus a monthly home care maximum benefit.

Day of Wk Expenses Incurred Daily Home Care Max Benefit Out of Pocket Expenses Monthly Home Care Max Benefit Out of Pocket Expenses
Monday____$500______________$200________________________$300__________________$6,200________________________$0

Tuesday____$500______________$200________________________$300__________________$6,200________________________$0

Wednesday_$500______________$200________________________$100__________________$6,200________________________$0

Thursday____$500______________$200________________________$100__________________$6,200________________________$0

Friday_______$500______________$200________________________$100__________________$6,200________________________$0

Total_______________________________________________________$900_________________________________________________$0

In this example you would have $900 in out of pocket expenses with a daily home care maximum benefit versus zero out of pocket expenses with a monthly home care maximum benefit. While adding a monthly feature to a daily benefit policy may add 5% to the cost of the overall policy, it could more than make up for the additional cost if you have just one week of high expenses over the life of the policy.

Action Step – Protect Yourself with a Monthly Home Care Maximum Benefit
When you purchase a long term care insurance policy with a monthly home care maximum benefit you protect yourself from large out of pocket home health care costs in any one particular day or week.

Question of the Month:What insurance is best?

The Independent Press - 01/06/10
Money Matters
By Aaron Skloff

Q: I thought there were only two different types of life insurance policies, term and whole. What types of life insurance are available and how do they differ?

There are two basic categories of life insurance, term and permanent. Term may be appropriate if you only need protection for a limited time; to protect a mortgage, loan or college education. Permanent may be appropriate if you need lifetime coverage. Let’s look at a variety of the most common term and permanent policies.

Traditional Term, as its name implies, covers you for a specified term, with 10, 20 and 30 years being the most common. Premiums are fixed over the term of the policy. It provides the greatest amount of coverage for the lowest premium.

Return of Premium Term, as it names implies, covers you for specified term, but then returns all of your premiums if you outlive the policy. Premiums are fixed over the term of the policy. It provides the second greatest amount of coverage for the second lowest premium.

Variable Life Permanent is a type of permanent life insurance that offers fixed premiums over your lifetime. Unlike most types of permanent life insurance, this type of policy is not designed to build up cash value. It provides the third greatest amount of coverage for third lowest premium.

Variable Universal Life Permanent is a type of permanent life insurance that offers flexible premiums based on how underlying investments inside the policy perform. Unfortunately the investments inside the VUL can drop, decreasing the policy’s cash value and death benefit. Combining something that is intended to be your safest financial instrument (life insurance) with risky investments (stocks and bonds) can be a recipe for disaster. It provides second least amount of coverage; second highest premium.

Whole Life Permanent is a type of permanent life insurance that offers fixed premiums. As the insurance company generally charges more than the actual life insurance costs in the early years of the policy, cash value builds in this type of policy. It provides the least amount of coverage for the highest premium.

Establishing the right amount and right type of insurance allows you to control what you want to protect in the most cost effective matter. Like most insurance, the earlier you start your policy the lower the cost of the policy. Consult a licensed insurance professional to understand of all your options.

Long Term Care University - Question of the Month

Long Term Care University - 12/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Can long term care insurance be offered as a company benefit to our employees? If so, are there any tax advantages for employers or employees? Are there still tax advantages for individuals who purchase a policy on their own?

The Problem – Attracting and Retaining Valuable Employees
A company’s success or failure is oftentimes determined by the quality of its employees. Offering an attractive benefits package can be a key element in attracting and retaining the highest quality employees. Employees seek out benefits packages that offer a competitive salary, health insurance, retirement plan and long term care insurance. Both employers and employees recognize the hidden costs of giving long term care (interruptions and decreased productivity), as well as the staggering costs of long term care.

The Solution – – Offer Long Term Care Insurance as a Company Benefit to Employees
Whether the business is a sole proprietor or multi-national corporation, long term care insurance can be offered as a company benefit. Unlike most company benefits, which prohibit the employer from discriminating, long care insurance can be offered on a limited or unlimited basis at the company’s discretion. Employees of companies with multiple participants can receive simplified underwriting for themselves and their family members, portable coverage if they leave the employer and group discounts.

Tax Advantages for Employers
C corporations can deduct the full amount of tax qualified long term care insurance premiums paid for employees, their spouses and dependents as a business expense. Sole proprietors, partnerships, limited liability corporations (LLCs) and S corporations can follow the same guidelines with deductions limited to the full eligible amount (limited to the chart below). Employers paying for employees, their spouses and dependents domiciled in certain states may also be eligible for either tax credits or deductions for premiums they pay. For example, New York state provides a 20% tax credit.

Tax Advantages for Employees or Individuals Purchasing Their Own Policy
Employees and individuals purchasing their own tax qualified long term care policy receive benefits federal income tax free, up to $280 per day (including indemnity benefits). Benefits above $280 are still federal income tax free up to the actual long-term-care costs. Employees who pay all or a portion of the tax qualified long term care insurance premiums for themselves, spouses and dependents (and individuals purchasing their own policy) may be able to deduct all or a portion of the premium on their federal income tax return. Employees and individuals purchasing their own policy living in certain states may also be eligible for either tax credits or deductions for premiums they pay. For example, New York state provides a 20% tax credit.

Employees and individuals purchasing their own policy can add the tax qualified premium (limited to the chart below) to other medical expenses (health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs, and other unreimbursed medical expenses). Amounts in excess of 7.5% of adjusted gross income (AGI) can be itemized as a medical expense deduction on Schedule A of Form 1040 of federal income tax return.

Age Before the Close of the Taxable Year Premium Deduction Limit 2009 Premium Deduction Limit 2010

40 or less_____________________________________$320 _______________________$330

More than 40 but not more than 50_____________$600________________________$620

More than 50 but not more than 60 _____________$1,190______________________$1,230

More than 60 but not more than 70______________$3,180______________________$3,290

More than 70___________________________________$3,980______________________$4,110

Action Step – Offer Long Term Care Insurance as a Company Benefit to Employees
Whether you are a sole proprietor, the benefits director of a mid sized LLC or the CEO of multi-national corporation, implementing long term care insurance as an employee benefit can have tremendous qualitative and quantitative benefits.

Question of the Month:When is ‘defective’ OK?

The Independent Press - 12/02/09
Money Matters
By Aaron Skloff

Q: What is an Intentionally Defective Grantor Trust (IDGT) and if it is defective can it still be a powerful vehicle to reduce or eliminate our estate taxes?

The problem – Estates larger than $3.5 million pay federal estate taxes of up to 45%. Estates larger than $675,000 pay New Jersey state estate taxes of up to 16%. That could add up to a 61% tax rate and millions of dollars of tax payments.

The Intentionally Defective Grantor Trust (IDGT) is one powerful vehicle that could eliminate estate taxes by transferring assets out of your estate. While low interest rate environments, like the one we are in are now, present certain challenges, they can enhance the benefits of IDGTs.

An IDGT is an irrevocable trust created by a person (the“grantor”), who gifts (“seeds”) assets (of at least 10% of the ultimate purchase price) to the trust, allowing the IDGT to then purchase the grantor’s assets in exchange for a promissory note with a specified term. Oftentimes, the note will require interest only payments with a balloon payment of principal at the end of the term.

The grantor avoids gift taxes upon sale to the IDGT because the grantor and the trust are the same entity for income tax purposes. Because the grantor ‘intentionally’ violates just enough of the Internal Revenue Code 671-679 control rules the assets are removed from the estate – thus the name Intentionally Defective Grantor Trust.

At the end of the term the remaining assets of the IDGT are distributed to the named beneficiary (the “remainderman”) or placed into a trust for the benefit of the beneficiary. While the grantor is responsible for all income taxes generated by the IDGT, those same income tax payments provide another “tax free gift” because they retain the maximum value of the IDGT. Translation: the trust’s value does not decline due to tax payments.

The earlier you establish an IDGT, the greater the potential benefit. Establishing an estate plan with the expertise of your financial advisor and estate attorney can be one of the best investments of your life.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 11/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some insurance companies offer Partnership Qualified long term care insurance policies. Can you explain what that means, what advantages it may provide and if the Connecticut Partnership for Long Term Care is unique?

The Solution – Partnership Qualified Long Term Care Insurance Policies
The Partnership Program is based on the Robert Wood Johnson Foundation program called the Program to Promote Long Term Care Insurance for the Elderly, initiated in 1987. Today, a Partnership Program is a “partnership” between a state, an insurance company and state residents who buy long term care Partnership policies. With a Partnership Qualified policy you can apply for Medicaid with ‘asset disregard’. This allows you to keep assets that would otherwise be disallowed. In almost all states that have Partnership Programs, the amount of assets Medicaid will disregard is equal to the amount of the benefits you actually receive under your LTC Partnership Qualified policy. This type of disregard is often referred to as Dollar for Dollar.

The Connecticut Partnership for Long Term Care
Let’s say you are a Connecticut (CT) resident who purchases $377,800 (the average rate of a private nursing room for an average three year stay in CT in 2009) worth of insurance through a CT Partnership Qualified policy. When the care is needed, the policy actually pays for $1.5 million of care (due to inflation protection). Under the CT Partnership Program you would then have $1.5 million of assets protected from CT Medicaid. Thus, the Connecticut Partnership for Long Term Care provides Dollar for Dollar asset protection. However, your income is considered in determining your eligibility for Medicaid.

The Connecticut Partnership for Long Term Care has minimum criteria, designed in part to protect the policyholder and in part to protect the state’s Medicaid program. Lest we not forget, this is a Partnership Program. Both the lifetime and daily, weekly or monthly benefits must increase at a 5% compound inflation protection rate for persons under the age of 65. Only the daily, weekly or monthly benefits must increase at a 5% compound inflation protection rate for persons age 65 and over.

Although there is no requirement for lifetime benefits to increase at 5% per year for persons age 65 and older, foregoing the inflation protection could limit the amount of assets protected from CT Medicaid. By increasing only the daily, weekly or monthly benefits the policyholder could deplete their benefits much faster than a policy that increases both lifetime benefits and the daily, weekly or monthly benefits. The key criteria of the Connecticut Partnership for LTC are listed below.

Minimum Daily Minimum Daily Minimum Inflation Protection of Minimum Inflation Protection of

Benefit 2009 2010 Benefits Under Age 65 Benefits Age 65 and Over

Nursing Facility $184 Nursing Facility $193 Lifetime 5% Compound Lifetime No Minimum

Home Care $92 Home Care $96.50 Daily, Weekly or Monthly 5% Compound Daily, Weekly or Monthly 5% Compound

Often Overlooked – Power Benefit of the Connecticut Partnership for Long Term Care
Connecticut Partnership for Long Term Care policyholders are guaranteed a 5% discount on nursing home rates in Connecticut.

Action Step – Purchase a Long Term Care Partnership Policy
When you purchase a Partnership Qualified policy, you gain the safety of long term care insurance and the peace of mind provided by asset protection.

Question of the Month

The Independent Press - 11/04/09
Money Matters
By Aaron Skloff

Q: What is a Grantor Retained Annuity Trust (GRAT) and is it a great vehicle to reduce or eliminate our estate taxes?

Estates larger than $3.5 million pay federal estate taxes of up to 45%. Estates larger than $675,000 pay New Jersey estate taxes of up to 16%. That could add up to a 61% tax rate and millions of dollars of tax payments.

The Grantor Retained Annuity Trust (GRAT) is one great vehicle that could eliminate estate taxes by transferring assets out of your estate. While low interest rate environments, like the one we are in are now, present certain challenges, they can enhance the benefits of GRATs.

A GRAT is an irrevocable trust created by a person (the “grantor”), who transfers assets into the trust and receives a stream of annuity payments from the trust for a specified term. At the end of the term the remaining assets of the GRAT are distributed to the named beneficiary (the “remainderman”) or placed into a trust for the benefit of the beneficiary. The grantor can avoid gift taxes from transfers if the GRAT is “zeroed out”. Translation: the full amount transferred in is paid back to the grantor.

The minimum stream of payments for the term of the trust is determined by the Internal Revenue Code 7520 Interest Rate, oftentimes called a “hurdle rate”. The current rate of 3.2% is significantly lower than the 6.2% rate as recent as August of 2006, making the GRAT more appealing now than at many periods over the last 10 years. The primary reason for establishing a GRAT is to remove net profits from the estate, with net profits defined as any excess return above the hurdle rate. The lower the hurdle rate, the easier it is to remove more assets from your estate. Translation: it is easier to earn more than 3.2% than it is to earn more than 6.2%.

If the Grantor dies before the term of the GRAT the entire transfer is added back to the grantor’s estate. This defeats the purpose of the GRAT and is a key reason to consider rolling GRATS. Rolling GRATs commence immediately after the preceding GRAT matured. They are primarily utilized to avoid two problems:

1) locking into too high a hurdle rate in a declining hurdle rate environment and

2) the penalty associated with a death of the grantor over the course of too long a term.

Hurdle rates are unlikely to remain this low for very long. Establishing a GRAT now, when hurdle rates are low, increases the likelihood you will be able to remove a larger amount of assets from your estate – potentially eliminating your federal and state estate tax obligations. The earlier you establish a GRAT, the greater the potential benefit. Establishing an estate plan with the expertise of your financial advisor and estate attorney can be one of the best investments of your life.

Long Term Care University - Question of the Month

Long Term Care University - 10/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Many of the long term care insurance brochures reference to the Total Pool of Money. Can you explain what that means and how it relates to a Daily or Monthly Benefit? Can a Total Pool of Money last longer than the Benefit Period?

The Problem – Understanding the Total Pool of Money
The Total Pool of Money, sometimes referred to as Total Benefit Value, is the total amount of money available to cover your long term care expenses on a daily or monthly basis. The Pool of Money is calculated by multiplying your Daily or Monthly Benefit by the Benefit Period. The value of the Total Pool of Money will be affected by claims payments, inflation protection and additions from the passing of a spouse or partner (if you have a Shared Care policy). For example, if you selected a Daily Benefit of $300 and a Benefit Period of five years, your Total Pool of Money would be $547,500.

Daily Benefit X Day Per Year X Benefit Period = Total Pool of Money
$300 X 365 X 5 Years = $547,500

Making Your Actual Benefit Period Last Longer than Your Stated Benefit Period
Your Daily Benefit can be thought of as your daily withdrawal limit from your Automated Teller Machine (A.T.M.). Although your balance is $547,500, the daily withdrawal limit is $300. Try to withdrawal more than $300 in a day and the A.T.M. will tell you that you have reached your daily limit. With your long term care insurance policy, request reimbursement in excess of your Daily Benefit and the insurance company will tell you that you have reached your daily limit.

