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Heidi Foster: How and When Should You Plan for Your Child’s Education?

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Remember when a college education was reasonably priced? Those days are gone, and that’s why college planning is so important.

From 2001 to 2006, the average tuition and fees at four-year public colleges and universities increased by 35 percent. The average tuition for private colleges increased 32 percent between 1996 and 2006 (according to the College Board).

How soon is too soon?
It never is too soon to begin saving for your child’s education. Many parents start as soon as a child is born. Some begin planning even before children arrive. If you’re planning on having a family someday, start planning now.  If you have a child on the way, start now. If you have an infant, toddler, grade-schooler or teenager, start now. Notice a theme here?

How late is too late?
If your child is already in high school, you may think it’s too late to start saving. Think again. Any pre-planning and saving you can do is better than nothing. If you are in a time crunch to save, start thinking of ways to reduce your monthly expenses and increase your cash flow. Then look at some ways to invest what you’ve saved. There are many options beyond a traditional savings account, such as CDs or money-market accounts.

What about retirement?
While you may feel putting off your retirement for a few years is an acceptable trade-off, you should not have to sacrifice your retirement savings to put your children through college. Remember, student loans are available. While you may not want your child to assume such a financial burden, you always could help repay the loan later. In addition, by having your children be responsible for at least a portion of their college tuition or expenses, they may experience a greater understanding of and appreciation for the value of their education.

You need a break
A tax break, that is. Many higher-education savings vehicles can provide one, such as 529 plans, Coverdell Education Savings Accounts, and certain kinds of tax-exempt bonds. However, as the number of tax-advantaged college savings vehicles have increased, so have the details, rules and fine print pertaining to them. In fact, some of these tax breaks could conflict with one another. Unless you’re willing to spend a great deal of time doing research, it may be wise to speak with a financial professional who can help you sort through these options.

Other alternatives
If money is tight, would your child be willing to complete his or her first two years at a local community college, then move on to a preferred college or university later? The tuition is likely to be much less at a state community college, and you could realize additional savings if your child attends school while living at home. If your child does not wish to start college locally, it may be worthwhile to look into the myriad of scholarships, work-study programs and off-campus jobs that may be available. The guidance office at most schools will have job information available if you inquire.

The simple fact is, the sooner you plan, the better. If you have not begun planning, start now, there is no better time to get the proverbial ball rolling. You may be surprised how a little planning now can make a big difference in the years to come.

Heidi Foster, CFP Wealth Advisor and Investment Manager with American Wealth Management and may be reached at 775.332.7000 or heidi@financialhealth.com.  Securities offered through Foothill Securities, Inc. member FINRASIPC. Investment advice offered through American Wealth Management, a registered investment advisor and a separate entity from Foothill Securities, Inc. This information should not be construed as investment, tax or legal advice. The author is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

529 plan benefits: An education for your student, tax breaks for you

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With the pace of higher-education costs rising faster than the general Consumer Price Index, it’s easy to understand why saving enough money to fund a child’s college education has become a financial challenge for many parents and grandparents.

The first-year college tuition bill in 2020 is projected to be $32,803 for an in-state public education institution and $66,036 for an average private institution (*see note at end of column). So whether college for your child or grandchild is years away or right around the corner, put time on your side consider the benefits of contributing to a 529 plan for a student, or beneficiary, in your family.

Made possible by federal legislation, 529 plans named after section 529 of the Internal Revenue Code, 26 U.S.C. 529 are implemented at the state or institution level. Nearly all states have approved and adopted these qualified tuition-assistance programs. Most states let nonresidents participate in their plans, though the tax benefits may be greater for residents than for nonresidents.

The student can use 529 plan account balances at any participating accredited postsecondary school in the U.S. and certain schools abroad for tuition, room and board, books, equipment and supplies. For 2010, qualified expenses also include computer technology, related equipment and Internet-access costs.

As the owner, you retain control of the assets and can change beneficiaries within the designated student’s family at any time without penalty. A qualified family member generally includes siblings, descendants, ancestors, aunts, uncles and first cousins.

