WEALTH MANAGEMENT ADVISOR

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WEALTH MANAGEMENT

ADVISOR

Why life insurance still plays an important estate planning role Contingency planning

Don’t let a disaster disrupt your life

Tax tip: Miscellaneous expenses can add up

Mutual funds or Etfs?

Understand the differences before you choose

March / april 2016

Private Client Advisory

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_{Floor / 15 West Sixth Street / Tulsa, OK 74119-5419}

918-592-5885 / 800-627-5885 / FAX 918-592-5892

[email protected] / www.NolandCompanies.com

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utual funds* have been around for nearly a century. Exchange-traded funds, or ETFs, are the newer kid on the block. The two investment types have much in common, but also important differences that make each more appropriate for some situations than others.

passive or active

ETFs have quickly assumed a prominent place on the U.S. invest-ment landscape. In late 2014, more than $2 trillion in net assets were held in 1,400 ETFs — up from a single offering in 1993 and fewer than 100 in 2002. Despite this growth, mutual funds remain dominant. According to the Investment Company Institute, there are nearly $16 trillion of assets owned across close to 8,000 mutual funds.

There are two basic types of mutual funds: actively managed and index-based. With actively managed funds, a portfolio manager decides which securities to buy and sell to give the fund the best opportunity to outperform a benchmark index. Index funds, however, are passively managed, meaning they’re designed to replicate a benchmark’s characteristics and match its performance.

Despite a small number of actively managed ETFs, the vast majority are passive invest-ments. They’re designed to track a particular benchmark, making them most similar to index mutual funds.

differences in pricing

Even though index funds and ETFs share many characteristics, they also have significant dif-ferences. For starters, investors in mutual funds generally buy and sell shares directly from a fund company. The shares are priced once per trading day after the close of trading, and investors must buy before then to receive that day’s price.

ETF shares, in contrast, are transacted on stock exchanges via a brokerage account. Their prices fluctuate throughout the day based on supply and demand. This means that shares some-times temporarily trade at a premium or dis-count to their underlying investment’s net asset value (NAV). If the gap between share price and NAV gets too wide, buyers or sellers theoreti-cally emerge to bring the prices back in line.

Mutual funds or Etfs?

Understand the differences before you choose

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However, in practice, the price discrepancy can persist for days or even longer.

Another key difference is that, just as with stock trades, investors incur brokerage commis-sions each time they buy and sell ETFs. Thus, the more frequently you transact, the higher your cost of ownership. Buying mutual fund shares directly from a fund company is usually commission-free (although some funds do have sales charges, or “loads”).

Because most ETFs are passively managed, they tend to have low expenses, especially compared with actively managed mutual funds. Index mutual funds also generally have low expenses.

tax treatment varies

Most ETFs are tax efficient, especially com-pared to actively managed mutual funds, because they aren’t required to make distribu-tions. ETFs are also typically more tax efficient than index mutual funds.

When index funds need to redeem shares, port-folio managers may have to sell stock to gener-ate cash. This can cregener-ate capital gains that are passed through to individual shareholders, even those who never sell their own fund holdings. Because ETFs are transacted privately between buyers and sellers, investors have significantly more control over their taxes.

But it’s important to note that, if you own mutual funds in a tax-advantaged retirement account, such as an IRA, your purchases and sales do not involve capital gains. What’s more, fund distributions don’t result in tax.

consider your goals

Both mutual funds and ETFs can help you achieve your investment objectives. But both also carry risks — including the risk that they’ll decline in value and you’ll lose money you’ve invested in them. Discuss your goals and risk tolerance with your financial advisor and he or she can help guide you to the most appropriate investment. n

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*Consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. For this and other

infor-mation about the mutual funds you’re considering, please read the prospectus carefully before investing. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Exchange-traded funds (ETFs) don’t sell individual shares directly to investors and only issue their shares in large blocks. ETFs are subject to risks similar to those of stocks. Consider the investment objectives, risks, and charges and expenses of ETFs carefully before investing. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.

considEr your oBjEctivEs

Your individual situation will deter-mine whether you’re best suited to an exchange-traded fund (ETF) or a tradi-tional mutual fund.

