Immodest Proposals From the IRS

The IRS has upended the apple cart with its new IR

The new IRA distribution rules recently released by the IRS are technically just proposals. But in the Alice in Wonderland world of IRA distribution planning, the old rules were just proposals, too, and they've now been effective since July 27, 1987. Such is the way with IRA distributions, where nothing is simple--even that which has been simplified.

This is great news for advisors. The new rules on distributions from IRAs and employer-sponsored qualified retirement plans simplify the old rules just enough so that the consumer press will get your clients all excited. But the new rules also shuffle things around so much and are still so incredibly complicated that consumers with sizable IRAs probably can't make decisions on their own without consulting an advisor.

IRA distribution rules have long been a hot topic for advisors because wealthy people can benefit from good IRA distribution planning. These are people who don't really want to take their distributions. Good planners help those people take the smallest distributions possible. This leaves more money to compound tax-free and more money for heirs.

Finding the best way to minimize your distributions under the old minimum required distribution rules was ridiculous. You had to decide on a beneficiary by April 1 of the year after you turned 701&Mac218;2, and then you had to choose an actuarial method for taking distributions. The age of an IRA beneficiary and the method of calculation were two of many variables in a Byzantine labyrinth of rules. Under the new rules it's simpler, but still a Byzantine labyrinth.

But you can plan on these rules remaining with us. Seymour Goldberg, an attorney in Garden City, New York, and a member of the IRS's Northeast Pension Liaison Group, says he expects the new rules will become final before the end of this year.

The big simplification is elimination of the formulas that you were required to choose between for calculating your annual distributions after age 701&Mac218;2. Gone is the choice among the term-certain, recalculation, and hybrid methods of determining your life expectancy, which then regulated the size of your distributions.

In its place, there will be a single method of calculating life expectancy: the Minimum Dis- tribution Incidental Benefit (MDIB)table. The MDIB table previously was used to calculate joint life expectancy when a spouse or other beneficiary was more than 10 years younger than the IRA owner.

The only IRA owners who will not use the MDIB table are those with spouses who are more than 10 years younger. In the instances of these lucky husbands (or wives), they can use their actual ages to figure their joint life expectancy.

But for the great majority of IRA owners, the MDIB table is of great benefit. This table assumes that your IRA beneficiary is 10 years younger than you. Whether your spouse is older or just a year younger than you, your required minimum distributions will be based on a joint life expectancy with someone that is 10 years your junior.

Marvin Rotenberg, an IRA planning expert at Fleet Bank's Private Clients Group and a frequent speaker at advisor conferences, offers an example to show how the MDIB table can benefit a 70-year-old with a spouse as beneficiary who is one year younger. Say the 70-year-old has a $1 million IRA that compounds annually at 7%. At age 85, he would have a balance of $1.317 million in his account after taking required minimum distributions based on the new rules and using the MDIB table to calculate the couple's joint life expectancy. Under the old rules, assuming the couple chose the term-certain method for calculating their joint life expectancy, the couple would have had $786,660 when the IRA owner turned 85--40% less than under the new rules.

Goldberg, who offers an online newsletter on these topics at, says that the use of the MDIB table, with its stretch-out capabilities, becomes mandatory only in 2002. IRA owners will have to proactively elect to use the MDIB table in 2001 to lower their required distributions.

Planners who have clients with Keogh plans will need to advise those plans to adopt a model plan amendment included in the revised regulations in order to use the new rules in 2001, according to Rotenberg.

Barry Picker, a Brooklyn, New York, advisor and author of Barry Picker's Guide to Retirement Distribution Planning (self-published, 2001) says the new rules have disconnected the link between your choice of a beneficiary and the size of your required distribution. "Unless you have a spouse more than 10 years younger than the IRA owner, distribution no longer depends on the age of the beneficiary," says Picker.

Here's another planning opportunity. Under the old rules, you had to make a choice of beneficiary by April 1 of the year after you turned age 701&Mac218;2, and at that point your method of calculating life ex-pectancy was irrevocable. You could change your beneficiary, but your beneficiaries were stuck with your actuarial formula for determining the size of your required distributions.

