William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Investment’

The next hot annuity for clients is ?

Posted by William Byrnes on January 20, 2014

As clients have begun to feel the shifting winds with respect to the general economy, the annuity market is now undergoing its own type of evolution.

While products that tie fluctuations in an annuity’s cash surrender value to prevailing market interest rates may have seemed unacceptably risky to most clients just a few months ago, changes in today’s interest rate environment now have clients flocking to find these features.

Annuities with market value adjustment (MVA) features may be the next hot product for clients looking to beat the return on other conservative investment products, so read the full analysis of this emerging trend by Professor William Byrnes and Robert Bloink at Think Advisor !

ThinkAdvisor.com supports the professional growth and vitality of the Investment Advisory community, from RIAs and wealth managers of all kinds, to independent broker-dealer and wirehouse representatives. We provide unparalleled access to the knowledge, information and critical resources they need to succeed at every stage in their career, including professional development, education and certification, industry news and analysis, reference tools and services, and community networking opportunities.

Posted in Insurance, Pensions, Retirement Planning, Wealth Management | Tagged: , , , , , , , | Leave a Comment »

Reforming Annuities’ Image Problem: New Focus on Risk

Posted by William Byrnes on August 16, 2013

Today’s media coverage of the variable annuity market has focused on company buybacks and modifications to existing clients’ product guarantees—a prospect that has many clients feeling more wary than ever about annuity purchases.

Despite this, insurance companies have used the negative experiences of recent months as motivation to effect positive change in their annuity product offerings by offering clients real flexibility and risk management options.

read William Byrnes and Robert Bloink’s full analysis regarding annuities at > ThinkAdvisor <

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the new tax strategies book “2013 Tax Facts on Investments” just released

Posted by William Byrnes on December 5, 2012

2013 Tax Facts on Investments in PRINT and E-Book format 2013_tf_on_investments_cover-m_2provides clear, concise answers to often complex tax questions concerning investments. Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2013 Tax Facts on Investments delivers the latest guidance on:

  • Mutual Funds, Unit Trusts, REITs
  • Incentive Stock Options
  • Options & Futures
  • Real Estate
  • Stocks, Bonds
  • Oil & Gas
  • Precious Metals & Collectibles
  • And much more!

Key updates for 2013:

  • New section on captive insurance
  • New section on reverse mortgages
  • Expanded section on ETFs
  • Expanded section on precious metals & collectibles
  • More than 30 new Planning Points, written by practitioners for practitioners, in the following areas:
    • Real Estate
    • Limited Partnerships
    • Stocks
    • Interest and Expenses
    • Options
    • Mutual Funds

Posted in Estate Tax, Retirement Planning, Taxation, Trusts, Wealth Management | Tagged: , , , , , , , , , , , , , , | Leave a Comment »

How Many Basis Points Is the Competition Charging for Advisory Services?

Posted by William Byrnes on August 5, 2011

A recent study has blasted the popular belief that lowering your rate will increase your volume of clients. Likely surprising to most, the truth is that lowering your rates could backfire and decrease your attractiveness to potential clients.

PriceMetrix, Inc., a software firm, published the study, which focused on the needs of wealth management firms and their advisors. They considered data from 380 million transactions conducted between 2007 and 2010. Included in the data pool were 1 million fee-based accounts and 4 million transactional accounts totaling over $850 billion in investment assets.

The results of the study show that advisors are miscalculating the appropriate value of their services—and losing money in the process— averaging $20,000 in lost fees.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Advisors’ Stairsteps of Influence

Posted by William Byrnes on July 12, 2011

Advisors understand that referrals from existing clients are their best source for new business, but what else is working, and how effective are other methods being used by advisors to generate new business? A recently released survey provides us with a laundry list of approaches used by advisors to solicit new clients and gauges the productiveness of their marketing efforts.  The survey, which polled 262 financial advisors in November and December of 2010, found that client referrals are still the top way advisors generated new business. Behind client referrals, professional referrals were the second biggest producer.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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In Recovery Again: U.S. Taxpayers Face Trouble?