If you want a chance to beat the market (by, for example, outperforming the S&P 500 index), you’ll probably want to con-sider an actively managed mutual fund. Of course, despite their best intentions, many active managers wind up trail-ing their benchmark because of higher expenses and other factors.

It’s important to think about your investment goals and timing. If you plan to make small, regular investments for a long-term objective, you might be better off setting up an automatic investment plan with a mutual fund company. That way, your frequent pur-chases will be free of transaction costs. ETFs, meanwhile, may be more cost effective if you’re making a larger, one-time investment.

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ecause the estate tax exemption currently tops $5 million, fewer people need life insurance to provide their families with the liquidity to pay estate taxes. But life insur-ance can still play an important part in your estate plan, particularly in conjunction with charitable remainder trusts (CRTs) and other charitable giving strategies.

home for highly appreciated assets

CRTs are irrevocable trusts that work like this: You contribute property to a CRT during your life or upon your death and the trust makes annual distributions to you or your beneficiary (typically, your spouse) for a specified period of time. When that period ends, the remainder goes to a charity of your choice.

These instruments are particularly useful when you contribute highly appreciated assets, such as stock or real estate, and want to reduce capital gains tax exposure. Because the CRT is tax-exempt, it can sell the assets and reinvest the proceeds without currently triggering the entire capital gain. Another benefit is that, if you opt to receive annual distributions from your trust, that income stream generally will be taxed at a lower rate than other income using a formula that combines ordinary taxable income, tax-exempt income, capital gains and other rates.

Here’s where life insur-ance comes in. Because CRT assets eventually go to charity — usually after both you and your spouse have died — you won’t have as much to leave to your children or

other heirs. A life insurance policy can replace that “lost” wealth in a tax advantaged way.

charities as beneficiaries

CRTs are ideal for philanthropically minded individuals. But there are other ways to use life insurance to fund charitable gifts and enjoy tax benefits. You might, for example, transfer your policy to a nonprofit organization and take a charitable income tax deduction (subject to certain limitations) for it. If you continue to pay premiums on the policy after the charity becomes its owner and beneficiary, you can take additional charitable deductions.

Another scenario is to just name a charity as your policy’s beneficiary. Because you retain ownership, you can’t take charitable income tax deductions during your life. But when you die, your estate will be entitled to an estate tax charitable deduction.

Here’s a third idea. Instead of leaving your IRA or other retirement accounts to your heirs, thus forcing them to pay income tax on any distribu-tions, designate these investment accounts for charity. Then buy a life insurance policy equal to the value of the donated assets to leave to your family. You might even want to pay the policy’s premiums with after-tax funds from a retirement account.

Wealth replacement tool

Life insurance can be used to replace wealth in many circumstances — not only when you’re donating to charity. For instance, if you’ve decided to forgo long term care (LTC) insurance and pay any LTC-related expenses (such as home nursing services or care in a

4 Why life insurance still plays

an important estate planning role

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nursing facility) out of pocket, you may not have as much to leave your heirs. Life insurance can help ensure that you provide your family with an inheritance.

Or, say you’re a business owner who intends to leave the company to one of your children who you believe can run it successfully. That may leave other children who won’t inherit the busi-ness. If you don’t have adequate assets out-side your company to equalize your children’s

shares, life insurance proceeds can help bridge that gap.

Multiple benefits

Estate taxes may no longer be a concern if your estate is valued at less than

$5.45 million. But, depending on your goals, life insurance can help you make charitable gifts, leave money to your heirs and realize tax advantages. Talk to your financial advisor about the types of policies that might be appropriate for estate planning purposes. n

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s chief operating officer, Leah

oversaw the creation of her company’s contingency (or disaster) plan. When a Category 4 hurricane put that plan to the test, it passed with flying colors. No employ-ees were harmed, and the company was able to resume operations only two days after the storm. Although the office sustained damage, insurance covered repair costs.

Unfortunately, Leah’s family wasn’t as pre-pared. She had trouble getting in touch with her husband and children as the storm approached, and though everyone was safe, their home was badly damaged. Worse, their homeowners’ insurance policy provided only limited flood coverage, forcing them to pay thousands of dollars out of pocket.

