Government funding and tax extenders legislation affects investors

After weeks of negotiations, Congress reached agreement on a bipartisan bill to fund the government through September 2016.  Following are provisions of particular interest to investors.

The legislation makes permanent (including retroactively for 2015) some provisions that previously had expired every few years:

  • IRA / charitable contribution provision for account holders over age 70-1/2
  • Tax credit for research and development expenditures
  • Enhanced write-off of small business capital expenses under section 179

The legislation extends (including retroactively for 2015) other provisions:

  • Extension and phase out of bonus depreciation through 2019

The legislation includes a number of new provisions:

  • Repeals the forty-year-old prohibition on exports of domestically produced crude oil
  • Expands 529 plan qualifying distributions to include student computers and technology

The legislation delays sources of funding and government reimbursements under the Affordable Care Act:

  • “Cadillac tax”(40%)  imposed on high cost employer health plans delayed until 2020; thereafter tax becomes deductible
  • Medical device tax delayed until 2018
  • Annual fee on health insurance provider premiums written (“belly button tax”) delayed until 2018
  • Government reimbursements for insurance company losses limited to amounts collected from profitable insurers (reimbursement fund must be revenue neutral)

Of interest to financial advisors, the legislation:

  • Does not prevent the Department of Labor from finalizing and implementing the proposed IRA account fiduciary rules
  • Does not make significant changes to Dodd-Frank

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Another government shutdown?

Congress returns from recess next week facing a month-end deadline to fund government operations for the next fiscal year. I’m concerned we could be looking at a reprise of 2013. That year, the federal government shut down on October 1 for sixteen days over a Republican proposal to defund the Affordable Care Act. Now, Republicans are talking about defunding Planned Parenthood, a proposal the President is almost certain to veto. More broadly, there is significant disagreement on funding for social programs generally (the President wants increased funding; the Republicans are calling for social program cuts). If these disagreements cannot be breached, the government faces an October 1 shutdown.

 

The difference this time is when the debt limit must be raised to allow the federal government to borrow additional funds. In 2013, the government ran out of money and had to borrow by mid-October, setting up an incontrovertible deadline that Congress had to address, reopening the government in the process. This year, we’re told that the government will not need to borrow more money before November or even December. So, if the government shuts down, what will force Congress to compromise and reopen it in the near term?

 

Historically, markets often are volatile as fiscal deadlines approach and Congress appears unable to agree on a solution – until it does. Investors might consider taking action to protect against volatility until these deadlines have been addressed. More aggressive investors might view a pullback as a buying opportunity; markets tend to recover nicely after Congress finally agrees to raise the nation’s borrowing limit (as Congress invariably will do here, likely at the last possible moment).

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015. Reprinted by permission. All rights reserved.

Obamacare upheld again: Consequences for Business Owners and Investors

Presidential Seal

 

 

 

 

Last week the Supreme Court ruled that all qualifying Americans are entitled to receive subsidies to purchase health insurance under the Affordable Care Act, regardless of where in the country they live.  The decision leaves the status quo in place but nonetheless raises considerations for investors and business owners:

  • As interpreted by the Administration, the ACA requires small business owners with more than fifty employees to provide health coverage to their employees beginning in 2016.
  • There remains a concern about inadequate ACA enrollment, particularly by middle- and higher-income Americans.  If enrollment continues to lag, it could lead to significant premium increases, as the insurance pool will not have sufficient “good” risks to balance out the less favorable ones.
  • Speaker Boehner’s legal action against President Obama remains outstanding.  Boehner’s suit objects to the Administration’s unilateral decisions to delay the employer mandate and to reimburse insurance carriers for losses incurred from insuring high-risk people.  A Boehner victory (which most legal experts consider a long shot) could end the carrier subsidies, which likely would prompt carriers to increase premiums or cut coverage to recoup the lost revenue.
  • The decision avoids a decline in health care stock values.  Many companies – particularly for-profit hospitals – benefit from the greater insurance coverage provided by the ACA.  However, premium increases discussed above could cause the feared “death spiral”, in which higher premiums leads to fewer healthy enrollees, which leads to higher premiums, etc.  That consequence could hurt health care stock values down the road.
  • The decision eliminates any realistic possibility of repeal of the 3.8% surtax on investment income for higher-income taxpayers.  Revenue from that tax is used to pay for the bulk of the insurance subsidies that the Court upheld.  There is no realistic prospect of a reduction in tax rates in sight.

