All Things Financial Planning Blog


Before the Eulogy

The New Reality of RetirementI recently attended a funeral mass for the father of a client. It was a wonderful occasion to reflect on a well lived life of more than 90 years. Our client and his siblings were able to eulogize and honor their father beautifully in what was a touching ceremony all around.

I was especially happy for this client who, recognizing that his father’s health wasn’t always going to be a certainty, had spent the last year making some extra trips back home to spend time with his Dad. Having this time to share, visit, debate and enjoy each other’s company in the time leading up to his passing must have meant a great deal to both.

I recount all this as it dawned on me during the ceremony how often we miss an opportunity in waiting until someone is gone to really reflect on their role in our lives and how fortunate our client was to not have missed that opportunity. Eulogies serve a great purpose for loved ones to share and remember all the wonderful things about those that have passed, but the greater opportunity is to share those things with those we care about while they’re still with us.

This is certainly not a new concept, but one that often makes the ever growing list we all carry around that contains our “important, but not urgent” best intentions. We take for granted that others know how much we truly value them or, even if we do feel it needs to be said, are too embarrassed, proud or just don’t have the words to explain to another person what kind of impact they’ve had in our lives.

This blog has touched on many of the important issues surrounding proper estate planning, having one’s affairs in order and ensuring that everything that can be done to carry out our wishes is in place. That’s not a message we’re likely to stop delivering any time soon. It’s a crucial component to both our financial and emotional peace of mind. All I suggest is adding letting those we care about know what we value about them to that estate planning to-do list.

Adding to these kinds of lists typically increases the potential burden and reduces the likelihood that we will actually carry them out. My hope is that this particular suggestion will actually incent us to take action. Adding something that should be rewarding for both you and those you love will hopefully move your end of life plans up your to-do list.

So, while you’re deciding who should take care of your affairs after you’re gone, how to manage your estate for minor children, whether there is sufficient insurance in place to cover your income, or any of the other many questions surrounding your estate, be sure to share not only your plans, but what makes your loved ones such a special part of your life.

The result could mean a great deal to you and those you love both during and after all are here to enjoy.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH



Skippin’ RocksMost of what we, as taxpayers, understand about taxation comes from our focus on taxes and how they affect us either individually or as a business. With the business owner, tax strategies will often be managed in aggregate between the business tax return and the owner’s personal return so as to optimize benefits and deductions and minimize taxes.

Rarely, however, do households look at aggregate family taxation to develop strategies for life’s expenditure requirements or desires – college education, first time homebuyer assistance, weddings, family member ‘support’, inter vivos wealth transfers, etc., etc., etc. The concept here is one of wealth and resources management through family income shifting and tax effect optimization. When, as practitioners, we do see family taxation considered in family financial activities there is usually a CERTIFIED FINANCIAL PLANNING™ professional involved.

So what are some of those family taxation considerations that the “pro’s” use for income shifting and tax effect optimization?


If you gift assets away, $14,000 per individual in 2013, they become the property of the transferee, your daughter for example, presuming you made what is called an irrevocable gift. The income on that asset will now become the income of, in this case, your daughter. If the asset gifted away is sold by your daughter, a gain or loss may be recognized by her based on your original purchase value and the tax rate upon the sale by the daughter will generally be based on the holding period (long term or short term) starting with you, not your daughter’s date of ownership. The strategy here for tax effect optimization is to have the income or gain from the asset taxed at the lowest rate of a family member.

If the gift was made to a minor, it would be made through a Uniform Transfer to Minors Account or a Uniform Gift to Minors Account. The purpose of this type of arrangement is to provide oversight of the asset until the child reaches the age of majority in the state. One issue that comes up with gifts to minors (and to those under age 24) is what is called the “Kiddie Tax”. The “Kiddie Tax” may limit the tax benefit from this income shifting opportunity by subjecting amounts of unearned income exceeding $2,000, in 2013, to taxation at the applicable parent’s tax rate.

