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From the Desk of:

John D. Pivirotto
Calif. Insurance License #0699308

Financial Concepts

Burlingame, CA 
(650) 348-1880
(650)348-0255 Fax


Helping Build & Protect Your Future

Investment Advisor Representative
Securities and Advisory Services
offered through
Lincoln Financial Securities Corporation
Member SIPC

Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2009 Liberty Publishing, Inc.
Copyright 2009 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opin ions, or recommendations of the Financial Planning Association, its affiliates or members. CFPTM and CERTIFIED FINANCIAL PLANNERTMare federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.
Giving Stock to Children, Saving on Taxes

Giving away stock that has appreciated in value to children and grandchildren who are in lower tax brackets is more attractive since passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The reason: As of May 6, 2003 long-term capital gains are taxed at 15% versus 20% for investors in upper income brackets. Meanwhile, those in lower income tax brackets pay half as much as before with a long-term capital gains rate of 5%. For families, the savings can be significant and very helpful in meeting major goals, such as funding a college education.

A Closer Look
For illustrative purposes, let’s take a look at a hypothetical example. Suppose Janet and Tom Shea have owned 200 shares of stock in company XYZ for 15 years. Its current fair market value (FMV) is $20,000, and their basis is $2,000. Their daughter Abby is 18 years old and about to begin her freshman year of college. 

The Sheas, who are in the 28% federal income tax bracket, would like to use this stock to help pay her tuition. If they sell the stock at its current FMV, they will owe $2,700 in capital gains taxes ($18,000 x 15%).

However, if they give the stock to their daughter Abby, who is in a 10% federal income tax bracket, and she sells the stock, the gain will be subject to the lower 5% rate, which
applies to taxpayers in the 10% and 15% brackets.

 If Abby sells the stock and the FMV is $20,000, she will owe $900 in long-term capital gains tax ($18,000 x 5%)—$1,800 less than her parents.  When gifts of stock are made to individuals, the recipient’s basis is the same as the donor’s. 

Furthermore, the recipient also keeps the donor’s holding period. So in this case, even if Abby sells the stock one month after receiving the gift, she would still qualify for the long-term capital gains rate, since her holding period would include the length of time that her parents held the stock. This is beneficial because short-term capital gains (investments held less than one year) are taxed at the investor’s generally higher
marginal rate. 

Key Planning Points
A couple can give away as much as $22,000 ($11,000 for individuals) in appreciated stock to each of their children or grandchildren, every year, without incurring gift
taxes. Donors, however, should weigh any disadvantages that could be caused by the kiddie tax that applies to children 14 years of age and younger. Under the kiddie tax, a
child’s unearned income over $1,600 is taxable at the parent’s tax rate.

The 5% rate will remain in effect through 2007. In 2008, the long-term capital gains tax for taxpayers in the lowest two brackets will be eliminated for one year. Simply put, taxpayers in the 10% and 15% brackets will owe zero taxes on their long-term capital
gains. Unless Congress takes additional legislative action, the former long-term rates of 20% and 10% will again take effect in 2009. 

Families with children who will be age 14 or older may want to consider the potential benefits that could be realized with early planning. As you develop your strategies, it is important to remember that gifts are irrevocable and that you relinquish control of assets. However, with proper planning, you may be able to significantly reduce your family’s tax bill. 

QTIPS and Your Estate
Is a qualified terminable interest property (QTIP) trust for you? It could be if your answer is “yes” to the following three questions: 1) Are you interested in providing income to your surviving spouse for his or her lifetime? 2) Do you want your assets to qualify for the unlimited marital deduction? 3) Do you wish to designate who will receive the remainder of the trust’s principal after your spouse’s death? A QTIP trust is often teamed with a bypass trust. As a result, some estate planners refer to this as an A-B trust
For the purposes of taxation, the value of assets within a QTIP trust are placed into your spouse’s estate, not your estate. However, you are able to designate who receives the trust’s assets after your spouse dies. Wondering if there’s some kind of catch? There is. Your spouse must receive all the income generated by the trust as long as he or she lives. Additionally, the surviving spouse cannot assign his or her interest in the trust assets to other persons.

Here’s an example of how a QTIP trust works. Let’s say your estate is worth $2 million and your spouse’s is valued at $500,000. The first step would be to establish a bypass trust for $1.5 million (basing this on the estate tax exemption for 2004). This move protects 75% of your assets from the estate tax. How about the remaining 25% or $500,000? If you left it to your spouse, there would not be a tax penalty, thanks to the unlimited marital deduction (provided your spouse is a U.S. citizen), but your spouse would then designate who would ultimately receive the assets. You could also give the assets to your heirs, but they would have an immediate tax bill.

