PacWest Financial Management Newsletter
2nd Quarter 2007

Volume XI, Issue II

    July 2007

Market Overview

Is the Dow up 100 today or down 100? It seems the answer to that question is “yes” as of late, as the index has seen wide intra-day swings. We explored volatility in our last quarter’s newsletter, and advised not to get shaken by short-term market swings and remain focused on long-term objectives. Even as the 3% plunge back in February fades from memory as the market approaches a new record high, once again the media keeps us updated on the latest market fluctuation, all the while fixated on the latest private equity deal, cell phone release, or hedge fund public offering.

Nevertheless, probably the most important movement over the quarter somehow failed to make headlines. As pieces of economic data dripped in over the quarter, a change in the expectations for future interest rates asserted its view in the bond market. So, even as the Federal Reserve held steady over the quarter with very little change in focus and no change in the discount rate, short-term rates declined as the rates on 2yr. to 30yr. bonds rose, resulting in a more normally sloped yield curve. (See chart below)

This shift is important because it points to continued economic growth and lays to rest the fears of an imminent recession for the time being. Currently, the consensus continues to believe that there will be no movement on interest rates by the Federal Reserve for the remainder of the year. And while this too may change as more economic data is released, for now, it seems we have a relatively low level of interest rates coupled with a historically average valuation for stocks, with expectations for economic growth while inflation remains at an acceptable level. Such an environment should be positive for corporate earnings and stock prices, though somehow does not make for as exciting news as Anna Nicole’s will or Paris Hilton’s probation terms.

Here at Pacwest, we are looking forward to next month’s earnings announcements. We continue to search for quality companies that we believe are executing successful strategies to grow their business. While the headlines may report generalizations about the latest tick in home prices or gasoline prices, we are keeping to our discipline of investing in individual companies that we expect will continue to reward their stockholders for years to come.

Grace Y. Lau, CFA and Elliot C. Kauffman, CFA, CPA

Why Should I Have a Trust?
 

Trusts provide obvious tax advantages for high net worth people, which we hear about every time trusts are discussed. We can avoid probate and shield assets from creditors. We can cook up elaborate ways to take care of our spouses, our children, our children’s children, and set parameters regarding how they may and may not receive money.

After tax considerations and planning for the financial security of the loved ones who survive us, the most important reason to have a trust is for incapacity planning 

This is particularly important for single individuals or couples who might both end up with capacity issues.

If we are ever suddenly incapacitated, or become too ill to manage our finances, a trust document will spell out exactly who should make the determination of our incapacity (usually one or two physicians). A trust and well-drafted general and medical powers of attorney can mean the difference between our care being taken care of immediately or dragged around in the court system.

Without a trust, friends and relatives must rely on the courts to gain access to our finances. They must hire attorneys and open a Conservatorship, the court must appoint a Guardian, and every time funds are needed to care for us, our Guardian must petition the court. This requires attorneys, creates delays, and is a matter of public record. Anyone can look through the court documents and see how and where our money is spent.

Whether we are single, married, childless, blessed with children, we need to consider carefully who we want to step in and make medical and financial decisions for us should the need arise. It is important to have a team of advisors who care about us and our well-being, and to communicate our wishes to everyone on that team.

My mom was the contingency planner of all contingency planners. Her attitude was, if I have plans in place to take care of the worst that can happen, it won’t happen.

Turns out she was lucky enough to be right.

Tax Corner - Rolling Over Non-Spouse Qualified Plan Benefits

We mentioned a tax law change in our October 2006 Quarterly Newsletter that made an important improvement for certain beneficiaries of 401(k), 403(b) and 457(b) plans. For the first time, heirs of a plan participant can roll over the participant’s account to an IRA even though they’re not the surviving spouse.

The IRS has long agreed nonspousal IRA beneficiaries can make trustee-to-trustee transfers to another IRA if the new IRA is in the name of the decedent for the beneficiary’s benefit. However, beneficiaries of qualified retirement plan accounts haven’t historically had the same option unless they were the plan participant’s spouse. You will see below that many of the requirements for IRA rollovers to nonspouse beneficiaries also apply to rollovers of qualified retirement plans.

The ability to roll over the funds to an IRA offers the opportunity to defer the tax that would otherwise be due if the entire inherited amount was distributed in a lump sum. For example, assume that Sarah inherits her uncle’s $100,000 401(k) account at his death. Under pre-2007 law, she would likely have received the full $100,000 in a single distribution and be taxed in the year of receipt.

If the company’s plan allows it, Sarah can now instruct the 401(k) plan administrator to do a trustee-to-trustee transfer of the $100,000 to an IRA that she sets up just for receiving the distribution. She can then spread out the distributions over a period of years, thereby allowing the funds to build up tax deferred.

There is no downside to rolling over the inherited retirement account to an inherited IRA, as you can always take the money out if desired or needed. However, for a rollover to be tax free, you must arrange for a trustee-to-trustee rollover from the plan directly to a new IRA established for this purpose. Do not take the cash and plan on rolling it over later, as this will not work. Also, the funds should not be transferred to an existing IRA, nor should any additional contributions be made to this new IRA. Furthermore, the IRA must be titled as an inherited IRA, e.g., Sarah Stephens as beneficiary of Sam Adams’ IRA. Finally, in certain circumstances, the rollover will need to be completed no later than the year after the account owner’s death.

L. Jane Heist, CPA  

U.S. States Renamed for Countries with Similar GDP

Gross Domestic Product (GDP) is a convenient way of measuring and comparing the size of national economies. Annual GDP represents the market value of all goods and services produced within a country in a year. Put differently: GDP = consumption + investment + government spending +(exports – imports)

Although the economies of countries like China and India are growing at an incredible rate, the US remains the nation with the highest GDP in the world – and by far: US GDP is projected to be $13.22 trillion (or $13,220 billion) in 2007, according to this source. That’s almost as much as the economies of the next four (Japan, Germany, China, UK) combined.

Reprinted from http://www.strangemaps.wordpress.com (map #131), 6/10/07