This shifting assets (income) strategy also is designed to take assets that might be taxed upon death at an estate tax rate that might reach 40% and puts them into the hands of the beneficiary whose individual tax rates might be, today, perhaps as high as 43.4%. The ‘estate’ tax ‘individual’ tax rate differential obviously is not as compelling today (individual rate is higher than the estate rate) for the avoid estate taxation argument of inter vivos wealth transfers nonetheless they should be looked at depending on the facts of each situation. Additionally estates are not even taxed until they exceed $5,250,000 in 2013 so for most there will never be, lol, an estate tax to worry about.

An advantage to your receiving an asset after someone dies rather than having it gifted to you during their lifetime is that there is a step-up in value (presuming an increased value in the asset) to the value at the date of death. For example, if Mom was the last to die and she and Dad paid $100,000 for a home that you inherit when it is valued at $900,000 and you sell it for $900,000 there is no gain or loss. Under the gift scenario, based on these facts alone, the $800,000 gain would not be ‘stepped up’ so a tax would be due on that appreciated value upon a dispositive event – a sale. With respect to this ‘step up in value concept’, one should be aware that IRA’s, annuities, Pensions and Retirement Accounts that have never been taxed do not get a step up in basis.

So if we know we would not need an asset in our lifetime, or if we know that we are dedicating an asset for a specific life expenditure occurring at some date in the future (college, bar or bat mitzvah, etc.), would we benefit from shifting that asset, and the income thereupon, to another in order to most optimally accumulate funds for our dedicated expenditure purpose? Would that give us more available for the expenditure or, perhaps, give us the amount needed sooner? Should we do this type of thing now, and if not, when? In doing so, would we be putting assets into the hands of someone, a child for example, who then would be precluded, for example, from getting financial aid for school because they ‘owned’ too much in assets? Would the asset transferred become subject to the control or potential attachment of another? There are lots of causes and effects to any strategy hence the need to think not only of tax optimization but asset preservation and protection.


If we have a business, or if we have a housekeeper or maintenance worker (gardener), rather than employing other than a family member to work in those activities, we could employ our child, family member, or related children in doing that work. An advantage to employing family members in our business or in our household is that they will have earned income shifted to, or earned by, them by being paid a wage. Earned income can be excluded from taxation up to the amount of our personal exemption and standard deduction. So for a 16 year old child claimed as a dependent on her parent’s tax return helping with filing and office clean up during the year in Mom’s business they could earn $6,100 + $1,000 in income and not pay any taxes on that income. With just $6,000 of ‘earned’ income the child could fund a Roth IRA which would not be a tax deduction to the child but it wouldn’t be needed as such anyway. The advantage to a Roth over other types of IRAs is that you can access your contributions to a Roth IRA at any time. You do not have to wait five years. You do not have to wait until age 59 ½. Contributions to Roth’s can be accessed at any time, earnings on Roth’s, however, are another story.

Even if there is not a business for a child to work in they certainly can do work around the home, do gardening or do baby-sitting, for example, all of which are examples of earning ‘earned’ income in a household doing domestic services. Of course, unlike the business activity, employment of your children in the household would not provide a tax deduction to the family just like the gardener or pool man is not deductible to the family today. For certain businesses employing under age 18 family members there may even be payroll taxes avoided (See Pub 15 Page 12).


Making the most of what we are able to earn and keep for ourselves is so important to families today. Parents who have worked their whole lives to have what they have want to ensure what they have earned and accumulated is most fully shared by those they wish to benefit. Having income or transfer taxes eat up what we have or are able to acquire is a terrible thing if it can be avoided. Making the best of good family tax strategies is a wonderful thing. Take the time to think about your fiscal responsibilities and life’s expenditures and see if you are optimizing your resources for them.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


How Do Options Work?

The Economics of FearWhat if you had had a hunch that Microsoft stock would skyrocket when it introduced Windows 8? Would you have risked purchasing Microsoft stock on just a hunch? Or what if you owned a hundred shares of Apple but wanted to protect yourself from the stock’s recent declines? Well you can do both through options. An option is a standardized contract to either buy or sell a stock at a pre-determined price within a specific date. The key word is option; if you buy an option contract, you have the option, not the obligation, to exercise your contract if it makes financial sense for you at that future date. Option trading has been around for thousands of years and is widely used by many people to either protect the value of an existing investment or speculate on the future movement of an asset. There are two types of option contracts: calls and puts. A call option gives the owner the option to buy a stock at a set price in the future, whereas a put option gives the owner the option to sell a stock at a set price in the future. Let’s see how each one works.

