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The Conversation by Ray Padrón, CPA, CFP®, CIMA®, PFS, Wealth Advisor

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ave you personally experienced a big change where you were questioning Published exclusively for the information and enjoyment of the clients and friends of Brightworth. “What if this is not the right thing?” “What if it goes wrong?” “Why does this have to happen now?” If so, it probably caused a great deal of anxiety in direct proportion to how much control you had over the situation and the outcome. I’ve recently experienced watching this as my 84 year-old parents prepare for their transition to an assisted living facility. Given the impact moving to assisted living can have on your health, finances, relationships and community, it’s no wonder it’s such a difficult decision to make.

VIEWS

My parents’ journey to this major point in life was not quick and we never had what many articles on this subject describe as “the conversation”. In fact, we have been talking about this day for years. What started as a conversation turned into a four year dialogue and process of decisionmaking. It was initiated by the things that you typically read about when discussing later in life issues. “So, when are you thinking of moving to that retirement home?” “What would happen if you forgot to take your pills?” There are many articles that try to tell you when it’s time, including signs to look for such as bills not being paid on time, home deterioration and dishes left untouched for days or weeks. While these are valuable road signs, they have not shown up in my parents’ life yet, and I’ve realized they may not provide the real motivation to act.

Spring 2011

For my parents, the decision to make the move has come down to two key factors. The first was the fact that eventually something was going to happen that might force them to move, such as my father falling and breaking a hip. We didn’t know when that something might happen, but my parents did know that making the transition before an event would be a lot easier than after, as more choices and decisions would be made on their terms. The second factor was the possibility that only one of them would be making the transition—alone. In fairness to demographics, that would probably be my mother. Years ago my parents made a deposit at an assisted living facility near their home, never really certain they would need to move there. They felt it was a wise decision to at least get on the waiting list. By the time they finally were ready to inquire, my parents had been on the top of the list for years! Now ready to move, my parents have chosen a different place. Yet they’ve stayed in control of their decision, and although it’s a major one and it produces stress, they are not as anxious as they could have been had they waited too long. My parents have taken advantage of options and time, and in hindsight, that has served them and our family well. As I reflect on this process for our family, and why it’s been a positive experience for my parents, my siblings and me, the main advice my family would give is to: 1) start the dialogue early; 2) make the change as a couple (if applicable) while you can; 3) make the change while it’s easier to cope with; 4) take small steps and keep moving forward; and 5) don’t wait until family has to get involved, as they’ll tend to help longer and harder than they should, leading to stress on the younger generation. The richness of having a dialogue and process only confirmed how blessed we are as a family. Not everyone gets to watch their parents move through this part of their lives. Not every couple is given the chance to do it together. However, each of us can be an encouragement to those who are one phase ahead in life, or to those who are watching from a generation behind.

Inside The Fed – Walking the Inflation/Deflation Tightrope

2

An Old “New Story” Draws Closer to the Climax

4

Partner: Are You Saving For Your Future?

6

Knowing Your Options 7 Stuck in a Trust

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The Conversation by Ray Padrón, CPA, CFP®, CIMA®, PFS, Wealth Advisor

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ave you personally experienced a big change where you were questioning “What if this is not the right thing?” “What if it goes wrong?” “Why does this have to happen now?” If so, it probably caused a great deal of anxiety in direct proportion to how much control you had over the situation and the outcome. I’ve recently experienced watching this as my 84 year-old parents prepare for their transition to an assisted living facility. Given the impact moving to assisted living can have on your health, finances, relationships and community, it’s no wonder it’s such a difficult decision to make.

My parents’ journey to this major point in life was not quick and we never had what many articles on this subject describe as “the conversation”. In fact, we have been talking about this day for years. What started as a conversation turned into a four year dialogue and process of decisionmaking. It was initiated by the things that you typically read about when discussing later in life issues. “So, when are you thinking of moving to that retirement home?” “What would happen if you forgot to take your pills?” There are many articles that try to tell you when it’s time, including signs to look for such as bills not being paid on time, home deterioration and dishes left untouched for days or weeks. While these are valuable road signs, they have not shown up in my parents’ life yet, and I’ve realized they may not provide the real motivation to act.

