February, 2016
Watters Financial Services, LLC
The following brief article takes a look at some of the insurance issues associated with gaps in coverage.  It is an interesting article for anyone who has questions about their current coverage. If you have questions or concerns regarding this article, please feel free to call my office at 201-843-0044.

Are There Gaps in Your Insurance Coverage?

Buying insurance is about sharing or shifting risk. For example, health insurance will cover some of the cost of medical care. Homeowners insurance will assume some of the risk of loss in the event your home is damaged or destroyed. But oftentimes we think we're covered for specific losses when, in fact, we're not. Here are some common coverage gaps to consider when reviewing your own insurance coverage.

Life insurance

In general, you want to have enough life insurance coverage (when coupled with savings and income) to allow your family to continue living the lifestyle to which they're accustomed. But changing circumstances may leave a gap in your life insurance coverage.

For example, if you have life insurance through your employer, changing jobs could affect your insurance coverage. You may not have the same amount of insurance, or the policy provisions may differ. Whereas your prior employer may have provided permanent life insurance, now you may have term insurance that will expire on a predetermined date. Review your income, savings, and expenses annually and compare them to your insurance coverage, and be mindful that changing circumstances may require a change in the amount of insurance coverage.

Homeowners insurance

It's not always clear from reading your homeowners policy which perils are covered and how much damage will be paid for. It's important to know what your homeowner’s policy covers and, more important, what it doesn't cover.

You might think your insurer would pay the full cost to replace your home if it were destroyed by a covered occurrence. But many policies place a cap on replacement cost up to the face amount stated on the policy. You may want to check with a building contractor to get an idea of the replacement cost for your home, then compare it to your policy to be sure you have enough coverage.

Even if your policy states that "all perils" are covered, most policies carve out many exceptions or exclusions to this general provision. For example, damage caused by floods, earthquakes, and hurricanes may be covered only by special addendums to your policy, or in some cases by separate insurance policies altogether. Also, your insurer may not cover the extra cost of rebuilding attributable to more stringent building codes, or your policy may limit how much and how long it will pay for temporary housing while repairs are made.

To avoid these gaps in coverage, review your policy annually with your insurer. Also, pay attention to notices you may receive. What may look like boilerplate language could actually be significant changes to your coverage. Don't rely on your interpretations--seek an explanation from your insurer or agent.

Auto insurance

Which drivers and what vehicles are covered by your auto insurance? Most policies provide coverage for you and family members residing with you, but it's not always clear-cut. For instance, a child who is living in a college dorm is probably covered, but a child who lives in an off-campus apartment might be excluded from coverage. If you and your spouse divorce, which policy insures your children, particularly if they are living with each parent at different times of the year? Notify your insurer about any change in living arrangements to avoid a gap in coverage.

Other gaps include no coverage for damaged batteries, tires, and shocks. And you might not be covered for stolen or damaged cell phones or other electronic devices. Your policy may also limit the amount paid for a rental while your vehicle is being repaired.

In fact, insurance coverage for rental cars may also pose a problem. For instance, your own collision coverage may apply to the rental car you're driving, but it may not pay for all the damage alleged by a rental company, such as loss of use charges. If you're leasing a car long term, your policy may cover the replacement cost only if the car is a total loss or is stolen. But that amount may not be enough to pay for the outstanding balance of your lease. Gap insurance can cover any difference between what your insurer pays and the balance of your lease.

Policy terms and conditions aren't always easily understood, and you may not be sure what's covered until it's time to file a claim. So review your insurance policy to be sure you've filled all the gaps in your coverage. This blog post just starts the discussion. Other possible topics could include Long Term Care Insurance and Disability Insurance as well.

What Are the Tax Issues Associated With a Gain or Loss on a Primary Residence?