Other key advantages of these plans include:

Federal-income-tax-free qualified distributions. The student may be able to take qualified distributions federal-income-tax-free.

No income limitations for participation There is no income limit for contributing to a 529 plan, which is a benefit for higher-income families.

Substantial contribution amounts Contribution limits are significantly higher than those allowed for other education savings plans. Maximum account balance limits vary from state to state.

Significant estate-planning benefits A single person can contribute up to $65,000 in one year per beneficiary; a married couple can contribute up to $130,000 in one year per beneficiary with no gift-tax consequences. Such a contribution will be considered a five-year accelerated annual-exclusion gift, so no additional gifts can be made for that beneficiary for the next four years without incurring gift-tax implications unless the annual exclusion gift increases. The gift amount and subsequent appreciation, however, are removed from your taxable estate. A portion of the contribution amount may be included in the donor’s taxable-estate calculation if the donor should die within the five-year period.

No burden of investment decisions The plan’s chosen investment manager will be responsible for portfolio management of all contributions. Initially, some plans may let you select from several asset-allocation-model alternatives, which generally might be changed once every calendar year and/or with a beneficiary change.

If for some reason the account balance is not used for qualified higher-education expenses, every withdrawal from a 529 plan is separated into two components: an earnings portion and a return of your investment portion. If a withdrawal is not used for qualified higher-education expenses, the earnings portion of the withdrawal is subject to federal income tax and potentially a 10 percent IRS penalty. The return of your investment portion in the 529 plan is never subject to federal income tax or IRS penalty. State laws regarding taxes and penalties can vary from state to state, however, and may apply. You always should check with your tax professional before making this type of withdrawal. If the beneficiary dies, becomes disabled or receives a tax-free scholarship, you may take penalty-free withdrawals from the 529 balance within that same calendar year.

Keep in mind that 529 plan investment balances could affect eligibility for financial aid:

If a parent owns the 529 account, up to 5.64 percent of the value is included in Expected Family Contribution as a parental asset. Any 529 accounts owned by a dependent student, or by a custodian for the student, are reported on the Free Application for Federal Student Aid as a parental asset. Any qualified withdrawals from these accounts are not included as income to the student.

If a 529 account is owned by a grandparent (or someone other than a parent or the student), the value of the 529 plan is not reportable as an asset on the FAFSA.

However, distributions from these third-party accounts are considered financial support to the student and are reportable on the following year’s FAFSA as student income. Student income is assessed at the student’s rate of 50 percent.

There are many 529 plan choices discuss college-funding alternatives with your Financial Advisor and choose the one that best fits your needs.

* Total yearly costs for in-state tuition, fees, books, room and board, transportation and miscellaneous expenses are based on the 2009-10 school year. Costs for 2020 projected by Wells Fargo Advisors in October 2009 assuming a 5.4 percent increase per year. Source: Trends in College Pricing. 2009 collegeboard.com, Inc. Reprinted with permission collegeboard.com. All rights reserved.

As Wells Fargo Advisors does not render tax advice, you should consult with a tax advisor before making any investment decisions which could have tax consequences.

An investment in a 529 plan will fluctuate such that the shares when redeemed may be worth more or less than the original investment. There are no guarantees that an investment in a 529 plan will cover higher-education expenses. Investors should consult the plan’s offering document for the fees and expenses associated with that plan. You should consider a 529 plan’s investment objectives, risks, charges and expenses carefully before investing. The plan’s official statement, which contains this and other important information, should be read carefully before investing.

Estate Tax Can — but doesn’t have to — Hurt Middle Class

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By Kelly Ann Scott

The claim

Politics met taxes this week in the race between Republican Sharron Angle and Democratic U.S. Senate Majority Leader Harry Reid.

At issue are the taxes paid on estates when people die, something known as the estate tax, inheritance tax, or, if you are a critic, the “death tax.”

This week, Angle went to a small business in Sparks and signed a pledge saying that if she is elected in November to the U.S. Senate then she would work to abolish the tax.