Spring 2011

For my parents, the decision to make the move has come down to two key factors. The first was the fact that eventually something was going to happen that might force them to move, such as my father falling and breaking a hip. We didn’t know when that something might happen, but my parents did know that making the transition before an event would be a lot easier than after, as more choices and decisions would be made on their terms. The second factor was the possibility that only one of them would be making the transition—alone. In fairness to demographics, that would probably be my mother. Years ago my parents made a deposit at an assisted living facility near their home, never really certain they would need to move there. They felt it was a wise decision to at least get on the waiting list. By the time they finally were ready to inquire, my parents had been on the top of the list for years! Now ready to move, my parents have chosen a different place. Yet they’ve stayed in control of their decision, and although it’s a major one and it produces stress, they are not as anxious as they could have been had they waited too long. My parents have taken advantage of options and time, and in hindsight, that has served them and our family well. As I reflect on this process for our family, and why it’s been a positive experience for my parents, my siblings and me, the main advice my family would give is to: 1) start the dialogue early; 2) make the change as a couple (if applicable) while you can; 3) make the change while it’s easier to cope with; 4) take small steps and keep moving forward; and 5) don’t wait until family has to get involved, as they’ll tend to help longer and harder than they should, leading to stress on the younger generation. The richness of having a dialogue and process only confirmed how blessed we are as a family. Not everyone gets to watch their parents move through this part of their lives. Not every couple is given the chance to do it together. However, each of us can be an encouragement to those who are one phase ahead in life, or to those who are watching from a generation behind.

Inside The Fed – Walking the Inflation/Deflation Tightrope

2

An Old “New Story” Draws Closer to the Climax

4

Partner: Are You Saving For Your Future?

6

Knowing Your Options 7 Stuck in a Trust

8


2 Brightworth VIEWS

The Fed – Walking the Inflation/Deflation Tightrope by Don Wilson, CFA, CFP®, Director of Portfolio Management

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oaring food and energy prices and the Fed’s quantitative easing have contributed to higher inflation in recent months and raised concerns that inflation could be headed higher. The pendulum has now swung to the other end of the spectrum from last fall when investors were worried about deflation and a double-dip recession. (To read the background of how we got to this point, see the extended version of this article at brightworth.com under Insights and Innovations.) Now the questions are whether inflation or deflation is more likely and where are prices headed as the Federal Reserve tries to walk the inflation/deflation tightrope?

Summary Soaring food and energy prices have increased inflation Several factors should keep inflation from spiraling out of control this year including: • Continued high unemployment • Economic headwinds • Sharply higher energy prices reducing demand for other goods and services Given the Fed’s current stance and its propensity to avoid deflation at all costs, significant deflation seems unlikely but… • Long-term underlying deflationary currents could overwhelm current inflationary trends and require the Fed to again fight deflation in the not- too-distant future • There are too many unknowns to confidently construct an investment portfolio solely for inflation or deflation. We believe a better approach is to position portfolios to do reasonably well under a number of scenarios

0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3

One-Month Percent Change in CPI for all Urban Consumers (CPI-U), Seasonally Adjusted, Feb. 2010 - Feb. 2011 0.5 0.3 0.2

0.2

0.4

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0.0

0.0

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Jul

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Source: www.bls.gov

Chart 1

Where do we go from here? Overall and core inflation in the U.S. (excluding food and energy prices) have remained low over the past twelve months, but both are likely headed higher as low inflation months from last year roll off and new months are added (see Chart1). Although inflation in the U.S. appears to be headed higher in coming months, a number of factors should keep it under control this year. First, high unemployment, downsizing state and local governments, less wage and benefits cost pressure and globalization should keep wage inflation in check for a long time. The official unemployment rate remains near 9% and some of the improvement has come as discouraged workers have stopped looking for jobs. The rate of workers who are “underemployed” is even higher. Many state and local governments will be reducing their workforces even further to balance their budgets, which will likely keep unemployment high. During the 1970s, labor union employment contracts were often tied to inflation creating an inflationary feedback loop. Today labor unions make up a much smaller percentage of the workforce, making the same inflationary feedback loop unlikely. Additionally, the global economy

allows corporate managers to quickly and easily move their operations and outsource functions to low cost countries. Globalization and increasing use of technology (to lower the number of employees needed) will likely continue to keep wage inflation low for a long time. Since wages are a significant part of corporate costs, this should help suppress overall inflation. Second, overall economic growth faces continued headwinds from high unemployment, a weak housing market and a deleveraging private sector. Inflation can occur even when overall demand is not surging (stagflation), but that’s not typical. While the U.S. economy is expected to continue to grow, few economists expect the high levels of growth typically associated with inflation. Slack in industrial capacity should also dampen inflation. A continued weak housing market should curtail increases in rental prices that make up over 40% of the Consumer Price Index (CPI). And consumer spending should only grow modestly as consumers continue to reduce debt. All of these factors are likely to keep demand in check, thus reducing inflationary pressures. Sharply higher energy prices have contributed to rising inflation in recent months as unrest in the Middle