January 2016

Watters Financial Services, LLC

For most Americans the most valuable asset they own is their home. At Watters Financial Services, LLC we invest a great deal of time helping our clients with their financial planning issues. One of the issues that comes up often is what to do with the primary residence, especially for those clients nearing retirement. The following brief article takes a look at some of the tax issues associated with a gain or loss on a primary residence. It is an interesting article for anyone who has questions about how real estate is taxed. If anyone has any questions or concerns regarding this article please call my office at 201-843-0044.

What Are the Tax Issues Associated With a Gain or Loss on a Primary Residence?

Description: A homeowner may be able to claim a significant tax break on any gain from the sale of a primary residence. Here's more on the break.

For U.S. federal income tax purposes, you may be able to exclude from income any gain up to $250,000 for a single taxpayer and $500,000 for a married couple filing a joint return. Generally, to exclude the gain, you must have owned and lived in the property as your main home for two of the five years prior to the date of the sale. If you lose money on a sale, the loss is not tax deductible.

Your Adjusted Basis

A dollar amount known as your adjusted basis determines whether you experience a gain or a loss. If you purchased or built your home, your initial cost basis typically is the cost to you at the time of purchase. If you inherit a home, the cost basis is the fair market value on the date of the decedent's death or on a later valuation date selected by a representative of the estate.

The formula for determining your gain or loss is as follows:

Selling price - Selling expenses = Amount realized

Amount realized - Adjusted basis = Gain or loss

The cost basis may be adjusted over time due to the following conditions:

·      Additions and other improvements that have a useful life of more than one year and that add to the value of your home. These may include a garage, decks, landscaping, a swimming pool, storm windows and doors, heating and air conditioning systems, plumbing, interior improvements and insulation. Note that repairs that keep your house in good condition but do not significantly enhance value, such as fixing gutters, repainting, or plastering, do not affect the basis.

·      Special assessments paid for local improvements.

·      Amounts spent to restore damaged property.

·      Payments for granting an easement or right-or-way.

·      Depreciation if the home was used for business or rental purposes.

·      Others as determined by the Internal Revenue Service (See Publication 523 Selling Your Home).

The definition of a "main home," according to the Internal Revenue Service, includes a private residence, condominium, cooperative apartment, mobile home or houseboat. It is to your advantage to maintain records of a home's purchase price, purchase expenses, improvements, additions, and other issues that may affect the adjusted basis.

Required Attribution: Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content. © 2015 Wealth Management Systems Inc. All rights reserved.

Is your advisor prepared for a cyberattack?

Greetings,

Tim Watters of Watters Financial Services, LLC was recently quoted on cyber-security in an article on CNBC.com !

Click on the link below to view the article if you are interested   

Is your advisor prepared for a cyberattack?

Combating Cyber Crime

November, 2015

Cyber security attacks are becoming more and more prevalent. At Watters Financial Services, LLC (WFS) we have experienced fraudulent attempts to gain access to our clients’ assets and private information many times. There are a number of ways in which this can occur. Some of the methods they use are listed below.

·       IRS fraudulent calls

·       Tax Returns filed and refunds taken by scammers

·       Impersonation of the client at a bank to withdraw funds.

·       Phishing attacks to a firm requesting client funds (This actually happened again to one of our clients yesterday)

·       Fraudulent credit cards issued in the client’s name

To combat these security attacks, WFS has instituted office policies and procedures to combat cyber crime.  Some of these policies and procedures include:

·       Clients have a secret password that they use whenever requesting funds.

·       Clients are set up for electronic fund transfers from TD Ameritrade Institutional to their personal checking account.

·       WFS calls clients to verify their identity whenever funds are requested via email.

·       WFS encourages clients to change their passwords on key financial websites every 3 months.

·       WFS uses an encryption software Citrix ShareFile®, when sending and receiving sensitive data and attachments by email. 

·       WFS has a picture of clients on file.

·       WFS encourages clients to switch to email providers other than AOL.

·       WFS uses Orion® as an online portal that allows clients to access their performance securely from anywhere in the world.

·       Client data and paper documents are shredded after the appropriate holding period.

