As the U.S. economy continues to recover from the Great Recession, many Americans see starting their own business as a unique growth opportunity. In fact, according to the Global Entrepreneurship Monitor’s 2013 U.S. report, last year an estimated 25 million Americans started or were running new businesses.

Owning a business can be rewarding. However, it also comes with unique risks that could have far-reaching effects. Entrepreneurs pursuing their dreams and forging their own success are wise to put some safeguards in place to ensure that business ownership doesn’t upend personal financial planning.

Choosing the structure

A business’ legal structure can affect how much its owner pays in taxes, the amount of required paperwork, personal liability and the ability to borrow money.

For example, individual business owners have three primary options: operate the business as a sole proprietorship, form a limited liability company (LLC) or create a corporation. A sole proprietorship may be the simplest option, because a separate entity is not created. In this scenario, the owner can employ others, but he or she won’t be paid by the company.

Unlike a sole proprietorship, an LLC is a separate legal entity. Compared to a sole proprietorship, an LLC may offer more protection of personal assets if the business is sued. However, if capital must be borrowed, business lenders generally require personal guarantees from a small company’s owners, so owners would likely still incur personal liability. As for federal taxes, an LLC’s income is taxed to the owners individually and earnings are subject to self-employment taxes.

A corporation is a completely separate legal entity that transacts all business operations in its own name, including borrowing money and filing federal income taxes.

While this decision is very important, know that it’s not set in stone – an owner can begin as a sole proprietor and convert to another structure if needs change. It’s imperative that an owner seek professional tax and legal advice to help weigh all options carefully.

Knowing the value

Knowing the value of a business can help an owner access needed capital, create a succession plan and protect family from a large tax liability in the event of death. If an owner were to die unexpectedly, and the business was worth more than expected, the person may leave the family with a large tax bill.

Armed with an independent valuation of the business, an owner may be able to use insurance or other strategies to ensure sufficient liquidity to handle any estate taxes. Contact a valuation professional, who can assess the value of the business based on an analysis of various business and economic factors.

Protecting the business

Each business presents different risks, which is why it’s important to evaluate insurance options that protect against natural disasters, the sudden death of a key employee or other potential hazards. However, an absolute must for all businesses is professional or business liability coverage, which protects a business from acts of negligence in today’s litigious society.

General liability insurance protects business assets in the event of a lawsuit for something a person’s business did (or didn’t do) that caused injury or property damage. Liability insurance covers claims such as bodily injury, property damage, personal injury and damage from slander or false advertising.

Professional liability insurance, also known as errors and omissions insurance, is important if a business gives advice, makes recommendations, designs solutions or represents the needs of others. This type of coverage protects against claims that something a company did on a client’s behalf was incomplete or inadequate, cost the client money or caused harm in some way.

Succession planning

Letting go of the business someone has spent a lifetime building is a huge decision. It’s important to create a succession plan to ease the ownership transfer process and ensure that retirement goals can be achieved.

One may plan to transfer ownership to a family member or sell interest to an outside party. Another option is to sell ownership interest to employees through an Employee Stock Ownership Plan (ESOP).

Whichever plan is choose, it should protect the company’s value and competitive position, minimize potential conflicts among family members or co-owners, and create income for the exiting owner. A succession plan can also be an effective tool to minimize estate taxes if the company is public, because the owner can give his or her children up to $14,000 worth of company stock tax-free over several years, due to the federal gift-tax annual exclusion.

Much of business owners’ net worth is tied up in the business they have worked so hard to build. Carefully planning how to preserve and access capital is key to ensuring financial and retirement goals are met. An owner can prepare for the future by consulting with an experienced financial planner able to provide a comprehensive view of current and projected financial well-being.

People work too hard building their businesses to not benefit from them in the long term.

John Wyckoff is a senior investment counselor with StanCorp Investment Advisers. He has nearly 15 years of experience handling personal financial planning and investments. Contact him at 971-321-8090 or at john.wyckoff@standard.com.