So, if after you were 701&Mac218;2, and in "pay status," you switched beneficiaries, naming your child instead of your spouse, your child after your death would still be stuck making distributions based on the life expectancy of your spouse--even though your child was expected to live much longer. And if your two children were co-beneficiaries, then the life of the oldest child was used to calculate required distributions for both children. Under the new rules, you can change beneficiaries even after hitting pay status, and your new beneficiary's age will be used to calculate required distributions after your death.

In addition, the new rules also allow significant post-mortem planning opportunities. Now the designated beneficiary for determining the length of post-death distributions is not determined until December 31 of the year following the year of the IRA owner's death, according to Rotenberg. The beneficiaries cannot be changed, but steps can be taken to change the beneficiary on whose life expectancy the distribution payout period calculation will be made.

For instance, to take advantage of a post-mortem planning opportunity, a spouse could typically disclaim her right to an IRA payout. A spouse has nine months after a death of the IRA owner to make a qualified disclaimer of an IRA. Secondary beneficiaries can then take ownership of the IRA and take minimum distributions based on their life expectancies. So, a spouse could disclaim ownership of her husband's IRA, and this could stretch out an IRA for many years to a child or several children or grandchildren. Under the old rules, even after a spouse disclaimed the IRA, the children would still be required to withdraw based on her life expectancy if the account was in pay status.

Goldberg says advisors should go through beneficiary forms with clients to be certain they have chosen contingent beneficiaries. "Since your kids can now get a fresh start on your IRA through use of post-mortem planning, advisors should be sure their clients have selected contingent beneficiaries."

Picker says a spousal disclaimer could also present a charitable giving opportunity. Making IRA money a charitable gift has always been thorny issue in IRAs. If you leave your IRA to multiple beneficiaries including a charity, the withdrawals were dependent on the age of the beneficiary with the shortest life span. A charity has no life span and thus all your IRA beneficiaries would be forced to take all distributions right away. Picker says that under the new rules, a charity can take its share as a co-beneficiary immediately after the death of the IRA owner. As long as the charity is no longer a beneficiary, the co-beneficiaries have until December 31 of the year following the year of the IRA owner's death to begin distributions and the distribution can then be based on their life expectancies.

Goldberg says some planners may use the disclaimer as a way to fund a unified credit. A child or grandchild can be named as a beneficiary of a trust, and the trust can be named as beneficiary of the IRA. Previously, an IRA owner would have had to set this trust up before hitting pay status at age 701&Mac218;2. Changing the beneficiary after that age would not have changed the withdrawal formula to be based on the child's life expectancy. Now an IRA owner may change his beneficiary and allow the child to take out the IRA from the trust over his lifetime.

Picker says that the new rules will also affect IRA owners who do not pick a beneficiary. Under the old rules, an IRA owned by an 80-year-old who died without naming a beneficiary would have been fully taxed as income to his heirs. Now, Picker says, the heirs will be able to withdraw that IRA over the owner's remaining life expectancy, which is 91&Mac218;2 years for an 80-year-old.

Rules governing heirs inheriting an IRA before the owner hit pay status also will change. The same two options are still there: Heirs can choose to take the payout over their life expectancy or over five years, but the default method was the five year withdrawal and you had to elect the lifetime withdrawal. Now lifetime withdrawal is the default.

Rotenberg say there is one other change that advisors should keep in mind. For the first time, the IRS will know whether an IRA owner in pay status is withdrawing the required minimum amount. There has always been a 50% penalty for withdrawing too little, but it was unenforceable because the IRS couldn't figure out your required withdrawals with all your different beneficiaries and actuarial assumptions. Now they will know.

Centerpiece Ups the Ante

Facing formidable competition, Centerpiece improves itself

Maybe the best thing ever to

happen to Centerpiece was TechFi. Centerpiece, of course, is the portfolio management system used by about 3,000 advisors. It's owned by Raleigh, North Carolina-based Performance Technologies Inc. (PTI), which in turn is owned by Charles Schwab & Company.

Three years ago, TechFi Corp. arrived on the scene with its Portfolio 2000 software. The brainchild of TechFi founder and CEO Matt Abar, the software was priced for the pocket of an advisor who was just starting out but was scalable enough so that large firms could use it as well.

Nine months after introducing Portfolio 2000, Abar rolled out a Web-based version of his product, allowing advisors to access P2000 reports from a browser. At the same time, Abar planned to start up AdvisorMart, a service bureau to handle portfolio reporting over the Web, accessible by browser by you and your client.