These are just some of the ways that WFS is committed to safeguarding our clients’ assets and private information.

More Information can be found on the Department of Homeland Security’s website at http://www.dhs.gov/stopthinkconnect#

Buy Sell Agreements

Understanding Buy-Sell Agreements

Oct 15, 2015

Watters Financial Services, LLC – October 2015

One of the key areas we focus on at Watters Financial Services, LLC is risk management for small businesses. There is allot at stake for many closely held businesses and smart planning can help mitigate some of the risk. In this recent article from Wealth Management Systems Inc. some of the specifics of Buy-Sell Agreements are outlined. We encourage all businesses to take a look at their relevant risks on at least a yearly basis. We are happy to be of assistance if anyone has any questions regarding this issue.

Business Succession Issues: Understanding Buy-Sell Agreements 

Description: This article examines how buy-sell agreements can provide a viable exit strategy for owners who wish to sell shares in a private business.

 Synopsis: Buy-sell agreements are legal arrangements used to ensure that a closely held business will be able to continue in case of the death, disability, or departure of an owner or partner, as well as other possible triggering events. They spell out how such a situation will be dealt with and set a value on the ownership interests, or a procedure for determining the value at a future time. Buy-sell agreements may be structured as cross purchase, entity purchase, and hybrid purchase plans. Life insurance policies typically provide the source of funds for purchasing shares under a buy-sell agreement. The structure and funding of an agreement depend on such factors as the number of owners involved, the needs of the business, tax effects, and the preferences of those covered by an agreement. Buy-sell agreements have many potential benefits but are complex arrangements that require the input of legal, tax, and insurance professionals. 

Running into financial troubles isn't the only reason that some closely held businesses fail to succeed. Their untimely demise may result from the lack of a formal plan providing for the orderly succession of management and ownership of the business. Such a plan frequently incorporates a buy-sell agreement as the tool for ensuring that the business will continue even after the departure, death, or disability of an owner.

To head off future problems, it pays to understand the uses and structures of these agreements. Although they can be adopted at any time, it is best to decide whether to put a buy-sell agreement in place as early as possible in the life of a business.

Legal Blueprint

A buy-sell agreement is a legal document allowing the remaining owner(s) to acquire the interest of a withdrawing shareholder or partner due to a specified event. The agreement usually restricts an owner's ability to transfer his or her interest and sets out the terms under which another owner or the business entity may acquire the departing owner's interest.

A buy-sell agreement can anticipate situations that could imperil the business or be harmful to owners and key employees. For example, it can be used to prevent unwanted outsiders or heirs from obtaining an ownership interest. It can prevent the continued involvement of retired or inactive shareholders or partners. It can ensure the legal continuation of the entity should an owner become bankrupt or lose a required professional license.

Among its benefits, a buy-sell agreement creates a marketplace for the shares of a closely held business, helps ensure that departing owners will receive adequate compensation, and provides cash to pay estate taxes and settlement costs for surviving heirs, if applicable. In fact, fixing the value of a business or establishing a procedure for valuing it in the future addresses one of the most important issues facing a closely held business. An agreement can also help increase job stability for minority owners and non-owner employees critical to the success of the business.

A buy-sell arrangement can be triggered by a variety of events. In addition to the death, disability, or retirement of an owner, other possible triggers may include an attempt to dissolve the entity, an unsolvable conflict among owners, or an owner's desire to sell his interest.

Possible Structures and Funding

There are generally two basic types of buy-sell agreements:

Cross purchase. Each owner enters into an agreement with every other owner. This approach becomes cumbersome if more than three or four individuals are involved. For example, 64 separate agreements would be required for eight owners.

Entity purchase. The business itself enters into an agreement with each owner and is obligated to buy the shares of a departing owner.

A third type, or so-called Hybrid plan, is essentially a combination of the cross purchase and entity purchase. This approach allows the entity and its owners to delay a purchase decision until a triggering event occurs. The entity typically has the first right of refusal for purchasing the shares of a departing owner.

