Friday, December 14, 2018

Year-end tax and financial to-do list for individuals

With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends:
Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.
Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)
Take RMDs. If you’ve reached age 70½, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.
Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).
Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.
Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).
Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)
For assistance with these and other year-end planning ideas, please contact us.

© 2018

Private Market Investors Say Fees Matter Most in Manager Selection

Prospective investors in private market funds are more concerned about fee structures than historical performance or fund strategy, according to a PitchBook survey.
Respondents to the survey, including more than 50 allocators ranging from pensions to family offices, weighted performance fees and hurdle rates above all other factors, including the fund’s strategy and historical performance.
The second most important factor in fund selection, according to the survey respondents, was existing manager relationships, followed closely by management fees.
Management fees were the area where the largest portion of respondents believed the interests of limited partners and general partners were misaligned, with about 20 percent of investors saying that they were poorly aligned. Just under a tenth of respondents said investors and managers were poorly aligned on performance fees and hurdle rates. 
Traditionally, private equity firms have charged a 2 percent management fee and taken 20 percent in carried interest. However, a recent study by asset management advisor MJ Hudson’s limited partners unit suggested that fees are on the way down.
Fewer than half of all private equity firms in the study charged a management fee between 1.76 percent and 2 percent, while 19 percent of firms charged a 1.5 percent management fee.
And although 20 percent remained the norm for carried interest rates, MJ Hudson said that more funds are offering arrangements such as deal-by-deal performance fee structures.
Despite their fee concerns, institutional investors surveyed by PitchBook indicated that they planned to allocate more money to private market strategies over the coming two years. On average, respondents anticipated having a 32.5 percent allocation to private market strategies such as private equity and real assets in 2020.
The majority of respondents said private market strategies had met or exceeded their expectations over the last three years, with growth, venture capital, and real assets funds most often outperforming expectations.
Going forward, around a third of investors said they had lowered their return expectations for each private market strategy, though they still expected double-digit IRRs (internal rates of return) for every strategy in the survey except for funds of funds.
The surveyed investors had the highest expectations for venture capital funds, which the median respondent expected to deliver an average IRR of 19.8 percent.

Monday, December 10, 2018

Can a PTO contribution arrangement help your employees and your business?

As the year winds to a close, most businesses see employees taking a lot of vacation time. After all, it’s the holiday season, and workers want to enjoy it. Some businesses, however, find themselves particularly short-staffed in December because they don’t allow unused paid time off (PTO) to be rolled over to the new year, or they allow only very limited rollovers.
There are good business reasons to limit PTO rollovers. Fortunately, there’s a way to reduce the year-end PTO vortex without having to allow unlimited rollovers: a PTO contribution arrangement.
Retirement saving with a twist
A PTO contribution arrangement allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.
This can be appealing to any employees who end up with a lot of PTO left at the end of the year and don’t want to lose it. But it can be especially valued by employees who are concerned about their level of retirement saving or who simply value money more than time off of work.
Good for the business
Of course the biggest benefit to your business may simply be that it’s easier to ensure you have sufficient staffing at the end of the year. But you could reap that same benefit by allowing PTO rollovers (or, if you allow some rollover, increasing the rollover limit).
A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.
Also, a PTO contribution arrangement might help you improve recruiting and retention, because of its appeal to employees who want to save more for retirement or don’t care about having a lot of PTO.
Set-up is simple
To offer a PTO contribution arrangement, simply amend your retirement plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.

Have questions about PTO contribution arrangements? Contact us. We can help you assess whether such an arrangement would make sense for your business.