Example of a Put Option:

A put option grants you the right to sell a stock at a set price. An investor buys a put option if she feels the price of a stock is going to decline and wants to lock-in a particular price. Let’s look at a specific example: It is March, and you own 100 shares of Apple stock (symbol: AAPL) that you bought for $400. You think that the price of Apple will decline from its current price of $457 in the coming months and you want to protect your gains. Each option controls 100 shares of the underlying stock, so 1 put option would give you the protection you seek. You could buy a $450 put option that expires in 3 months (May). If the price of Apple goes below $450 between now and May, you can exercise your option and sell your shares at $450. If the price of Apple doesn’t get that low, then you would keep your shares and simply let your option expire.

Example of a Call Option:

A call option grants you the right to buy a stock at a specific price. You would buy a call option if you think the price of a stock will rise within a given time and you wanted to benefit from the expected rise. Continuing with our Apple example, assume you don’t own the stock, but you think that Apple stock will rise in the next couple of months. You could buy an option that expires in May that allows you to buy Apple stock at $500. If the price of Apple rises above $500, you could exercise your call option and buy the stock at $500. Again, if the price of Apple does not rise by the May expiration date, you simply let your option expire.

As you can imagine, options can be useful for certain investors who are interested in: protecting a large gain; benefiting from a stock’s rise/fall without actually owning the stock; and in some cases, diversifying. While there are only two types of options (calls and puts), there are a multitude of strategies an investor can employ by combining calls and puts.

Though it may seem that options as part of your portfolio is a no-brainer, this article is simply an introduction to options. It is important to understand that options are quite complicated and can be rather risky. Options should only be used by experienced investors who really understand the mechanics of options – note, there is no easy money in trading options. Some people brag about making a lot of money in options, but be careful because option prices move very quickly, and while you can quickly make a lot of money, you can also easily lose a lot of money in just a single day.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


Take Charge of Your Financial Literacy

End 2010 with a “KISS”As you may have seen on this or other sites, April is Financial Literacy month. While some people go back and forth as to whether or not literacy is the right term, the fact is it’s never been more crucial to have a good grasp of your own personal financial situation and to educate yourself and your family as to how they relate to money.

Movements to include more financial education at all levels have cropped up across the country. Many states have passed laws mandating some level of financial education in state curricula, but funding has not followed. Many business leaders have called for an increase in awareness and education, but concrete solutions have not been realized. I attended the RISE Conference at the beginning of the month where even Federal Reserve Chairman Ben Bernanke referenced the need for financial education as a key pillar to improving the long term economic picture for our country.

So, what does this mean to me and my family?

Efforts by federal, state and local governments, school boards and other institutions to determine how best to increase personal financial education amongst all Americans is an admirable goal, but one likely to take a generation or more to truly have an impact.

That’s not to bemoan those efforts. Shifting how a population thinks about something as fundamental to our lives as money is a big job. It’s simply to suggest that perhaps it’s time those of us that are so inclined pick ourselves up by our proverbial boot straps and take charge of our own financial education.

How do I do that?

It all depends on your current personal financial knowledge, what areas need some improvement and who you are. No matter where things stand in your life, there are countless tools available to help. Yes, the internet can be a bit of a gamble as to the quality of information available, but that’s no excuse for not taking the time to seek out free or inexpensive resources that could dramatically change your financial future.

Giving specific examples of where to go to find great resources for all the various stages of life is a whole series of blogs for a different day. For now, I’ll just give you a quick list of some of my favorites.

Starting Young
For teaching children some of the basic tenets about respecting money, there’s a new website called The Secret Millionaire’s Club. The club was partially developed by Warren Buffett who acts as the mentor in the animated series to a group of entrepreneurial kids. Guest appearances by Jay-Z, Shaquille O’Neal and other celebrities add to the fun. The website features information on how to access videos, related games and other tools to help kids embrace strong financial values.