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Wake Me Up When September Ends

Please read this article written by Andrew Friedman of The Washington Update LLC

In my legislative update early this year, I noted that ongoing acrimony between Congressional Republicans and the Obama White House likely precludes agreement on any broad new legislative initiatives this year.  Instead, Congress and the White House are likely to reach agreement only in the face of “forcing events” – deadlines that compel action to ward off a draconian result.

As it turns out, Congress appears to be arranging for all of the major deadlines to occur around a single date – September 30.  This schedule sets up a massive negotiation for September, when Congress returns from summer recess.  Investors should be aware that this negotiation is likely to lead to market volatility and some new tax changes.

I discuss the upcoming imbroglio in more detail below.  But first, two quick announcements:

  • The Affordable Care Act is affecting retiree medical costs in a number of ways, most of them adverse.  A new white paper on the site, Preparing for Rising Medical Costs in Retirement, discusses how retirees and near retirees can develop an estimate of their likely retirement medical costs and a plan to help defray those expenses.  Subscribers can access the paper here.
  • My colleague Jeff Bush recently launched a new way for you to keep with what he and I are reading each day.  You can now follow us on Facebook to see our daily must read articles:  https://lnkd.in/eJAdh88 .  This is our way of keeping you abreast of the latest happenings out of Washington, happenings that can affect your investments and your business.

Now back to the legislative outlook.  By or around September 30, Washington must reach agreement on:

  • Raising the debt ceiling:  Congressional borrowing authority ended on March 15, 2015.  Current estimates suggest the government will run out of money and need to borrow by around early October.  Failure to raise the debt limit by that time would impinge on the government’s ability to pay interest on debt outstanding, leading to default on U.S. debt.
  • Highway funding:  Funding for summer infrastructure work (road and bridge repair) runs out on May 31.  All indications are that Congress will pass a short term “patch”, funding construction through September 30.  After that date, Congress will need to find a permanent source for highway funding.
  • Government funding:  The federal government’s fiscal year ends on September 30.  By that date Congress must appropriate money to run the government next year.  Otherwise the federal government will shut down on October 1.
  • Tax extenders:  Congress wants to extend a popular group of tax provisions that expired at the end of last year.  Paul Ryan, the chairman of the House Ways and Means (tax writing) committee, said he wants to take up the extenders during the funding discussions in September.

Longtime readers will remember that Washington reached a similar September 30 impasse two years ago, causing the government to shut down for sixteen days beginning October 1, 2013.  In that instance, with the debt limit deadline approaching, Congress and the White House agreed on a plan to reopen the government and raise the debt ceiling.  That plan included caps on future spending on defense and domestic programs.

As in 2013, reaching consensus on these knotty budget issues will be challenging.  With U.S. military involvement expanding, both parties agree that next year’s defense budget must be higher than the spending caps set in the wake of the 2013 budget impasse.  The President, though, insists that any increase in defense spending be matched with a corresponding increase in spending on domestic programs.  Republicans not only oppose additional spending on domestic programs, they are looking to further cut those expenditures.

For investors, the September 30 deadline is important for two reasons.  First, as the deadline to raise the debt ceiling gets closer and Congress and the Administration (likely) continue to bicker, the markets often turn volatile.  I have long said that a market decline over concern about Congress’ impending failure to act is a buying opportunity.  Congress will act – likely at the last minute – at which point the market will recover.  It is incumbent on investors and financial advisors to keep these “forcing event” dates in mind as investment opportunities.