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While oil prices could spike even higher in the short term, sustaining sharply higher oil prices over an extended period is unlikely because of the self-correcting pricing mechanism commodities tend to have over the intermediate term. High energy prices encourage consumers to reduce their demand and producers to increase their supply. Lower demand and higher supply eventually result in lower prices again. In 2008 when oil prices spiked to $145 per barrel, Americans drove less for the first time in years and the U.S. decreased its net oil imports. Consumers bought fewer gas-guzzling SUVs and started buying more fuel-efficient vehicles. Reduced consumer demand across the board contributed to the ensuing recession that followed. Reduction in the demand for oil (and energy speculators selling) caused oil prices to fall to $30 per barrel. While this is an extreme example, it illustrates the self-correcting pricing mechanism commodities can tend to exhibit. How Will the Fed respond to Higher Food and Energy Prices? The Fed’s quantitative easing seems to have contributed to higher commodity prices such as food and energy (see Chart 2) although there have been other contributing factors including the easy money policies of

2.7m

360

2.6m

340

2.5m

320

2.4m

300

2.3m

280

2.2m

260

Millions

Federal Reserve Balance Sheet vs. CRB Commodity Index 380

2.1m

240

2.0m

220

Nov - 2010

Sep - 2010

Jul - 2010

May - 2010

Mar - 2010

Jan - 2010

Nov - 2009

Sep - 2009

Jul - 2009

May - 2009

Mar - 2009

Jan - 2009

180

Mar - 2011

200

Jan - 2011

Thompson Reuters / Jefferies CRB Commodity Index

Nov - 2008

East has raised the risk of supply disruptions. Events in the Middle East are unpredictable and oil prices may go higher, but in recent years higher energy prices haven’t flowed through to higher prices elsewhere. Consumers feel higher oil prices primarily at the gas pump, as the price of a gallon of gas may be the best known price of any product in the country. High gas prices can tend to have a disproportionate impact on consumer psychology resulting in consumers spending less money on other items. Less demand creates downward pressure on prices for other goods and services. Paradoxically, high energy prices may actually be deflationary over the intermediate term when measured across all goods and services.

1.9m 1.8m

Sources: Thompson Reuters/Jefferies and Board of Governors of the Federal Reserve System.

Chart 2

central banks from other countries. While overall inflation is higher, it is still below its long-term average.

inflation and slowing growth, or continuing to spur growth at the risk of higher inflation in the future.

The Fed’s dual mandate of price stability and full employment puts the Fed in a difficult position since unemployment remains very high. Based on the Fed’s most recent statements, for now they seem less concerned with inflation and believe high food and energy prices are transitory and unlikely to lead to higher core inflation. The Fed plans to continue QE2 through the end of June in an effort to reduce unemployment although they could adjust this if inflation expectations rise significantly. One of the big questions is what will happen when QE2 ends in June?

Portfolio Implications While it appears inflation will increase from here, we don’t believe it is destined to spiral out of control in the near term. Given the Fed’s current stance and its propensity to avoid deflation at all costs, significant deflation seems unlikely but longer-term deflationary pressures may require the Fed to combat deflation concerns again in the not-toodistant future. There are too many unknowns to confidently construct an investment portfolio solely for inflation or deflation. There are money managers we respect who believe we will have inflation and others who think deflation is more likely. Because the assets that will do best in an inflationary environment will do poorly in a deflationary environment (and vice versa), investors who position their portfolios for only one or the other are taking significant risk if they turn out to be wrong. We believe a better approach is to position portfolios with the expectation they will do reasonably well under a number of scenarios. In that way, we expect to have a safety net should the Fed slip on the inflation/ deflation tightrope.

Last summer when QE1 ended there were signs that economic growth was sputtering and the stock market fell. If that happens again, this time the Fed could hold monetary policy steady to not add to inflation, but that could risk the still fragile economic recovery. Or the Fed could step in again with QE3, risking higher inflation in an effort to keep the economic recovery from slipping back into recession. Another possibility is that the economy will have reached a self-sustaining level and do just fine when QE2 ends and the Fed won’t have to make a tough decision. If things are unclear, this could present a dilemma where the Fed has to decide between fighting


4 Brightworth VIEWS

An Old “New Story” Draws Closer to the Climax Perplexities of China—Part One of Four by Alan Gotthardt, CPA, CIMA®, Consultant

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t a recent Shen Yun Performing Arts show in Atlanta, my family watched in amazement as the talented artists danced, sang and played their way through legends and events that shaped the rich culture of China; stories of war and peace and romance that have played out over the millennia. I was reminded of just how young we are as a society in America. The thought also occurred to me that in one very important way, it is the United States that Chinese Consumption, Exports and Investment as a % of GDP