Your Actual Benefit Period is determined by how quickly you incur Actual Long Term Care Expenses, within the Daily Benefit limit. Divide your Daily Benefit by your Actual Long Term Care Expenses and then multiply by the policy Benefit Period to determine your Actual Benefit Period. For example, if you only accumulate $150 of Long Term Care (LTC) Expenses per day, or half the $300 Daily Benefit, your Total Pool of Money remains the same while your Actual Benefit Period will be 10 years.

Daily Benefit / Actual LTC Expenses X Benefit Period = Actual Benefit Period
$300 / $150 X 5 Years = 10 Years

Your Actual Benefit Period Could Last Shorter than Your Stated Benefit Period
Some long term care insurance companies allow you to increase your Daily Benefit for Home Care. The formula for determining you Actual Benefit Period is the same as in the previous example. For example, if you selected a 150% Home Care benefit, that reimburses 150% of the Daily Limit for Long Term Care expenses incurred in your home and your Actual LTC Expenses are $450 per day, your Total Pool of Money remains the same while your Actual Benefit Period will be 3.33 Years.

Daily Benefit / Actual LTC Expenses X Benefit Period = Actual Benefit Period
$300 / $450 X 5 Years = 3.33 Years

Action Step –Understand How Your Total Pool of Money and Actual Benefit Period Relate to One Another
Your policy design will determine your Daily Benefit, Benefit Period and Total Pool of Money, while your Actual Expenses will determine your Actual Benefit Period.

Question of the Month

The Independent Press - 10/07/09
Money Matters
By Aaron Skloff

Q: What is a Credit Shelter Trust and can it help us reduce or eliminate our federal and New Jersey estate taxes?

If the value of your estate is less than $3.5 million and you pass in 2009, you are exempt from federal estate taxes. Go over the limit and the tax bite can be brutal. In 2009, the maximum federal estate tax rate is a whopping 45%.

If the value of your estate is less than $675,000 and you pass in 2009, you are exempt from New Jersey state estate taxes. Exceed the limit and the tax bite would be in addition to any federal estate taxes. In 2009, the maximum New Jersey estate tax rate is 16%.

Fortunately, both the federal and New Jersey state estate tax laws include a marital deduction that permits the spouse that passes to transfer their entire estate to the remaining spouse, free of taxes — no matter the size of the estate. On the surface this seems like an easy solution, yet foregoing either your $675,000 New Jersey state or $3.5 million federal exemption could create an even larger tax burden for future beneficiaries when the remaining spouse passes.

One solution to this problem is the Credit Shelter Trust, sometimes called a bypass trust.

The trust comes alive, as defined by the wills, when the first spouse passes. To maximize the tax benefits, the wills dictate the funding of the Credit Shelter Trust at the maximum amount permitted by the exemptions in that year. Although most trusts name the children as the beneficiaries, the remaining spouse can utilize the trust for reasonable living expenses.

Things could get ugly in 2011. In 2010, the federal estate tax is repealed – meaning there is no estate tax, although this could change by the time 2010 rolls around. In 2011, the exemption returns with a relatively modest amount, $1 million. To add insult to injury, the maximum federal estate tax rate jumps to an exorbitant 55%.

Do not forget about your will. Without a legal will that clearly defines your intentions and what person or entity is to execute them — it is as good as useless. Recent statistics show a full 70% of U.S. adults do not have a valid will.

Long Term Care University - Question of the Month

Long Term Care University - 09/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for inflation protection. Can you explain what that means and what advantages it may provide?

The Problem – The Rising Cost of Long Term Care
At approximately $220 per day, the average cost for a one year stay in a private nursing home room in 2008 was approximately $80,000. With the average nursing home stay lasting approximately three years, you could spend over $252,000 if you entered in a nursing home today.

If you are 55 years old today, you should expect to pay approximately $930 for one day or $340,000 for one year of nursing home care when you are likely to need it 25 years from now at the age of 80. Based on the average nursing home stay, expect to pay approximately $1.1 million per person — easily wiping out a lifetime of savings for many families.

The Solution –Inflation Protection
A long term care insurance policy with inflation protection, sometimes called an increase rider, increases your benefits each year. A long term care insurance policy without inflation decreases in value, on an inflation adjusted basis, every year the cost of long term care increases. Differentiating between the two most common forms of inflation protection is critical in determining which type is best for your needs.

Simple Inflation Protection
With simple inflation protection, your policy benefits increase at a fixed percentage of your original daily benefit. As evidenced by the chart to the right, a 5% simple inflation protection policy will increase a $220 per day or $80,000 per year benefit to $495 per day or $180,000 per year, over the over the course of 25 years. This should cover about 53% of your daily or annual nursing home costs.

Compound Inflation Protection
With compound inflation protection, your policy benefits increase at a significantly faster pace, as each year’s benefit increase compounds upon the previous year’s increase. As evidenced by the chart to the right, a 5% compound inflation protection policy will increase a $220 per day or $80,000 per year benefit to approximately $930 per day or $340,000 per year, over the course of 25 years. This should cover about 80% of your daily or annual nursing home costs.

No Inflation Protection
As you approach your 80th birthday, the cost to add inflation protection can become expensive. You may consider forgoing inflation protection and simply obtaining a policy with a daily benefit greater than the current cost of care in the marketplace.

Question of the Month: How safe is a 'Safe Harbor'?

The Independent Press - 09/02/09
Money Matters
By Aaron Skloff

Q:My company is considering offering a Safe Harbor 401(k) plan. What is a Safe Harbor 401(k) plan, and how does it differ from a plain 401(k)?

A plain 401(k) will fail its annual compliance testing if officers with incomes of $160,000 or more, and key owners (owing 5% or more) are credited with more than 60% of the assets of the plan. With a Safe Harbor 401(k) plan, all employees can maximize contributions to the plan each year, even if lower paid employees do not contribute or contribute very little.

A Safe Harbor 401(k) requires the employer to match employee contributions in one of three ways:

Option 1: A dollar-for-dollar match on salary deferrals up to 3% of compensation and 50 cents on the dollar for deferrals between 3% and 5%.

Option 2: A dollar-for-dollar match on salary deferrals up to 4% of compensation.

Option 3: A minimum 3% nonelective contribution to all employees eligible to make elective deferrals to the plan.

Beyond the required matching, employers can add a profit sharing component to the plan to allow for additional contributions by the employer. Maximum tax-deductible employer contributions are limited to 25% of compensation on the first $245,000.

An employer offering a Safe Harbor 401(k) plan is providing an incentive for employees to contribute to their own retirement, through the form of a guaranteed match.

Employee contributions limits are the same in plain and Safe Harbor 401(k)s: $16,500 for those age under the age of 50 and $22,000 for those 50 and older.

Employers with 100 or fewer employees who start a retirement plan may be eligible for a tax credit. The credit equals 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan.

The deadline to establish a Safe Harbor 401(k) plan for 2009 is Oct. 1.

What action can an employee take? Encourage implementation of a Safe Harbor 401(k) Plan. Your company can reduce its administrative concerns and simultaneously provide a powerful benefit to all eligible employees.

Editor’s Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 08/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for a shared care benefit. Can you explain what that means and what advantages it may provide?

The Problem – You or Your Partner Need More Care than Your Individual Policy Covers
Most long term care insurance policies are designed as individual policies that insure one person, ignoring the pool of benefits inside your spouse’s or partner’s policy. Unfortunately, you may need more care than your individual policy covers.

For example, you and your spouse or partner each have a long term care (LTC) insurance policy with a $300 daily benefit and a five year benefit period, obligating the insurance company to pay $300 per day for five years. If you only need $150 worth of care, or half the $300 daily benefit, the insurance company is obligated to pay $150 per day for 10 years, or twice as long.

If you need the full $300 worth of care, or the full daily benefit, you will exhaust the policy benefits in five years. Unfortunately, you may need more than five years of care. In the event you need an additional two years of care at $300 per day, it will cost you $219,000 out of pocket. This example ignores the income taxes and early withdrawal penalties associated with the withdrawal of many retirement assets. It also ignores the devastating effects of inflation, which can wreak havoc on a lifetime of savings if your LTC insurance policy does not have inflation protection.

The Solution – Shared Care Benefit Policy
The shared benefit policy provides you the ability to utilize your spouse’s or partner’s benefits when your own policy benefits have been exhausted. In the example above, you can use the benefits of your spouse’s or partner’s policy and avoid a $219,000 expenditure. The mere avoidance of this expenditure can mean the difference between a secure and an insecure retirement.

All those assumptions are based on current dollars. If this example were 28 years in the future and the cost of care (along with your policy’s inflation protection) rose at 5% per year, the shared benefit policy would save you over $876,000 in expenditures.

Shared Benefit Policy with Survivor Benefits
Some policies have a provision to protect the surviving spouse or partner. If one of you dies, the survivor’s benefits will increase by the deceased spouse’s or partner’s remaining benefit dollars. For example, if you each have a policy that covers $300 per day for five years and one of you die, the survivor will now have a policy that covers $300 per day for 10 years – doubling the benefit period.

Shared Benefit Policy with Replenish Provision
Some polices have a provision to protect the spouse or partner whose policy has been depleted by the person receiving care. Once your spouse or partner has depleted your benefits, you have the option to purchase a new policy without medical underwriting.

Imagine your spouse or partner depletes their own policy and then depletes your policy. Unfortunately, you now suffer from a number of health conditions. With the replenish provision you can purchase a new LTC policy without any medical underwriting whatsoever. Despite the deterioration in your health the insurance company is legally obligated to issue you a new policy based on your original health – even if your current health would normally qualify you under a poor health rating or entirely disqualify your from obtaining a policy.

Action Step – Protect Yourself with a Shared Benefit Policy
When you purchase a shared benefit LTC policy with survivor benefits you protect yourself and your spouse or partner from greater than expected expenses and avoid the risk of seeing a deceased spouse’s or partner’s unused benefits evaporate.

Question of the Month: Are There Tax Benefits in Stock Market Losses?

The Independent Press - 08/05/09
Money Matters
By Aaron Skloff

Q:My investment portfolio has declined significantly in the last 18 months. Are there any tax benefits owed to me?

When you sell investments, such as stocks, bonds or mutual funds at a gain, you generally pay taxes on the capital gains. When you sell at a loss you can force the IRS to give you a tax break.

Short-term capital gains are gains on investments held for one year or less and are taxed at your income tax rate. Long-term capital gains are gains on investments held for more than one year and are either not taxed, if you are below the 15% income tax bracket, or are taxed at a 15% rate. An unlimited amount of short-term gains can be offset with short-term losses.

An unlimited amount of long-term gains can be offset with long-term losses. Additionally, you can force the IRS to provide you a net $3,000 annual loss against your income. If you are in the top tax bracket of 35%, you can avoid paying $1,050 in income taxes.

Like life, the timing of your transactions is everything. The IRS discourages you from locking in your losses and buying back the same or substantially identical investment through its wash sale rule.

So take your losses while the taking is good.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 07/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some insurance companies offer Partnership Qualified long term care insurance policies. Can you explain what that means, what advantages it may provide and if the New York State Partnership for Long Term Care is unique?

The Solution – Partnership Qualified Long Term Care Insurance Policies
The Partnership Program is based on the Robert Wood Johnson Foundation program called the Program to Promote Long Term Care Insurance for the Elderly, initiated in 1987. Today, a Partnership Program is a “partnership” between a state, an insurance company and state residents who buy long term care Partnership policies. With a Partnership Qualified policy you can apply for Medicaid with ‘asset disregard’. This allows you to keep assets that would otherwise be disallowed. In almost all states that have Partnership Programs, the amount of assets Medicaid will disregard is equal to the amount of the benefits you actually receive under your LTC Partnership Qualified policy. This type of disregard is often referred to as Dollar for Dollar.

Let’s say you are a New Jersey resident who purchases $306,600 (the average rate of a private nursing room for an average three year stay in NJ in 2008) worth of insurance through a Partnership Qualified policy. When the care is needed, the policy actually pays for $900,000 of care (due to inflation protection). Under the state’s Partnership Program you would then have $900,000 of assets protected from NJ Medicaid.

The New York State Partnership for Long Term Care
Only two states in the entire U.S. can offer both Dollar for Dollar and Total Asset Partnership Programs – Indiana and New York. As its name implies, Total Asset offers unlimited asset protection from Medicaid – far more powerful than Dollar for Dollar.

Let’s say you are a New York resident who purchases a New York State Partnership for Long Term Care Qualified policy. After you exhaust your policy, you can apply for New York State Medicaid Extended Coverage – which allows you to protect some or all of your assets, depending on whether you select a Dollar for Dollar Asset Protection plan or a Total Asset Protection plan. However, your income is considered in determining your eligibility for Medicaid Extended Coverage. The plans are as follows:

nysp-chart

Question of the Month: SIMPLE IRA vs. 401(k)

The Independent Press - 07/01/09
Money Matters
By Aaron Skloff

Q: We are evaluating which retirement plan to implement for our business. What are the advantages and disadvantages of a SIMPLE IRA retirement plan versus a 401(k) retirement plan?

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan can be offered by businesses that have 100 or fewer employees. A 401(k) plan can be offered by businesses that have one or more employees.

A SIMPLE IRA allows employees to contribute up to $11,500 in pre-tax salary deferrals or $14,000 if age 50 or older. A 401(k) allows employees to contribute up to $16,500 in post or pre-tax salary deferrals or $22,000 if age 50 or older.

Like a Roth IRA, the Roth version of the 401(k) allows for post tax contributions (with significantly higher limits than a Roth IRA). Unlike a Roth IRA, employees with relatively high incomes can still make contributions.

A SIMPLE IRA requires employers to either match employee contributions 100% of the first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 years.) or contribute 2% of each eligible employee’s compensation (with a $245,000 limit). A 401(k) does not require employers to match or contribute.

New Comparability, also known as Age-Weighted, is a type of 401(k) plan design that maximizes the amount contributed to a select group (typically the business owner and other key employees) while minimizing the total cost of employee contributions.

A SIMPLE IRA requires all contributions to be immediately 100% vested. A 401(k) requires employee salary reduction contributions to be immediately 100% vested. With a 401(k), employer contributions may vest over time according to plan terms.

A SIMPLE IRA is a low or no cost plan to the employer that does not require an annual IRS filing. A 401(k) is a low cost plan to the employer that requires an annual IRS filing, which is often provided by the 401(k) vendor. Based on plan design, a 401(k) may require employee discrimination testing.