Second, meeting these deadlines requires funding for new government initiatives, such as additional defense spending and funding long-term highway construction.  Congress typically does not like to spend money unless it raises taxes (or cuts spending elsewhere) to defray the additional cost.  Congress thus searches for “loophole closers”– provisions in the tax code that arguably provide unduly favorable benefits.  (An example of a loophole closer that keeps arising – but has never been enacted – is to curtail the use of “stretch” IRAs and 401(k)s.)  Thus, as September approaches, investors would be wise to consider how Congress intends to fund additional expenditures.

One way to fund these new initiatives could be corporate tax reform.  As if addressing these deadlines was not enough, Chairman Ryan hopes to have a corporate tax reform plan ready by the end of the summer.  (It appears that reforming individual taxes is now recognized as too difficult politically.)  If Congress and the White House can agree on corporate reform (possible but difficult), then the funds from a deemed (Democrats) or optional (Republicans) one-time repatriation of foreign earnings could be used to fund the permanent highway bill.  Otherwise, Congress will have to find revenue raisers to pay for highway funding and extenders; Ryan says using repatriation funding without tax reform is a no go.

 

Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

The Impact of True Collaboration

Recently, Ryan and Tim were asked by STAFDA, a large national trade association we have spoken to, to write an article for their upcoming trade magazine.  This article highlights the impact of collaboration with an entrepreneurial family group and their advisory team.

Please click the link below to view the PDF file.

The Impact of True Collaboration – Ryan Barradas – Tim Young

Investing in a Rising Tax Environment

Rising Tax Environment

We at WealthPoint are always looking for pieces that educate our readers and provide insight.  Andrew H. Friedman of TheWashingtonUpdate.com recently wrote the article attached to this post.   This white paper discusses the likely future direction of taxes, and what investors can do to minimize the tax impact on their investment returns.

Investing_in_a_Rising_Tax_Enviroment_2015

Click on the link above to view the full article (PDF)

 

Obama comments on IRA fiduciary rules

Presidential Seal[The update is of interest primarily to financial advisors.]

Last week the President gave a speech in which he focused on forthcoming Labor Department rules intended to ensure that IRA holders receive investment advice unencumbered by financial advisor conflicts of interest.  In conjunction with the President’s speech, the Labor Department will be re-issuing proposed rules addressing the extent to which financial advisors may receive compensation in connection with investments made by IRAs and other retirement accounts they advise.  The new proposed rules should be available in the next 60-90 days.

The Labor Department first issued proposed rules on this subject in 2010.  Of great concern to the financial services industry, the 2010 proposed regulations effectively would have precluded financial advisors from receiving commissions and other payments on IRA transactions and investments.  DOL withdrew the proposal in 2011 due to public pressure and concern.

The President’s comments last week contained a good bit of anti-Wall Street rhetoric (“A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments – with high costs and low returns – instead of recommending quality investments – isn’t fair.”).  They make clear that the Administration is determined to continue to press this issue in some form.  At the same time, the White House material accompanying the comments states that the new proposal will “ensure that all common forms of compensation, such as commissions and revenue sharing, are still permitted.”  This language suggests that the new proposal will be more lenient than the original.

For instance, the new proposal could permit all forms of advisor compensation but require the advisor to disclose to the client conflicts of interest, such as where particular investments result in higher commissions or other payments to the advisor.

The Administration’s continued concern about arrangements that heretofore had not been thought to pose problems is worrisome from the perspective of the securities industry.  On the other hand, the fact that all forms of compensation will remain acceptable suggests that the newly proposed regulations will be at least somewhat less harsh.  My guess is that the industry is still likely to be unhappy with the new proposal, and will push back once it is announced.  The DOL has said the public will have the opportunity to comment on the proposal, including at a public hearing, before final regulations go into effect, so the matter is far from resolved.

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015. Reprinted by permission. All rights reserved.

