Wednesday, January 25, 2012

Do you have an Umbrella?

Why do most people buy insurance? Risk primarily. Fear can play a role, but most of the things we fear never actually happen. Peace-of-mind is the hope (it’s much better than a claim). What kind of insurance coverage makes the most sense? Cost effective protection from a catastrophic risk. One of the best examples of this is Umbrella Liability Insurance.

How does it work? Homeowners, auto and watercraft insurance policies offer liability protection up to certain limits. Umbrella Liability Insurance is designed to add an additional layer of liability protection in the event of a lawsuit. Umbrella Liability Insurance is designed to “kick-in” when liability protection on an underlying policy has been exhausted. An Umbrella policy must be coordinated with all underlying risks (homes, boats, properties, etc.).

Who is at risk? If you own a home, office building, car, watercraft, vacation home, etc. you are at risk. Young drivers are more accident prone. Visible community members with the appearance of “deep pockets” can be targeted. Pools, pets, and trampolines can increase your risk. You can reduce your risk but you can’t eliminate it. Most people don’t experience a lawsuit, but it can happen to anyone.

How much do you need? As a general rule, the higher your net worth the more coverage you need. However, it doesn’t just apply to the wealthy in today’s litigious society. Most of the middle class should consider coverage with the potential for a lawsuit targeting assets and future earnings. Umbrella coverage typically ranges from one to five million dollars but can go higher. You may have to increase liability protection on underlying coverages (homeowners, auto, etc.) to qualify.

What’s the good news? It’s cheap! Although it varies, $15 per month may get you one million dollars of umbrella liability coverage. Costs do increase incrementally as the coverage amount goes up, but most people find it inexpensive relative to the catastrophic protection provided.

As with most insurance products, there are many nuances to consider. It is helpful to find a reliable property and casualty insurance agent who can shop rates, obtain multi-policy discounts, and consider the claim history of a company. If you would like to discuss further, please call or request a discussion at your next meeting.

The above discussion is generic and informational only. In some cases Retirement plans and Trusts may add a layer of liability protection. Please confirm all specifics with your insurance agent and/or attorney.

Thursday, January 19, 2012

It's a New (Tax) Year

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

Uncertainty is always a factor with tax planning, but the past few years have been particularly difficult. Fortunately, we have one more year of (relative) certainty before we encounter the (potential) expiration of Bush era tax rates in 2013. Here is what to expect in 2012:

Income Tax Rates: Don’t expect any changes to income tax rates or the special dividend/capital gain treatment in 2012. However, income tax brackets will be adjusted slightly for inflation.

Estate Tax: The Estate Tax exemption rises with inflation to $5.12 million in 2012 but the annual Gift Tax exemption amount will remain $13,000.

Social Security: The annual earnings limit for “early” Social Security retirees will increase from $14,160 in 2011, to $14,640 in 2012. The amount of earnings subject to FICA (Social Security) tax, otherwise known as the “wage base”, also increased from $106,800 in 2011, to $110,100 in 2012. The much-publicized year-end “spat” in Washington resulted in an extension of the 4.2% employee FICA tax rate (down from 6.2%) through February 29, 2012.

Medicare: The Medicare tax rate remains at 1.45% (2.9% for Self Employed) on all earnings. However the Affordable Care act did provide some premium relief with Medicare Part B premiums down from $115.40 per month in 2011, to $99.90 in 2012. Keep in mind, however, that Part B premiums are adjusted for high income taxpayers.

Education Credits: You can expect the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the Student Loan Interest deduction to remain intact through 2012.

Expired Provisions…. Maybe: The AMT exemption and the (itemized) sales tax deduction have not (yet) been extended into 2012. Without an extension of the (itemized) sales tax deduction, taxpayers from states without an income tax will be impacted the most (Washington, Nevada, Alaska, Florida, New Hampshire, South Dakota, Texas, Tennessee and Wyoming). Without an extension of AMT exemption levels, the exemption will revert to year 2000 levels and affect millions of new taxpayers. Another year-end AMT “patch” seems likely given the implications.

Let's hope for a more permanent tax structure next year. In the meantime, these are the rules of the game.

The above explanations are summarized. The list is not all inclusive. Please confirm all specifics with your tax professional.