Establishing A Budget
Ah, the monthly budget. A process loathed by many and fully embraced by few. Yet, we know it to be one of the best ways to keep spending in line. There are lots of tools out there to help make this process a little less of a chore. My current favorite is You Need a Budget or YNAB. YNAB is great because it’s not just a way to track spending, but a whole philosophy shift in how you approach your month to month needs. The software comes at a cost, but the related education tools around spending, taxes and other financial areas add lots of value.

If you’re more interested in just seeing where the money is going and keeping track of your assets and liabilities, Mint offers a free service through their website which is widely established as an industry leader.

Saving For College
Surprisingly, the College Board administers much more than just the SAT. It’s also a great resource for learning more about financial aid, college scholarships and the college planning process. If you’re just looking to get over that shock of how much you might need to save to help pay for a child’s education, Bankrate has a great calculator that allows you to add multiple dependents, choose between in-state, out of state and private schools and include savings you’ve already stashed away.

This is far from an exhaustive list, but just a way to get you started thinking about different ways you can improve your financial IQ on your own. None of this takes the place of finding a trusted adviser to provide one-on-one advice when you want to get serious about your specific situation, but a lifetime of improved decisions about your money starts with the first step.

Don’t wait another month or for another reminder about how important your personal finances are to your life. Take that first step today!

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


Keeping What You Make – Managing Taxes Owed on Income Received

The Debt Crisis Isn't Over YetTax Rates Overview

Under our current tax code, The Tax Act of 1986, as amended to date, the income that we earn for income tax purposes can be subject to either ‘no taxation’, ‘regular income taxation’, or an ‘alternative rate of taxation’ known as capital gains rates.

For some taxpayers the regular income taxation rate will be defaulted to a ‘parallel’ tax system known as the Alternative Minimum Tax (AMT) and an alternative tax rate on that income which is a flat tax rate of 26 or 28%.

For individuals who are not subject to AMT, their income would be subject to one of the following tax rates – 10%, 15%, 25%, 28%, 33%, 35% and 39.6% ($400,000 single or head of household or $450,000 if married filing jointly). Well technically one who is subject to the 33% tax rate, for example, is subject to each of the 10, 15, 25, and 28% tax rates because we have a progressive tax system that taxes us at various levels as we fill up those lower income tax rate buckets with income. If we took each bucket’s tax and related income number, we could calculate a weighted average tax paid from all of those buckets of income and we would call it the taxpayer’s ‘effective tax rate’. The lower one can get that effective tax rate for a given level of income, the better one will have done to ‘manage’ their tax liability on income.

For taxpayers making over $200,000, as single or head of household, and $250,000, as married filing jointly there will be an additional 3.8% tax on investment income which could be either (1) regular income, called ordinary income, like interest earned, (2) qualified dividend income, like income on your NYSE traded stock, or (3) capital, like capital gains. This new 3.8% tax will alter how we manage our income resources for those at these income levels.

Capital gains and qualified dividend taxes could be 0%, 15%, 20% (taxpayers making over $400,000 single or head of household and $450,000 married filing joint), 25% (real property depreciation unrecaptured gain) or 28% if a collectible is sold at a gain.

Social Security income is tax free if we do not earn too much income so for those who are receiving social security benefits managing income and the taxability upon it is crucial. Too much income annually is defined by the IRS as $25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year; $32,000 for married couples filing jointly; and $0 for married persons filing separately who lived together at any time during the year. For every dollar of income earned over those thresholds a dollar of otherwise tax free social security benefits becomes taxable. For a taxpayer in the 35% tax bracket, for example, the loss to taxes from social security benefits becoming entirely taxable would be 32 cents on a dollar – (85% maximum of benefits that could be taxed) times (35% the marginal tax bracket). The least amount of benefits that could become subject to taxation if you go over the threshold is 50%.

