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Vol. 72, No. 2, March 2018
FOCUS ON Estate, Disability, & Financial Planning
Redemption Fees: Reward for Punishment
William Waller, PhD David Nanigian, PhD, CFP Michael Finke, PhD, CFP
Mutual funds impose redemption fees with the intent of maximizing the wealth of fund shareholders through discouraging them from engaging in frequent trading activity. This paper empirically analyzes whether and how redemption fees achieve this goal. The research finds that funds with redemption fees outperform their counterparts by 1.0 percent to 1.4 percent a year. Moreover, performance increases by 0.5 to 2.4 percentage points a year following the initiation of a redemption fee such that the performance differential is attributable to the fee. The authors find that the fee improves performance through changing portfolio characteristics. Most notably, cash holdings decrease after fee initiation.
A 50-State Review of ABLE Act 529A Accounts
Annemarie Kelly, JD, LLM Lewis Hershey, PhD, MA
This article reviews recent literature, legislation, and account information concerning 529A accounts created under the Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act [26 U.S.C. § 529A (2014)] and analyzes ABLE savings programs across all 50 states. The authors conclude that a 50-state review of ABLE Act rollouts dictates that professional planners should consider six key questions when deciding which state ABLE program best serves a client’s needs: 1) Will program fees for maintenance, disbursement, print, rollovers, administration, or other services unduly burden or otherwise inconvenience the client? 2) What are the state account balance limits? 3) Is the client eligible for a state income tax credit for ABLE account use? 4) Is the client best served by a program that offers a debit or purchasing card to use ABLE account funds? 5) Does this state offer the degree of investment risk that most benefits the client? and 6) How will the investment-related fees for this particular state program impact the client? Best practices for due diligence as well as professional standards of care require that specialists be familiar with the core differences between active state ABLE account programs and then tailor their guidance accordingly.
Regulatory Changes Impacting Partnerships: An Opportunity for Financial Professionals
J. William Harden, PhD, CPA, ChFC David R. Upton, PhD
The IRS recently issued proposed regulations related to the new partnership audit regime. Of particular interest to financial service professionals is a change in the rules that allows persons other than partners or members to act as partnership tax representatives. This new rule opens up the possibility for financial service professionals to act as the partnership tax representative for partnership clients. This article outlines changes in the new partnership audit regime and discusses how these changes might expand the reach of the financial service practice.
Income-Shifting Strategies for Those with Children
Daniel C. Ruggieri, CPA
Individuals, especially those who own their own business, are continually looking for ways to shift income to minimize their tax liability. As a result, they seek to tap into opportunities to avoid the “kiddie tax,” employ their children, establish family limited partnerships, implement sale and leasebacks, and create useful trusts. This is not an all-inclusive list, however it provides a reasonable starting point for advising clients about taking advantage of income-shifting strategies and how they minimize tax liability.
How Does the Tax Cuts and Jobs Act of 2017 Affect Your Clients?
Kenn Beam Tacchino, JD, LLM
In the wake of any tax law change, financial planners will need to assess which of their clients come out ahead and which clients will end up owing more in taxes. Planners can take the necessary steps to see how their clients fared under the new tax law by examining the changes that have been made to tax rates, tax tables, exclusions from taxation, above-the-line deductions, the standard and itemized deductions, and other changes to the tax rules. This column summarizes the major changes that apply to an individual (as opposed to corporate) taxpayer and provides a guide for how to go about making a suitable assessment for each of your clients.
Guest Column—Tax Law Update
Important Life Insurance Provision in Tax Cuts and Jobs Act Affects Journal Article
David K. Smucker, CPA, CLU, ChFC, MSM
The January 2018 Journal published the author’s article, titled, “Strategy: Cross-Purchase versus Stock Redemption Buy-Sell Agreements in S Corporations” [Journal of Financial Service Professionals 72, No. 1 (2018): 42–54].
Section 13521 of the Tax Cuts and Jobs Act (P.L. 115-97) retroactively repealed part of Revenue Ruling 2009-13. The repeal significantly affected the article. The accompanying material explains the repeal and restates the example discussed in the article.
Accounting & Taxation
Tax Court Weighs in on “Captive Insurers”
Thomas F. Commito, JD, LLM, CLU, ChFC, AEP
Captive insurance companies can be a very useful planning tool. However, the IRS has been concerned about certain promoters abusing the concept. Because a “captive” involves an operating company getting a deduction for premiums to the captive, without having the captive reporting the amount as income (up to $2.2 million, subject to an inflation adjustment), there is a possibility of abuse. In the case of Avrahami v. Commissioner [149 TC No. 7 (August 21, 2017)], the U.S. Tax Court adjudicated a number of issues concerning captives. The case was in the court for over 2 years, and the final opinion is 105 pages long. In many ways, it stands as a primer on how not to form and operate a captive.
Advice for the New Planner
Irrevocable Life Insurance Trust Regrets: Options for Trusts That Are Unneeded (or Seem That Way)
April Caudill, JD, CLU, ChFC, AEP
For clients who now believe they have little chance of being affected by the federal estate tax, as it is currently structured, steps taken in the past might require changes, or rethinking. New advisors should be prepared for these discussions.
Uniform Voidable Transactions Act Kerfuffle: Designed to Help Creditors, But Not All Estate Planners Are Happy
Mark R. Parthemer, Esq., AEP
The Uniform Voidable Transactions Act (UVTA) is an update designed to strengthen the rights of creditors in the applicable uniform law. However, a debate by attorneys within sections of the several state bar associations has caused confusion, and in many states the proposal has stagnated. Understanding the relative perspectives may lead to enough support one way or the other—either to quash the effort to update the law or to find a solution to bridge the gap between the factions.
Ethics & Regulation
Bitcoin Investing—An Ethical and Regulatory Quandary
James Pasztor, MSF, MPAS, CFP
Interest in bitcoin has skyrocketed along with its price. Clients are approaching advisors and seeking investment advice about bitcoin and other cryptocurrencies, yet many advisors have minimal knowledge in this area. Advisors need to be careful, as there are numerous ethical and regulatory considerations that should be considered and taken into account before giving advice.
A Funny Thing Happened on the Way to Retirement
John N. Migliaccio, PhD, RFG, FGSA, MEd
What do the retirement confidence survey, gerontological aging, and a multigenerational marketplace for retirement have in common? The complexities of the markets, products, marketplace, and individual clients and their families indicate that clients will be increasingly seeking your expertise in the future.
Insurance & Risk Management
The Life Insurance Agent as Financial Planner
Steve Parrish, JD, RICP, CLU, ChFC, RHU
There are two major trends occurring with life insurance and risk management. First, many traditional life insurance agents are becoming financial planners. Second, financial planning is rapidly transitioning from a sales model to an advisory model. If these trends continue, life insurance and risk management will increasingly become a subset of financial planning. For many consumers, that’s good news.
Richard M. Weber, MBA, CLU, AEP (Distinguished)
Technology—especially of the consumer variety—experienced significant exposure and growth in 2017. Consider the number of Amazon delivery boxes received in the weeks and months leading up to the holiday season—especially those requiring a power source—to validate your own exposure. Last year’s technology saw some flops along with its successes, and 2018 promises an ambitious agenda. This issue’s technology column brings you a selection of reviews and commentary to challenge your experiences with the world of technology.