Posted by William Byrnes on April 10, 2011

Why is this Topic Important to Wealth Managers? This topic discusses the Recovery Act spending and its effects on the national economy.  It provides wealth managers with indicators and information to help clients better understand the use of government (taxpayer) funds and their allocation as a result of the financial crisis and ensuing financial recovery.

The American Recovery and Reinvestment Act of 2009, enacted February 2009,[1] was designed to put Americans back to work and combat the largest downturn in the economy since the Great Depression.  Through the Recovery Act, Congress allocated funds in three ways.  The single largest part of the Act —more than one-third of it, or $288 billion— was tax cuts.  Ninety-five percent of taxpayers have seen taxes go down as a result of the Act. [2]

The second-largest part or $244 billion — just under a third — was direct relief to state governments and individuals. This funding helped state governments avoid laying off teachers, firefighters and police officers and prevented states’ budget gaps from growing wider. On an individual level, the Act ensured those hardest hit by the recession received extended unemployment insurance, health coverage, and food assistance.

The remaining third or $275 billion of the Recovery Act financed the largest investment in roads since the creation of the Interstate Highway system; construction projects at military bases, ports, bridges and tunnels; overdue Superfund cleanups; clean energy projects; improvements in outdated rural water systems; upgrades to overburdened mass transit and rail systems; and much more.

The $787 billion (in total) economic Recovery plan included provisions, in sum, designed to (1) create and save jobs, (2) spur economic activity and invest in long-term economic growth, and (3) foster unprecedented levels of accountability and transparency in government spending.

The Recovery Act was intended to provide a short-term jump start to the economy, but many of the projects funded by Recovery money, especially infrastructure improvements, are expected to benefit economic growth for many years. Thus, the Recovery Act’s longer-term economic investment goals include:

  • Initiating a process to computerize health records to reduce medical errors and save on health-care costs
  • Investing in the domestic renewable energy industry
  • Weatherizing 75 percent of federal buildings and more than one million homes
  • Increasing college affordability for seven million students by funding a shortfall in Pell Grants, raising the maximum grant level by $500, and providing a higher education tax cut to nearly four million students
  • Cutting taxes for 129 million working households by providing an $800 “Making Work Pay” tax credit
  • Expanding the Child Tax Credit [3]

Has the Recovery Act worked? Read the analysis at AdvisorFYI


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Target Date Funds on Top of the Defined Contribution World

Posted by William Byrnes on April 8, 2011

Why is this Topic Important to Wealth Managers? This topic discusses a relatively new form of retirement investment offered by companies to their employees. The topic presents information about target date funds, what they are, who may use them and how they work. The defined contribution retirement market is a prime location for wealth managers to earn fees and commissions. Thus, staying informed about new market updates is provided to give managers an edge when exploring retirement benefits.

The Government Accountability Office recently published a report stating that financial security of millions of Americans in their retirement years will substantially depend on their savings in 401(k) and other defined contribution (DC) plans. [1]The GAO notes, to help ensure adequate financial resources for retirement, participants in DC plans should make adequate contributions during their working years and invest contributions in a way that will facilitate adequate investment returns over time.

To that end, the Pension Protection Act of 2006 (PPA) included various provisions designed to encourage greater retirement savings among workers eligible to participate in 401(k) plans, such as provisions that facilitate plan sponsors’ adoption of automatic enrollment policies. [2]

Under such policies, eligible workers are automatically enrolled unless they explicitly decide to opt out of participation. Because an automatic enrollment program must also include a default investment—a vehicle in which contributions will be invested absent a specific choice by the plan participant—the act also directed the Department of Labor to assist employers in selecting default investments that best serve the retirement needs of workers who do not direct their own investments. Since that time, target date funds (TDF)—that is, investment funds that invest in a mix of assets, and shift from higher-risk to lower-risk investments as a participant approaches their “target” retirement date—have emerged as by far the most popular default investment.

TDFs are designed to provide an age appropriate asset allocation for plan participants over time.    However, target date funds vary considerably in asset structures and in other ways, largely as a result of the different objectives and investment philosophies of fund managers. In the years approaching the retirement date, for example, some TDFs have a relatively low equity allocation—35 percent or less—so that plan participants will be insulated from excessive losses near retirement. Other TDFs have an equity allocation of 60 percent or more in the belief that relatively high equity returns will help ensure that retirees do not deplete savings in old age.