If you place the $500,000 into a QTIP trust, the assets are counted as part of your
spouse’s estate for tax purposes. When your spouse dies, the assets are transferred to the person or persons you designate. Meanwhile, if your spouse’s assets are still under the $1.5 million estate tax exemption (2004), there’s no estate tax bill. As the estate tax exemption increases to $3.5 million in 2009, a QTIP trust can become increasingly attractive as an estate planning tool. Because a QTIP trust allows individuals to direct
who will receive their assets when the second spouse dies, it can be useful to those who have children from a prior marriage, and who wish their property be left to those particular heirs.

However, if you establish a QTIP trust, keep in mind that your heirs will not receive the
assets until your spouse dies. As a result, a QTIP trust may be less suitable for couples
where one spouse is much younger than the other. In addition, establishing a QTIP trust
requires careful planning. If your QTIP is funded with unproductive assets that do not generate cash flow, it may not be able to satisfy the surviving spouse’s annual income requirements and the marital deduction could be lost.

One final note: A QTIP trust can be useful if a surviving spouse does not have the experience ordesire to manage assets. In such instances, a QTIP trust could be created
as part of your will and, in accordance with your wishes, be managed for the security of
the surviving spouse, while ensuring that those assets are preserved for the ultimate

Declining Dollar: What Does It Mean?
When the U.S. dollar declines against other international currencies, such as the Japanese yen, it means that a dollar can be exchanged for fewer yen. Imports of goods made in
that country then become more expensive, as does travel to that country. The effect is the same as inflation within our own economy—a dollar doesn’t go as far as it previously did. A weaker dollar also means our exports are cheaper than similar goods in the country whose currency has strengthened against the dollar. While on the surface this might appear to be a positive effect of a falling dollar (sales of U.S. goods will be greater abroad), it doesn’t necessarily work out that way. Some countries have trade policies that prohibit the import of certain products, or levy high tariffs, even though those imports are cheaper than similar goods made within that country. 

The Four Forms of Co-Ownership
Owning property with another individual or partner may be a complex relationship. Because of the complexity, the way you agree to take title or ownership must be worked
out in advance. Consulting with your legal professional can help you establish the ownership form in a way that will benefit you and your heirs. The four forms of 
co-ownership, one of which will be better suited for your particular circumstances, are as
Tenancy in common is a form of co-ownership often used between unrelated persons. Tenants in common may own unequal shares of property. For example, one person could
own a one-fourth interest and another could own a three-fourths interest as the entire property. For example, if two individuals are equal tenants in common to a parcel of land, it is incorrect to characterize one co-owner as owning the west half and the other as owning the east half. Rather, both co-owners own a one-half interest in the entire parcel. Joint ownership is a specific type of co-ownership with some very unique legal characteristics. 

Unlike a tenancy in common, where co-owners may own unequal interests, the legal interest of each joint owner is equal to the interest of every other joint owner. For example, if there are three joint owners, each joint owner owns an equal, undivided, one-third interest in the entire property. However, this proportionality does not necessarily carry over interest in the property. For example, if there are two joint owners and one of them passes away, the surviving joint owner automatically owns the entire property.

If there are three joint owners and one of them passes away, each of the two surviving joint owners automatically becomes one half owner of the entire property. This form of
ownership may be common among married couples. Tenancy by the entirety is recognized by many states as a variation of joint tenancy that applies only to joint ownership between spouses. This special form of joint ownership is called tenancy by the entirety. A tenancy by the entirety generally has the same legal characteristics of a joint ownership with equal rights of possession and the right of survivorship. 

Community property applies to married couples who own property in any of the following nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Regardless of whose name is on any ownership papers, such as a deed, any property accumulated during the marriage is “owned” by both parties. This includes cash, real estate, and any other assets that may be acquired.

Remember, splitting property, for any reason, is generally a difficult task. Therefore, the decision to purchase property with another party is one that may require careful consideration.

Deducting Student Loan Interest
In 2004, up to $2,500 of interest paid on student loans is tax deductible both for taxpayers who take the standard deduction and for those who itemize, however, certain income limits apply. Single taxpayers with modified adjusted gross incomes (MAGIs) of $50,000 or less ($100,000 for married couples filing jointly) are eligible to deduct up to $2,500 of interest paid on a student loan that covered qualified education expenses, such as tuition, room, and board. Single filers with MAGIs less than $65,000, and joint filers with MAGIs less than $130,000, qualify for partial deductions. Prior to tax year 2002, only interest payments made within the first 60 months of loan repayment qualified for the deduction, but the IRS has eliminated this limitation. 

Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in California, Oregon and Colorado only. Advisory Services are offered to residents of the state of California only. Lincoln Financial Securities Corporation is not affiliated with Financial Concepts. Financial Concepts offer insurance & financial services to residents in California and Oregon. Variable & Group insurance products offered through LFS Marketing and Insurance Sales Corporation; fixed insurance products offered through Financial Concepts Insurance & Financial Services.
John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047