Meanwhile, the folks at Centerpiece seemed to be standing still. PTI's corporate parent, Schwab, did not seem interested in pouring money into Centerpiece.

The software did not scale well for larger advisory firms, and some large firms said it repeatedly crashed. It did not have the Windows usability features of P2000, and its more costly rival, Advent Axys, remained the software of choice for deep-pocketed advisors with growing practices.

The program wasn't the center of an advisor's practice. Instead, Centerpiece was just one more application--like a contact manager or financial planning package.

Schwab, it seemed, was thinking about abandoning Centerpiece and creating a new Web-based system for portfolio reporting. Employees at PTI, even at the company's highest levels, were clearly nervous.

That's history. Schwab is off the fence now. Centerpiece is being retooled. It's being "Web-ified." A new version is more scalable. PTI's workforce has just about doubled in two years. And a new, more powerful Centerpiece is emerging.

The timing was funny. Shortly after Schwab seemed to have made the decision to give new life to Centerpiece, Advent Corp. slapped Schwab in the face. Advent said it would discontinue support of its Schwab interface, forcing advisors to get downloads from Advent instead. If advisors rely on Advent for downloads, it becomes the key intermediary, and possessing this power could ultimately diminish Schwab's importance. Along with TechFi's emergence, Advent's action gave Schwab impetus to make Centerpiece a more presentable product.

A new, more powerful Centerpiece, however, will make its ownership by Schwab a more prickly issue than ever, and advisors who feel queasy about being too dependent on Uncle Chuck will have to confront that issue. But before you can understand that, let's just look at where Centerpiece is going.

Last month, I briefly mentioned a couple of Centerpiece's new initiatives, but now I've got details. Let's start with genTrade.

GenTrade is a trading module that you can add on to the April release of Centerpiece version 5.24. GenTrade will cost $2,000 a year for a one-user license and $1,000 for each additional license. That is pricey, but Schwab wants Centerpiece to start making money, and the software is cheap relative to Advent. In addition, genTrade product manager Lisa Welborn said one advisor in the beta test told her that he estimated genTrade would save his firm 20 hours of work a month.

The big timesaver comes from being able to run block trades right from your portfolio management system. Until now, if you wanted to have all your portfolios trade out of one stock or fund and into another, you would have had to run a rebalancing report in Centerpiece and then fax it to your trading desk. Now you can do it all in Centerpiece.

GenTrade comes at a time when advisors are increasingly trading in individual securities. Over the last three years, as Internet stocks soared, many advisors started to spice up mutual fund portfolios with a handful of individual equities. Before this foray into stocks began, the great majority of Centerpiece users managed assets strictly in mutual funds. Accompanying the rise in individual equity trading has been a tendency to trade more.

GenTrade taps into a live data feed over the Web from DBC, which provides real-time prices. It takes block trades and rolls them up into one order to get you the best execution. Five "wizards" lead you, step by step, through common types of trades. The Exchange Funds Wizard walks you through the process of purchasing one fund for all your accounts with proceeds raised from selling another fund. Another wizard lets you trade out of one fund and use the proceeds to purchase multiple funds.

Centerpiece will also allow for straight-through processing through Schwab. If the trades are done through Schwab, you won't even have to call the trading desk. Centerpiece will basically "talk" directly to Schwab's trading system and place the orders in the right amounts.

There is a problem, however.

The straight-through processing in genTrade only works with Schwab's back-office system. Lots of advisors using Centerpiece custody assets away from Schwab. In fact, most of the 3,000 or so advisors who have opened accounts at TD Waterhouse and many of the advisors working through Fidelity Institutional are also Centerpiece users. These non-Schwab accounts are going to have to wait for straight-through processing on genTrade until the custodians and Centerpiece work out the technology kinks.

Centerpiece VP Steven Winegar insists that PTI will not drag its heels on the straight-through processing project, even though it may not be in the interest of its corporate parent, Schwab.

Competition has also forced PTI to create a service bureau. It will be called Coworker, and is scheduled to be rolled out in August. As reported previously, the Centerpiece service bureau will be different from TechFi's AdvisorMart or AdventOutsource, both of which feature browser-based reporting.

Coworker will mean that you still have to run Centerpiece in your office. You won't, however, have to take daily downloads from your custodians. PTI will do that.

PTI's Welborn says you won't have to handle the downloads, scrubbing, or reconciliation, and you won't have to worry about corporate actions or missing prices creating bad performance numbers.