TDFs also vary considerably in other respects, such as in the use of alternative assets and complex investment techniques. In addition, allocations are based in part on assumptions about plan participant actions—such as contribution rates and how plan participants will manage 401(k) assets upon retirement—which may differ from the actions of many participants. These investment differences and differences between assumed and actual participant behavior may have significant implications for the retirement security of plan participants invested in TDFs.

Read the analysis at AdvisorFYI

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Investment Trusts (or Not) Via Limited Liability Companies

Posted by William Byrnes on March 14, 2011

Is a state law trust that is established as an investment trust to hold interests in an LLC, which has the power to vary its investments, classified as an investment trust?


LLC is organized under the laws of State as a limited liability company and is treated as a partnership for federal tax purposes.  LLC will acquire, hold and manage a portfolio of investments.  The governing document of LLC permits the managers of LLC to sell assets in the portfolio and acquire new assets.

LLC will issue two classes of interests:  common interests and manager interests.  Holders of common interests and holders of manager interests have different rights to the income, deductions, credits, losses, and distributions of LLC.  Manager interests will be held by a select group of investors who are also responsible for managing LLC.  The common interests of LLC will be held by Trust.

Trust is organized under the laws of State as a trust.  The governing documents for Trust provide that Trust is only permitted to hold common interests in LLC.  Trust will issue trust certificates and each certificate will entitle the holder to all the income, gain, profit, deductions, credits, losses, and distributions associated with one common interest in LLC.  The governing documents for Trust indicate that Trust is a trust for federal tax purposes.

First, the Treasury Regulations provide that a “business entity” is an entity recognized for federal tax purposes that is not properly classified as a trust under or otherwise subject to special treatment under the Code. [1]

In addition, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. [2]

There are arrangements that are known as trusts because legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Code because they are not simply arrangements to protect or conserve the property for the beneficiaries.   These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit making business which normally would have been carried on through business organizations that are classified as corporations or partnerships (business entities) under the Code. [3]

Moreover, an “investment” trust will not be classified as a trust if there is a power under the trust agreement to vary the investments of the certificate holders. [4] An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, will be classified as a trust if there is no power to vary the investments of the certificate holders.

The essential nature of an arrangement, whatever its form, as shown by the objects attained and the manner of their attainment, is what controls the classification of the arrangement as a trust.[5] In determining the character of an arrangement, the managerial powers of all parties to an arrangement will be combined in order to arrive at the full amount of permitted managerial activity and its object. [6]

Going back to our example, to determine whether Trust is an investment trust for tax purposes, it is appropriate to consider the nature and purpose of Trust.  Trust is holding the interests in LLC for the purpose of providing investors with the benefits of the managed investments of LLC.  These investment activities would result in Trust failing to be classified as a trust if Trust were permitted to engage in those activities directly.  Because the nature and purpose of Trust under this arrangement is to vary the investments of the certificate holders, Trust is likely a business entity for federal tax purposes and not an investment trust.

Restated, a state law trust that is established as an investment trust to hold interests in an LLC partnership, that has the power to vary its investments, is generally not classified as a trust for federal tax purposes.

Tomorrow’s blogticle will discuss relevant topics to wealth managers in 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

[1] Treasury Regulations § 301.7701-2(a).


[2] Treasury Regulations § 301.7701-4(a).

[3] Treasury Regulations § 301.7701-4(b).

[4] Treasury Regulations §  301.7701-4(c); See also Comm’r v. North American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701 (1942).

[5] Morrissey v. Comm’r, 296 U.S. 344 (1935).

[6] See Comm’r v. Chase Nat’l Bank, 122 F. 2d 540 (2d Cir. 1941).