Life insurance is the most popular funding mechanism for buy-sell agreements. Life insurance is unique in that it creates immediate funding in the event of death, while allowing tax-deferred cash to build up over time. In a cross purchase plan, each owner buys and maintains a policy on every other owner in an amount sufficient to cover the beneficiary's ownership interest. In an entity arrangement, the business purchases the insurance policy on each owner and the business is the beneficiary.

Besides life insurance, other less popular but potentially effective funding mechanisms include cash flow, asset sales, loans, sinking funds, and reserves.

Making Sense of Buy-Sell Agreements

Like all business succession matters, buy-sell agreements are complex and require the assistance of qualified legal, tax, and insurance professionals to ensure proper execution and funding.

Tax and Estate Planning Considerations

Tax consequences are an essential consideration in determining whether to utilize a buy-sell agreement and how to structure one. This process involves evaluating the benefits and drawbacks of each type of arrangement in relation to the specific situation. For example, a cross purchase agreement offers shareholders a stepped-up basis on stock acquired in a buyout, and there are no alternative minimum tax (AMT) consequences if the business has C corporation status.

On the other hand, the cash value of any life insurance owned by the decedent that insures the life of another owner under a buy-sell agreement is included in the decedent's estate, which may affect estate taxes. Secondly, federal law precludes using a buy-sell agreement as a discounted giving technique.

Moreover, buy-sell agreements may be problematic for individuals looking to pass their business on to other family members if the agreement sets a price that is less than the fair market value of a deceased owner's stock. If that were the case, then the entire amount of stock passed on to the surviving spouse would not qualify for the marital deduction. In addition, a child named in a buy-sell agreement who elects not to purchase a deceased parent's shares may subject the surviving parent to gift taxes for the shares the child did not purchase.

An entity purchase plan has tax ramifications for the business itself. While death benefits are received tax free, life insurance cash values and death proceeds may result in corporate AMT. Also, insurance premiums are not a deductible business expense.

As this overview suggests, buy-sell agreements have many potential advantages. Among others, they can reduce conflicts, create a marketplace for shareholdings, and assure customers, suppliers, and employees that the business will continue. However, their complexities must be assessed, and agreements must be carefully crafted to address needs of the business, its owners, and their heirs. Input from qualified insurance, legal, and tax professionals is essential before entering into a buy-sell agreement.

Points to Remember

1.     A buy-sell agreement spells out what will be done with -- and funds the transfer of -- the ownership interest in a closely held business in the event of the death, disability, or withdrawal of an owner or partner.

2.     A buy-sell agreement can reduce disputes among those involved in a closely held business, as well as ensure the continuity of the business, by providing a fair process that protects departing owners, remaining owners, and the business itself.

3.     A buy-sell agreement may be structured as a cross purchase, entity purchase, or hybrid purchase plan. The choice of structure depends on the number of owners involved, as well as tax, estate planning, and other concerns specific to each situation.

4.     Life insurance is the most popular mechanism for funding a buy-sell agreement. The structure of the agreement determines whether individual owners or the business entity purchase the policies and receive their proceeds.

5.     Legal, tax, estate planning, and insurance professionals familiar with buy-sell agreements need to be consulted before deciding whether to employ an agreement and which structure it should use.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. neither Wealth Management Systems Inc. or Watters Financial Services, LLC  nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. or Watters Financial Services, LLC be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2015 Wealth Management Systems Inc. All rights reserved.

Exchange Traded Funds and Mutual Funds: Two Investment Vehicles – How to decide?

First, let’s start with the basic definition of an Exchange Traded Fund (ETF). “An Exchange Traded Fund is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund, ” according to Investopedia.com.

Second, let’s look at the basic definition of a mutual fund. “A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt,” according to Investor.gov.

A comparison of ETF’s and mutual funds.

