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May 11, 2015

Dear Clients and Friends,

 We breathe a little easier after tax season has passed. It is certainly a busy time of year in terms of helping clients and their professionals with the compliance of filing an accurate and timely tax return. However, beyond helping service clients with compliance, it is good to revisit the “value-added” tax-related services that are part of our routine process, tax location and tax planning.

Tax Location
We have all heard the expression that the three most important things in evaluating a piece of real estate are location, location, and location. We could say the same thing about the location of the underlying components (sub-asset classes) of stocks, bonds, etc. that exist in client portfolios. Each sub-asset class can have unique tax characteristics and can be subject to different tax rates. From a tax perspective, long-term capital gains are generally the most preferred type of return, followed by qualified dividends, with ordinary income being the least desirable. Below are general characteristics of the sub-asset classes that we distinguish between:

·        Low turnover stock funds (i.e. ones that buy and sell only a few positions annually) have inherent tax deferral and enjoy long-term capital gains rates.

·        High turnover stock funds have some component of long-term capital gains, but generally negligible tax deferral.

·        Taxable bond funds with the highest yield produce the greatest amount of ordinary income, which is taxable annually.

·        Funds that employ derivatives to gain economic exposure can vary from producing high ordinary income or high capital gains, but, like taxable bond funds, produce taxable income annually.

·        Municipal bond funds, which typically yield less than taxable bond funds, produce no taxable income at the federal level, but taxable income at the state level.

In addition, the various types of accounts that a client owns, such as Traditional IRAs/401ks, Qualified Retirement Plans, Roth IRAs/401ks, Irrevocable Trusts, and other taxable accounts (joint, individual and revocable trusts) have their own tax characteristics. They are as follows:

  • Traditional IRAs/401ks and Qualified Plans are tax-deferred, which means that taxes are paid when monies are distributed out to the account owner or beneficiary.  The tax rate on the distribution is the ordinary income tax rate, not the lower capital gains rate.
  • Roth IRAs/401ks produce nontaxable growth with distributions that are generally not taxable.
  • Taxable accounts with the account owner's tax ID are taxed at the owner's marginal tax and capital gain rates, depending on the type of income.
  • Trusts with their own tax ID generally are subject to higher income and capital gain rates for investment income, to the extent that income and capital gains are retained in the trust.

Optimizing tax location is the process of allocating sub-asset classes amongst the various types of client accounts in the most tax-advantaged method. This is a time consuming process, but we believe it is worth the effort. A study by Daryanani and Condaro in 2005 concluded that optimal tax location improved returns by an average of 30 basis points (3/10 of 1%). Note: Our experience in reviewing the asset allocations of prospective clients has been that the vast majority of financial service professionals do not optimize tax location.

Tax Planning

We perform the majority of our tax planning work in November and December of every year. While that work may seem like a one-off annual event, we analyze numerous what-if scenarios that help us guide clients to make strategic tax moves before year-end, and into the following year. 

The first step in the tax planning process is to take a client’s most recent tax return and replicate it in our tax planning software. This provides a baseline as many clients have similar year-to- year income and deduction items. Once this is done, we copy the previous year into the current year column and proceed to make all adjustments that are known at that time. Doing this work in November-December allows us to plan with fairly good precision since we only need to project several weeks of data.

Once the projection is complete, we go through our three plus page checklist that contains a multitude of what-if scenarios. Areas that are covered, but not are limited to, include:

·         Is it better to contribute to a Roth 401k or a Traditional 401k?

·         Is it better to invest in municipal bonds or taxable bond funds?

·         What is the most tax-efficient way to make charitable gifts? We review sources (IRAs, appreciated securities or cash) and the timing of the gift.

·         Should a Roth conversion be recommended, and if so, how much?

·         Should income be shifted to children or other loved ones that need support?

·         Is your family receiving the maximum education credits for children in college?

·         Can we reduce the impact of the Medicare premium surcharge?

·         When should we harvest capital losses or gains?

·         When should any state tax liability be paid, this year or next?

·         How should tax and investment advisory fees be paid?

·         Should principal distributions from trusts be encouraged or not?