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Recent news coverage of high-profile security breaches and stolen credit card data from stores such as Target and Neiman Marcus, among others, has many people worried. This issue, however, isn’t new to Portland or the rest of the country. According to a December 2013 report from the U.S. Department of Justice, 16.6 million Americans – about 7 percent of the population – fell victim to identity theft in 2012.

One form of identity theft involves criminals stealing personal information and opening accounts, borrowing money and generally wreaking havoc on your financial life. However, 85 percent of cases in the report involved stolen credit or debit card information that was used to make unauthorized purchases. Although less severe, credit card theft is nonetheless alarming – and it can be challenging to resolve.

With many shoppers increasingly using plastic instead of cash for daily transactions, reliance on credit cards and the associated risks appears to be on the rise. Fortunately, there are a variety of ways to better monitor and guard personal information in today’s economy.

Be cautious and proactive

People who develop certain habits can help protect their credit card information and thwart would-be thieves.

• Be cautious online. Be sure to clear user names and passwords after visiting a website. Don’t be duped by phishing scams, which can come in the form of pop-up windows or emails that look like they’re from legitimate businesses, but are really set up by criminals. Remember to use a credit card for online purchases, because they generally have better guarantees under federal law than debit cards do.

• Review credit and bank accounts monthly – even weekly, if possible. Monitor closely for purchases not made.

• Shred documents with personal information such as Social Security numbers, birthdates and account numbers. Shred paper mail with personal information and account numbers. Better yet, move as many accounts as possible to online statements to reduce the likelihood of information falling into the wrong hands.

• Set up alerts with banking and credit accounts. Most companies provide a range of text and email alert options for free. These alerts can be customized so that notification is given at the time of specified transactions – such as a purchases over $500, online purchases or account information changes.

• Monitor credit reports regularly. By law, you are entitled to one free credit report a year from each of the three credit report agencies – Equifax, Experian and TransUnion. Check one report every four months, rotating through the agencies, and review for abnormal activity.

After-the-fact discovery

Many people realize their credit card information has been stolen after the fact, such as when a store or credit card company calls to verify a transaction. Some may spot the offending purchase – or purchases – on a statement. If this happens to you, or if you find that your card is missing, call the issuing company as soon as possible. Generally speaking, if your credit card is used without your permission, you won’t be liable for more than $50 under federal law; however, debit card rules and regulations can be trickier, and you could be held responsible for purchases made before you reported the fraudulent activity.

Identity protection services

With all the other daily commitments – work, family, etc. – it may not be possible to set aside time to monitor accounts closely. There are companies that will do it for you, often offering insurance as well. Generally, this insurance covers costs incurred while dealing with fraud, but not necessarily financial losses from the fraud itself.

For around $10 or more per month, there are companies that will monitor your accounts for unusual activity, conduct daily Internet searches for unauthorized use of your personal information and help you resolve theft problems.

By diligently guarding your information and keeping a watchful eye on your accounts, you can lower your risk of credit card theft and quickly put an end to it when it does occur. Your financial adviser may have additional tips or resources for you to better protect yourself – taking small steps early on can help prevent a lot of burden and stress in the long run.

John Wyckoff is a senior investment counselor with StanCorp Investment Advisers. He is a Certified Financial Planner and a Certified Public Accountant. Contact him at 971-321-8090 or at john.wyckoff@standard.com.

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As 2014 begins, it’s a good idea to look ahead to the financial changes expected. There has been a lot of recent news coverage of the politics and policies around our nation’s budget, the “fiscal cliff” and more; with Congress continuing to work on large-scale financial issues, it’s possible that further action will be taken. That said, there are several changes we do know will happen that may impact financial planning for 2014. Here’s an overview of what to expect.

Social Security and Medicare

The 63 million Americans receiving Social Security benefits will see a 1.5 percent increase in payments beginning in January, due to an annual cost-of-living adjustment.