Wednesday, December 5, 2018

#MeToo Movement Has Created A Cooties Pandemic For Wall Street Men

For more than a year now, American culture has been dealing with the catharsis of the #MeToo movement.
After scores of powerful men have been laid low by revelations of troubling sexual behavior towards women both in and outside professional settings, it feels like no corner of our nation has been left untouched by the sweeping societal shift that is making us increasingly aware that we are way overdue in rethinking how men and women should interact in a modern, self-conscious era.
Like any moment of growth, the #MeToo era has been painful but necessary, and it’s laudable that everyone seems to be so on board.
No more dinners with female colleagues. Don’t sit next to them on flightsBook hotel rooms on different floors. Avoid one-on-one meetings.
In fact, as a wealth adviser put it, just hiring a woman these days is “an unknown risk.” What if she took something he said the wrong way?
Across Wall Street, men are adopting controversial strategies for the #MeToo era and, in the process, making life even harder for women.
See? They get it.
Interviews with more than 30 senior executives suggest many are spooked by #MeToo and struggling to cope. “It’s creating a sense of walking on eggshells,” said David Bahnsen, a former managing director at Morgan Stanley who’s now an independent adviser overseeing more than $1.5 billion.
And if a Woke-ass bro like noted political centrist David Bahnsen can’t wrap his head around the best way to handle the ramifications of #MeToo, what hope do other older wealthy men who intestinally fear change have?
Maybe Bloomberg is overdoing it, men on Wall Street are probably just playing it a little safe and this is just another anti-money sentiment from another socialist media organization…
A manager in infrastructure investing said he won’t meet with female employees in rooms without windows anymore; he also keeps his distance in elevators. A late-40-something in private equity said he has a new rule, established on the advice of his wife, an attorney: no business dinner with a woman 35 or younger.
The changes can be subtle but insidious, with a woman, say, excluded from casual after-work drinks, leaving male colleagues to bond, or having what should be a private meeting with a boss with the door left wide open.
Safety first, you guys. There’s no scientific proof that every person working on Wall Street without a Y chromosome is organically programmed to ruin her male colleagues’ careers by insidiously tempting them into overt sexual harassment, but why risk it? After all, who’s more risk-averse than an infrastructure investor? It makes total psychological sense that you would bet huge amounts of capital on massive construction projects and municipal bonds and then stand five feet from a woman in an elevator lest your hand become somehow inexplicably magnetized to her ass.
It’s not like people who market their decision-making prowess to pull in hundreds of billions of dollars that they manage for mindbogglingly high fees should be asked to evince acceptable social behavior on a daily basis. It’s much better that the finance sector continues to assume vast sums of money will flow into it while it locks itself away even higher up in a perceived ivory tower with a newly-installed “No Girlz” sign hung on the door. What could be the long-term downside of that trade now that women are making their voices heard?
“Women are grasping for ideas on how to deal with it, because it is affecting our careers,” said Karen Elinski, president of the Financial Women’s Association and a senior vice president at Wells Fargo & Co. “It’s a real loss.”
If an executive at Wells Fargo can identify an external problem through the miasma of the bank’s own perma-nightmares, it must be something glaring.
Wow. It almost feels as if treating women like vampiric grifters in response to their movement for equality is not the best look for powerful men in finance.

Family businesses need succession plans, too

Those who run family-owned businesses often underestimate the need for a succession plan. After all, they say, we’re a family business — there will always be a family member here to keep the company going and no one will stand in the way.
Not necessarily. In one all-too-common scenario, two of the owner’s children inherit the business and, while one wants to keep the business in the family, the other is eager to sell. Such conflicts can erupt into open combat between heirs and even destroy the company. So, it’s important for you, as a family business owner, to create a formal succession plan — and to communicate it well before it’s needed.
Talk it out
A good succession plan addresses the death, incapacity or retirement of an owner. It answers questions now about future ownership and any potential sale so that successors don’t have to scramble during what can be an emotionally traumatic time.
The key to making any plan work is to clearly communicate it with all stakeholders. Allow your children to voice their intentions. If there’s an obvious difference between siblings, resolving that conflict needs to be central to your succession plan.
Balancing interests
Perhaps the simplest option, if you have sufficient assets outside your business, is to leave your business only to those heirs who want to be actively involved in running it. You can leave assets such as investment securities, real estate or insurance policies to your other heirs.
Another option is for the heirs who’d like to run the business to buy out the other heirs. But they’ll need capital to do that. You might buy an insurance policy with proceeds that will be paid to the successor on your death. Or, as you near retirement, it may be possible to arrange buyout financing with your company’s current lenders.
If those solutions aren’t viable, hammer out a temporary compromise between your heirs. In a scenario where they are split about selling, the heirs who want to sell might compromise by agreeing to hold off for a specified period. That would give the other heirs time to amass capital to buy their relatives out or find a new co-owner, such as a private equity investor.
Family comes first
For a family-owned business, the family should indeed come first. To ensure that your children or other relatives won’t squabble over the company after your death, make a succession plan that will accommodate all your heirs’ wishes. We can provide assistance, including helping you divide your assets fairly and anticipating the applicable income tax and estate tax issues.

© 2018

Tuesday, December 4, 2018

Italy Finds a Friend in U.S. Hedge Fund

corporate battle at Telecom Italia SpA shows why it’s tough to be an investor in Italy these days. The government is interfering with a private company to get hold of its most prized asset: the country’s phone and broadband network. The opposition tacitly supports the plan. Italy is playing fast and loose with property rights and no one seems to care.
The ruling Five Star Movement has presented a draft amendment to a fiscal decree, which envisages creating a single company to combine the networks of Telecom Italia and Open Fiber, a smaller rival. Luigi Gubitosi, who became Telecom Italia’s CEO at the weekend, is open to the plan. It’s also supported by Elliott Management Corp., a hedge fund from New York that’s in effective control of Telecom Italia. Populists can embrace some strange bedfellows.
Vivendi, the French media company that is Telecom’s largest shareholder, is opposed.
It would be easy to see this episode as the interests of the public and private sector happily aligning, but it’s murkier than that. To make things worse, it’s not clear how Rome means to pay.
The problem is that Open Fiber was the brainchild of a previous Italian government, which wanted another company to help accelerate broadband and fiber development in the country alongside Telecom Italia. Cassa Depositi e Prestiti, a state-controlled lender, owns half of Open Fiber, alongside Enel SpA, the state-controlled energy company. But Rome has subsequently realized that it wasn’t the smartest move to have two fixed network suppliers duplicating investment. So it’s trying to devise a way to repair its own mistake.
With Telecom Italia’s new CEO open to the merger, too, you could argue that this is merely the will of company and so should be respected. But you need to understand the background here.
In the spring, the CDP took a minority stake in Telecom Italia and its votes helped Elliott seize control of the board from Vivendi. So Telecom Italia’s new willingness to play along is not merely the result of market forces, but of deliberate government meddling. Vivendi wouldn’t have been so amenable. Meanwhile, Telecom Italia’s shares have fallen by a quarter in the past six months. 
This tale of state intervention is part of a broader story on the respect of property rights in Italy. Last Summer, when a bridge collapsed in Genoa killing 43, the Italian government immediately blamed the road operator, Autostrade per l’Italia SpA, saying it should lose its license. The Five Star Movement, in particular, wanted a greater role for the state in operating Italy’s motorway network.
Three months later, few formal steps have been taken, but the rhetoric has severely dented the credibility of Italy’s services sector for foreign money. Even if the blame does end up lying with the operator, who would want to invest in a country where the government isn’t bothered by due process?
The paradox is that Italy has little money to pay for its new penchant for intervention. Of course, Rome is free to pursue any license or network it wants, so long as it offers proper compensation. In the case of Telecom Italia, this would mean paying between 10 and 15 billion euros — depending on the valuation of the network — or taking over a chunky portion of the company’s debt, which has the network as collateral.
The trouble is that Italy is saddled with an enormous public debt of its own and is struggling to find resources to relaunch its anemic growth rate. One option would be for CDP to take over these assets. But this would still add to the state’s pile of contingent liabilities.
Rome said in its latest budget that it will dispose of state assets worth about 1 percentage point of GDP to cut debt. This is hard to square with new nationalizations. Or with coherent policy-making.

Does prepaying property taxes make sense anymore?

Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?
The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.
What’s changed?
The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.
For property tax prepayment to make sense, two things must happen:
  1. You must itemize (that is, your itemized deductions must exceed the standard deduction), and
  2. Your other SALT expenses for the year must be less than $10,000.
If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.
Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.
Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.
Look before you leap
Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.
For help determining whether prepaying property taxes makes sense for you this year, contact us. We can also suggest other year-end tips for reducing your taxes.

© 2018