 

How To Get Started

Part 4 of a 4 part series

Provided by Ryan F. Barradas and Tim Younggetting-started

In order for you to confidently move forward with big decisions in a manner you haven’t previously, you need an approach that invites three key dynamics into the room: your entrepreneurial spirit, the relational factors unique to closely-held or family business and the technical aspects of sound planning. You have to get to that point of instinctual clarity about how you’d like your story to play out from here forward.

However, your advisors also have a responsibility to know your story. In order to do this, there must be a process that allows them to take the time and have the respect to hear the full story of all the stakeholders in the planning process before recommending any action. You need to learn how potential planning will affect their lives; how they make decisions and the motivations they bring to their role. Sometimes people just need to be heard. Yet sometimes they have a legitimate issue that will impact the plan. I believe it’s imperative to get all the necessary players into the arena and on the team at the onset. Anything else is inefficient.

So how do you do this? You do it through deep discovery with all key stakeholders – meaning anyone who’s going to be affected by decisions you will make either financially, emotionally or from a business perspective. This can include: spouses, business partners, key employees, active and inactive children, key advisors, bankers, key business relationships and more. It’s the people part where most if not all planning processes get derailed, technical solutions come later.

Once this deep discovery is complete, the findings should be organized and distilled down into a document that outlines ten to twenty of your macro goals. These are goals and objectives that absolutely cannot be violated, period. Regardless of the effectiveness of a strategy, if it violates one or more of the macro goals, it should never be presented for consideration. This will keep you on track and provide you with benchmarks for measuring success.

Next, you must embrace a process that allows advisors to truly collaborate. Some families feel that bringing advisors together for group meetings may increase fees. Ironically, if organized properly the opposite occurs. With communication occurring real-time amongst all parties, better ideas are formulated in less time, often reducing fees, taxes or other expenses. The team arrives at more relevant solutions faster and there’s less chance of one person’s style driving the result.

Last but not least, do not try to do this yourself! It’s hard enough to run your business, but doing it while managing a complex process with so much at stake is nearly impossible. As soon as the process diverts your attention from what makes you money, you’ll table the subject until the “right time” which never comes. Procrastination can cost money and more important, it limits your choices. Hire a professional with a multidisciplinary background. Make sure they have the capacity to understand all the dynamics at play (entrepreneurial, relational and technical), and will hold all the accountable parties accountable.

Ryan Barradas (ryan@wealthpoint.net) and Tim Young (tim@wealthpoint.net) are co-founders and partners of WealthPoint, LLC in Phoenix, AZ.  WealthPoint is a nationally recognized firm focusing in the areas of succession, exit and wealth transfer planning for entrepreneurial family groups.

Averting Planning Disasters

Part 3 of a 4 part series

Provided by Ryan F. Barradas and Tim Young
Unknown Conditions Ahead

In our previous articles in this series we discussed the entrepreneur’s need for a decision-making process versus a planning process. Furthermore, we covered the fact that good decision-making is governed and grounded by gut instincts. So what prevents us from making decisions? What enables us to procrastinate and kick the proverbial can farther and farther down the road?

We often seek out or are offered help with succession and exit planning without a process to gain clarity on the following: the relational factors that are unique to closely held business, the operational needs of the company and a way to see all of this transpire numerically.  We believe the primary reason most plans never get off the ground is that they are driven by solutions or the technical aspects of sound planning.  Tax and legal advisors are attempting to solve the income and estate tax issues along with ownership succession matters.  The technical or tax tail begins to wag the dog.  Before you know it, you become overwhelmed with solutions that fail to address some of the basic needs that are at play in the back of your mind. Instinctually, you know there is more to the puzzle.