People under full retirement age and simultaneously collecting Social Security benefits and working will see their payments reduced by $1 for every $2 earned over $15,480 a year, or $1,290 a month. This “retirement earnings test exemption amount” allows $350 more in earnings a year without penalty than in 2013.

People who reach full retirement age in 2014 will see their payments reduced $1 for every $3 earned over $41,400 for the year – an increase of $1,320. The maximum monthly Social Security benefit is $2,642 in 2014, up from $2,533 in 2013.

Medicare Part B insurance and deductible costs will remain the same; however, the Part A hospital inpatient deductible has been raised $32 for each benefit period or hospital stay.

Retirement plans and health savings accounts

Employees can contribute up to $17,500 in their employer-sponsored retirement plan (401(k), 403(b) or 457(b) plans) – a limit that is unchanged from 2013. Similarly, Individual Retirement Account contributions are capped at $5,500 – the same level as last year. “Catch-up” limits will also remain steady, allowing people to contribute an additional $5,500 to their retirement plan, and $1,000 to IRAs, if they are age 50 or older.

For people who participate in a health savings account, the annual maximum contribution in 2014 will increase to $3,300 for individuals and $6,550 for families.

Taxes

As for tax changes in 2014, there will be a slight upward modification of tax brackets, with the personal exemption amount increasing from $3,900 to $3,950. Other increases include a bump in the maximum taxable earnings for Social Security taxes to $117,000 – an increase of $3,300 over 2013. The Alternative Minimum Tax (AMT) exemption amount and corresponding exemption phase-out threshold has increased slightly, while the annual gift tax exclusion remains at $14,000 for individual gifts, or $28,000 for joint gifts.

Stay updated

Again, these are the financial changes we know to expect for 2014; however, there may be more in the near future as Congress continues working in January. To stay updated on any additional developments, it’s a good idea to speak with a financial planner and tax professional early this year.

John Wyckoff is a senior investment counselor with StanCorp Investment Advisers. Contact him at 971-321-8090 or at john.wyckoff@standard.com.

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Even though January is only a couple of weeks away, there is still time to plan year-end strategies for minimizing 2013 tax liability. A better understanding of itemized deductions, investment returns, IRA contributions and other key areas can inform decisions, and help investment portfolios and tax planning in the near future and beyond. Here is a broad overview of some year-end tax-planning tactics.

Timing, deductions, credits

It’s important to note that planning begins by obtaining a good sense of expected 2013 income, adjusted gross income (AGI) and corresponding tax bracket.

When it comes to taxes, timing can be important. By delaying income such as a year-end bonus or commissions, people can defer their taxes on that income until 2014. Or, if someone expects to be in a higher tax bracket in 2014, taking that income in 2013 may be a better move.

Then estimate AGI by deducting common adjustments from expected income, such as 401(k) and individual retirement account (IRA) contributions, alimony and student loan interest payments. These are adjustments that can be taken even without itemizing.

Next, take a close look at other common deductions and tax credits. A deduction reduces taxable income – that is, the amount of income on which tax is calculated.

How much a deduction saves depends on a person’s tax bracket. For example, in a 25 percent bracket, a $1,000 deduction saves $250 of tax. In a 33 percent bracket, the same deduction saves $330.

Many people find that claiming itemized deductions for expenses such as mortgage interest, state and local tax, and charitable contributions provides them with a better tax result than claiming the standard deduction.

Unlike a deduction, a tax credit directly reduces tax liability. Whatever a person’s tax bracket, generally speaking, a $1,000 tax credit saves $1,000 of tax. There are several tax credits people may qualify for, such as tax credits for children, post-secondary education for someone in a household and even a saver’s credit.

Investment income

Investment income includes taxable interest, dividends, rents, royalties, annuities, capital gains and income from a business investment. If someone has realized capital gains on investment sales this year, tax liability can be lowered by generating offsetting losses. Capital losses can be used to offset gains, plus up to $3,000 of ordinary income.

