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Retirement Planning > Retirement Investing

Get Smart

By Staff Writer

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With South Dakota and Georgia becoming the 49th and 50th states, respectively, to enact legislation to develop 529 college savings plans, the future for anxious parents struggling to fund college tuition has never looked brighter. The problem is, very few people know these plans exist. A survey sponsored by Putnam Investments notes that although parents feel that funds saved for college should be tax-deferred, only one-third are actually taking advantage of any tax-deferred investment. Further, only 7% of respondents use a 529 plan.

So what does this mean to you as an advisor? Plenty. While these plans have been around since 1997, more and more states are opting to hire outside vendors–like Merrill Lynch and Fidelity–to run the plans, hoping to make the 529 a household word. And since these vendors are competing with one another, these 529s will no doubt become better investments for consumers. What’s left is for advisors to help consumers find the 529–or combination of 529s–that’s best for their clients’ particular college funding needs.

Mercury Funds, a unit of Merrill Lynch Investment Managers, recently teamed up with Franklin Templeton Investments to implement and manage Mercury’s GIFT College Investing Plan for Arkansas and Wyoming. Franklin will offer the plan through its national network of distribution agents, including broker/dealers, banks, and insurers. Mike Saliba, Mercury’s 529 business development director, says the partnership “gives us a delivery tool to get the plan

to our clients.” Franklin Templeton benefits by getting a piece of the 529 action without having to go out and sign up a state on its own.

The 529 plans, which are available to anyone in any state regardless of residency, have high contribution caps that vary from state to state. However, investing in a certain state’s plan may hold specific tax benefits depending on the state and the individual’s needs. Federal tax law merely requires that states set reasonable limits based on the amount of money necessary to cover the total cost of higher education for a beneficiary. In general, contri-bution limits are $100,000 per beneficiary for the lifetime of the account. (For a list of which vendors service which states, go to www.savingforcollege.com.) And when clients ask you how on Earth they can possibly foot a tuition bill that for four years at a private institution in 2018 is expected to eclipse $225,000, put 529s at the top of your list of suggestions.–Cort Smith and Josh LeBaron

Goldman Reaches Out
Goldman Sachs, in a sign of its interest in the independent advisor channel, announced that a number of broker/dealers will provide its Prime Access research, products, and execution services to the B/Ds’ advisors. Advest Inc., Dain Rauscher, Mesirow Financial, Raymond James, Robert W. Baird, Scott & Stringfellow, Stephens Inc., Stifel, Nicolaus & Co., Sutro & Col, Tucker Anthony, U.S. Bancorp Piper Jaffray, Wachovia Securities, and William Blair & Co. are all now offering Prime Access.

Prime Access has been available in Europe since September, but has now crossed the Atlantic to supplement the services B/Ds already offer their advisors. According to a Goldman Sachs spokesperson, Prime Access offers trade execution, coverage of more than 1,200 companies in the Americas, general market strategies and economic research, proprietary structured equity products, and specialized services for high-net-worth clients. Among those services are convertibles; derivatives; single-stock risk management products such as collars; and structured products such as principal protected notes.–Marlene Y. Satter

Splitsville for Split Dollars

The IRS changes the rules on some split-dollar arrangements, meaning some clients may have to change their plans

It was fun while it lasted. The Internal Revenue Service issued Notice 2001-10 earlier this year, effectively putting a stop to the benefits of split dollar agreements.

In the private versions of the agreements, a person could fund an irrevocable life insurance trust above the annual $10,000 gift exclusion without suffering any negative estate tax consequences or using his unified credit. This was done by making a no-interest loan each year to the trust for the purpose of the trust paying off the premiums.

It was called a split-dollar agreement because a document was signed that stipulated that the trust would repay these no-interest loans. Typically, however, the loan was either never repaid or the person who made the loan would simply access the cash value of the policy once she retired.

For example, Charlotte wants to fund an irrevocable trust that contains millions of dollars but at the same time does not want to use any of her $675,000 unified credit. She has two options: 1) Set up an irrevocable life insurance trust that owns a life insurance policy whose premiums are funded each year with gifts not exceeding the $10,000 gift exclusion; or 2) Set up a split-dollar agreement by which she would make no-interest loans to the trust each year in excess of $10,000 to pay the premiums.

In the public versions of the agreement, an employer would pay all or most of the premiums of a variable life insurance policy owned by a valued employee. The cash premiums would be left to grow over time and then accessed by the employee tax-free during the employee’s retirement. Again, a document would accompany the deal saying that the no-interest loans would eventually be paid back.

The problem with both of these scenarios, says Mary Young, manager of program marketing at Hartford Life, is that you’re not paying taxes on the loans. The employer is effectively giving the employee tax-free retirement dollars, while Charlotte funds an irrevocable trust above the $10,000 annual gift exclusion without using her unified credit. To stop this, the IRS issued Notice 2001-10, which will now will force the client to pay taxes in both instances.

In the public version, a person will now have two choices: Pay taxes on the premiums as a no-interest loan, or income taxes on the returns the premiums garnered while in the policy. “It’s still unclear if you have to pay the income taxes when the premiums are paid, or later, when the employee begins accessing the policy,” Young says.

The IRS has not yet said whether Notice 2001-10 will affect private split-dollar agreements, yet most experts believe that there’s no question that it eventually will. “Most people are treating it as if private split-dollar agreements are over,” Young says. It is also not clear whether existing split-dollar agreements will be grandfathered when the final IRS notice is issued.

For now, companies like Hartford Life are promoting shared ownership arrangements. Young says it’s possible to set up a shared ownership structure where the client pays the equity portion of the premiums–which accounts for the lion’s share–and then gift the death benefit portion to the trust. In this manner, the trust will own the death benefit, which will exist outside the client’s estate when it pays off, and the client will own the cash value of the policy. “That’s what you want,” Young says, “the client with access in retirement to the cash, and the trust with the death benefit. There are no loans and thus no taxes.”–Mike Jaccarino

Managing Just Fine
T he popularity of managed accounts and mutual fund wrap accounts has surged over the last five years as investors have developed a taste for paying asset-based fees for advice, according to a national survey of senior financial advisors commissioned by Phoenix Investment Partners in Hartford, Connecticut. The survey, conducted by Yankelovich Partners, polled advisor-client relationships and found that 40% of advisors said their clients are investing more in managed accounts than five years ago, while 38% said more are investing in mutual fund wrap accounts.

High-net-worth investors are attracted to managed accounts’ tax efficiencies and portfolio customization features, Phoenix says. And investors with less cash are attracted to wrap accounts’ asset allocation, portfolio monitoring, and rebalancing features.

Among the advisors whose clients hold managed accounts, 56% said capital preservation and portfolio customization are the most valued features. And 53% of clients also valued the initial ongoing due diligence of managed accounts. Lower taxes were also noted as a prized feature by 51% of clients.

Of the advisors polled, 38% said their clients are investing more in wrap accounts than five years ago, while 13% said their clients have not changed and 11% said fewer of their clients are investing in wrap accounts. And 40% of respondents said their clients are investing more in managed accounts, 27% said their clients are investing the same in such accounts, and 12% said they are investing less in managed accounts.

“The survey shows an interesting trend toward investing in funds through mutual fund wrap programs,” said Jack Sherry, president of Phoenix’s Private Client Group, in a prepared statement. “We see this in our own mutual fund business, where about 40% of the flows into Phoenix mutual funds come from wrap programs. The growing interest in both managed accounts and mutual fund wraps signifies a real shift among investors toward paying asset-based fees for advice, and away from transaction commissions.”–Melanie Waddell

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