Below is a list of common reasons we see that most plans fail:

  • They ignore basic business issues – what does the business need in order to support the needs of all of the stakeholders?
  • They fail to address the “void” left by the involvement in business – passion can be channeled in other directions so long as there is comfort in leaving.
  • They fail to adequately address family financial security – When do you cross over the line from “I need more” to “I have enough”?
  • Too many moving parts (too complex) – the best plan isn’t the one with the most tax savings or looks the prettiest on paper. It’s the one you can implement, live with and maintain.
  • They don’t involve “the next generation” – what are the needs and desires of the next generation? What are their expectations?
  • They don’t involve “the key employees” – how are you going to get where you want to go unless you know your key employee’s goals, desires and expectations?
  • Professionals are conflicted out of representing multiple parties – when there are conflicting interests, tax and legal advisors are forced to serve one client.
  • Everyone wants to avoid confrontation – any business is successful due to its ability to avoid drama. However, some relational issues cannot continue to be swept under the rug.
  • They rely upon the owner(s) to drive implementation – this only lasts for a short while.  Once the owner’s primary duties suffer, progress halts.
  • There is no way to measure success.

 

Without a process to avert one or more of the above, smart people might move forward in planning for a little while, but when it comes time to execute, they back away from the table. There’s simply too much at stake with their wealth, their business and their relationships to risk faltering.

In our next article, we will define the components of a successful planning process to avoid the pitfalls above and describe how to get started.

Ryan Barradas (ryan@wealthpoint.net) and Tim Young (tim@wealthpoint.net) are co-founders and partners of WealthPoint, LLC in Phoenix, AZ.  WealthPoint is a nationally recognized firm focusing in the areas of succession, exit and wealth transfer planning for entrepreneurial family groups.

5 Levels of Succession

Part 2 of a 4 part series

Provided by Ryan F. Barradas and Tim Young

Passing the BatonIn our last article we defined succession and exit planning as a process that facilitates two events: financial security during retirement and success in the absence of current leaders.  In order to do this effectively succession planning must be addressed on five levels: management succession, ownership succession, relationship succession, cultural succession and last but not least, leadership succession.

The only way a company and current leaders can grow is through embracing a culture of succession. This must be initiated and modeled by senior leadership. Individuals must check their ego at the door and look to find the next generation of leaders. Some companies do this naturally while many others often operate with star players in a very fragile organizational structure.

Let’s address each level of succession. Management succession is a process that allows for the growth and development of emerging talent in an organization.  Managers must look at the situation like this: “In order for me to grow, I must find my successor.”  Weak individuals may shy away from this while strong team members will embrace it. The cream rises to the top.

Ownership succession is simple, yet complicated. Ownership succession and management succession can become entangled in our thinking. But, ownership succession simply addresses who will be the next generation of stockholders. This doesn’t mean they will lead, manage or run the company. It merely means that they will own the stock and benefit from profits and dividends.

Relationship succession is a crucial and often overlooked piece of the puzzle. Organizations often ride on the backs of strong relationship managers.  You need to avoid and plan for problems that could be crippling if one of those people should leave, get sick, die or quit.  It’s a process, not an event.  A conscious effort must be made to bring new faces into key relationships to shore up the problems that could exist if not addressed.

What makes a company great is its culture. Culture is the vibe or beat that any organization marches to and is driven by strong leaders.  In order for a company to stay great, it must stick to the recipe that got it there in the first place. Culture is driven, fostered and controlled by strong leadership and must be backed up by an undying commitment to mission and vision.

Last but not least, leadership succession. This is something that the largest companies struggle with. In small, family or closely held businesses we need to remember that the “gene pool” is not always the deepest talent pool to pull from when searching for the next generation leaders. Leadership is earned, not bestowed. Furthermore, if you have an organization that has been driven by a dominant personality throughout its history, you may have to look outside of the organization to find a leader that will garner the respect and admiration of the troops. Promoting from within can be successful, yet in many cases it can be detrimental.

In our next piece, we will address the common reasons why most plans fail.

Ryan Barradas (ryan@wealthpoint.net) and Tim Young (tim@wealthpoint.net) are co-founders and partners of WealthPoint, LLC in Phoenix, AZ.  WealthPoint is a nationally recognized firm focusing in the areas of succession, exit and wealth transfer planning for entrepreneurial family groups.