While many would think that using tax tables along with the published rates on capital gains, qualified dividends, and tax on net investment income would be sufficient for planning purposes, the complexities of our tax code require us to go through this level of detail and to use sophisticated income tax planning software to ensure accurate conclusions. 

Asset Allocation
The most important financial planning objective for most clients is to balance existing financial needs with future needs taking into consideration existing and expected financial resources. One’s savings and spending patterns have the most influence on achieving this proper balance and success. To assist with this objective, we allocate resources (investments) in a diversified manner and in line with your risk tolerance and risk capacity.  The chart below shows how the nation’s largest pension funds allocate their resources to match their objective of providing a promised income stream to their pensioners. Note that pension plan portfolio advisors have the benefit of being tax-neutral in allocating assets, since portfolio earnings are tax-deferred with payments to pensioners ultimately subject to ordinary income rates, regardless of the asset or sub-assets used.    

Source: Pensions & Investments Magazine


Financial Considerations As We Age

Many clients retain their personal financial management skills as they move through their retirement years. Others are not so fortunate and eventually need help. Threats to your finances can be from the outside, such as scams or thefts perpetrated by unknown individuals or from the inside, such as the misappropriation of funds by family members or others you know.

What are some steps you can take to protect yourself from outside threats?

Do not leave bank statements, check books, tax forms, or any other material that contains account numbers or Social Security numbers out in the open or in unlocked files. Shred any personal documents before throwing them away.

Reconcile your bank account monthly, or at least review for unusual withdrawals. Open all investment statements and review them for unusual or unauthorized activity. The same review should be made of all credit card statements.

Be extremely careful about sharing personal financial information with anyone over the phone. This includes family names, dates of birth, Social Security numbers, previous addresses, and credit card information. The IRS does not contact citizens over the phone. If you are asked to provide personal financial information over the phone, ask for a name and number to call them back. Then contact someone you trust to verify that the request is legitimate. If you don’t have a family member to help, call us and we will follow up for you.

Unfortunately, the National Center in Elder Abuse reports that 90% of financial abusers of the elderly are family members. What are some steps you can take to protect yourself from these inside threats?

It is important to have a plan in place so you can be confident that your finances will be managed in a way that is consistent with your wishes. If you are fortunate to have a spouse who can manage your household finances, that is often the best option. If not, clients usually lean on an adult child for assistance.

If you are receiving assistance with bill paying from an adult child, have another child or person you trust review your bank and investment account activity on a regular basis for any irregularities. With online access, these reviews could be done by a family member residing elsewhere. The key is to have more than one person helping you and overseeing your personal financial management. 

If you would like help paying bills, have a family member added as a signer on your checking account. Have that person help you set up auto pay for as many recurring payments as possible to limit the need for check writing. We do not recommend adding the signer as a co-owner of the account. This can cause access to the funds by the co-signer’s creditors and cause inheritance issues with other children.

A formal delegation of personal financial management is usually done through a Durable Power of Attorney. The delegation is considered “durable” since it stays in effect even when the grantor is disabled. Every client should have a Durable Power in place.

If you would like assistance with setting up a system to enhance your personal financial security, contact your service advisor at Schiavi + Dattani to discuss.


Do You Still Need a Credit Shelter or Residuary Trust?

The current federal estate tax exclusion is $5.43 million, allowing a married couple to protect up to $10.86 million from federal estate taxes that start at 40%. When the exemption was much lower, estate plans were designed to place assets owned by the first spouse to die in a trust to benefit the surviving spouse during his or her lifetime, but would also shelter those assets from being subject to estate tax at the death of the surviving spouse. These trusts were often titled or described as residual or residuary trusts and were complimented by marital trusts, whose assets benefited from trust management but were included in the estate of the surviving spouse.

Many wills and revocable trusts have directives to fund a residual trust up to the amount of the federal estate tax exclusion amount. This can mean that an entire individual’s estate could end up in such a trust.