Last Points 2009: Exports 26.2% Investment 42.4% Consumption 34.3%

55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5%

1980

1985

1990

1995

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2005

55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5%

Exports of goods and services (% of GDP) Gross fixed capital formation (% of GDP) Household final consumption expenditure (% of GDP) Source: The World Bank

Chart 1

is the “old hand” and China the neophyte—economic development and widespread prosperity. America has built the greatest wealth for the greatest number of people the world has ever seen. And we’ve been working on it for hundreds of years; starting with a constitutional framework that unleashes human creativity and potential like no other. There have been plenty of bumps and bruises along the way, and the system is far from perfect even today. However, in addition to being the largest economy in the world by a factor of almost three, the qualitative and structural aspects of the U.S. economy stand in even more dramatic contrast. Stephen Roach of Yale University wrote recently in an article entitled

China’s Turning Point: “Premier Wen Jiabao laid the groundwork four years ago, when he first articulated the paradox of the ‘Four Uns’—an economy whose strength on the surface masked a structure that was increasingly ‘unstable, unbalanced, uncoordinated, and ultimately unsustainable’…China can no longer afford to treat the Four Uns as theoretical conjecture. The post-crisis era is likely to be characterized by lasting aftershocks in the developed world—undermining the external demand upon which China has long relied.” In short, global demand is a gale-force headwind against China’s growth prospects. And, without a return to the growth in demand we witnessed up until 2008, China is left with only two very shaky paths to maintaining even the status quo GDP. Importantly, experts consider 5-6% GDP growth in China to be the minimum needed to avoid civil unrest. So the status quo is not good news. We will discuss those two paths to redemption in the final article in this series, but unfortunately, we assign a low probability to either one occurring. GDP by overinvestment– understanding the problem From 2000 to 2010 China’s GDP grew from around $1.5 trillion to $6 trillion. How? Predominantly three ways: 1) government-controlled exporting of cheap labor products at a time of massive, global, consumer demand, followed by 2) governmentcontrolled investment of the proceeds of exporting and 3) foreign direct investment into China. The point was to rapidly create jobs and a domestic economy for the billion rural Chinese who desire a better standard of living. With that many mouths to feed, economic viability and profitability of government investments are not even a secondary consideration. The cost of such

rapid export/investment growth is an economy that is much more vulnerable to outside forces—global financial crises, trading partner recessions, etc. An economy driven by domestic consumption (think U.S. and Europe at almost 70%) will be more self-sustaining than one dependent upon exports to other countries. Similarly, GDP from manufacturing and exports can be more readily continued than GDP from investment. Chart 1 shows a 20 year history of consumption, exports, and investment as a percentage of GDP in China. The numbers are startling when you consider the implications. First, the Chinese consumer has fallen from 50% of the economy to around 35%. This is a major imbalance caused by the state-owned factories, banks and other sources of production. At the same time, investment has grown as a percentage of the economy to an estimated 48% in 2010 (CIA Factbook). In fact, of the 10% growth in China’s economy last year, I’ve seen estimates that 90% of that growth was from investments (building projects, infrastructure, railways, etc.). Investment GDP can be good for the future of a country, but the trillions that have poured into Chinese infrastructure (often borrowed money) over the past few years raise serious doubts about the economic viability of the projects. At some point—and many experts believe we passed the point years ago—the money is just going down a hole. Further, the ability to grow GDP by investment counts on a continuing flood of cash entering the country via exports or outside investors. Therein lies the rub. Mathematically, without a strong consumer, China must get cash from the outside just to maintain its GDP, much less grow. Continued on page 6


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Lisa Brown Named Brightworth’s Newest Partner Lisa is a Wealth Advisor providing comprehensive investment and financial advice to the firm’s clients, with a particular focus on retirement transition planning, executive compensation strategies and working with successful women. She has an MBA with a Personal Financial Planning major from Georgia State University and graduated Summa Cum Laude from Le Moyne College with a Bachelor’s degree in Finance and Economics. She is a Certified Financial Planner™ practitioner, Accredited Estate Planner® and completed the IMCA® Investment Analyst Program at the elite University of California Berkeley Haas School of Business. “Lisa has made significant contributions to Brightworth’s growth over the years. She is an outstanding advisor for clients. We are proud of her accomplishments and welcome her as an equity partner in our firm.” - Chris Dardaman, Chief Executive Officer

Brightworth Promotion We are pleased to announce the promotion of Patrick King, CFP®, to Wealth Advisor. Patrick earned his MBA with a major in Personal Financial Planning from Georgia State University and was the recipient of the Brightworth Scholarship for Excellence. Prior to joining Brightworth in 2008 as a Financial Planner, he worked for Financial Discovery Group while earning his MBA. Patrick received an undergraduate degree from Clemson University in Mechanical Engineering and spent 10 years in Project Management as a Design Engineer prior to entering the financial services industry. His technical focus is in executive compensation, estate planning and investment strategies for high net worth clients. Congratulations, Patrick!