Conversely, if someone has already sold some investments at a loss, capital gains can be taken on appreciated stock that the person may have been hesitant to sell because of tax consequences. As long as the gains aren’t more than available losses, the person will be able to take them without the tax liability.

High-income earners may be subject to the new 3.8 percent Medicare tax on investment income. This surcharge will be imposed on taxpayers who have any amount of combined net investment income, if their AGI is greater than $200,000 for single filers, and $250,000 for married filers. Working to reduce AGI to below the appropriate threshold could help avoidance of this tax.

What works best for you

On a final note, remember that pre-tax contributions to an employer’s retirement savings plan and/or deductible contributions to an IRA can reduce current taxes as well as help retirement savings. If possible, try to max out retirement plan contributions for the year.

Deciding on the most appropriate tax-planning tactics can be a challenge for even the savviest saver. Work with both an investment adviser and a tax professional to gain clarity on how to minimize tax liability and determine which strategies make sense for your investment portfolio.

John Wyckoff is a senior investment counselor with StanCorp Investment Advisers. Contact him at 971-321-8090 or at john.wyckoff@standard.com.

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Some changes in the Roth IRA landscape have everyone clamoring about new conversion opportunities. But deciding whether to convert your traditional IRA to a Roth IRA is not only a tax decision; it’s also a financial planning decision that must be made with thorough consideration.

Beginning this year, the $100,000 income cap on eligibility to convert to a Roth IRA has been eliminated. Also, married taxpayers filing separately, who were previously restricted from converting traditional IRAs to Roths, are now able to do so.

This new opportunity was created by the Tax Increase Prevention and Reconciliation Act of 2005. The law was intended to create current revenue for the government, by collecting taxes on accounts converted now, rather than when money is withdrawn from traditional IRAs.

Anyone weighing whether to convert some or all of a traditional IRA into a Roth should ask themselves four key questions.

When you retire, will your tax rate be lower, the same or higher than it is now?

Converting to a Roth means you pay taxes on the investment now, rather than when you withdraw the money. This makes sense if you anticipate that the taxes you would pay now are less than those you would pay in the future. It depends on both future tax rates and your future tax bracket. Unless you’re confident that you’ll be in a higher income tax bracket when you withdraw the money, converting might not be the right decision.

Where will you get the money to pay the taxes?

You’ll incur a federal income-tax liability on the taxable portion of the traditional IRA in the year that it’s converted to a Roth. For conversions made in 2010, a special rule – “tax splitting” – mitigates the tax hit by allowing you to split the taxable amount between your 2011 and 2012 taxes. Regardless of whether you elect to split the taxes, if you don’t have the means to pay them from a non-retirement source, converting might not be a wise move because you’ll lose the investment benefits on the money you have to use to pay the taxes.

How long will the money remain in the account?

Generally, the older you are, the less sense it makes to convert (except in cases covered in the next question). To avoid penalties, when you begin making qualified withdrawals on your Roth account, you must be age 59½ and have had the funds in the account for five years. If you’re near retirement age and plan to begin withdrawing money from your retirement account within the next five years, conversion is probably the wrong choice.

Will you need to live on the money when you retire?

Because taxes are paid up front, Roth IRAs can be an advantageous way to pass on money to your heirs. If you don’t plan on using the money in your IRA during your retirement, converting a traditional IRA to a Roth may be a good estate planning decision.

If you’ve decided that conversion makes sense for you, you next need to determine how much to convert. Partial conversions allow you to create tax and investment diversification. They also can help you avoid jumping into a higher tax bracket when you make the conversion. And, if you don’t have cash to pay the taxes due on a full conversion, a partial conversion lowers the payment.

While online calculators are available to help you analyze Roth conversion scenarios, they often start by asking how much you want to convert. In reality, this is the last question – and it can be answered only by reviewing your individual situation.

Because these changes in the Roth landscape are new and because the income-splitting opportunity is available only for 2010 conversions, it’s a good time to consider whether a Roth conversion makes sense for you. But don’t rush to convert just because you can. Converting a traditional IRA to a Roth is not the right choice for everyone. It’s essential to take time to work through the numbers with an investment adviser.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or jwyckoff@standard.com.

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Financial literacy is a hot topic in schools, businesses and the media. In 2003, the Financial Literacy and Education Commission was established to improve Americans’ financial literacy. Efforts are geared toward education and outreach.

When the market was good, it may have seemed like everyone was a financial expert. But the truest test of financial literacy is what happens when the markets drop. If the past couple of years have taught us anything, it’s that financial literacy means a lot more than being able to recite a couple of finance-related definitions, balance a checkbook or make a quick buck with one right move in the stock market.

In fact, financial literacy has been defined as the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.

Knowledge itself isn’t enough. So what does a truly smart investor need in order to be described as financially literate?

A long-term personal plan
Formulating an investment strategy that will work for you depends upon you: your goals, your age and investing timeline and your personal tolerance for risk. Only a plan that takes these elements into account will meet your needs for the long term. Blindly following the herd into a hot deal, or making a choice that doesn’t fit your long-term goals or personal investment strategy, isn’t likely to help you achieve your goals. We call this “chasing performance,” and no one is very good at it. It’s also essential that your plan be a long-term vision, so that you can ride out fluctuations in the market while still progressing toward your goals.

A sense of realism
A plan is important; but so is a back-up plan. Even when times are good, it’s essential to consider, and plan for, the worst case scenario. By realizing that your investments, job, marriage, home value, and more are not guaranteed, you can create a more comprehensive and long-term vision that takes into account bad turns – in the market or in your personal life. A realistic approach to finances, and solid savings, can help a smart investor withstand difficult times.

A diversified portfolio

You can reduce overall risk by diversifying your investments among different investment classes, thus shielding you somewhat when markets go haywire. Appropriate asset allocation also allows you to combine more moderate investments with riskier ones, balancing your portfolio and reducing risk. Look for solid mutual funds with investment performances that exceed benchmarks. Look at the funds’ underlying investments and examine the track record of the fund managers. And remember that an asset allocation that is right for a 20-something is almost certainly not right for a 50-something.

Patience
Resist the urge to tinker with your portfolio when something underperforms for a short period of time, but still meets your investment criteria and fits into your long-term plan. Resist the urge to “do something.”

Unless there has been a significant change in your goals or financial situation, your long-term plan is still your best bet to get you where you want to go – so strive to continue to follow it during periods of market volatility. As a long-term investor, you should have time to recover from any short-term losses. Plus, you’ll be positioned to participate in market recoveries. While reviewing your investments is essential, do it on a quarterly basis so you aren’t tempted to make changes based on short-term fluctuations in your investment values.

The consequences of making financial decisions without financial literacy are clearly evident in the current economy. Smart, financially-literate investors need more than knowledge of numbers and markets to stay on course when the market goes down or fluctuates wildly. As we teach future generations the foundations of financial literacy, it is essential that we also pass along the values that allow them to combine knowledge with skills and vision to create a lifelong financial plan.

Each time you consult with your financial advisor and review your financial plan, you have an opportunity to grow your own financial literacy so you can create, and pass along, a lifetime of financial well-being.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or jwyckoff@standard.com.

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The end of the tax year – and the coming holidays – make this an excellent time to consider tax-deductible charitable donations. More than ever, not-for-profit organizations need your support: Charitable donations decrease during times of economic recession, just when more people need help.

But to whom, how, and how much you give are decisions you need to make based on solid information, not just emotions. Luckily, it’s easier than ever to research charities and to make donations.