ETF’s and mutual funds share more similarities than differences. Both investment vehicles offer diversification. By pooling money together from many investors, ETF’s and mutual funds have greater buying power, enabling them to buy many different securities in large quantities. They gather money from many investors and use it to acquire stocks, bonds, and other assets. Another similarity is transparency. Compared with actively managed funds, most index ETF’s and index mutual funds are extremely transparent. Also, in the United States, all mutual funds, as well as the vast majority of ETF’s, are subject to strict regulation under the Investment Company Act of 1940 and associated Securities and Exchange Commission rules and regulations.

“The tax efficiency of an investment product generally has more to do with how it is managed—index versus active—than whether the product is structured as an ETF or mutual fund,” according to Vanguard.com.

This brings our discussion to that of the differences between ETF’s and mutual funds. The first major difference between ETF’s and mutual funds is trading flexibility. Unlike mutual funds, an ETF trades like common stocks on a stock exchange. This means that ETF’s experience price changes throughout the day as they are bought and sold. On the other hand, an order to buy or sell a mutual fund is executed at the end-of-day price, known as the net asset value. This means that mutual funds experience price changes only at the end of the trading day.

Next, the most prevalent difference between ETF’s and mutual funds is the way costs are charged to the investor. While ETF’s and mutual funds share some common costs, ETF’s have unique costs not associated with mutual funds. The main difference is the Bid and Ask spread. “While trading ETF’s on the secondary market, there is a difference between the price a dealer is willing to pay for the ETF (the “bid”) and the somewhat higher price the dealer will accept to sell the ETF (the “ask”), ” according to advisors.vanguard.com.

“The amount by which the ask price exceeds the bid price is called the “bid-ask spread.” An ETF usually trades as closely to its net asset values, or NAV, as possible. The market provides a lot of liquidity to the system in order to ensure this. However, for some low-volume ETFs, bid-ask spreads may exist and widen. Trading ETFs with large spreads may decrease potential returns since they affect the ETF purchase and sales prices. Investors may also purchase an ETF above its NAV, which essentially means paying a premium for the basket of securities,” according to a recent article on finance.yahoo.com.

In the end, ETF’s and mutual funds may be suitable alternatives to stocks and bonds. Investors need to consider all of the similarities and differences between the two in order to make an informed decision.

 

 

Making Sense of Mutual Fund Lingo

 

                      Making Sense of Mutual Fund Lingo

The jargon of investing may seem designed to confuse, but understanding a few of the terms can help you navigate your way more easily through the maze of financial information.

Measuring Performance              

The NAV -- or net asset value -- of a fund is the price to buy or sell one share of the fund. It is calculated on a regular basis by the fund company using the closing price of each security held in the fund. In some retirement plans, the actual unit value of shares may differ from the NAV.

Capital appreciation (or depreciation) is the difference between the price (NAV) of your shares when you bought them and the current price. While maximizing capital appreciation is the objective of growth funds, money market mutual funds strive to maintain a constant NAV of $1, so they offer no opportunity for capital appreciation.

Yield is the interest earned or income generated by the fund as a percentage of its NAV. Although some equity funds may pay interest, yield is most relevant as a measurement for bond and money market funds that have income as their primary objective.

Total return is calculated as a percentage change in the fund's NAV, plus any other income. It represents the gain -- or loss -- of any fund over time, assuming that all distributions by the fund have been reinvested. It may be useful to compare your fund's total return to an appropriate benchmark index as well as to other mutual funds with similar investment objectives.

Fund Distributions

When the securities in a fund pay interest or dividends, the fund passes them along to its shareholders. In the same way, any capital gains -- or profit -- realized by the sale of a security in the fund are distributed as well. Through your retirement plan, these dividend and capital gains distributions are automatically reinvested in the fund to foster long-term growth. You receive additional shares (or fraction of a share) rather than cash.

Taking the time to decipher the language of investing can be an important step toward taking control of your financial future.

Because of the possibility of human or mechanical error by Watters Financial Services (WFS) or its sources, guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall WFS be liable for any indirect, special or consequential damages in connection with the use of the content.