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Passive Foreign Investment Company Special Disclosure Tax

Posted by William Byrnes on February 27, 2011

A significant number of Offshore Voluntary Disclosure Practice cases (remember the Swiss Bank Accounts) involve Passive Foreign Investment Company (PFIC) investments.  A lack of historical information on the cost basis and holding period of many PFIC investments, the Service notes, may make it difficult for taxpayers to prepare statutory PFIC computations and for the Internal Revenue Service to verify them.  As a result, resolution of many Disclosure Practice cases are said to be unduly delayed.  Therefore, for purposes of this initiative, the Internal Revenue Service is offering taxpayers an alternative to the statutory PFIC computation that will resolve PFIC issues on a basis that is consistent with the Mark to Market (MTM) methodology authorized in Internal Revenue Code section 1296 but will not require complete reconstruction of historical data.

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New Dodd-Frank Study Calls for Stringent Standards

Posted by William Byrnes on February 21, 2011

The Securities and Exchange Commission (SEC) submitted to Congress a staff study recommending a uniform fiduciary standard of conduct for broker-dealers and investment advisers — no less stringent than currently applied to investment advisers under the Investment Advisers Act of 1940– when those financial professionals provide personalized investment advice about securities to retail investors.

Section 913 of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required SEC to conduct a study to evaluate:

  • The effectiveness of existing legal or regulatory standards of care (imposed by current authorities) for providing personalized investment advice and recommendations about securities to retail customers; and
  • Whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for providing personalized investment advice about securities to such customers that should be addressed by rule or statute.

In the study, the SEC notes that investment advisers and broker-dealers are regulated extensively under different regulatory regimes.  But, the study claims, many retail investors do not understand and are confused by the roles played by investment advisers and broker-dealers.  The study finds that “many investors are also confused by the standards of care that apply to investment advisers and broker-dealers” when providing personalized investment advice about securities.  Read the analysis at http://www.advisorfyi.com/2011/01/new-dodd-frank-study-calls-for-stringent-standards/


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Retirement Plan Approved and Prohibited Investments

Posted by William Byrnes on February 15, 2011

Why is this Topic Important to Wealth Managers? Discusses retirement plan investments with regards to client retirement planning.  Provides types of investments retirement plans can and cannot make.

What types of investments can a retirement plan make?

Although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments.

In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement.

In addition, certain rules apply to specific plan types.  For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan.

Read the entire analysis at AdvisorFYI.

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House Passes Bill Modernizing Mutual Fund Taxation

Posted by William Byrnes on January 25, 2011

Although overshadowed by the fight over the Obama tax agreement, mutual fund legislation passed the House on December 15.  The Registered investment Company Modernization Act of 2010 (RICM Act), H.R. 4337, was originally passed by the House on September 28, but the Senate amended the bill, forcing a second vote in the House.  The President signed it into law December 22 – Public Law 111-325.

Tax Code provisions governing mutual funds have not had a substantial update since 1986, with some components of the Code relating to mutual funds sitting untouched for sixty or more years. The tax and regulatory landscape has changed significantly in the intervening years, which has left the tax rules for mutual funds sorely in need of updating.

The RICM Act brings the Tax Code’s treatment of mutual funds and other registered investment companies (RICs) up to date by introducing the following provisions to the Tax Code, among others: Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of mutual fund investment in Adviso’rs Journal, see Can Term Life Coupled with a Mutual Fund Investment Replace a Variable Universal Life Policy? (CC 10-77).

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Offshore Private Placement Variable Universal Life Insurance

Posted by William Byrnes on October 2, 2010

Author: Benjamin S. Terner

Why is this Topic Important to Wealth Managers? Provides an overview of one useful tool for affluent clients.  Presents offshore private placement life insurance considerations wealth managers may consider when discussing this topic with clients.

As a brief review, private placement variable universal life insurance may allow individuals “the ability to select asset management beyond the limited asset-management choices offered in retail variable life insurance products.”

Generally speaking, one benefit derived from the use of private placement policies “in the high-net-worth market” is that the policy is essentially an “investment vehicle, optimally used for the most tax-inefficient asset classes in an investor’s portfolio.”  Therefore, some common goals for wealth managers structuring transactions as private placement life contracts: “are to take advantage of the income tax and possible estate tax savings, to maximize investment choices, and to incur as little cost as possible in doing so.”

Please see the AdvisorFYI blog for the entire blogticle.

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