The contention (really which came from the American Family Business Institute and Angle by her signing the pledge) is that the inheritance tax hurts families, small businesses and farmers.

The background

Financial experts say some sort of tax on estates has been around almost since the United States became a country. The taxes have been used to fund wars and other national events, according to newspaper accounts. And, they also helped prevent aristocracies from forming in America, experts say.

But the glitch of the law that has prompted the cries for abolishment came just this year — It’s a political problem.

In 2001, President George W. Bush lowered the estate tax from 55 percent to 45 percent and raised the amount you can pass on tax-free from $1 million to $3.5 million. The glitch is that the change was set to expire in 2009. Lawmakers never managed to agree on a new tax law, so the entire thing expired then. If you die this year and you’re rich, there’s no estate tax for 2010.

But, the estate tax does start again in 2011 — going back to the pre-Bush administration changes. That means the $1 million starting point and 55 percent tax rate — unless Congress does something.

The Obama administration has proposed returning the estate tax to its 2009 level, with a $3.5 million exemption and a 45 percent rate on assets that exceed that amount. The House approved the administration’s proposal last year, but Republican opponents blocked action in the Senate, according to USA Today.

Now what exactly is this estate tax? Well, according to the IRS, it works like this (assuming the $1 million limit): You can pass on the first $1 million of your estate (money, business, etc.) without paying the tax, but then have to pay the 55 percent tax on everything over that amount.

Proponents argue the tax hits those who have the money to pay it, affects a small number of Americans and encourages charitable giving. Critics say that the tax essentially taxes people twice, hits those who put the most amount of money back into the economy and could have a crippling affect on small businesses passing between generations.

The facts of the matter are these:

In Nevada in 2008, the IRS reported that 140 households ended up paying about $714 million in estate taxes (after deductions, etc.). That’s when the tax exclusion was $2 million with the tax at 45 percent. In the entire country for that year, 17,172 people paid the estate tax, which brought in about $25 billion, according to the IRS.

The estate tax recently came back into the spotlight with the death of New York Yankees owner George Steinbrenner. He died this year — the year of no estate tax — and the federal government missed out on about $500 million in taxes, according to experts who estimated that for a Los Angeles Times article.

In some ways the debate over Steinbrenner’s estate highlights the argument for the tax. Here’s an estate unlike most of ours — it’s worth billions. In fact, there are only about 400 billionaires in the entire United States, according to Census data.

But, the tax with a starting point of $1 million could hit a lot more than the Steinbrenner’s of the world.

In fact a Spectrem Group study found that households with a net worth of $1 million or more — but not including their primary home — grew in 2009 to 7.8 million households, according to an article in the Los Angeles Times. That number grew by 16 percent from 2008.

Heidi Foster, who is a wealth adviser and investment manager with American Wealth Management, said a $1 million estate is what many people want to achieve in terms of estate planning. If you live off 5 percent of a $1 million estate, then you have about $50,000 a year — close to the average income for the average household, she said.

Steve Anderson, who is a financial consultant with RBC Wealth Management, said that generally those who have to pay the estate taxes can reduce their tax burdens through financial planning, but they can’t avoid it.

Generally, financial experts say that while everyone understands that the government needs to collect revenue, the estate tax wasn’t meant to cut into the inheritances of the middle class. With inflation and a $1 million starting point, that could happen. It’s not a stretch for a successful small business owner to have an estate worth $1 million.

Yet, at the same time, many financial experts point to the estate tax as a way of increasing charitable donations, which can help mitigate what some pay. Without it, some wonder whether as many foundations, donations and endowments would happen.

The verdict

Does the inheritance tax hurts families, small businesses and farmers?

Well, yes, it might if it kicks in at a $1 million starting point and 55 percent rate. However, with a $1.47 trillion deficit (as of Friday), it’s pretty difficult not to acknowledge that the government needs revenue. And doing nothing with that could hurt families, small business and farmers just as much. Perhaps a higher starting point and smaller percentage would affect fewer people who might be caught in the tax net — and really aren’t the people the tax intended to touch.