Advantages of a Residual Trust


Disadvantages of a Residual Trust




·         Protects assets from beneficiary’s creditors



·         Annual tax filing fees


·         Better than a pre-nuptial agreement for protecting assets in the event of a subsequent marriage



·         Loses the ability to step-up tax basis of inherited assets at the death of surviving spouse

·         Assets, within limits, can skip a generation for estate inclusion



·         Potential for trust income to be taxed at higher levels than if income was earned outside of the trust

·         Protects against a possible step-down in tax basis




·         Could limit distribution flexibility of surviving spouse

·         Protects assets from state estate taxes where state exemption is less than federal exemption




·         Moves asset appreciation out of surviving spouse’s estate




There are many advantages to having the ability to fund a credit shelter or residual trust from one’s estate. However, many estate plans would benefit if the surviving spouse, with the assistance of his or her advisors, could carefully direct the amount of assets used to fund the trust. This can be accomplished by the use of disclaimers. The will or revocable trust of the deceased could direct the distribution of all of his or her assets to the spouse outright with any assets carefully disclaimed by the spouse used to fund the residual trust. Please note that assets in the residual trust would still be used to support the surviving spouse during their remaining lifetime.
We encourage any married individuals with a combined estate significantly below $10.86 million to set up a meeting with their estate planning attorney to see whether they would benefit from changing their estate plan. Please keep us informed if you elect to consider a change so we can be involved in the planning process with you.

The Importance of Family Financial Planning

The attached article is expected to be published shortly in the Delaware Business Times. Please contact your Schiavi + Dattani service advisor if we can assist you with any family financial challenges.


A Reminder
Please use us a resource to discuss any major financial commitments. We want to help you enjoy your financial blessings in a way that does not seriously impact your future financial security.

We continue to work daily to earn your trust and confidence.


Best Regards,



Vincent A. Schiavi, CFP®, CPA/ PFS                  Ravi P. Dattani, CFP®, CPA

President                                                             Vice President  


The Importance of Family Financial Planning

By Vincent A. Schiavi, CFP®, CPA/PFS of Schiavi + Dattani

If you are like most people, you place the health of your family ahead of almost all other concerns. Wanting financial security for your family is a natural extension of this desire. Our first obligation, like the parent in an airplane who is directed to put the oxygen mask on first, is to get our own financial house in order before assisting others. Let’s assume that you, with the assistance of a competent advisor, have your financial house in order and wish to play a part in helping your adult children.

One way to help your adult children is to balance your financial resources with your needs and have an adequate cushion for any expenses, including health care needs, you may incur in the future. For many individuals, knowing that they will not be a financial burden to their children is enough of a gift. In fact, if you are able to confidently say that you will not be a burden, you are probably in the minority. If, however, you have been blessed with more financial resources that you know you will need in your lifetime, then you have choices. You could do nothing and let your children’s efforts finance a lifestyle they can afford, or you could assist them in any number of ways. Examples include assisting a family member with the down payment of a home, finance some or all of a grandchild’s education, pay for orthodontia care (braces) or a grand family vacation.

We have seen clients struggle with decisions around helping adult children. How much can they afford to help? Is it alright to treat one child different from another? If they do treat children differently during their lifetime, should they even things out in their estate distribution? How should children inherit the assets? Should it be outright with no strings attached, or in trust to protect against future creditors, including divorce property distributions? Would your children benefit from professional financial management? If so, you can put that in place now. 

If you are blessed with a long and healthy life, your children may not inherit your assets until their own retirement years. For some children, this may be too late for an inheritance to materially impact their lives for the better. If you decide to provide assistance during your lifetime, should it be with a gift or a loan? If a gift, should it be of cash or securities? If securities, which ones? If it’s a loan, how should it be structured? Should it be unsecured or secured? Should it be forgiven at your death, or retained in your estate to even out bequests to other children? 

A financial advisory firm that actually performs coordinated financial planning, as opposed to strictly money management, is in the best position to explore family planning opportunities that are both tax-efficient and effective.

Too many families neglect multi-generational planning. If done properly, that planning could enhance the lives of your loved ones. In return, you will receive the benefit of knowing you did what you could with what you have. Only you can measure how much that satisfaction is worth.



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