Leah learned a hard lesson: Individuals and families need disaster plans, too. Here’s how to put one together.

first things first

Start with your homeowners’ insurance. Make sure your policy covers flood, wind and other damage that’s a real possibility in your region and that its

dollar amount is adequate to cover replacement costs. Also review and, if necessary, update your life and disability insurance.

Next, document all of your assets. Create a list of your bank accounts, titles, deeds, mortgages, home equity loans, investments and tax records. Then inventory physical assets not only in writing (including brand names and model and serial numbers), but also by photo-graphing them.

ready documents

It’s smart to store copies of important financial and personal documents somewhere other than your home. Secure, offsite locations include a safe deposit box at your bank, your attorney’s office, or the distant home of a trusted friend or relative.

You probably also have digital documents and data you want to protect. Consider “cloud computing” — storing files with a secure Web-based storage provider so you can access them anywhere — or back up files on portable flash or hard drives you keep somewhere other than your home.

5 Contingency planning

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cash on hand

When a disaster strikes you may not receive insur-ance money right away. And while government relief funds may be made available — depend-ing on the severity of the incident — those funds typically are distributed weeks or months after the event. Having a cash reserve readily available is a key component of any recovery plan.

A good rule of thumb is to set aside three to six months’ worth of living expenses in a savings or money market account. You can draw from this cash reserve to pay for a hotel room and other day-to-day expenses in the interim.

Also consider keeping a cash reserve in your home — at least $75 per family member in small bills — in the event you’re unable to access your bank accounts immediately. For an added level of protection, stash this cash in a durable, fireproof safe.

communications and supplies

Of course, if a disaster occurs, your physical security is paramount. Establish a family emer-gency plan that includes methods of getting in touch and a safe place to meet. Also devise evacuation routes should you need to leave your home, neighborhood or city quickly.

On the other hand, should a disaster require you to stay in your home for an extended period, you’ll need emergency supplies. Stock your supply kit with:

n Several gallons of water,

n Nonperishable food,

n Flashlights,

n Extra batteries, and

n A first aid kit.

Finally, to stay informed of the latest develop-ments, consider buying a battery-powered — or better yet, hand-cranked — radio in case phone and data lines and wireless networks are down.

don’t procrastinate

You never know when disaster is going to strike. As many businesses have learned, it doesn’t pay to put off contingency planning. And in many cases, families have a lot more to lose. n

6 tax tip: Miscellaneous

expenses can add up

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id you know that you can deduct work-related expenses, professional advisor fees and even job search costs on your fed-eral tax return? Possibly, but there’s a catch: Miscellaneous expenses must first add up to more than 2% of your adjusted gross income (AGI) or you can’t deduct any of them. Fortunately, with a little planning, you may be able to itemize and deduct more than you think.

the “other” category

Expenses in the miscellaneous category are a mix of items that don’t fit elsewhere — for example, safe deposit box rent, tax preparation software, investment advisor fees and legal costs incurred while attempting to col-lect or preserve income. You may even be able to deduct costs associated with claiming a refund from the IRS.

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This publication was developed by a third-party publisher and distributed with the understanding that the publisher and distributor are not rendering legal, account-ing or other professional advice or opinions on specific facts or matters and recommend you consult with a professional attorney, accountant, tax professional, financial advisor or other appropriate industry professional. The hypothetical examples used are for illustrative purposes only and not intended to represent the value

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For most taxpayers, however, the largest miscellaneous expenses are work related. These include unreimbursed employee business expenses such as union dues and professional and civic organization memberships, uniforms necessary for the job (professional office attire such as suits doesn’t count), and tuition for education requested by an employer.