Summary
As each plan offers certain advantages and disadvantages, speak with a retirement plans expert before making a decision.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 06/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Some of the long term care insurance policies I am researching allow for an indemnity benefit. Can you explain what that means and what advantages it may provide?

The Problem – Reimbursement Only Policies
Most long term care insurance policies are designed as reimbursement only. With a reimbursement only policy, upon submitting all of your receipts for long term care expenses the insurance company will reimburse you up to your policy’s limits. Unfortunately, you may have ancillary expenses associated with your long term care, including expenses to:
1. add ramps and expand doorways throughout your home
2. add additional railings to your staircases or add wheelchair lifts
3. purchase or lease a van with a lift to get to and from your physician’s office

The Solution – Indemnity Policies
Unlike reimbursement only policies, indemnity policies pay benefits above and beyond your actual long term care expenses. There are two basic types of indemnity policies, full and partial.

Full Indemnity Policy
With a full indemnity policy (sometimes called a flexible cash benefit or cash model), once you simply require long term care the insurance company pays you a monthly benefit. You receive these payments regardless of your actual expenses. Imagine your policy provides a $6,000 monthly benefit. Regardless of the amount or cost of your care, the insurance company will pay you $6,000 a month. You can pay an unlicensed family member or friend to care for you. You can payoff your mortgage. You can invest in your grandchild’s college fund. You can spend, save or invest the money however you choose.

Partial Indemnity Policy
With a partial indemnity policy (sometimes called a cash benefit or monthly indemnity benefit), once you actually receive at least one hour of long term care per day you receive a daily benefit. You receive these payments regardless of your actual expenses. Imagine your policy provides a $200 daily benefit. Regardless of the cost of your care, the insurance company will pay you $200 a day. You can spend, save or invest the money however you choose.

Getting the Most Out of Your Policy
Both full and partial indemnity polices address an underlying concern that you may have when you purchase a policy – you want the policy’s maximum benefit regardless of your actual expenses. With both types of polices the concern is eliminated.

Action Step – Protect Yourself with an Indemnity Policy
When you purchase an indemnity policy you protect yourself from unexpected expenses and gain the flexibility to spend, save or invest your money how you see fit.

Question of the Month: How to solve the IRA squeeze?

The Independent Press - 06/03/09
Money Matters
By Aaron Skloff

Q: Based on our household income we are unable to make Roth IRA contributions. Can we
convert our Traditional IRAs into Roth IRAs?

The Problem – Income Limits on IRA Contributions and Conversions.
If you are provided an employer sponsored retirement plan, have income over $109,000 and file jointly, you cannot
deduct Traditional IRA contributions.

This leaves you with two choices:
1) a nondeductible Traditional IRA that will defer taxes until required minimum distributions (RMDs) are required or
2) a Roth IRA that will completely avoid taxes.

While the Roth IRA is clearly the better choice, you are disqualified from contributing to a Roth IRA if your joint income exceeds $176,000. This leaves you with only one option, a nondeductible Traditional IRA. To make matters worse, you cannot even convert a Traditional IRA to a Roth IRA if your household income exceeds $100,000.

The Solution – Convert in 2010.
Starting in the year 2010, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) allows you to convert your Traditional IRA to Roth IRA regardless of income. If you convert in 2010, you’ll be able to spread the tax impact over 2011 and 2012.

No Free Lunch.
Like all Traditional IRA withdrawals, a conversion is a taxable event. However, once you convert to a Roth IRA all capital gains, dividends, and interest are tax free while in the Roth IRA and upon withdrawal. Based on the massive federal deficit, there is a high probability that income tax rates will rise over the next three years. By converting in 2010, you lock in your income tax rate, without concern of what rates may jump to in 2013.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Long Term Care University - Question of the Month

Long Term Care University - 05/15/09
Research
By Aaron Skloff, AIF, CFA, MBA

Q: Many of the long term care insurance policies I am researching require me to make permanent choices about the policy benefits. Are there any types of policies that allow me to change my policy benefits in the future?

The Problem – Inflexible Policies
Most long term care insurance policies require you to make permanent decisions about the benefits of your policy upon purchasing the policy. This presents a host of problems, including:
1. insufficient coverage for the future if you chose coverage that is too modest
2. unmanageable premiums today if you choose higher coverage than you can afford
3. inability to change policy benefits and features if your health deteriorates

The Solution – Flexible Policies
Some long term care insurance policies allow you to make changes to your policy after the policy has been purchased. This can be a tremendous benefit if you are interested in obtaining a policy today, but are working within a budget.

Some insurance companies offer flexible policies that allow you to increase your coverage without additional underwriting. Imagine you purchase your policy when you are 55 years old and are in perfect health. After 10 years, you are now 65 years old, are interested in increasing your coverage, but now you suffer from a number of health conditions. A flexible policy would allow you to increase your benefit without any medical underwriting whatsoever. Despite the deterioration in your health the insurance company is legally obligated to increase your coverage upon your request.

Pay close attention to what conditions are associated with your flexibility options. Some insurance companies will allow you to exercise changes throughout the life of the policy. Others will discontinue your ability to make changes if your decline the option to change two times in a row.

Some insurance companies allow you to enhance you coverage as follows:
1. increase your daily benefit based on inflation
2. increase your benefit period
3. decrease your elimination period

Pay close attention to how the insurance company prices their flexible policy. Ideally, you should only pay for the additional benefits you add to the policy, while the premium for the initial coverage purchased at the inception of the policy remains unchanged. In the example above, you are able to save money during the first 10 years of the policy and are then able to enhance your coverage at a more affordable price than most long term care insurance polices would offer.

Action Step – Do Your Research
Before purchasing a policy, be sure to research the features of your policy. Understanding if your policy is a flexible or inflexible policy before you purchase it can avoid unnecessary aggravation and financial hardship in the future.

Question of the Month: Is Your Life Insurance Eroding?

The Independent Press - 05/06/09
Money Matters
By Aaron Skloff

Q: As the financial markets have declined over the last two years, has my VUL insurance policy become a ticking time bomb ready to implode?

A: Variable Universal Life insurance (VULI) is subject to financial market risk. Combining something that is intended to be your safest financial instrument (life insurance) with risky investments (stocks and bonds) can be a recipe for disaster.

The first step in defusing the implosion is obtaining a current prospectus that provides an overview of the policy. Next, obtain an in force illustration of the VULI policy, ideally every two to three years.

After careful review, determine:
1) which sub-account changes should or should not be made
2) what additional contributions may be required
3) if you want the policy to implode (cancel)
4) if the policy should be exchanged to another insurance carrier or another type of policy

Fortunately, section 1035 of the Internal Revenue Code permits you to make a tax free exchange of a VULI policy to another insurance contract that is considered a “like kind exchange”. There are a number of ways of ways you can trip this up, so work closely with each carrier throughout this process.

Unless you are extremely comfortable reviewing an extensive set of tables provided with your in force illustration, work with a licensed insurance agent that has in depth analytical skills - ideally a CFA.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Question: What’s Better Than a 401k?

The Independent Press - 04/01/09
Money Matters
By Aaron Skloff

Q: Last year I could only contribute 8% of income to my 401(k), while this year it will be less than 5%.
What type of retirement plan would allow me to maximize my tax advantaged savings?

A: Contributions to your 401(k) plan are limited by the IRS — $16,500 if you are under the age of 50 and $22,000 if you are over. The IRS also limits assets of key employees (officers, directors and the like) to no more than 60% of plan assets.

If you are less than 50 years old and earn $200,000, you can only contribute 8% of your salary to your 401(k). If you earn $325,000 you are capped at 5%.

The Solution.
Your company could offer you a Non-Qualified Deferred Compensation (NQDC) Plan, which has many of the same benefits of a 401(k), without many of the restrictions.

Designed for key employees, limited to the top 35% wage earners, a NQDC plan allows you to defer up to
100% of your income on a tax deferred basis. Like a 401(k), profits grow on a tax deferred basis. Unlike a
401(k), withdrawals of contributions are permitted before the age of 59 ½, a tremendous benefit if your
goal is to retire early.

All NQDC plans must satisfy the following three requirements regarding deferred compensation:
1) the arrangement between you and your employer must be entered into before the compensation is earned,
2) it cannot be available to the employee until a previously agreed future date or event and
3) it cannot be secured

The advantages to your employer of offering a NQDC plan include the:
1) flexibility of discretionary contributions,
2) ability to include a vesting schedule and
3) significantly less restrictive plan rules versus a 401(k)

With a NQDC plan, a private company can offer unique investment choices, such as phantom stock. This
is a great way for a company to incent key employees.

Have your company implement a NQDC and you will maximize your retirement assets and your tax
savings. You will be happy when you retire and your CPA will be happy the next time you file your taxes.
Note.

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

How to Protect Your Benefits

The Independent Press - 03/04/09
Money Matters
By Aaron Skloff

Q: What are the top four benefits I should be aware of when leaving my employer?

Taking the extra time to address your benefits before leaving or shortly after you leave your employer
can save you from grief for years to come. Without any action, you could forego valuable benefits or
jeopardize your health.

Listed below are the top four benefits that should be addressed as soon as possible.

1. Flexible Spending Account (FSA).
Be sure to submit all your un-reimbursed medical expenses before leaving your employer. FSAs work on a use it or lose it basis – you must spend your balance before the end the year while you are still employed or your old employer keeps the balance.

2. Retirement Plan.
Whether you have a 401(k), 403(b), or 457(b), be sure any profit sharing and matching has been credited to your account before leaving your employer. Rollover your retirement plan to an IRA. This tax-free transfer avails you to thousands of investment choices most retirement plans do not offer. Consider a tax advantaged transfer of company stock inside your 401(k) plan, using the Net Unrealized Appreciation (NUA) rule.

3. Life Insurance.
Many employers offer group life insurance as a paid benefit to employees. If continuation is offered, it may be inappropriate and/or too expensive. Consider replacing it with an individual life insurance policy, which is a critical financial planning and estate panning tool.

4. Health Insurance.
Less than 10% of eligible workers establish COBRA benefits during the normal 60 day window. Many decline COBRA because they must pay the entire premium (plus a 2% administrative fee) their employer was paying, which can easily cost a family $13,000 a year. The new American Recovery and Reinvestment Act of 2009, which the president signed into law on Feb. 17, includes a 65% subsidy on the cost of COBRA premiums for up to nine months.

Addressing your benefits before leaving and soon after leaving your employer can protect you and your family. Delay action and you could permanently lose benefits. Be sure to speak with an RIA obligated by law to act in your best interest when making key financial decisions.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm in Berkeley Heights. He can be contacted at www.skloff.com or 908- 464-3060.

Question of the Month: How Long Term Care Insurance Program Works

The Independent Press - 01/07/09
Money Matters
By Aaron Skloff

Q: Can you explain how the recently introduced New Jersey Long Term Care Insurance Partnership Program works?

About half the population who will reach the age of 65 are expected to enter a nursing home at least once in their lifetime. A 55 year-old New Jersey (NJ) resident is expected to pay over $300,000 for one year of nursing home care when they are likely to need it at the age of 80. Based on the average nursing home stay, total costs are expected to reach $1.5 million per person – easily wiping out a
lifetime of savings for many families.

The Deficit Reduction Act of 2005 radically changed the Medicaid playing field. The most important change was an extension of the look-back period for asset transfers to establish Medicaid’s eligibility for nursing home coverage from 3 to 5 years and changes the start of the penalty from the date of the transfer to the date of Medicaid eligibility. The second most important change was the lifting of the moratorium on states introducing new partnership programs to increase the role of private long term care insurance in financing long-term services.

The NJ Long Term Care Partnership Program (NJLTCPP) allows individuals to protect assets equal to the insurance benefits received from a Partnership Policy so that the assets will not be taken into account in determining financial eligibility for Medicaid. One of the key aspects of the policies is their requirement for inflation protection (minimum of 3%) in the policy for most individuals.

For example, a NJ resident purchases $102,200 (the average rate of a private room in NJ in 2008) worth of annual care through the policy. When the care is needed, the policy pays for $900,000 of care (due to inflation protection). Under the NJLTCPP, a person would then have $900,000 of assets protected from NJ Medicaid. This type of protection is commonly referred to as “dollar for dollar” asset protection.

Establishing LTC insurance immediately reduces the financial and psychological burdens that will ultimately plague most families when the need for long-term care arrives. With many states running large deficits, it is even more critical than ever to take advantage of any programs designed to protect your assets, before they review the legislation and discontinue the issues of new policies. Like most insurance, the earlier you start your policy, the lower your cost of the policy.

Who’s in Charge of My 401(k)?

The Independent Press - 12/03/08
Money Matters
By Aaron Skloff

Q: Who manages my 401(k) and my wife’s 403(b) and 457(b) accounts?

In a recent study based on nearly one million participant 401(k) portfolios, 69% had inefficient portfolios and/or inappropriate risk levels. Almost 50% held high concentrations of company stock and 33% were not contributing enough to their 401(k)s to receive the full employer match. If your retirement plan is like most, the only person responsible for managing your account is you.

The Solution
Either take an active role in researching and managing your account or hire a professional for the job. Listed below are the top five retirement plan management mistakes investors make and how to avoid them.

1. Inappropriate Risk Level.
As time marches on, your investments should change with your long term risk tolerance. Adjust your portfolio to reflect your risk tolerance.

2. Concentration in Company Stock.
Owning too much of its stock could leave your retirement nest egg in shambles. Do not allocate more than 10% of you assets to any one stock.

3. Not Researching Investment Options.
Most investors lack the time and skills to properly research each investment option.

4. Not Managing the Account.
An unmanaged account can turn a once low-risk investment into a high-risk investment. Manage your account to reflect investment option changes and shifts in asset classes.

5. Hiring the Wrong Manager.
Unsure if the person is acting in your best interest? Have the person accept fiduciary duty in writing on company letterhead. In doing so, that person is obligated by law to place your interests above and beyond their interests or their company’s interests.

Some Steps You Can Take Towards Identity Theft Protection

The Independent Press - 11/05/08
Money Matters
By Aaron Skloff

Q: How can I protect myself from identity theft?

Each year nine million Americans fall victim to identity theft, costing businesses and individuals $50 billion. In
additional to financial loss victims are subject to embarrassing denials of credit, annoying collection agency
notices and even outstanding warrants.

The Solution? Protect yourself.
Through a combination of shredding documents, memorizing a few key numbers and obtaining a free credit report, you can greatly reduce your probability of identity theft.

Two-thirds of all identity theft victims had credit or debit cards misused, making it the biggest category of theft.
Rather than simply throwing away your copy of credit card transactions, shred them at home.