Choosing whom to support
It’s important to support organizations whose values and mission mirror your own beliefs, whether by advancing social causes, providing research and education, or promoting shared beliefs. But there are other factors to weigh besides a charity’s goals and services. Inform yourself, and ensure that your contribution goes to a legitimate source that will use the money effectively.

Tips for giving
• Make sure the organization is legitimate. Choose charities you know, and don’t be fooled by similar-sounding names. Before making a donation, request information and research the organization. Any legitimate charity will happily send information and won’t pressure you to give on the spot.

• Find out how much of every dollar donated goes to programs. Efficient and effective charities spend 65 percent or more of the donations they receive on programs and services, rather than on salaries, fundraising, and administration.

• Never give over the phone. While some legitimate organizations do conduct telemarketing, in most cases the telemarketers themselves keep more than half of the money they collect. Even if the person calling is a volunteer for a legitimate charity, don’t give out credit-card information over the phone. Ask them to send you information so you can review it and make an informed decision.

• Make sure your donation is tax-deductible. Some nonprofit organizations are not charities, and your gift may not be deductible.

• Consider giving more money to fewer organizations. Giving a smaller amount to many different groups might seem like a good way to support a variety of causes. But in reality the processing time and fees associated with receiving a donation (whatever the amount) might mean that your money won’t go as far as it would if you gave larger amounts to fewer charities.

• Never give cash. Ensure that your money is going to legitimate organizations, and keep better records for yourself. Either mail a check to the organization, or give online directly through the charity’s Web site. Do not use e-mail.

• Keep records. File receipts, canceled checks, and credit-card statements for any donations you make. If a donation is more than $250, request a formal receipt from the charity for confirmation.
Useful resources
The Internet makes it easier than ever to research charities and make informed decisions about which to support.

Get a portfolio of recommended charities based on your preferences and funds:
• Donation Dashboard: dd.berkeley.edu/user/index.php

Research charities, from spending habits to reviews to tax filings, and see what percentage of funds go directly to programs:
• Charity Navigator: www.charitynavigator.org
• GuideStar: www.guidestar.org
• American Institute of Philanthropy: www.charitywatch.org

Search a list of organizations registered as charities:
• IRS Charity Search: www.irs.gov/charities/article/0,,id=96136,00.html

There are many ways to support the charities you believe in. Contact your financial adviser for information on annuities, endowments, gifts in-kind and more.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or jwyckoff@standard.com.

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You’ve planned ahead: you’ve written a will, created an estate plan and documented your wishes. And you’re smart: you manage your online accounts with varied and strong passwords. But have you considered how your digital life will be affected by your death?

For most people, online access to financial and personal information provides a convenient and secure way to manage accounts. As you prepare your estate plan, it is essential that you also ensure your heirs will be able to access those accounts.

Without comprehensive information about your online accounts, including log-ins and passwords, accessing online accounts would be both time-consuming and difficult for your heirs. Calling a company to report a death and request access sometimes results in an account being closed, further complicating the process of accessing the money or information. Other times, it begins a long process of paperwork and phone calls.

And, if you receive only online statements (to reduce waste as well as increase security), your heirs may not even know about the existence of some accounts.

Planning ahead
Obviously, account and password information needs to be protected. However, you also must be certain that access to this information is available to those who need it in the event of your death.

There are several ways to ensure that your online passwords don’t go with you to the grave:

1. Give your executor the information. The executor of your estate should be someone trustworthy enough to also know your online account information. A list of all online accounts, log-ins and passwords will give the executor the information necessary to fully execute your will and provide access to all components of your estate.

2. Give someone else the information. Choose someone you trust, perhaps a lawyer or a friend or relative, and pass it on.

3. Keep the information in a safe deposit box. Another option is to keep a list of your online accounts and access information in a secure place. But if so, it is essential that someone (such as your executor) know about the safe deposit box, know where the key is and what the box contains. Check with your bank to confirm access requirements.