3.8% Investment Tax Effect

Interest Income from a bond taxable at 35% or interest free? What is better? The formula for determining net yield after tax would be (yield) minus [(yield) times (tax)]. So to determine the tax equivalent of a municipal (tax free) bond to a corporate bond we would divide the tax free yield by (one) minus (marginal tax rate). For example, before the 3.8% extra tax a taxpayer in the 35% tax bracket would have been indifferent between a corporate bond that paid 5% and a tax free bond that paid 3.25%. Now, after the 3.8% additional tax is imposed, the same taxpayer earning the taxable 5% would be indifferent if the tax free rate was only 3.07%. Alternatively stated, to earn the equivalent of a 3.25% tax free, now the taxpayer would be looking for a taxable bond earning 5.29%.

Strategy Considerations

For Investment Income: Interest, Qualified Dividends and Capital Gains

The first thought is to re-allocate your CD type money into a dividend paying stock. For a single person in the 28% tax bracket ($87,850 to $183,250) that would save .13 cents on every dollar of earnings (.28 – .15). For a single person in the 15% tax bracket ($8,925 to $36,250) that would save .15 (.15 – 0) cents on every dollar. But is that penny wise and pound foolish? It might be because unlike your CD investment where your principal is secure, and most likely FDIC protected, the stock price associated with your investment paying that dividend may decline. A 1% negative move in a $20 dividend paying stock, 20 cents, would wipe out the tax gain you were trying to achieve by seeking out dividend income over ordinary income. So consider both your personal ability to tolerate risks of loss and determine the appropriateness to your financial circumstances of putting your principal to that risk.

To ensure that your capital gains get the favorable 0, 15%, or 20% (plus 3.8%, if applicable) tax treatment the investment must be held for more than one year. Knowing that the market does not go straight up, it might not be appropriate to seek capital gains by investing in the stock market if the money you are investing might be needed in the short to intermediate term – 3 to 5 years. Again, risk tolerance and diversification should always be taken into consideration.

For those subject to the 3.8% tax muni bonds can avoid that tax so they have become somewhat more attractive (as illustrated above a tax free rate of 3.25 is now equivalent to 5.29% rather than 5% without that tax being imposed. There are a significant number of strategies with regard to the 3.8% tax so consult with your advisor if you are subject to the tax.

For Social Security Taxability

When one is receiving social benefits it is even more important to manage the timing and character of income (ordinary, tax free, capital) so that one minimizes the impact of taxation on those benefits. Municipal bond income is tax free but it is considered taxable for purposes of determining whether or not, and how much of, your social security benefits could become taxable. To the extent the muni bond can provide more income than the taxable bond considering all of these factors it may (always run the numbers) be a tax optimizing investment choice when one is drawing social security benefits. Alternatively, an investment that provides cash flow without large taxable components to the cash flow might be a very good strategy to manage social security benefit’s taxability. An immediate annuity purchased with after tax dollars will have an exclusion ratio to the payments received that will then provide cash flow without taxation.

Concluding Thoughts and Observations

Wealth accumulation and wealth management require vigilance in both tax and portfolio risk management from the investment perspective. Tax rates have a huge impact on our net returns so strategizing for optimizing our tax impact with consideration of our own risk tolerance, and need to take risk, if any, for investment returns is an ongoing responsibility. Choices of tax-free, tax deferred, ordinary or capital gains income are very important in achieving optimal results with our resources earned over our lifetime. I hope you are maximizing and keeping all that you have worked so hard to earn.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


Don’t Pay-Off Your Student Loans

Give the “Kiddie Tax” a Time-OutIf you are like most professionals, you graduated with over $100,000 in student loans. While that debt may feel like a monkey on your back, it is well worth it. Unlike credit card debt which is used to fund consumption, your student loans financed your education and training, and was as an investment in your career. Not only that, but it was also like free money in a period when you weren’t earning any. Now you are earning money and one of the most commonly asked questions I get is “should I pay off my student loans?” The short answer is that it depends on whether you are making the decision emotionally or purely from a financial perspective. Here are some things to consider before paying down your student loan.