One of the most dangerous things you can do is carrying your PIN number in your wallet or purse. A criminal can
easily steal thousands of dollars using your PIN. When creating your PIN use a number that is not associated with
your address, date of birth or social security, and memorize it.

By consolidating your spending to only one or two credit cards you reduce the chance of losing one of many cards and you may even spend less. Your responsibility on a credit card is limited to the first $50 when the card is used without authorization. However, there is no such limit on debit card losses.

There are a number of companies that offer credit reports and credit monitoring services for a fee. Some will alert
you of unusual activity on your credit cards or changes in application history. Alternatively, you are entitled to
receive a free report from each of the three reporting services, Equifax, Experian and TransUnion, once per year.

If a theft occurs, request a “fraud alert” from one of the three providers. Once requested, the account will usually
be flagged by all three. Financial institutions will then know to contact you directly before issuing an approval to
set up an account or issue credit.

Do not carry your social security card in your wallet or purse. Memorize your number and keep your card in a safe
place either at home or in a safety deposit box. Any request by any federal, state or local government for your
number must be accompanied by a disclosure statement explaining whether providing it is mandatory. Private
industry has a right to ask for your number when it is required for identity verification or for IRS reporting.

Like your social security number, your driver’s license number is a valuable tool for a criminal. Only provide
your driver’s license number when it is absolutely necessary. Update your license to a photograph version with
embedded photocopy protection. This can reduce the likelihood that it will be duplicated.

In review, shred unnecessary documents, memorize key numbers and order a free credit report. These three steps
can easily reduce your probability of identity theft.

Editor’s note: Aaron Skloff, an Accredited Investment Fiduciary (AIF) and Chartered Financial Analyst (CFA),
holds an M.B.A. and is CEO of Skloff Financial Group, a registered investment advisory firm based in Berkeley
Heights, 908-464-3060.

Question of the Month: What is an ILIT?

The Independent Press - 09/03/08
Money Matters
By Aaron Skloff

Q: My colleague at work mentioned the importance of an ILIT for estate planning purposes. What is an ILIT and
how can it benefit our family?

With an Irrevocable Life Insurance Trust (ILIT) you can protect one of your largest assets, the proceeds from your
life insurance policy, from both federal and state estate taxes. Sorry tax collectors –– those are the rules.

In 2008, each U.S. citizen is entitled to a federal estate tax exemption of $2 million, with a 45% tax rate thereafter. Each NJ resident is entitled to a state estate tax exemption of $675,000, with an approximately 11%-16% tax rate (depending upon the beneficiaries and size of your estate) thereafter.

While many married couples utilize the unlimited spousal exemption to transfer assets and life insurance proceeds
without tax, they are setting themselves up for a potentially huge tax burden when the second spouse passes away. While the beneficiaries of life insurance polices are not subject to taxation, the owner’s estate could be – as life insurance is added to the estate’s value.

For example, assume that between the value of their home, retirement plans and savings Bob and Myrna have $2
million in assets. In addition, Bob purchased a life insurance policy for $2 million to protect his family, naming
Myrna as the beneficiary.

When Bob passes away, neither his estate nor Myrna will be responsible for federal or state estate taxes due to the
spousal exemption.

But if Myrna passes away shortly thereafter, she will leave behind a $4 million estate. If her children are the
beneficiaries, Myrna’s estate will be subject to $900,000 in federal estate taxes. If her siblings are the beneficiaries, Myrna’s estate will be subject to over $1.1 million in combined federal and state estate taxes.

Rather than paying unnecessary estate taxes, Bob worked with an estate planning attorney to establish an ILIT.
After they established a trust, they named a Trustee other than Bob to purchase a life insurance policy on Bob’s
life. Bob then gifted the price of the policy to the trust. Bob stipulated who the beneficiaries were on the policy,
how the beneficiaries will receive the proceeds and what conditions must be met to receive the proceeds.

By utilizing the ILIT, Bob has removed $2 million from his estate and will pass $2 million in other assets to
Myrna. The trust was designed to pay Myrna $100,000 per year and each of their children $50,000 per year.
When Myrna passes away she leaves behind the full $2 million to her children, without the $900,000 tax bill
discussed above.

Establishing an ILIT is a critical part of good estate planning. Your family will thank you for generations to come.

Note: Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of
Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based
in Berkeley Heights. Call 908-464-3060.

Planning for Your Demise

The Independent Press - 08/20/08
Business News
By Aaron Skloff

Q: How important is it that we have a will? Are there other key estate planning documents we should have?

Let’s face it; nobody wants to address their demise. That is a key reason why 69% of parents with children under the age of 18 do not have a will. But good estate planning can be as easy as 1, 2, 3 – literally. With just three basic estate planning documents you can determine who will receive your assets, who will take care of your children and who will make your medical decisions if you cannot.

The Will.
If you pass away without a will (intestate) in New Jersey, your spouse is only entitled to the first $50,000.00
outright. Your spouse must split the rest of your assets with your children, no matter how young or old they are. If you have no children, your parents are next in line. With a will, you decide to whom, when, and in what amounts your assets should be distributed. You select your executor or personal representative, the one who shall be responsible for the disposition of the estate.

A will must be written, signed by the testator (maker) and witnesses. The original copy is the legal document and must be signed. For a will to be legal in NJ you must have at least two witnesses. The testator and the witnesses are required to be present at the signing, and each must see the others sign the will. The witnesses do not have to read or know what the will contains. They must simply be told by the testator that it is his or her will, and asked be to sign as witnesses.

Guardianship.
Without a will, someone will need to file a court proceeding for guardianship of your minor children. This person may or may not be the person you would choose to be guardian and this person may be required to post a
bond. The costs of this proceeding and the cost of the bond may be paid out of the value of your estate. With a will, you can specify the person who is to be guardian of your minor children and you can waive the requirement of a bond.

Without a will a court appointed executor will designate a person to manage your children’s inheritance until they reach age of 18. Ideally, you may prefer they receive the money after they complete their college education or reach the age of 25. With a will, you can specify the person who will manage this money for your children, how the money is to be spent, and at what age your children will receive the money directly.

Determining guardianship for your children can be one of the most serious decisions you will make in your lifetime. Think long and hard who the guardian(s) should be before making a decision.

Living Will.
The legal name for the living will is the advanced directive. It permits you (the patient) to communicate,
in advance, the medical care decisions you would make if you are rendered incapacitated. These clear instructions can circumvent a difficult decision your family may be forced to make otherwise. The living will is a relatively simple
document that must be in writing, signed and dated in the presence of two subscribing adult witnesses, who must attest to the fact that the person is of sound mind and free from duress and undue influence.

Action Steps.
Although the three estate planning documents listed above are of tremendous value, there are a number
of variables that can add additional complications to your estate planning needs. Work closely with your financial
advisor and estate attorney to develop an estate plan that meets your personal objectives.

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business
Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley
Heights, NJ. He can be contacted at 908-464-3060.

Question of the Month: Should I Invest Globally?

The Independent Press - 07/02/08
Money Matters
By Aaron Skloff

Q: Whenever I think about investing internationally the hair on the back of my neck stands up, so I avoid it.
By being too conservative am I missing the boat on good opportunities?

From coups in Columbia to debt defaults in Russia, it is easy to make blanket statements about the risks of
international investing. Only after you peal back the onion do you learn the rewards more than outweigh the
risks.

Imagine understanding the principles behind a Nobel Prize. Stop imagining – you can.
Dr. Harry Markowitz was jointly awarded the prize in economics for his contributions to portfolio theory. His portfolio theory boils down to this: by combining asset classes that move dissimilarly to one another, you can reduce risk within your portfolio. In practical terms, a recession in the U.S. may not stop the stellar growth in China – they can
act dissimilarly to one another.

If you can only remember one thing from this article, here it is: adding international investments to an
all U.S. portfolio reduces risk and increases return!

Over the last 30 years ending in 2006, the S&P 500 (an index that represents the U.S. stock market) has
generated an annualized return of 12.5%. During the same period, the MSCI EAFA (an index that represents
the international stock markets) generated an annualized return of 12.8%.

Although the MSCI EAFA generated higher returns, it did so with higher risk. Had you combined both indexes, you would have generated an “optimal” risk and return portfolio.

In the last 50 years, international stocks as a percentage of the world’s stock market value have more than
doubled. Approximately 75% of all publicly traded companies around the world are outside the U.S.
Investors who do not maintain investments outside the U.S. are missing tremendous investment opportunities.

The emerging markets include countries such as Argentina, Brazil, China and India. Although investments in
these markets may entail greater political, economic and currency risks, returns have been stellar. Over the
last 10 years ending in April, 2008, the S&P 500 has generated an annualized return of 3.9%. During the
same period, the MSCI EM (an index that represents the 25 emerging country stock markets) generated an
annualized return of 10.7%.

Not only does investing internationally provide access so some of the world’s leading companies, but the
addition of international investments can reduce the risk of your portfolio while increasing its return.
Diversify internationally and reap the rewards.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of
Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm
based in Berkeley Heights. He can be contacted at 908-464-3060.

Question of the Month: Should I Sell Now?

The Independent Press - 05/07/08
Money Matters
By Aaron Skloff

Q: The stock market has been so volatile in the last six months, I was thinking about selling all of my stocks
and mutual funds. What are the key considerations of such a change?

Somewhat like the weather, the stock market has been fluctuating from day to day and from hour to hour.
Sometimes it just seems safer to simply keep your money in the bank, but this could be a big mistake.

Remember the story of the tortoise that finished first in a race against the hare? Investing in the stock market
can be very advantageous for the slow and steady investor and very disadvantageous for the erratic investor.

Look at the example of two investors, Madison and Torrey. At the end of 1987, Madison invested $1,000 in
the S&P 500 Index (an index that represents the U.S. stock market) and maintained her investment until the
end of 2007. At that point, Madison’s $1,000 generated a compound return of 11.5% - leaving her with
$8,860.

Although Torrey invested the same amount at the same time, she moved money in and out of the
market as she became fearful during market volatility. By missing the best 25 days, Torrey’s $1,000
generated a compound return of 6.2% - leaving her with only $3,304. That’s right, simply remaining invested
for the best 25 days left Madison more than twice as wealthy as Torrey.

If you can only remember one thing from this article, here it is: timing of the stock market over the long
term is a fool’s game!

A historical perspective:
During the world’s most devastating events the stock market, as measured by the S&P 500 Index, declined meaningfully. More importantly, it has always rebounded. For example, a $1,000 investment in the S&P 500 Index during the Great Depression would have been worth $2,000 10 years later and over $2.5 million at the end of 2006. Astute investors see times of turmoil and market volatility as opportunities.

One of the biggest mistakes you can make is letting your emotions determine your investment decisions. It is
just too easy to get caught up in the euphoria when everything is going up and everyone seems to be getting
rich. But, buying at the top of the market when stocks are selling at premium valuations or selling after prices
have already discounted weak results is a recipe for disaster.

Stay Invested.
Timing the entries and exists of the stock market is a fool’s game. Maintaining a long term
investment horizon and slow and steady investment approach is a recipe for success. Stay invested and reap
the rewards.

Note. Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of
Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm
based in Berkeley Heights. He can be contacted at 908-464-3060.

Some Key Considerations When Starting a Business

Princeton Business Journal - 04/01/08
It's Your Business
Aaron Skloff

Q: After working for a telecommunications company for 20 years my position was outsourced overseas and now I am ready to start my own consulting business. What are the key considerations in establishing and operating a new business in New Jersey?

The problem: Starting and operating a new business.
The time you spend establishing and operating a business can provide great joy or great pain, depending on how you go about it. Simply registering a business incorrectly can prevent even the best business from commencing operations. Taking the important steps discussed below can set the stage for a successful business.

The solution: Follow the laws, create the rules.
Let’s say you want to name your business Premier Communications Consultants. Whether or not you offer “premier communications consultants” is not the legal issue. The legal issue is the requirement that you register your business name.

With the exception of conducting business in your own name, the state of New Jersey requires you to register a trade name. Verify that your business name is not already taken, as this could preclude your use of the name. The state may also require you to obtain and maintain licenses. New Jersey issues over 150 different types of occupational licenses, from electrical inspector to professional engineer.

Conducting business in New Jersey without required licenses could put your clients, your company and you at great legal risk. Obtain all required licenses before commencing business.

Choosing an ownership structure.
The majority of businesses start as sole proprietorships. As the name implies, there is only one owner. The advantages to a sole proprietorship structure include the ease of formation and tax reporting. A critical disadvantage is the unlimited personal legal and financial responsibility of the sole proprietor.

Partnerships are for businesses with more than one owner. Most partnerships have the same advantages of sole proprietorships, but a key disadvantage is the shared responsibilities partners accept for one another.
Corporations are separate legal entities from the owners. The advantages to a corporation are the shareholders’ limited liability and the relative ease of raising capital. Key disadvantages of corporations include higher taxes and cumbersome documentation.

A relatively new ownership structure is the limited liability corporation (LLC). An LLC provides the limited liability features of a corporation and the tax efficiencies and operational flexibilities of a partnership.

Speak with an attorney and financial advisor before selecting an ownership structure.

Protecting your business.
Imagine if you were testing a $1 million communications system for a client when the roof of your building collapsed and destroyed the system. Without insurance, your business could be destroyed and you could be left with years of personal financial obligations. Property and liability insurance insures your business against such things as a fire in your office or an injury caused by one of your communication systems.

Speak with an insurance agent to fully understand the risks and rewards of protecting your business.

Operating your business.
Along with the daily client calls and project proposals there are the administrative responsibilities. Employers in New Jersey are responsible for reporting wages, withholding taxes and forwarding payments on a monthly or quarterly basis. Information on the following items is required: wages, employee withholdings of New Jersey gross income tax, state unemployment insurance, workforce development partnership fund and state disability insurance.

All New Jersey employers, not covered by federal programs, must have workers’ compensation coverage or be approved for self-insurance. Just as your job was outsourced, consider outsourcing these administrative responsibilities so you can focus on your key strengths.

Create the rules.
Lest we forget, one of the reasons you are starting a business is to make your mark. In establishing your company rules, utilize the strong policies your former employer created and discard the weak ones. Do not let lax industry standards guide your company rules. Rather, set company benchmarks that exceed the norm and wow your clients.

Soon, they will be referring additional clients to you.

Action steps: Start a new business.
Starting a business requires work, but following the steps outlined above can greatly increase your success rate. You do not have to be an expert in every aspect of your business — seek outside professionals and tap their knowledge base.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at (908) 464-3060.

Opening an IRA Account is a Must for New Jerseyans

Princeton Business Journal - 03/04/08
It's Your Business
Aaron Skloff

Q: My accountant said I can open an Individual Retirement Account (IRA), while my banker said I could not because of my income. What are the rules regarding IRAs and are there any unique considerations for New Jersey residents?

The problem: Qualifying for an IRA.
New Jersey’s top state income tax rate is among the highest in the U.S. With a top rate of 9 percent, New Jersey ranks in the highest 10 percent of all states. Qualifying and utilizing an IRA could save a New Jersey resident thousands of dollars of unnecessary income taxes.

Contrary to popular belief, the qualifications for participating in an IRA are relatively modest.

The solution: An Individual Retirement Account.
Contributions to an IRA can be sheltered from taxation for as short as a day to as long as multiple generations. Outside of an IRA, investments that generate interest, dividends and gains are all subject to U.S. federal and New Jersey state taxes. Inside of an IRA, those same investments are sheltered from all taxes.

The power of tax sheltering.
To illustrate the benefits of tax sheltering let’s utilize an example of two New Jersey residents.

Harvey maximizes his IRA contribution of $6,000 per year and earns 8 percent per year — leaving him with over $274,000 at the end of 20 years. Marc invests the same amount, earns the same return, but does not utilize an IRA — leaving him with less than $188,000 at the end of 20 years.

By utilizing an IRA Harvey has accumulated an additional $86,000, or 46 percent more wealth than Marc. Harvey is wealthier because he did not have to pay 35 percent U.S. federal taxes or 9 percent New Jersey state taxes.

Qualifying for an IRA.
Whether you earn over $1 million per year or absolutely no income you can still qualify for an IRA. Even a child who earns income delivering newspapers can qualify for an IRA. In order to qualify for an IRA as a non-earner, your spouse must generate earned income. Earned income includes salary, self-employed income and sales commissions. It does not include interest, dividends, pension income or social security income.

Contribution Limits.
For 2008, contributions are limited to the lesser of earned income or $5,000 for those under the age of 50 or $6,000 for those aged 50 and over. For example, a 65 year-old retired husband and 63 year-old semi-retired wife, who earns $12,000, could each contribute $6,000 to an IRA in 2008. As another example, a 12 year-old part-time newspaper deliverer, who earns $3,000, could only contribute $3,000.

Traditional IRAs.
Contributions are fully tax deductible if you are not an active participant in an employer-sponsored retirement plan. Otherwise, the deduction begins to phase-out once your modified adjusted gross income (MAGI) exceeds $53,000 for single filers or $85,000 if both persons are covered and married filing jointly. With or without a deduction, earnings in a traditional IRA are sheltered from taxes until they are withdrawn.

Roth IRAs.
Contributions are never deductible and eligibility begins to phase-out once your MAGI exceeds $101,000 for single filers or $159,000 for those married filing jointly. The Roth IRA has a very important distinction from the traditional IRA. Not only is income sheltered from taxation while in the Roth IRA, but withdrawals are tax free.

A traditional IRA is like “having your cake,” while a Roth IRA is like “having your cake and eating it too.”

Action steps: Start your IRA.
Question not, “Should I start an IRA?” instead question, “Which IRA should I do?” With such liberal restrictions, most people qualify for an IRA. The government realizes Social Security and Medicare are broken, while the costs in retirement are ballooning. Thus, it has essentially given taxpayers a gift in the form of an IRA. Do not look a gift horse in the mouth.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small- to middle-sized companies. He can be contacted at (908) 464-3060.

Flexible Spending Accounts Benefits are Myriad

Princeton Business Journal - 02/05/08
It's Your Business
Aaron Skloff

Q: My company is considering instituting a Flexible Spending Account benefit. While it sounds good, what are the strengths and weaknesses of a FSA? Are there any special benefits to New Jersey residents?

The problem: Determining if an FSA is beneficial.
New Jersey ranks in the top 30 percent most expensive states in the U.S. for healthcare costs. Healthcare costs are rising 8 to 10 percent per year here and are likely to grow at two to three times the rate of inflation for the foreseeable future.

New Jersey ranks in the top 20 percent most expensive states for child care for pre-schoolers. Employers are shifting more child care, healthcare and insurance costs to the employees — forcing employees to evaluate FSA’s.

The solution: A flexible spending account.
Imagine getting over a 40 percent discount on your healthcare and child care costs. That is essentially what an FSA provides.

Contributions to an FSA are made on a pretax basis and can be used to pay for unreimbursed medical and dependent day care costs. Contributions avoid both federal income taxes, top rate 35 percent, and the Federal Insurance Contributions Act (FICA) tax of 7.65 percent.

Employers also avoid paying FICA taxes on employee contributions. The wonderful state of New Jersey is one of the only states that assess a state income tax on FSA contributions.

Unreimbursed medical costs.
There are a wide range of items covered, including: prescribed and over-the-counter medication, eyeglasses and contact lenses, crutches and hearing aids, and nicotine patches.

We all know we should visit the dentist twice a year for a checkup. Unfortunately, many employers offer modest dental insurance plans, leaving employees with large out of pocket costs. Many dental insurance plans have $1,000 or $2,000 family limits and cover only “reasonable and customary” charges. In New Jersey, that could leave you paying $600 for a $1,000 procedure.

Dental examinations, cleanings and fillings are all covered medical costs through an FSA. While paying $600 out of pocket for a dental procedure is not easy to swallow, at least getting a 40 percent discount is palatable.
Often overlooked FSA items include: insurance co-payments and deductibles, in vitro fertilization, and physician-prescribed weight loss programs. There is no federal limit on contributions to FSAs for unreimbursed medical costs.

Dependent day care costs.
Two groups of dependents are permitted under dependent day care:

1) a dependent age 12 or under who entitles you to a personal tax exemption and,

2) a spouse or other dependent who is physically or mentally unable to care for herself/himself.

Qualifying expenses include: care outside of the home, dependent care center and payments to relatives, as long as they are not your dependent.

One often overlooked FSA item is summer day camp that is primarily custodial versus educational. The federal limit on contributions to FSAs for dependent day care costs is $5,000 per year.

Use it or lose it.
Take the time to determine the qualifying expenses you expect to incur throughout the year when establishing your contribution amount. Over-estimate and your unused contributions will be forfeited if you do not utilize them by the end of your employer’s plan year. Even if it means running out to the pharmacy on New Years Eve to stock up on aspirin, do not let your hard earned money go to waste.

Although, with a change in laws, starting in 2005 some employer plans allow for purchases through March 15 of the following year.

Action steps: Utilize your FSA.
If your employer offers an FSA, take the time to estimate your unreimbursed medical and dependent day care costs and contribute to your FSA. If your employer does not offer an FSA encourage them to consider one. Not only will it be viewed as a valuable benefit to attract and retain employees, but it can also save the employer taxes.

The government realizes healthcare and dependent care costs are skyrocketing. Thus, it has essentially giving taxpayers a gift in the form of an FSA. Do not look a gift horse in the mouth.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small- to middle-sized companies. He can be contacted at (908) 464-3060.

Year’s End is a Critical Time for Financial Planning

Princeton Business Journal - 12/11/07
It's Your Business
Aaron Skloff

Q: With the end of the year quickly approaching, what are some important tax and financial planning measures we can take to reduce our taxes and improve our financial position?

The problem: Year-end financial oversights and mistakes.
With so many gifts to purchase and holiday parties to attend, it is easy to forget important year-end tax and financial planning measures that can save you taxes or bear benefits for years to come.

The solution: Take action in the next two weeks.
Many tax and financial planning deadlines are based on a calendar cycle — do them after Dec. 31 and lose the benefit for that year. Outlined below are some of the most common oversights and mistakes to avoid before the year comes to a close.

Not contributing to your 401(k) or 403(b):
Not only do you build your retirement nest egg, but you also gain a tax break by contributing to your employer’s retirement plan. Better yet, many employers will match your contributions. Unfortunately, there is a cap on contributions each year. For 2007, it is $15,500 for those under the age of 50 and $20,500 for those aged 50 and over. Once you maximize your contribution you cannot make additional contributions to make up for under-contributing in previous years.

Not timing capital gains and losses:
Capital gains and losses are classified as either short-term (less than one year) or long-term (more
than one year). Long-term losses can only offset long-term gains, and vice versa.
Selling investments, like stocks or mutual funds, you have held for more than one year generates a 15 percent capital gains tax rate.

Realizing a gain on investments held for less than one year could generate a 35 percent tax rate. Review your portfolio to maximize your gains and losses. Do not forget your gains are reported on your New Jersey state income tax filing.

Leaving money in your flexible spending account:
Many employees take advantage of their employer-provided pre-tax flexible spending account (FSA). Unfortunately, many employees leave balances in their accounts at year-end instead of spending them down.
Many FSAs have a “use it or lose it” policy, and you could be wasting your hard-earned savings by not spending down your balance. Make sure you pay your child’s day care bill and fill your medical cabinet before Dec. 31.

Paying the alternative minimum tax:
The AMT is rampant in New Jersey. Instead of prepaying your state income taxes and real estate taxes, pay them when they are due. Instead of exercising your incentive stock options early, exercise them when they are closer to their expiration date. Each of these measures could eliminate or mitigate your AMT exposure.

Forgetting to take your required minimum distribution:
Also know as RMD, required minimum distributions are necessary on
traditional IRA accounts once you turn 70 ½ years old. If you have a 401(k) or 403(b) from a former employer and you are at least 70½ years old, RMD applies as well. Forget to take your RMD and you can be subject to a 50 percent tax penalty.

Forgetting to fund your 529:
For 2007, the maximum contribution per person, per beneficiary to a 529 higher education savings plan
is $12,000. There is a special five-year one time pull-forward rule. Like a 401(k) or 403(b), once you maximize your contribution you cannot make additional contributions to make up for under-contributing in previous years.
Plan assets of up to $25,000 in the New Jersey 529 plan won’t be included in determining a beneficiary’s eligibility to receive financial aid awarded by the state of New Jersey.

Action steps: Reduce your taxes and improve your financial position.
Do not leave money on the table, pay more taxes then you need to pay, or fail to meet your goals of funding a college education or a comfortable retirement. Avoiding the oversights listed above can reap benefits for years to come.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small- to middlesized companies. He can be contacted at (908) 464-3060.

It’s Important to Understand Disability Benefits

Princeton Business Journal - 11/13/07
It's Your Business
Aaron Skloff

Q: I was recently injured during a softball game and my doctor said I could not return to work for 9-12 months. Am I eligible for New Jersey disability coverage? Are there other additional forms of disability coverage?

The problem: Not understanding your disability benefits.
Three in 10 workers entering the work force today will become disabled before retiring. An illness or accident will keep one in five workers out of work for at least a year during their working careers.

Unfortunately, over 70 percent of working Americans do not have enough savings to meet short-term emergencies. Most people do not understand their disability benefits until they are disabled.

The solution: Understanding your disability benefits.
New Jersey is one of only five states that offer disability benefits to their workforce. Just a quick background on disability benefits and disability insurance. Let’s start with a basic definition of a disability. It is an accident, condition or illness that prevents you from performing your job responsibilities. Interestingly, a maternity leave may qualify you for disability benefits.

Unlike workers compensation insurance, which provides coverage for injuries on the job, disability benefits cover workers for non-work related events.

Before we dig into disability benefits, let’s dispel two common myths about publicly provided disability benefits.

Myth number one: The state of New Jersey provides adequate coverage.
Unfortunately, New Jersey provides the lesser of two-thirds of your weekly wage or $502 per week. Benefits are limited to 26 weeks or $13,052 and are not payable immediately. Most individuals cannot survive on this meager benefit.

Myth number two: The federal government provides adequate coverage.
Unfortunately, the federal government’s Social Security Disability Insurance (SSDI) program is available only to those out of work for at least one year. A startling 70 percent of claims are denied. The average monthly SSDI benefit is a mere $978. Clearly, this is an inadequate benefit for those individuals that do qualify for benefits.

Disability insurance provides a source of replacement income during your disability. It provides an income stream to partially replace the wages lost when you are unable to work for an extended period of time.

Most policies limit coverage to 60 to 70 percent of your previous income. State laws and insurance regulations are designed to discourage workers from realizing the same level of income while disabled. In essence, this provides an incentive to return to the work force.

Disability insurance policies should be examined based on three key criteria: the elimination period, the benefit period, and inflation protection. The elimination period defines how long you will be precluded from receiving benefits. The longer the elimination period, the lower the cost of the policy.

The benefit period defines how long a benefit will be paid. A typical benefit period is through the age of 65. Coincidentally, this is the age at which many workers are eligible for full benefits under Social Security.
Inflation protection is a critical part of any policy. In order to keep up with the rising costs of living, most policies provide for inflation protection ranging from 3 to 5 percent compounded on an annual basis.

Many employers provide a combination of short and/or long-term disability benefits. These benefits may or may not be employer paid or subsidized. Although benefits provided by an employer may come with a lower price tag, due to group pricing, they are not generally transferable if you leave the employer. An individual disability insurance policy provides much greater flexibility, as it is not tied to a specific employer.

Action step: establish disability insurance.
Establishing disability insurance immediately reduces the financial and psychological burdens that can cause hardship when the need for disability benefits arrives. Like most insurance, the earlier you start your policy the lower the cost of the policy.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle-sized companies. He can be contacted at 908-464-3060.

Points to Consider in Selecting an Estate Planning Attorney

Princeton Business Journal - 10/02/07
It's Your Business
Aaron Skloff

Q: We are finally ready to address our estate planning needs, such as our wills, trusts and protecting our assets. What are the most important considerations when selecting an estate planning attorney? What are the most common estate planning mistakes?

The Problem: Choosing the right estate planning attorney to avoid common mistakes.
A recent internet-based yellow pages search for lawyers lists over 80 results in Princeton alone. Their services range from arbitration to tax law. With so many firms to choose from, matching your needs to the professional’s expertise can be an arduous task.

The Solution: A little due diligence goes a long way.
Because estate planning is based on a series of ever changing laws, it is critical that you engage an estate planning attorney who devotes a significant portion of their time and resources to estate planning. Otherwise, the end result could be disastrous and financially devastating. Interview the estate planning attorney you are considering engaging.

Ask pointed questions, such as: What percentage of your practice is devoted to estate planning? What is your expertise in tax law? Will you consult with my financial planner to review all aspects of my wealth? If you are not provided with clear answers move on to the next candidate.

A strong estate planning attorney should help you navigate the treacherous terrain known as estate planning. They should be well aware of the common estate planning mistakes and how to avoid them. Making even a small mistake throughout the process could cost you and your loved ones pain, suffering and financial hardship.