4. Utilize an online service. Several Web sites, including LegacyLocker.com and AssetLock.net, allow you to store account information and passwords, and specify procedures for disseminating that information to beneficiaries in the event of your death (which is usually verified through a process of established contacts and a copy of a death certificate).

By making sure that your online accounts are accessible upon your death, you’ll be saving your heirs considerable time, money, and stress. You’ll also be facilitating the execution of your estate plan and will.

Remember: No matter which method you choose, be sure to keep the information current. Because you likely change your passwords (as required by the Web site or to ensure ongoing security) and open or close accounts, it is essential that you update the information regularly – at least annually, if not more frequently.

Other online accounts
Beyond your financial accounts, if a lot of your life exists online, it is important that you plan how you want it accessed upon your death. Not having passwords to music and photo-sharing sites could prevent your loved ones from accessing cherished media. Being unable to access e-mail accounts could prevent all of your friends and associates from being contacted. Also, consider detailing how you would like online profiles – on social or professional networking sites, for example – to be updated or handled.

A complete plan
Your online accounts are an important part of your financial portfolio and personal legacy. Your financial advisor can help ensure that you have appropriate provisions for accessing those accounts, and that the information is updated regularly along with the rest of your estate plan.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or jwyckoff@standard.com.

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In the area of estate tax law, the only thing that is certain right now is that things are going to change. The Economic Growth and Tax Relief Reconciliation Act, passed in 2001, came with a “sunset clause,” giving Congress until Dec. 31, 2010 to extend the law or else it would disappear and the laws previous to its passing would go back into effect. Under current law, the estate tax disappears entirely in 2010, and then returns with a vengeance in 2011 with lower exemptions and heftier rates.

Several bills designed to clear up some of the confusion around estate tax laws, are being reviewed, and are set to make their way through Congress in the coming months.

Some certainty on the horizon
The “Taxpayer Certainty and Relief Act of 2009” aims to eliminate some of the uncertainty and fluctuation around estate taxes and exemptions. The bill makes the 2009 estate tax, gift tax and generation skipping tax laws all permanent. Some of the elements of this proposal include:

• A permanent estate tax exemption of $3.5 million for an individual and $7 million for a married couple. An amended version approved by the Senate sets the exemption at $5 million. Under current legislation, in 2011 the exemption reverts to only $1 million for an individual.

• A maximum estate tax rate of 45 percent. An amended version approved by the Senate sets the rate at 35 percent; currently, the maximum rate is 55 percent. There will be a 5-percent surcharge on very large estates.

• A portability provision for married couples allows the unused exclusion amount of the first spouse to die to be added to the surviving spouse’s exclusion.

• A permanent gift-tax exemption of $1 million and permanent generation-skipping transfer-tax exemption of $3.5 million. The exemption doubles for married couples.

• Inflation indexing provides for an increase in the amount exempt from estate taxes as the cost of living goes up. This indexing would be in $10,000 increments, starting in 2011.

• Reunification of the estate and gift tax, meaning that the $3.5 million exemption would apply for estate, gift and generation skipping tax purposes. The same rates would apply to all three taxes as well.

In general, the increase in the estate tax exemption and the decrease in the estate tax rate that this proposed legislation offers is good news to people with large estates. However, some other proposals are on the table that change the way other tools for passing wealth could be utilized.

Limitations on current techniques
Other proposals under review seek to limit the way other tools and techniques can be used to pass wealth with minimal taxation.

Crummey provisions: Proposals are aimed at limiting the use of irrevocable trusts with Crummey provisions to qualify gifts for the annual exclusion from gift tax.

Duration of generation skipping tax: Proposed changes would limit the duration of the exemption to one additional generation, essentially eliminating the perpetual deferral of estate or generation skipping taxes.

Valuation discounts: Proposed changes would eliminate marketability and minority discounts and passive assets, preventing the use of family entities to transfer passive investments at discounted values for estate and gift tax purposes.

Qualified personal residence trusts: Proposals seek to eliminate use of these trusts, which allow clients to transfer to their beneficiaries a portion of the appreciation in their principal residence, estate tax and gift tax free.

Grantor-retained annuity trusts: Proposed changes would limit the use of one of these trusts by imposing upon them a minimum of 10 years.

The bottom line
Changes in the economic landscape, tax law, or your personal or financial situation can make even the best estate plan outdated. A periodic reassessment can ensure that your plan adheres to current tax law and will continue to meet your objectives.

These new tax law provisions can greatly affect your estate plan, so be sure to reexamine your plan with your professional adviser.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment Advisers. Contact him at 971-321-8090 or jwyckoff@standard.com.

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Many clients who have accumulated wealth and built up family businesses are eager to pass these on to future generations – without hefty tax liabilities. Gift taxes can severely dilute the value of wealth transferred through intergenerational gifting. But current economic conditions, such as depressed values and low interest rates, make this an excellent time to distribute wealth with greater gains and fewer taxes.

Gift taxes
Accumulating wealth doesn’t necessarily mean that you’ll be able to transfer most of it. Without proper planning, a large portion of your wealth can be lost to taxes. While estate taxes govern taxation on assets after your death, gift taxes govern what you can give away during your life. Current guidelines limit what can be given tax-free:

The annual exclusion – Federal tax law allows you to give up to $13,000 annually (per recipient in 2009) to an unlimited number of individuals – with no tax or reporting obligations.

Gift splitting – Married couples can give away up to $26,000 (per recipient in 2009) each year using their gift-tax annual exclusions.

Lifetime Exemption – The tax law also provides a lifetime gift-tax exemption (currently $1 million) beyond the $13,000 annual exclusion.

Beyond those exclusions and exemptions, any wealth transferred is subject to a gift tax, which is the responsibility of the donor. The tax is nondeductible.

The advantages of a depressed market
Current economic conditions make this an ideal time to pass on wealth. Low values and low interest rates can help you maximize the amount you can transfer tax-free.

Lower values = greater gifting. Values on most stocks, real estate and business assets are currently low, which means a donor can transfer more of the item and still remain under the annual exclusion and lifetime exemption for gifting.

Lower interest rates = better lending opportunities. Another way to transfer wealth is by lending assets. As long as the donor charges the recipient the applicable federal rate of interest (AFR), the loan is not treated as a gift, and gifting limitations and taxes do not apply. With the AFR as low as 2.25 percent (June 2009), even modest stock gains can result in great appreciation – without gift or estate taxes.

Other techniques for wealth transfer
Additional techniques can help protect family businesses, maximize the amount of wealth you transfer to future generations, and minimize taxation.

GRAT – A grantor retained annuity trust (GRAT) is a popular estate planning technique that provides an opportunity to pass assets on to your heirs at a minimal gift-tax cost. To establish a GRAT, assets that are likely to appreciate, such as securities, are transferred into a trust. You retain the right to receive an annuity from the trust for a set period of years. When the trust term ends, the assets remaining in the GRAT – including any appreciation – pass to the trust beneficiary(ies) free of additional gift tax.

Life Insurance – Even with proper planning, estate taxes can result in a financial burden for heirs, and often result in family businesses being sold. Life insurance can help offset these risks by paying much of the remaining tax liability.

In addition to the economic situation, the legislative outlook also makes now a good time to consider wealth transfer. U.S. estate tax laws are in transition. While it is unclear what future legislation will hold, it is likely that the usefulness of methods such as GRATs for wealth transfer will be minimized.

If you are interested in intergenerational gifting, a professional advisor can work with you to create a plan that takes advantage of the current economic climate to maximize wealth transfer.

John Wyckoff, a Certified Public Accountant, Personal Financial Specialist and Certified Financial Planner, works to develop and implement financial plans and manage investment portfolios for individuals and families in his position with StanCorp Investment. Contact him at 971-321-8090 or jwyckoff@standard.com.

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