PTI will be pulling in corporate actions data and running it against your database. An advisor picks up her database file every morning from a secure server on the Web that will be hosted by PTI.

Winegar says that requiring advisors to still run Centerpiece really isn't such a bad thing. He says advisors will be able to go into their databases to clean up strange problems that pop up. You maintain control over your data, but you hand off the labor-intensive aspect of portfolio reporting.

The sexiest new feature being added to Centerpiece is called e-Reports Live. It's also fairly complex and may wind up to be fairly expensive.

It's strange for me to write about this product because my company is beta testing e-Reports Live and is one of the Web vendors that will facilitate e-Reports. Having disclosed the potential conflict of interest, let me give you the facts on the product.

E-Reports Live will require that you run your own Web server in your office. An appropriate server would cost you at least $5,000 and as much as $10,000 to buy. Leasing a Web server will cost about $3,000 annually. Plus, there's the cost of hiring a consultant to care for your server.

Meanwhile, your network server will continue to hold your Centerpiece data. When someone visits your site and wants to see a client report, they will punch in their password and user name and click on a link on your portfolio account look-up page.

What happens next is the cool part.

The link triggers a query of your Centerpiece database. Someone can visit your Web site and request a portfolio report based on your download this morning. This ability of querying your database live is a different way of doing things. It's real-time.

Not only will the query allow clients to get portfolio reports on demand based on what's in your database now, but the Web pages with your reports can include links to real-time or 20-minute-delayed stock prices and other up-to-the-minute data. This is a major improvement over the PDF pages now used to deliver online portfolio reports, though the exact cost remains unknown.

Perhaps the best part of e-Reports Live is that advisors won't have to give up client data to a third party. The SEC recently adopted final rules under the Graham-Leach-Bliley (GLB) Act, the legislation that replaced Glass-Steagall. GLB also created new responsibilities for the way financial institutions handle a client's right to privacy.

Regulation S-P of GLB spells out restrictions and notice requirements for banks, RIAs, B/Ds, and other institutions in releasing non-public client data to third parties. Since many advisors have felt uneasy about portfolio reporting solutions in which they must give up their client data to unregulated third parties, e-Reports Live could be a timely new option for some advisors.

Another change in Centerpiece is tighter integration with a contact manager. Last summer, Centerpiece struck a deal with a contact manager now known as Junxure, which allows advisors to see some portfolio holdings data as well as contact information on a client. In addition, Junxure includes some workflow management capabilities tailored to the needs of financial planners.

The new version of Centerpiece allows you to use an XML query in Junxure to tap position data in Centerpiece. For example, Winegar says that if Intel declines 50%, you will now be able to run a query in Junxure to show you all of the clients who own Intel; you'll also have their phone numbers and e-mail addresses right there as well.

Centerpiece may have come a long way in the last two years, but it isn't finished. Over the next two years, it's likely that Centerpiece will migrate to a more industrial-strength database, such as Sequel. More importantly, other applications are likely to be integrated into Centerpiece, such as a financial planning software package. Schwab knows advisors need this kind of tool.

Just as you can now see all your clients in Junxure with a particular security holding, I think that in a couple of years Centerpiece will be tied to a financial planning software package that draws upon Centerpiece data. Perhaps you'll run a Monte Carlo analysis in your planning program using asset allocation information pulled from Centerpiece. There are many planning chores that could be streamlined by such integration. Which raises the Schwab issue.

Some advisors fear being too dependent on Centerpiece's parent company. Schwab is getting better at offering advice online and in its branches. It bought U.S. Trust and is clearly targeting high-net-worth clients. Schwab steadfastly maintains that it's leaving the middle market for advisors, but that middle seems to be shrinking. Most advisors realize that Schwab is a direct competitor.

As Centerpiece actually does begin to live up to its name and advisors become more reliant on the software, they will also indirectly become more dependent on Schwab. While some advisors will feel discomfort with that dependence, others may take comfort in knowing they are working with an efficient, competitive financial services giant.

Either way, however, advisors win. A stronger Centerpiece is good for Centerpiece users, and it's good for non-users because competition spurs innovation.

Options, Options

A Web site will help you handle those pesky client stock options

As an independent advisor, you like to do things your own way. That's why you became independent. But advisors who try to become Web-zillionaires should be prepared to invest a lot of time and money.