Common mistakes your estate planning attorney can help you avoid:

• Not having an estate plan.
Without a will, living will, durable powers of attorney for healthcare and property or Letters of Guardianship, the state will likely decide the distribution of your assets and the caring of your loved ones. An estate plan clearly defines the distribution of your assets, how and if care will be provided in the event you cannot exercise control over your medical care and who will act as the guardian for your children and other dependents.

• Not providing for your family when you pass.
Father time has a way of teaching us lessons when we least expect them. In the event you, your spouse or both of you were to pass unexpectedly, you may leave a large financial burden to those you leave behind. Without a source of financial security, your family may be forced to sell their home, relocate to a new town or forgo a college education.

Your financial planner and estate planning attorney can implement strategies to protect your loved ones. One of the simplest strategies is life
insurance.

• Not protecting your estate from estate taxes.
Based on your net worth, your estate could be subject to estate taxes of over 70 percent. This excessive amount is in part due to New Jersey’s graduated state estate tax. Imagine working your entire life and less than 30 percent of your net worth passes to your loved ones.

Your estate planning attorney can utilize trusts, such as a bypass trust or an irrevocable life insurance trust, to protect your estate from unnecessary
federal and state estate taxes.

• Not designating beneficiaries on assets.
Without designating a beneficiary on assets, such as 401(k) plans and IRA’s, the assets may be subject to unnecessary taxes. Beneficiary designations on retirement accounts supercede your will. Imagine the entire balance of your 401(k) or pension account distributed to an ex-spouse, when that was not your intent.

Your financial planner and estate planning attorney can review your beneficiary designations to confirm they are consistent with your wishes.

• Not understanding Medicaid, Medicare and long term care.
Unless you want the state of New Jersey to determine the quality and location of your long term care, have a course of action. An estate planning attorney with expertise in elder law can execute a sound strategy of protecting your assets and assuring the quality of care you receive.

In conjunction with your financial planner, an estate planning attorney can identify solutions to protect your interests throughout your working career and throughout retirement.

Action Steps:
Conduct due diligence when selecting an estate planning attorney. Verify that they will work closely with your financial planner in reviewing and implementing various strategies. Engage an estate planning attorney who devotes a significant portion of their time and resources to estate planning and has expertise in the areas that impact you and your family.

Do a Little Work Before Picking an Investment Firm

Princeton Business Journal - 09/04/07
It's Your Business
Aaron Skloff

Q: We were taking a walk in Princeton and were shocked by how many investment firms lined the streets. What
are the major differences investors should consider when evaluating different investment firms, their services
and their financial advisors?

The problem: Choosing the right financial advisor at the right firm.
A recent Internet based yellow page search of the word "stockbroker" lists over 50 results in Princeton alone. They all seem the same, with one name fancier than the next. Their services range from stock brokerage to financial planning and wealth management. With so many firms to choose from, investors can easily make a wrong decision, which they will regret for the rest of their lives.

The solution: A little due diligence goes a long way.
Choosing the right financial advisor at the right firm is similar to selecting the right surgeon at the right hospital, but with a couple of twists. Every investor needs to understand the different types of investment firms before they can make an educated decision.

Let's start with the largest firms in the industry. These are the firms we see advertising during events like the Super Bowl. Please pay attention to the upcoming twist. These firms are publicly traded companies that trade on the stock exchange like any other stock. And, like any other stock, their boards of directors must act in the best interest of shareholders — not clients of the firm.

Many of the middle- and smaller-sized firms are not publicly traded and can act in the best interest of their clients — not the shareholders. Finding out if the investment firm you are considering is a publicly traded company is as easy as looking it up online or calling the firm directly.

Understanding a firm's registration is critical.

Fiduciary duty is the highest level of duty an investment firm can exercise. When accepting fiduciary duty an investment firm must, by law, act in the best interest of its clients — above and beyond those of its shareholders or employees.

All investment firms must register with securities regulators. Most of the large investment firms register as a broker dealer, avoiding the obligation of fiduciary duty in the process. If a firm registers as a Registered Investment Advisor they are obligated by law to accept fiduciary duty. Here comes another twist.

Some investment firms register as an RIA, but claim those aspects of their business are ancillary to their practice — mitigating their responsibility in the process.

If you can only remember one thing from this article, here it is: If you want the investment firm you are dealing with to place your interests above and beyond their interests, have them clearly accept fiduciary duty in writing on their company letterhead.

Understanding the firm's services is critical.
Many of the larger firms imply they provide independent financial planning and investment management services. In reality, their financial plans are "free" reports designed to lure you into their own investments. No doubt, there is some disclosure buried somewhere in the documents explaining all the conflicts, but most people do not have the time to search for them.

Many of the middle- and smaller-sized firms imply they provide independent financial planning and investment management services. In reality, they are insurance salespeople trying to sell as much insurance as you can afford, and then some.

One good litmus test is to find an investment firm that can assess a fee for a financial plan, whether or not you choose to utilize any of their other services. Another good litmus test is to find an investment firm that does not have their own investment products.

The financial advisor's background is the most critical aspect of your evaluation.
When meeting with a financial advisor, consider it an interview. The reality is you are hiring them for the most important part of your life ... well, at least your financial life. Some important questions to ask include: Where did you go to college or graduate school? What degrees do you have? What licenses and certifications do you have? How long have you been in the industry?

Ideally, your financial advisor should have a strong academic background, carry the appropriate licenses for your needs and have good experience.

Two designations stand out in the industries of financial planning and investment management: Chartered
Financial Analyst, a program based on a series of progressively more difficult exams, and the Certified Financial Planner, a program based on one exam.

Conclusions.
Selecting the right investment firm and financial advisor is a critical decision. Utilizing the criteria discussed in this article can turn a difficult task into one of ease.

If you are already working with an investment firm and a financial advisor be sure they can provide the level of service and independence you deserve.

Aaron Skloff, is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business
administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small- to middle-sized companies. He can be contacted at 908-464-3060.

A Look at the Pros and Cons of Community Banks

Princeton Business Journal - 08/07/07
It's Your Business
Aaron Skloff

Q: Several community banks have opened in the Princeton area recently. What are the advantages and
disadvantages of working with a community bank versus a regional or national bank?

The problem: Choosing the right bank.
Here a bank, there a bank, everywhere a bank-bank. A song, or a reality? These days it is a reality. With so many banks to choose from, it is important to understand their similarities and differences as well as their strengths and weaknesses.

The solution: Finding a bank that meets your needs.
For an individual, choosing the right bank could mean the difference between obtaining a mortgage and remaining in an apartment. For a business, choosing the right bank could mean the difference between obtaining a loan and going out of business. Finding a bank that meets your needs can be trickier than it sounds. Let's look at the two broad categories of banks.

Community banks
Community banks are often started by executives that defect from larger banks, community banks have been starting up throughout New Jersey. In traditional corporate fashion, many of the more successful community banks were acquired by the regional and national banks in the late 1990's. This has left a void, thus an opportunity for new banks to flourish.

One of the key advantages of community banks for customers is direct access to senior bankers and top management. With a community bank, employees on the front line have more discretion to make decisions than a larger bank that must follow stricter policies and procedures from corporate headquarters.

For example, with most large banks the decision to offer a mortgage to an individual is based primarily on the applicant's credit score. A community bank has the flexibility to review the application, review the credit score and meet with the borrower to gain an understanding of any unique circumstances that may influence a final decision to offer a mortgage.

Community banks can offer personalized services the larger banks have a difficult time matching. Whether it is a teller's smiling face or a bank officer delivering documents to your business, community banks go a long way towards providing a high level of personalized service. Community banks have done a good job of retaining their staff, allowing them to provide a consistent customer experience.

Weaknesses of community banks include their limited branch network, lending capabilities and range of financial services. Unlike some of the larger banks, many of the community banks have a small number of branches. Fortunately, most offer Automated Teller Machine cards that can be utilized around the world, as well as internet access 24 hours a day, seven days a week.

A growing business may realize the local community bank simply cannot offer the $30 million loan needed for it to expand its operations, due to bank lending restrictions. Consumers looking for investment services and insurance services will often-times be turned away at the community bank. A number of community banks have recently begun offering these services through partnerships with companies that specialize in these services.

Regional and national banks
Some consumers like the idea that they can go into the same bank, no matter what city (or state for that matter) they are in — just like a fast food chain. Having the ability to make a deposit at a branch near your office or a withdrawal near your home is a luxury some consumers just cannot resist. Many of the larger banks have hundreds of branches in a wide spectrum of locations, from supermarkets to office buildings to stand-alone locations.

Businesses that deal in cash, like restaurants and gasoline stations, may require a regional or national bank with branches close to each of their locations. Some businesses must deposit cash in their bank account two times a day to reduce the risk of theft. Larger businesses seeking capital to grow may need the lending solutions offered by regional or national banks. The regional and national banks have tremendous lending capacity locally, nationally and globally.

Most regional and national banks offer a wide variety of financial services, from investments to insurance to trusts. These services may be offered by employees of the bank or through outside partners.

Conclusions
Selecting the right bank should be based on your individual needs. Customers looking for a large branch network or large loan capability may be best suited for a regional or national bank. Customers looking for personalized service, direct access to top management and more flexible loan criteria may be best suited for a community bank. Sometimes, it just comes down to supporting a local business in your community.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business
administration. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small- to middle-sized companies. He can be contacted at 908-464-3060.

Health Savings Accounts -- An Option to Consider

Princeton Business Journal - 07/10/07
It's Your Business
Aaron Skloff

Q: My company recently began offering a Health Savings Account available to all the employees. Why are
employers throughout New Jersey rolling out these plans? What are the pros and cons of a HSA?

• The problem: healthcare costs.
If you think rising healthcare costs are only the insurance company's problem or your employer's problem, think again. Most employees pay 10 to 90 percent of their healthcare costs, when all costs are included. All it takes is a quick review of your pay stub over the last few years to see that the insurance companies are passing on increasing healthcare costs to employers and employers are passing on these costs to employees.

Healthcare costs have risen 8 to 10 percent each year over the last three years and are likely to grow two to three times the rate of inflation for the foreseeable future. Compounding the problem are New Jersey insurance laws.

Almost every state in the U.S. can deny individuals coverage through the underwriting process. New Jersey is one of only five states in the U.S. that provides for "guaranteed issue" — which guarantees health coverage, regardless of health status, age, claims history, or any other risk factor. Although this may be considered a blessing, it is an expensive blessing. Almost by definition, this increases the cost of insurance coverage for everyone in the state to account for those who use the benefits most.

• The solution: a Health Savings Account.
Just a quick background on a Health Savings Account and how it works. Established as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the HSA is a hybrid between health insurance and a retirement plan. The HSA was established so savings used for qualified medical expenses for yourself, or anyone you claim as a spouse or dependent would be free from taxes.

Qualified medical expenses include: medical doctors, dental and optical care, chiropractic care, long-term care, and Medicare Part A or Part B and Medicare HMO insurance premiums. Unqualified medical expenses include: cosmetic surgery, health club dues, nonprescription drugs and medicines, and funeral expenses.

A contribution to a HSA is only permitted if the health insurance accompanying it has a deductible (your out of pocket expense) of at least $1,100 for individual coverage or $2,200 for family coverage. The current contribution limit per year is $2,850 for individual coverage or $5,650 for family coverage. Those 55 and older can contribute an additional $800 in 2007. Contributions are all pre-tax, a tremendous benefit for those seeking tax breaks. If the savings are used for qualified medical expenses, the entire amount can be withdrawn free of taxes.

Yes – that is right, free of taxes. If the savings are used for other purposes, the withdrawal is taxed as income and accessed a 10 percent penalty (if under the age of 65). At age 65, when Medicare begins, withdrawals are only taxed as income at your then tax rate. All interest, gains and dividends in a HSA are sheltered from taxation — allowing all earnings to compound on a tax-advantaged basis. Unused balances can be rolled over from year to year.

Many employees view the HSA as a retirement plan — providing them a tax-advantaged way to save for retirement above and beyond their 401(k) and their Individual Retirement Account.

• A win for employees, employers and insurers.
Because the HSA is based on a high deductible insurance plan the employee takes on a higher level of responsibility and risk for medical expenses than a traditional insurance policy. Employees who run their family to the doctor's office every time someone has the sniffles — because the visit only costs them $10, while the nsurance company pays the remaining $65 under a traditional plan — will think twice when they pay the full $75 out of their own pocket under a HSA. That said, those out of pocket costs are all with pre-tax dollars that were contributed to the HSA. By utilizing a HSA employers can reduce their premium costs by as much as 50 percent, passing most or all of those savings directly to the employees.

Many employers, particularly in "guaranteed issue" states like New Jersey, are implementing a HSA based on these benefits.

• Action steps: Implement a Health Savings Account.
Implement a HSA for your company or ask your employer to implement one. With health care costs increasing faster than wage increases, employees are bearing more and more of the cost burden. A HSA provides a pre-tax means to contribute towards an account that will grow over time, with the option to use the money for medical expenses on a tax-free basis or for any purpose in retirement on a penalty free basis.

Implementing a HSA saves money for all those involved and forces employees to be more responsible with their own savings. While the healthcare problem is not going away anytime soon, the HSA provides one powerful tool to combat the problem. When it comes to important employee benefits, speak with a licensed financial professional before making irreversible decisions that may haunt you for years to come.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration degree. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at (908) 464-3060.

Big Retirement Choice: Annuities or Mutual Funds

Princeton Business Journal - 06/26/07
It's Your Business
Aaron Skloff

Q: I am a public school teacher with the Princeton Regional High School District and my husband is a professor at
Rutgers University. We can either chose annuities or mutual funds in our 403(b) retirement plan. What are the
pros and cons of each?

The problem: annuities in retirement plans.
Over 80 percent of 403(b) retirement assets are invested in tax sheltered annuities, while only 20 percent are invested in mutual funds. In New Jersey, the percentage invested in tax sheltered annuities is even higher. At face value this sounds harmless, but hiding just underneath the surface is a very profitable, little talked about secret that is unnecessarily costing investors billions of dollars.

Insurance companies originally developed annuities so investors could invest their money and have all interest, dividends and gains sheltered from taxation — thus the term "tax shelter." Then, in their infinite wisdom, they came up with the idea of offering their tax shelters inside of employer sponsored retirement plans.

If you only remember one thing from this article, it should be: 401(k), 403(b) and 457 retirement plans are already tax shelters!

Pros and cons of annuities in a 403(b).
One pro of annuities is the option for a fixed return — thus the term "fixed annuity". Investors are generally promised a fixed interest rate for up to one year, after which, the rate resets each year. Unlike a certificate of deposit, however, a fixed annuity is not guaranteed by the FDIC,. Another con of annuities is the high costs built into the other type of annuity, the variable annuity.

Like a mutual fund, variable annuities allow investors to participate in the long-term benefits of stocks and bonds. But here comes the big dirty secret: In addition to the underlying expenses inside the actual investments, the insurance company applies a second set of expenses called a mortality and expense risk charge.

How big is this M&E problem? Approximately $200 billion dollars are invested in variable annuities inside of 403(b)s. Applying the average M&E charge of 1.4 percent on top of the underlying expenses results in a $2.8 billion problem.

Let's look at our two educators who each invest $6,000 per year for 20 years.

Educator one invests in a 403(b) using an annuity. Although her investments generate an annual return of 9 percent, the M&E charge brings the return down to 7.6 percent.

Educator two invests in a 403(b) using mutual funds with equal risk and generates a return of 9 percent. Educator two is $44,200 wealthier, simply by avoiding the M&E charge inside the annuity.

Do not forget, the M&E risk charge continues as long as you have your money invested in a variable annuity — destroying your wealth well after you have stopped contributing.

Pros and cons of mutual funds in a 403(b).
One very big pro of mutual funds are their low costs, as discussed above. Unlike annuities, mutual funds do not have an M&E risk charge. Another pro of mutual funds are their transparency. Unlike variable annuities, mutual fund prices are readily accessible on a daily basis through newspapers, finance web sites or by calling the mutual fund company directly.

One con of mutual funds is their lack of a fixed interest rate. Unlike fixed annuities, mutual fund companies offer money market mutual funds that provide a variable interest rate. This can work to your advantage in a rising interest rate environment, as the money market's interest rate would rise as well.

The solution: Choose what is right for you.
For some investors, earning a fixed rate, sometimes lower than the inflation rate, is the right choice to reduce risk. For most investors, generating a rate of return well above the inflation rate is the right choice to reduce the risk of losing money in real dollars.

When comparing annuities versus mutual funds in a tax-sheltered retirement plan, look out for your own best interests, not the insurance company's best interests.

Often overlooked: Many investors think they are trapped in their 403(b).
For They are not. Most employers allow employees to move from an annuity-based 403(b) to a mutual fund-based 403(b) and vice versa. The transfer is called a 90-24 transfer. Not only is the transfer easy, but there are no tax ramifications.

Once an employee terminates service with an employer, they can generally roll over their 403(b) to another employer's retirement plan or, better yet, into an Individual Retirement Account (IRA), again without tax ramifications.

Action steps: Be sure you have choices.
Make sure your employer offers choices. Unlike the corporate world, where annuities have almost been phased out, most non-profit employers will allow both annuities and mutual funds. If your employer only offers annuities, which is common in New Jersey, ask them to add a mutual fund option.

Remember, you have worked hard for your money — do not waste it on unnecessary fees.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration degree. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle-sized companies. He can be contacted at (908) 464-3060.

New Jerseyans Watch Out for that AMT Tax Bite

Princeton Business Journal - 05/01/07
It's Your Business
Aaron Skloff

Q: We completed our taxes and were penalized by the alternative minimum tax. Can you explain what AMT is
and why we and many of our family members who live in New Jersey have been affected?

The Problem: Alternative Minimum Tax.
While automated teller machines (ATM's) giveth, the alternative minimum tax (AMT) taketh away. The AMT was enacted in 1969 to collect taxes from the wealthy, who may have otherwise used loopholes to avoid paying taxes. Unfortunately, as incomes have gone up and the AMT has not been adjusted for inflation, the number of people adversely impacted has skyrocketed.

In 2001, 1.3 million taxpayers paid AMT. That jumped to 3.4 million last year. If Congress does not act, 25 million taxpayers will be adversely impacted this year, according to U.S. Treasury Department estimates. The average household reporting $100,000 to $200,000 of income would be hit with an additional tax bill of $2,800.

AMT details.
When taxpayers calculate their federal income taxes they make sure they include important exemptions, deductions and tax credits like personal exemptions, standard deductions, property taxes, state and local income taxes and child tax credits. After the benefit of all those adjustments a taxpayer may wind up only paying 20 percent of their reported income and 15 percent on their long-term capital gains.

The same taxpayer, under AMT, would pay a flat 26 percent or 28 percent on their reported income and 22 percent on their longterm capital gains — losing out on the tremendous exemptions, deductions and tax credits listed above.

New Jersey takes the cake.
In 2004 (the most recent reported data from the Tax Policy Center), 7.6 percent of New Jersey taxpayers paid AMT — the highest percentage of any state in the U.S.

New Jersey taxpayers edged out New York taxpayers, at 7.4 percent, and more than doubled the national average of 3.5 percent. States with high state and local income, like New Jersey, are most impacted by AMT. So what is the reward for paying high state and local income taxes, high property taxes and having a family? Unfortunately, higher
federal taxes.

The Solution: Yet another patch.
Congress is likely to repeat what it has done the last few years, provide last-minute changes to limit the number of taxpayers adversely impacted by AMT.

Like the federal deficit, Medicare and Medicaid, a quick fix for AMT does not appear imminent. Fortunately, last-minute patches to AMT have significantly contained the number of additional taxpayers impacted by AMT in recent years, and will likely have the same impact this year. Let's hope, at least.

Often overlooked.
Many investors assume their municipal bonds are free from income taxes. In most cases they are, but they may not be free from AMT. Pay close attention to the type of municipal bonds you own and buy. You could be sitting on or about to buy a tax trap. Many municipal bonds and municipal bond funds are AMT-free, meaning they are not subject to AMT — even if you are subject to AMT. Carefully read the offering memorandum before investing.

Action Steps: Somewhat limited.
Unless you move to a lower income tax state, move to a lower property tax community or stop earning income, AMT is likely to impact you and your family.

If you have control over the timing of your income and incentive compensation (such as bonuses and stock options), you may want to consider delaying their receipt until next year. All things being equal, it is better to pay your taxes later than sooner. For most taxpayers, the best thing you can do is to simply prepare to pay higher income taxes. When it comes to important financial matters, speak with a financial professional before making irreversible decisions that may haunt you for years to come.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a master's of business
administration degree. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle-sized companies. He can be contacted at (908) 464-3060.

Don't Let Insurance Lag as Your Home Appreciates

Princeton Business Journal - 04/03/07
It's Your Business
Aaron Skloff

Q: We live in West Windsor. In the last five years the value of our home has increased dramatically, our real
estate taxes have done the same, but our homeowners insurance has not. Are we getting a great deal or are we
missing something?

The problem: Homeowners' insurance gap. Over the last five years many homes in and around Princeton have increased in value by over 50 percent. In many cases the increases have been even greater, as property values in New Jersey have outpaced many parts of the country.

While many homeowners established insurance coverage when they purchased their home, they have not reviewed or adjusted the coverage since. The value of your actual home may have increased from $500,000 to $750,000, while the insurance coverage has remained at $500,000 — leaving a $250,000 gap.

The solution: Proper homeowners insurance. Like many types of insurance, homeowners insurance is a necessary evil. For many households, their home represents their most valuable and most cherished asset. Homeowners need to conduct an annual insurance policy review to keep up with the local building costs, improvements or additions to their homes and the value of personal belongings.

• How to insure your home
Homeowners insurance covers the structure of your home, not the fair market value of the home and the land. In many cases the land your home rests on is actually worth more than the home itself.

There are three ways to insure your home: replacement cost, extended replacement cost or actual cash value. Replacement cost insurance covers the cost of replacing the damaged property without any deduction for depreciation, but is limited to a maximum dollar amount.

Extended replacement cost insurance covers costs up to a certain percentage over the limit, usually 20 percent. This provides you protection against a sudden increase in construction costs.

Lastly, actual cash value insurance covers the cost to replace your home minus depreciation. Unless your policy states otherwise, you are covered for actual cash value.

Based on the age and condition of your home, some insurers will not insure older homes for the full replacement value. Insurers may offer modified replacement costs where plaster walls or moldings would be replaced with their modern-day equivalents.

In comparison, let's look at an actual cash value policy. If the life expectancy of your roof is 20 years and your roof is 15 years old, the cost to replace it today is going to be significantly higher than its actual value.

• How to insure your personal belongings
There are two ways to insure your personal belongings: replacement cost or actual cash value. Replacement cost insurance covers the cost to replace personal property with like kind or quality without deduction for depreciation. Cash value insurance covers the replacement value of damaged property minus depreciation. Most insurance policies provide coverage for personal belongings at 50 percent of the amount of insurance on your home.

Remember, that 10-year-old comfortable wrap-around couch you love may not be worth much to your insurer on a cash value policy, but may cost you a pretty penny to replace.

• Deductibles reduce cost
The higher the deductible you are willing to accept the lower the cost of insurance. Discounts generally begin with a $500 deductible and end with a $10,000 deductible. Check with your mortgage company before agreeing to a policy with a deductible of $1,000 or more, as you could wind up violating your mortgage agreement.

Something often overlooked is the fact that you should increase your coverage if you make renovations or additions to your home. You do not want to be "left out in the cold" by forgetting to cover a new deck added to your home.

Inventory your personal belongings. Take pictures, keep receipts and write down serial numbers where applicable. Update your coverage when you make a major purchase.

Action step: Review your homeowners insurance. Protect one of your most valuable assets and the contents inside it through homeowners insurance. Speak with a financial professional to learn the true value of your assets and how to protect them.

Aaron Skloff, is an accredited investment fiduciary, chartered financial analyst and holds a master's of business
administration degree. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small- to middle-sized companies. He can be contacted at (908) 464-3060.

Feeling Blue at Tax Time? Consider Municipal Bonds

Princeton Business Journal - 01/09/07
It's Your Business
Aaron Skloff

Q: I live in New Jersey and seem to be getting clobbered on taxes. How can I earn additional income without
losing it all to taxes? Are there tax-advantaged investments?

The problem: Taxes, taxes, taxes. While we are all proud to be taxpayers, few of us would volunteer to pay more taxes than are necessary. Yet, everyday we subject our savings to additional unnecessary taxes. The 1099 statements we are receiving around this time of year by our financial institutions can be viewed as a punishment for trying to earn additional income.

The solution: Tax-advantaged investments. No, we are not talking about risky, unregistered investments in the Cayman Islands. To the contrary, we are talking about some of the most secure, lowest risk investments available in the financial markets— municipal bonds.

In simple terms, municipal bonds are debt securities offered by states, local governments or non-profit organizations. Interest from municipal bonds is generally federal and state tax-free.

Like a bank, investors loan money to the municipality for an agreed upon period of time and interest rate. Unlike a bank, where deposits are federally insured, municipalities must compensate investors for accepting a higher level of risk because the bonds are not federally insured.

Many municipal bonds carry the highest credit rating available, AAA. This compares to many of the world's most profitable companies, which carry only an A rating. Many municipal bonds are backed by the municipality's taxing power and are called general obligation bonds. Additionally, commercial insurance companies insure some municipal bonds. This private insurance provides timely payment to bondholders if the issuer defaults on payments.

Like all bonds, municipal bonds carry traditional risks. Interest rate risk, the most prevalent risk, says the value of a bond will decline if interest rates increase. This is logical. As interest rates increase, investors demand higher rates on new bonds and will only purchase lower-yielding bonds at a lower price. Although credit risk is a key risk with most fixed income investments, it is a relatively small risk with municipal bonds.

• Double tax-free municipal bonds.
Can a 5 percent bond be more attractive than a 7 percent bond? Yes.
Imagine a New Jersey resident purchases a West Windsor 5 percent municipal bond that is federal and state tax-free. The bondholder would avoid paying 35 percent federal and 8 percent state income taxes — or a total of 43 percent. The New Jersey resident who purchases a 7 percent taxable bond would wind-up earning a mere 4 percent after taxes.

The investor who does their homework quickly realizes that the 5 percent tax-free bond is more attractive than the 4 percent after tax bond.

• Taxable municipal bonds.
Is there such a thing? Yes.

Some municipal bonds are actually taxable because the federal government will not allow the offering to have tax-free status if the financing is for activities that do not provide a significant benefit to the public. A good example would be the funding of a sports arena. So, if you see a Trenton sports arena municipal bond offering providing a 6 percent yield when similar municipal bonds are yielding 5 percent, pay close attention. The investor who does their homework may realize that the 5 percent tax-free municipal bond is more attractive than the 3.4 percent after-tax municipal bond.

• Individual bonds vs. bond funds.
Investors can purchase individual municipal bonds or municipal bond mutual funds. Individual municipal bonds entail the risk of default by an individual issuer. For example, if Newark were to default on a power plant municipal bond, investors could see only a part or none of their investment returned. If a municipal bond mutual fund, which owned 100 individual bonds, owned the same bond in its portfolio the damage would be significantly mitigated. Like a stock mutual fund, a bond mutual fund provides diversification and professional management.

Action step — consider municipal bonds. Tax-free municipal bonds can provide a healthy addition to an investment portfolio. The combination of safety and recurring income can make them an ideal investment in any market environment.

Redundant Fees Destroy 403(b) Retirement Assets: What the Insurance Companies Do Not Want You to Know

403bwise - 03/06/07
Features
By Aaron Skloff, AIF, CFA, MBA

The problem? More than 80% of 403(b) retirement assets are invested in tax sheltered annuities. On the surface this sounds like a good thing, but hiding just underneath the surface is a very profitable, and little talked about, secret that is costing investors billions of dollars, $2.8 billion to be exact.

Insurance companies developed annuities so investors could invest their money and have all interest, dividends and gains sheltered from taxation — thus the term "tax shelter." Sounds good, right? But if you can only remember one thing from this article, here it is: 401(k), 403 (b) and 457 retirement plans are already tax shelters! You get no additional tax advantage by investing in annuity products in these plans.

If approached by an insurance salesperson, ask the agent why they would recommend putting a tax sheltered product (an annuity) inside of a tax shelter plan like a 403(b). You will likely receive a blank stare. The insurance companies and annuity salespeople are generally obligated to lookout for their stockholders, not their investors.

So, do not expect them to volunteer how their costs are destroying your retirement assets. In addition to the underlying expenses inside the actual investments, the insurance company applies a second set of expenses called Mortality and Expense risk charge (M&E). Even the U.S. Securities and Exchange Commission (SEC) cautions investors on utilizing annuities inside tax shelters.