Heidi Foster is quoted in the following article which appeared in the Reno Gazette Journal in December 2010.

Heidi Foster: Charitable Giving is a Good Way to Reduce Estate Taxes

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Benjamin Franklin said many years ago, “Nothing is certain but death and taxes.”

In 2010, this certainty has not been proven as it relates to estate taxes through the present.

If Congress does not pass a law changing the estate tax, the one-year reprieve from estate taxes will end and the size of taxable estates is set to return to the 2000 level, where assets greater than $1 million per individual will be taxable at death.

Many Americans, even with the present downturn in the economy, will have taxable estates in 2011. Unless Congress passes changes, a number as high as $3.5 million per individual has been cited.

In 2011, America’s wealthiest families will be looking for ways to reduce estate taxes. By giving to a qualified 501(c)(3) charity at their death, which approximately 80 percent of Americans do at some point during their lives, individuals can reduce or eliminate estate taxes.

However, some statistics show that as few as 20 percent of individuals with taxable estates include charities in their estate plans (source: www.leavealegacy.org). Charitable giving not only allows tax reduction, it further permits people to benefit society and pass on their values.

Gifts can be made in several ways. The simplest method to give is through a gift or a bequest, which excludes these assets from a person’s estate.

In estate planning, people often overlook their retirement assets since they generally have designated beneficiaries. When these assets are transferred to family members, they are responsible for not only estate taxes, but also income taxes. But retirement assets transfer tax free to charities.

Another way to structure gifts is by using charitable trusts that allow up-front tax deduction while removing assets from an estate. By placing assets into a charitable remainder trust, a family receives an income stream for its lifetime with the remaining assets going to charity. Another option is a charitable lead trust, where a charity receives an income stream for a designated period with the remaining assets going back to the donor’s family or other designees.

Another alternative to consider is the use of a family or community foundation. Family foundations, although generally more work than the other alternatives discussed, allow their creator to truly pass on their beliefs and values to their family.

Heidi Foster, Wealth Advisor and Investment Manager with American Wealth Management and may be reached at 775.332.7000 or heidi@financialhealth.com. Securities offered through Foothill Securities, Inc. member FINRA / SIPC. Investment advice offered through American Wealth Management, a registered investment advisor and a separate entity from Foothill Securities, Inc. This information should not be construed as investment, tax or legal advice. The author is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

The Reno Gazette Journal featured this article written by Heidi Foster in June of 2010.

Committed to Your Financial Vision

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“We should not look back unless it is to derive useful lessons from past errors, and for the purpose of profiting by dearly bought experience.” George Washington

Since 1988, American Wealth Management has been providing caring knowledgeable financial advice and individualized solutions with the goal of enabling our clients to attain their lifetime goals and aspirations.

Your financial life can be broken up into many parts. However, finding financial success and reaching your goals means putting these parts together and creating a financial vision that will give you clarity, confidence and peace of mind about your future.

Investment management and financial planning are ongoing processes that address your continually changing circumstances. Continually listening to your unique needs is the foundation of our advice and service to you. You want someone on your team that shares your vision, understands your needs, upholds the highest ethical standards, and honors your confidentiality.

We are proud that Pat Meidell has been recognized by Barron’s magazine as one of the Top 100 Women Financial Advisors – June 2006 and as one of America’s Top 100 Independent Advisor’s as published in Registered Rep Magazine – August 2007 and 2009. Additionally, Laif Meidell is a regular guest on CNBC, Fox Business, Market Watch, Reuters as well as KUNR in Reno and has a daily column in the Reno Gazette Journal. Further, Heidi Foster is a regular guest on KUNR and monthly contributor to the Reno Gazette Journal.

American Wealth Management is a leading provider of fee-only financial planning and investment management services. If an integrated approach to financial planning and investment management from a firm recognized for its quality and expertise is of interest to you, please call us at (800) 288-2772 or you can e-mail us at heidi@financialhealth.com.