Which brings us to www.mycritical-, a great idea from Alan B. Ungar and Mark T. Sakanashi, two fee-based CFPs with over 22 years of experience apiece. Their practice specializes in helping clients use their stock options to reach what they call Critical Capital, which they define as "the amount of capital you need to be financially free from the need to work for the rest of your life."

Ungar and Sakanashi have built an impressive Web site that aims to use this concept in stock option planning. Co-authors of Employee Stock Options: Your Guide To Using Them, Spending Them, And Avoiding Expensive Mistakes (to be published by HarperCollins this spring), Ungar and Sakanashi are innovators.

But when our panel of four advisors toured the site and saw its capabilities, they stopped short of saying it was a breakthrough. While they all marveled at the beauty of the concept, they all said the Web application for calculating different option exercise scenarios was too crude because of the way it handles taxation. Still, advisors may want to consider using the site for making presentations to clients because the Critical Capital concept can cut through a lot of the most difficult issues planners face in explaining option strategies. At $350 a year for an advisor license and $30 to store a client's data, you only need use this tool once to close on a client for the site to become an asset in your option planning arsenal.

With, you input data about a client's age, living expenses, and the amount needed to pay off the mortgage. You also key in figures on investments in taxable and qualified plans, the proper tax rate, and, of course, stock option grant data. The application then builds a chart showing when the client will achieve Critical Capital. You can cut your living expenses, change the option exercise schedule, or change other variables to see how different scenarios will affect achieving the goal.

One of the most impressive aspects of the application is that you and your clients can do all this together on the Web, another great example of how collaboration is enabled by online applications.

Another neat feature is that you can see how using a grant with greater leverage can dramatically alter a client's net worth. For instance, you can see that a rise of 10% in the underlying stock would send the value of one option grant up 17% but send the value of another grant up by 35%.

But the best part of the software is that it shows how you could put your Critical Capital at risk by not planning properly. A client can see that if their stock drops below a certain price, they will lose their Critical Capital. This can help clients decide whether to take that capital off the table by exercising options and diversifying into other investments.

All of this sounds, and is, great. But the program's tax problems will make some advisors pause. "I'd be reluctant to give advice based on this analysis alone without much more rigorous tax analysis," warns Glenn Kautt of The Monitor Group in Fairfax, Virginia. "It's a good presentation tool but not a good planning tool," says Kautt.

Similar sentiments come from Diane Pearson of Legend Financial Advisors in Pittsburgh, Pennsylvania. "I don't like that it doesn't differentiate between the tax treatment of non-qualified stock options and incentive stock options," says Pearson.

Dale Walters, a CPA and CFP who handles stock option planning at Keats, Connelly in Phoenix, explains that ISOs are taxed at the long-term capital gains rate of 20%, while NQSOs are taxed as ordinary income. has not built into it the differing tax treatment on these different types of options and taxes all grants as ordinary income. So if you have a client in the 49% effective federal and state tax rate, his tax may be half of what is calculated by the program. That means the client with ISOs might be led to exercise more options than are really needed to reach Critical Capital because less money will actually be diverted to pay taxes.

Ungar concedes that the tax treatment is an issue, but points out that taxes should be a secondary issue in stock option planning. "The biggest mistakes are made when people focus on minimizing taxes and maximizing profits," says Ungar. "The focus should be on what I need to do to secure my Critical Capital."

According to Ungar, the site can be used to make presentations and "close" on prospective clients. Then, professional tax planning tools, such as StockOpter from NetWorth Strategies, can be used for implementation of a planning strategy.

While all four of the planners on our tour use StockOpter, an Excel-based application widely considered to be the best planning tool for stock options, they all say StockOpter is poor for client presentations. So using StockOpter along with may be a solution for some planners. Indeed, Glen Buco of West Financial in Annandale, Virginia, says it will work for him. "MyCriticalCapital is not good enough by itself to do employee stock option planning, but in combination with a more serious planning tool, it can work," Buco points out.

"You want to be sure that people granted stock options take advantage of the windfall and do not simply let the options ride and maybe disappear based on a change in the markets," says Buco. "MyCriticalCapital points out the risk of what can happen with a volatile stock. Most people think of their options from a tax perspective, so this could be a real eye-opener," he argues. "In real life, the tax issues are secondary."

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