Employees’ home office costs may also be considered miscellaneous expenses as long as the home office meets the IRS’s definition. (Among other requirements, a home office must be used regularly and exclu-sively for business.) Note that, if you’re self-employed, home office

expenses aren’t subject to the 2% miscellaneous itemized deduction rule: You can deduct them directly from your self-employment income. Finally, if you’re looking for a job, your employ-ment agency, transportation and other job-hunting costs may be deductible. For them to qualify, you must be seeking a position in the field or profession you currently work or recently worked in. So if you’re looking to leap from insurance to marine biology, you’re probably out of luck — at least from a tax perspective.

rare and nondeductible expenses

There’s actually a second category of miscella-neous expenses that aren’t subject to the 2% rule, but they generally relate to less-common scenarios. For example, you might be able to deduct:

n Casualty and theft losses from income-producing properties,

n Income received as the beneficiary of an estate,

n Losses from participation in a fraudulent

investment scheme, and

n Gambling losses up to the amount of

gambling winnings.

Then there are the miscellaneous expenses you can’t deduct under any circumstances, including adoption fees, funeral expenses, personal legal bills and commuting costs. And if you want to donate to the campaign of a political candidate this election season, go ahead. Just don’t deduct it on your tax return. For a longer list of deduc-tion no-nos, see IRS publicadeduc-tion 529.

Better in bunches

Not surprisingly, most taxpayers can’t deduct miscellaneous expenses subject to the 2% floor every year. But even if you don’t deduct them in the 2015 tax year, you may be able to accelerate or defer certain expenses and bunch them in a year when they’re more likely to add up to over 2% of your AGI. Your tax advisor can help explain this, as well as how the alternative minimum tax could affect the benefits of item-ized miscellaneous deductions. n

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At Integrated Financial we help guide you through the process of creating a financial blueprint. We will work with you to:

• Review your individual situation and personal objectives. Every family’s financial situation is unique. The more we know about you, the more precise considerations we can offer and the more we can help you. We will take the time to discuss your hopes, dreams and objectives — the things that really matter to you. • Analyze and review your needs. As needed, we will work with

you to identify and prioritize your objectives, and then help establish benchmark goals. This is important because we live in a world of unlimited choices. People often fail to achieve objectives because they try to accomplish too much at once, or they don't attach specific deadlines to their goals. By breaking down your goals to specific objectives, you can look at available resources and decide which goals are realistic, which need to be adjusted and scaled down, and any that simply must be abandoned. • Develop and implement a strategy to help you achieve your

goals. Based on our conversation and analysis, we can offer solutions to help you achieve your financial goals.

• Coordinate your financial activities. If you would like, we can also coordinate your insurance and financial activities for you with the other members of your team of financial, tax and legal advisers.

• Monitor progress; provide ongoing service as your situation and needs change over time. Planning is not a one-shot deal. Strategies need to be adjusted periodically as your life and the tax laws change. We will work with you over the years to help keep your program on track with your changing needs.

Through The Nautilus Group, a unique organization comprised of individuals with credentials in law, accounting and insurance, we can assist you and your advisors in creating the most innovative strategies with the highest standards of confidentiality and service.

A graduate of the University

of Tulsa, Michael received

his degree in economics

and finance.

At

Integrated Financial we

use a unique integrated

planning process to help

clients crystallize their goals

and objectives for themselves,

their families, their businesses

and their communities. We

develop an action plan to

help them get results.

Integrated Financial is a

wealth management firm,

which focuses on estate,

financial*, investment and

business planning. We help

implement appropriate

strat-

egies to optimize and pre-serve the integrity of what

our clients have built over

their lifetimes for their future

generations. In business since

1972, we work with clients

on a national basis.

Michael R. Noland, Registered Representative offering securities through NYLIFE Securities LLC. (Member FINRA/SIPC) A Licensed Insurance Agency 25th Floor, 15 West Sixth Street, Tulsa, OK 74119, 918-592-5885 Integrated Financial is not owned or operated by NYLIFE Securities LLC. or its affiliates. Michael Noland is securities licensed to sell mutual funds and variable products. Discussion of any other types of securities in this newsletter is provided for general information purposes only and should not be construed as an offering of those particular products. * Financial Adviser offering investment Advisory Services through Eagle Strategies LLC., A Registered Investment Adviser.

Private Client Advisory

Michael R. Noland, CLU, ChFC, AEP Financial Adviser*