M&E: A $2.8 Billion Problem
How big is this M&E problem? Approximately 35% of 403(b) retirement assets are invested in
tax sheltered variable annuities, or $200 billion according to the Spectrem Group. Applying the
average M&E charge, which according to the Variable Annuity and Research Data Service is
1.40%, on top of the underlying expenses results in a $2.8 billion problem.

The Solution? Instead of investing in annuities investors can invest in mutual funds. Unlike
annuities, mutual funds do not have M&E. Thus, investors get to pocket the difference. Do not
tell the insurance companies — you may upset their salespeople and stockholders.

Let's look at a two school teachers who each invest $6,000 per year for 20 years.

Teacher 1 invests in a 403(b) using an annuity. Although her investments generate an annual return of 9%, the M&E bring the return down to 7.6%. Teacher 2 invests in a 403(b) using mutual funds with equal risk and generates a return of 9%.

Teacher 2 is $44,200 wealthier by simply avoiding the M&E inside the annuity. Do not forget, the M&E charge continues as long as you have your money invested in a variable annuity — destroying your wealth well after you have stopped contributing.

Get Out of Annuities
Stop redundant fees from destroying your retirement assets: transfer out of annuities already in tax shelters. Check to see if your employer offers a more suitable mutual fund offering. If your employer's offerings are slim, you are actually permitted to transfer from your employersponsored 403(b) vendor to a vendor outside of your employer through something called a 90-24 transfer.

There are some restrictions, however, so see this link for more details. Retired or terminated employees can transfer their 403(b) saving into another employer retirement plan or a Rollover Individual Retirement Account (IRA) with a vendor of their choice.

Before completing a transfer, be sure to check if any surrender charges apply. They often do, and typically last at least seven years. If this is the case, one solution is to cease contributing to the annuity product, direct all new contributions to a new more suitable 403(b) vendor, then as money in the old annuity-based 403(b) is no longer subject to surrender charges, transfer it to the new vendor. For obvious reasons, many insurance companies do not make it easy to transfer out of their products. Your biggest ally may be the company you wish to transfer to.
Enlist them in your efforts. Good luck!

Aaron Skloff, AIF, CFA, MBA (askloff@skloff.com) is with the Skloff Financial Group.

Avoid 401(k) Mistakes and You're Sitting Pretty

Princeton Business Journal - 01/09/07
It's Your Business
Aaron Skloff

Q: My wife's 401(k) was devastated when the New Jersey technology company she worked for hit hard times.
Now, I am worried about the 401(k) offered by the New Jersey pharmaceutical company I work for. What are the
common mistakes people make in their 401(k)'s and how can we avoid them?

The problem: mistakes made in 401(k) plans. Many companies are eliminating or are simply not offering traditional pension plans. Instead, they are shifting the responsibility of a retirement nest egg to the employees. Most employees are not skilled in managing one of their largest assets, their 401(k) account, and make costly mistakes.

Just a quick background on the 401(k) and how it works. Employers offer their employees 401(k) retirement plans so their employees can contribute a portion of their own compensation toward their own retirement. As an incentive, some employers provide free matching of employee contributions. Other employers match and make outright contributions through profit sharing programs. Unlike traditional pension plans, where employers are required to contribute to the employees' retirement accounts, many 401(k) plans require no contribution by the employer.

A traditional 401(k) allows employees to make pre-tax contributions through salary deferral. Contributions, interest, gains, dividends and the like are all sheltered from taxation until the assets are withdrawn. Employee contributions directly reduce federal income taxes. For example, an employee who earns $100,000 and contributes $20,500 to his or her 401(k) only pays federal income taxes on $79,500 of income that year.

Withdrawals are taxed as income in the year they are taken at that year's tax rate. Imagine a 20-year-old employee not paying taxes on contributions and gains for 50 years; then being taxed only on the amount withdrawn. How often do you have the opportunity to legally avoid paying income taxes, penalty and interest free, for 50 years? The employee contribution limit per year is $15,500 for those under the age of 50 and $20,500 for those 50 years of age or over.

Common mistakes New Jersey employees make:
• Forgoing a company match.
If your employer matches your contributions 25 cents on the dollar up to 6 percent, contribute at least 6 percent and earn a guaranteed 25 percent return. Better yet, defer a larger percentage and earn additional tax benefits throughout your career and thereafter.

• Withdrawing from your 401(k) before retirement.
Money taken out before the age of 59½ is assessed a 10-percent tax penalty and is taxed at the current tax rate (which is often higher than in retirement). Some 401(k) plans allow employees to borrow against their own balance, paying themselves back plus interest. Think of your 401(k) assets as your absolute last resort when you hit a financial jam.

• Investing too conservatively.
Just because this is retirement money does not mean the portfolio should be invested too conservatively. To the contrary, the longer your time horizon the more risk you should tolerate.

• Over-investing in company stock.
New Jersey is home to some of the largest pharmaceutical companies in the world, which employ tens of thousands of New Jersey residents. Many employees want to show their pride by allocating 25 percent, sometimes up to 75 percent of their 401(k) to their company stock. Think twice before making this mistake. If the company hits difficult times the stock and your 401(k) can plummet, even if the overall financial markets soar. Simultaneously, if the company is having difficulties your job could be at risk. A good rule of thumb is to limit company stock to 10 percent of your portfolio.

• Over-investing in one industry.
It was only five years ago that you heard family, friends and colleagues saying, "You can't lose money investing in technology stocks." We all know how that story ended — badly. Not only were there massive layoffs throughout New Jersey, but many companies ended up shutting their doors. Many employees already had technology exposure in their 401(k), yet increased the exposure even further by allocating money toward technology stocks and/or funds. The end result was doubling or even tripling their losses. Avoid over-exposure in any one industry — particularly the one your job depends upon.

Action Step — bearing in mind the above advice, contribute to your 401(k). Contributing to a 401(k) immediately defers the taxation of any contributions and gains, provides a disciplined way to save for retirement and could provide a guaranteed return if your employer matches your contributions. If your employer does not offer a
401(k), ask to have one implemented. Like most investments, the earlier you begin contributing the more wealth you can create in the end.

Aaron Skloff is an accredited investment fiduciary, chartered financial analyst, and holds a master's of business
administration degree. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights-based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at (908) 464-3060.

Beware, New Jersey Estate Tax Threshold is Low

Princeton Business Journal - 10/31/06
It's Your Business
Aaron Skloff

Q: We are starting to think about what happens to our estate when we pass on. What are some of the important considerations regarding federal and New Jersey state estate taxes?

We all know the old saying that there are only two things in life you cannot avoid: death and taxes. While we
cannot avoid death, with careful planning estate taxes can be reduced and sometimes avoided completely. If the
value of your estate is less than $2 million and you pass in 2006, you are exempt from federal estate taxes.

Pay close attention to what falls into your estate, as $2 million can add up quicker than you think. Your estate
includes the value of your retirement plan, savings, investments, homes, cars, art collection and the often
overlooked life insurance policies. Go over the limit and the tax bite can be brutal. In 2006, the maximum federal
estate tax rate is a whopping 46 percent.

If the value of your estate is less than $675,000 and you pass in 2006, you are exempt from New Jersey state
estate taxes.

Clearly, exceeding New Jersey's $675,000 threshold is even easier than the $2 million federal threshold. Go
over the limit and the tax bite would be in addition to any federal estate taxes. In 2006, the maximum New
Jersey estate tax rate is 16 percent.

Fortunately, both the federal and New Jersey state estate tax laws include a marital deduction that permits the
spouse that passes to transfer their entire estate to the remaining spouse, free of taxes — no matter the size of the estate. On the surface this seems like an easy solution, yet foregoing either your $675,000 New Jersey state or $2 million federal exemption could create an even larger tax burden for future beneficiaries when the remaining
spouse passes.

Unfortunately, the remaining spouse is not permitted to combine their former spouse's New Jersey state or
federal exemptions with their own exemptions. One solution to this problem is the bypass trust. By utilizing a
bypass trust each spouse can take advantage of his or her estate tax exemptions. The trust comes alive, as defined by the wills, when the first spouse passes. To maximize the tax benefits, the wills dictate the funding of the
bypass trusts at the maximum amount permitted by the exemptions in that year. Although most trusts name the
children as the beneficiaries, the remaining spouse can utilize the trust for reasonable living expenses.

Things could get ugly in 2011. The federal estate tax exemption remains at $2 million in 2007 and 2008,
increasing to $3.5 million in 2009. In 2010, the federal estate tax is repealed – meaning there is no estate tax,
although this could change by the time 2010 rolls around. In 2011, the exemption returns with a relatively
modest amount, $1 million. To add insult to injury, the maximum federal estate tax rate jumps to an exorbitant
55 percent.

Do not forget about your will. Even the best-laid plans can go awry. All this information is wonderful, but
without a legal will that clearly defines your intentions and what person or entity is to execute them — it is as
good as useless. Recent statistics show a full 70 percent of U.S. adults do not have a valid will. Our lives are not
static; the birth of children and grandchildren, marriages and divorces and the passing of loved ones are all part
of our lives.

Making the effort to establish an estate plan with an expert can be one of the best investments of your life.

Aaron Skloff, is an accredited investment fiduciary, chartered financial analyst, and holds a masters of business administration degree. He is the chief executive officer of Skloff Financial Group, a Berkeley Heights based registered investment advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at (908) 464-3060.

Planning Makes the Difference Between a Good, Bad Retirement

The Independent Press - 10/04/06
Money Matters
By Aaron Skloff

Q: What are the most important financial considerations we should be concerned about going into retirement?

A: While there are a number of issues you should consider, the top five include:

1. How Long Savings and Investments Need to Last? The average 65-year-old man has a 50% probability to live to the age of 85, while the average 65-year-old-woman will likely live to the age 88. That means over 20 years in retirement - or more than half the length of an average career.

2. What Percent of Retirement Assets Can be Withdrawn Each Year? At a 5% withdrawal rate a balanced portfolio of stocks and bonds may last for 20 years, adjusted for inflation. That means only $50,000 could be withdrawn from a portfolio worth $1,000,000, today. An unbalanced portfolio or too high a distribution rate could easily derail a healthy retirement nest egg.

3. How Much Will Your Income Need to Increase Over Your Retirement Years? Plan to double your income in 25 years. For example, the average new vehicle cost $28,000 in 2004. In 2029, it is expected to cost $58,600.

4. How Should Assets be Invested in Retirement? Many investors believe the stock market is too risky during retirement. The risk of inflation eroding the value of a retirement nest egg requires many retirees to maintain exposure to the stock market – albeit at a more modest allocation than in preretirement.

5. Healthcare Expenses in Retirement? Today’s 65-year-old-couple may need $175,000 for medical expenses in retirement. One out of every two retirees will be admitted into a nursing home for some period of time (short or long term). While Medicaid may be an option, the flexibility of private care or in-home care may be a preferred solution.

Action Steps. A consideration for pre-retirees and retirees are to develop a financial plan based on an estimate of expenses and resources. Examine your plan regularly. Distinguish between must-haves and nice-to-haves. Identify where your income will come from in retirement. Utilize tax-advantaged and tax-free sources of income – it can make the difference between an unsuccessful retirement and successful retirement.

Note: Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. He can be contacted at 908-464-3060.

Skloff Financial Group Questions Interest Rates

The Independent Press - 09/06/06
Money Matters
By Aaron Skloff

Question: It seems like I am always paying high interest rates. Is there a way I can earn high interest rates?

Ever wonder how banks make so much money? They ask you to make deposits and pay you a modest interest rate, typically 3%. They then take your deposit and loan it to homeowners and companies at a higher interest rate, typically 7%. This generates a healthy profit of 4%. Quite attractive…for the bank.

Many companies skip the bank and obtain loans directly from the public by issuing bonds. When a company issues a bond they are legally obligated to repay the amount borrowed (the principal) and the periodic interest – similar to a certificate of deposit (CD). Unlike a CD, which is insured by the FDIC and pays a modest interest rate, company issued bonds pay a higher interest rate. Quite attractive…for the investor.

Like most investments, the higher the risk, the higher the reward. Independent credit rating agencies, such as Standard & Poors and Moody’s rate bonds based on risk. They may rate a bond AAA if they believe it is a safe investment and rate another bond B if they believe it is a riskier investment. Bonds issued by safer companies receive higher credit ratings and pay lower interest rates. Bonds issued by riskier companies receive lower credit ratings and pay higher interest rates.

For example, if General Electric were to issue AAA rated bonds they would be considered safe. Because they are considered safe, they may only pay an interest rate of 6%. In comparison, if General Motors were to issue B rated bonds they would be considered riskier. Because they are considered riskier, they may pay a higher interest rate of 8%.

A portfolio of bonds, such as those offered inside a mutual fund, provides exposure to a variety of
bonds. If one particular bond inside the mutual fund were to default, the other bonds could more than
offset the difference. Adding a portfolio of bonds to a portfolio of stocks has resulted in reduced risk
to an overall investment portfolio.

Note: Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights. Call 908-464-3060.

The Solution – MassHealth (Medicaid) Program If you receive MassHealth (Medicaid) benefits and have a long term care insurance policy that meets certain requirements, you might be exempt from some MassHealth eligibility and recovery rules. These rules determine:

An unlimited amount of long-term gains can be offset with long-term losses. Additionally, you can force the IRS to provide you a net $3,000 annual loss against your income. If you are in the top tax bracket of 35%, you can avoid paying $1,050 in income taxes.

A SIMPLE IRA allows employees to contribute up to $11,500 in pre-tax salary deferrals or $14,000 if age 50 or older. A 401(k) allows employees to contribute up to $16,500 in post or pre-tax salary deferrals or $22,000 if age 50 or older.

Like a Roth IRA, the Roth version of the 401(k) allows for post tax contributions (with significantly higher limits than a Roth IRA). Unlike a Roth IRA, employees with relatively high incomes can still make contributions.

Listed below are the top four benefits that should be addressed as soon as possible.

1. Flexible Spending Account (FSA). Be sure to submit all your un-reimbursed medical expenses before leaving your employer. FSAs work on a use it or lose it basis – you must spend your balance before the end the year while you are still employed or your old employer keeps the balance.

The Solution – MassHealth (Medicaid) Program
If you receive MassHealth (Medicaid) benefits and have a long term care insurance policy that meets certain requirements, you might be exempt from some MassHealth eligibility and recovery rules. These rules determine:

1. Flexible Spending Account (FSA).
Be sure to submit all your un-reimbursed medical expenses before leaving your employer. FSAs work on a use it or lose it basis – you must spend your balance before the end the year while you are still employed or your old employer keeps the balance.