Money Loses Value

Inflation is the erosion of the value of the dollar over time. We have all heard someone say “I remember when a new car cost…” Inflation is the reason why it cost $5 to see a movie when you were 18, but now it costs $12; or why $100 just doesn’t seem to buy as much as it did 10 years ago. If your loan is on a fixed-rate, inflation is your friend. Your fixed loan payment does not change for the duration of the loan, but the value of that payment decreases over time. For example, if your current loan payment is $800 per month, in 10 years, the real cost of that loan payment would be equal to $595 assuming a 3 percent inflation (see calculation below). Hence the purchasing power of that $800 has declined in that 10 year period to just $595. If the rate of inflation is higher than your fixed interest rate, you are essentially coming out ahead every year.

History Doesn’t Lie

Most current home buyers would cringe at a 5 percent home loan, but it wasn’t that long ago that 8 percent was the average. In fact, in 1981, the average mortgage rate was 16.63 (! So historically speaking, interest rates are at all time lows. Interest rates on student loans are also at historical rates. No one knows if interest rates will ever reach double digits again, but markets do tend to revert to their historical mean. If you currently have a student loan with a very low fixed interest rate, it makes more economic sense to pay only the minimum payments because of the low fixes rate and because of inflation.

Your Emotions

For a variety of reasons, some people have an aversion to debt – maybe you grew up seeing your parent’s worry about debt, or maybe your grandparents who lived through the Great Depression influenced you. Whatever the reason, if you are emotionally debt adverse, then it makes sense for you to aggressively pay down your debt, even if it’s financially prudent to pay only the minimum. If you can’t sleep at night worrying about your student loans, then it’s probably wise to start paying down your debt early.

The conventional wisdom is to pay off debt as quickly as possible and that all debt is bad. But as illustrated above, there is such a thing as good debt and it doesn’t always make sense to pay it off early. Yes, credit cards are generally considered bad debt, but student loans are an investment in your future earnings potential and is deemed good debt. For those who approach student loans from a strictly financial perspective, now is not the time to pay-off your student loans.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


Not Your Father’s Retirement Plan

Personal-DebtA recent article in Time featured a study by the Deloitte Center for Financial Services suggesting many American pre-retirees are throwing in the towel when it comes to saving or planning for retirement. Insufficient savings combined with the market downturn five years ago, a housing bubble, extended low interest rate environment and a Federal government seemingly bent on making it difficult to plan for the long term has created a perfect storm for many. This will be a significant problem facing Boomers over the next few decades.

But, this blog is not meant for those near retirement. This is for the Millennials entering the workforce and the Gen Y folks already there. It’s a brief wakeup call about your future financial goals and retirement plans. The short version – you’re on your own. Your retirement plan is not and cannot be that of your parents.

For most, pensions are a thing of the past. 401(k)s and similar plans are great places to start saving, but have their limitations. Social security is likely headed for substantial reform that will leave future benefits unclear. Medicare will face significant changes over the long run. Many of the sources past generations have relied on to help care for them in their later years are more vulnerable than ever before.

Sound frightening? It is. But it’s no excuse to throw in the towel. Inaction is not an option. There are simple, but not always easy ways to put meaningful plans and processes in place to enjoy today while keeping a mindful eye on tomorrow. You just have to be willing to commit to a plan and stay true to your own values.

The bottom line? Knowledge is the key. Not about which stock to pick or what your magic number is for retirement. Instead, you need a firm grasp on what you really value in life, what you want to do for your children or others close to you, and a realistic view of what resources you have and how much you’re willing to balance those resources between goals for today and those for tomorrow. You need to revisit these questions on a regular basis to make sure you’re on track and be clear in how you communicate expectations to all those impacted by your financial decisions.

I’m no pessimist. Quite the opposite as I think the future ahead is very, very bright. I also believe that we can meet our goals, provided there’s a plan in place, we stay true to that plan, protect against the unexpected to a responsible degree and really have a grasp on what’s important to us as early as humanly possible.

The most dangerous things we put off are those that are important, but not urgent. The best time to start mapping out your plan for today, tomorrow and well down the road is now. It may not feel urgent, but it may be the most important thing you do any time soon. The you that is 20, 30 and 40 years down the road is counting on you.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH