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From the Desk of:

John D. Pivirotto
President
Calif. Insurance License #0699308


Financial Concepts

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

JohnPiv@FinancialConcepts.net


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.
Leaving a Legacy

For millions of Americans, “charity begins at home.” Many have decided to make a difference by donating money to local religious, educational, social, or cultural organizations. In addition to the immense satisfaction that comes from giving to others, when done as part of an overall estate plan, charitable giving can provide tax benefits for the donor and his or her heirs (IRC Section 170(a) through (c)). 

Charitable Gifts of Life Insurance 
Gifts of life insurance have some unique advantages, among them: 
  • Since the payment of a life insurance policy death benefit to a named beneficiary is not part of the probate process, it is private—not a matter of public record like assets passing by will.
  • Although payment of the life insurance death benefit• Life insurance is a contract and death proceeds pass outside the will, so payment of the death benefit generally cannot be contested in probate kept intact for thedonor’s family, as described below.
Gifts of life insurance can be made in essentially two ways. Under the first, the insured is the owner of
the policy, and the charity is the beneficiary. This arrangement is used when an insured/donor desires to retain control over the insurance policy. Under this arrangement, the premiums are not income tax deductible. Additionally, since the insured owns the policy at death, the death benefit will be included in his or her estate under IRC Section 2042, but it will be 100% deductible from the estate, since it is payable to a charity (IRC Section 2055).
Under the second, the charity is owner and beneficiary. Unlike the situation where the insured retains
ownership, the premiums may be income tax deductible within Internal Revenue Service (IRS) guidelines. If the donor gives an existing policy to charity, the fair market value of the policy (generally, its full cash value (Proposed Reg. 126967-03)) is allowable as an income tax deduction.
The tax consequences of future premium payments for the gifted policy would work as described above where the charity is both owner and beneficiary.

Charitable RemainderTrusts (CRTs)
If the prospective charitable donor is looking for a way to increase income, reduce estate and income taxes, avoid taxes on gains, and make a significant charitable contribution without reducing his or her
family’s inheritance, a charitable remainder trust (CRT) and a wealth replacement trust may be the
right tools. A CRT can allow an individual to As a general rule, it may be best to fund a CRT with an asset that, if sold outside the trust, would produce substantial long-term capital gains tax. After the trust is executed, the donor transfers this appreciated, low or non-income-producing asset to the CRT. The CRT sells the asset and gives the donor an income for life, for a term of years, or for joint lives. At the death of the donor or the donor’s named non-charitable income beneficiary, the remaining trust assets pass to the charity. Here are some of the benefits of using this strategy:
  • Upon creation of the trust, the donor gets a current income tax deduction based on the present value of the future amount passing to the charity (IRC Sections 170(f)(2)(A) and 664(e)).
  • No tax on the gain is paid by the trust when it sells the asset, since the trust is exempt from such tax.
  • The donor gets increased income, since the trust may invest in assets paying a higher rate of return than the asset contributed was producing, and the trust would have more to invest, since it doesn’t pay tax on the gain.
  • Estate taxes are reduced, since the asset placed in the trust has been removed from the estate.

CRT Mechanics and TaxAspects
As a general rule, it may be best to fund a CRT with an asset that, if sold outside the trust, would produce substantial long-term capital gains tax. After the trust is executed, the donor transfers this appreciated, low or non-income-producing asset to the CRT. The CRT sells the asset and gives the donor an income for life, for a term of years, or for joint lives. At the death of the donor or the donor’s named non-charitable income beneficiary, the remaining trust assets pass to the charity. Hereare some of the benefits of using this strategy:
  • Upon creation of the trust, the donor gets a current income tax deduction based on the present value of the future amount passing to the charity (IRC Sections 170(f)(2)(A) and 664(e)).
  • No tax on the gain is paid by the trust when it sells the asset, since the trust is exempt from such tax.
  • The donor gets increased income, since the trust may invest in assets paying a higher rate of return than the asset contributed was producing, and the trust would have more to invest, since it doesn’t pay tax onthe gain.
  • Estate taxes are reduced, since the asset placed in the trust has been removed from the estate.

The Irrevocable Life Insurance Trust
After the donor’s death, the remaining assets in thetrust pass to the charity. The assets do not pass to
the donor’s heirs. The tax savings produced by the charitable donation and the income generated by the trust can be used to pay premiums on a life insurance policy owned by an irrevocable life insurance trust (ILIT)—sometimes known as a “wealth replacement” trust. The life insurance policy in this trust replaces the value of the assets that pass to the charity in the CRT. Since the life insurance is
purchased and owned by the irrevocable trust, the proceeds are free of income tax, as well as estate tax.There are a variety of charitable giving tools and techniques that can provide generous donors with certain tax benefits. For specific guidance, consult your qualified tax and legal professionals. 

When It's Time to Support Those Who Supported You
Americans are living longer. That reality means that many of us will eventually support our aging
parents. Fortunately, our income tax code offers specific tax breaks to help us shoulder the load. Unfortunately, many taxpayers aren’t taking advantage of these breaks. In 2004, you can take a $3,100 dependency exemption for another person if the following five tests are met:
1. The dependent’s gross income is no more than $3,100.
2. You provide more than 50% of the dependent’s support.
3. The dependent is related to you.
4. The dependent is a United States citizen or resident.
5. The dependent doesn’t file a joint income tax return unless it’s to obtain a refund.

Gross income, in this case, excludes nontaxable income (i.e., municipal bond interest) and all or part of any Social Security benefits received. Therefore, changing a parent’s asset mix or gifting income producing property to a child or grandchild can salvage a dependency exemption that otherwise would be lost. “Support” involves providing food, clothing, shelter, and medical care. All amounts actually spent on support (even those from nontaxable sources) are taken into account. So, being able to document your support computation each year is very important. When several siblings support a parent, but no one individually provides more than half of the support for a given year, use a multiple
support agreement. Any siblings providing at least 10% of the parent’s support can claim the dependency exemption in the current year provided the others agree. A different sibling can claim the exemption each year.
It’s important to note that dependency exemptions phase out at certain levels of adjusted gross income (AGI). For 2004, phaseout begins at AGI of $142,700 for single taxpayers and $214,050 for those who are married and file jointly.

Filing Status Matters
If you are single and you support a parent, consider filing as the “head of household.” You’ll be entitled to lower marginal tax rates and a larger standard deduction. To qualify, the parent must qualify as your dependent. And, you must provide more than 50% of the cost of maintaining your parent’s household, but you do not have to live in the same house. Consequently, if you pay more than half of your parent’s nursing home cost, you can claim head of household status.

Dependent Care Expenses
If you pay qualified expenses for a parent who is physically or mentally incapable of self-care, you
may be able to claim a dependent care credit. You must maintain and live in the same house as your
parent. And, you must incur expenses for your parent’s care (either inside or outside the home) that enable you to be gainfully employed. For higher-income taxpayers, the credit is limited to 20% of the first $3,000 ($6,000 for two qualifying parents) of eligible expenses incurred.
However, the dollar amount of expenses can be no greater than the earned income of either a single
taxpayer or, in the case of married taxpayers, that of the lower-paid spouse. A credit is particularly
valuable because, unlike a deduction, it provides a dollar-for-dollar reduction in income tax liability. If you (as opposed to your parent) pay for the quali- fied expenses, you can claim the credit. Taxpayers who participate in a Section 125 flexible spending account (FSA) may pay for dependent care expenses through the plan. Under these plans, up to $5,000 of your salary can go toward expenses to care for a qualifying parent. That amount avoids FICA and federal income (and sometimes state and local)
taxation. Whether you choose to take the dependent care credit or participate in the Section 125 dependent care program is up to you.
However, you cannot do both. As a general rule, high-income taxpayers will receive a greater tax benefit by paying dependent care expenses through the Section 125 plan.

Medical Expenses
You can also receive a tax deduction for medical expenses you pay on behalf of your dependent parents. The medical expenses must be greater than 7.5% of your annual AGI to be deductible. Since expenditures such as nursing home costs may qualify as medical expenses, your deduction can be
significant. Furthermore, even if your parent does not pass the dependency tests, you are still entitled
to the deduction. If you provide financial support for a parent or may do so in the future, plan your
taxes carefully. For specific guidance, consult a tax professional, who can help you sort out the complexitiesof the tax law and help you optimize your tax benefits. 

New Economic Realities for Today's Young Couples
For today’s young couples, the route to a secure future may be looking a lot different from the way it once appeared. Their income may be less certain compared to previous generations, and the demands on their financial resources are greater. In addition, rapidly evolving technology will likely require many individuals to change or reposition their careers more than once during their lifetimes. With the future of Social Security in question, and many employers no longer offering traditional defined benefit pension plans, employees must now rely heavily on their own savings to provide the bulk of their retirement income.

Meeting the Challenge of Uncertainty
What’s a young couple to do? Meet Kate and George Shea. They’re both in their mid-twenties and have been married for two years. Kate is a computer programmer at a software company and George is a manager at a local retail store. Before they were married, they lived in the city and enjoyed relatively financially carefree lives. Now, they own a home in the suburbs and are hoping to start a family sometime soon. As they begin to pursue their dreams, Kate and George are beginning to encounter the uncertainty many in their generation will face as a matter of course. Although the Sheas’ jobs are presently secure, many of their friends and relatives work for companies undergoing restructuring and are less certain about their job prospects. Since they’ll be depending on two incomes to support their family, how will they manage if one of them loses his or her job? And, will their desired standard of living be affected if they each ultimately undergo a number of career transitions?
The possibility of an uncertain income stream raises even more questions. Will they be able to afford
the number of children they want? Once they’ve started a family, will they be able to save for their
children’s education? Will they have adequate financial resources in case either of them becomes sick or disabled? And, what about their own retirement? Although they both participate in 401(k) plans at
work, will they be able to save enough to retire comfortably?

A Clear-Eyed Assessment Today—A Brighter Tomorrow
Although they face a challenging future, Kate and George are getting off on the right foot by asking
these questions. A realistic assessment of their goals and the economic climate they may face will allow them to develop alternative courses of action. If they start now, while they’re still young, they’ll have more flexibility in their spending choices and in determining the sacrifices they may need to make to secure both their current and long-term goals.
As the Sheas steer themselves toward a secure financial future, by keeping their eyes wide open they’ll
be in a better position to achieve their dreams. By making informed financial decisions and choosing
appropriate strategies today, they’ll be less likely to lose their way if they encounter personal and
economic detours and setbacks tomorrow. 
FINANCIAL
Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. FINRA Branch Office: 233 Bloomfield Road, Burlingame, CA 94010. 
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.
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John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047