Trend Watch Trends in Travel – The Extended Vacation Virtuoso, a luxury travel network, recently reported family and multigenerational travel is a top emerging travel trend for 2011. A recent study indicates 31% of adults spend leisure travel with their children or grandchildren. Popular destinations include island resorts, beachfront hotels and mountain ski lodges as they offer convenience and plenty of activities for all ages. Or, look for cities with public transportation or even an international trip timed to a local tradition. When family is gathering together from all parts of the country or world, working with a travel agent could save time, money and hassle. Source: The Wall Street Journal, March 5-6, 2011.

“A Brightworth Wealth Advisor exhibits a deep technical understanding across the financial disciplines and a proven commitment to providing the highest level of client service. Patrick has a natural ability to understand and connect with clients and develop strategies to address all aspects of their wealth management needs. We are proud of Patrick and the contributions he will continue to make to our firm and its future.” - Brightworth Management Committee

Behind The Scenes at Brightworth Wealth Advisor Dave Polstra has been named one of the 2011 Best Financial Advisers for Dentists in the Dental Practice Report. Financial Advisor Magazine quoted Wealth Advisor Annika Ferris in “March Madness: Then and Now” on investor confidence over the past two years. Wealth Advisor Chris Dardaman was named to the “Who’s Who” list by the Atlanta Business Chronicle as one of the Top 100 Business and Government Leaders guiding Atlanta’s financial sector. Lisa Brown, Wealth Advisor, presented “Bracing Your Clients for the Health Care Act: Forewarned is Forearmed” at the Financial Planning Association of Georgia’s 2011 Regional Conference. Director of Portfolio Management Don Wilson and Dave Polstra presented “Investing Money for Nonprofits: Reflections, Realities and Revelations” at the Georgia Institute of Continuing Legal Education’s 8th Annual Nonprofit Law Seminar. Emory University’s Goizueta School of Business invited Chris Dardaman to be a guest speaker for their MBA class on Ethics and Leadership.


6 Brightworth VIEWS

Partner: Are You Saving For Your Future? by Annika Ferris, CFP ®, CIMA®, Wealth Advisor

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ecoming a partner or owner of a professional services firm can be a major opportunity from both a career and financial standpoint. On the financial side, we have seen clear trends emerge regarding specific wealth planning issues that need to be handled such as cash flow planning, income tax planning, estate planning and asset protection. However, there is one pitfall that seems to catch many by surprise. This is the lack of discipline while working to systematically create the personal wealth needed to sustain their lifestyle in retirement. Typically, as highly paid professional service providers such as attorneys, CPAs and physicians gain experience and grow their practice, their level of earned income increases significantly over time. The income can be paid in a variety of ways including guaranteed salary payments, monthly budgeted capital distributions, lump sum capital distribution bonuses and/or simple draws from the business throughout the year based on the discretion of the owner. As advisors, we typically see that as income goes up, there is a proportional increase in taxes and lifestyle. What does not typically increase is the amount of money set aside each year to build the nest egg needed to eventually support the partner and their family in retirement. Many professional service firms— especially the larger ones—have a series of retirement plans in place that partners contribute to annually, including 401(k)s, profit sharing plans, cash balance plans and longterm incentive plans. Often, the long-term incentive plan is designed to pay out over several years (five years for example) and provides some recognition of the value of the billings or business the partner has built. These plans provide a good structure for establishing the foundation of retirement assets

for the partners. However, the big disconnect (or denial) is that in most cases, even though the partner contributes the maximum each year, these company savings plans simply will not be enough to fund the lifestyles to which they have become accustomed when they stop working. In fact, they are not even designed for partners to save enough because the IRS limits the annual contributions that are allowed. Without setting aside an additional piece of their overall income each year, many partners run the risk of having a rude awakening as they approach retirement and realize that too much of their income has been spent instead of put aside for the future. If we change our perspective on what it means to be an equity partner from a financial standpoint, we should view annual bonuses not as “earned income”, rather as a return of the value the partner has provided in helping the business grow. This is an important paradigm shift in thinking because in most cases, there won’t be a liquidity event where the service business is sold and the partner is rewarded with a large sum of money. Therefore it makes more sense to invest these funds (or a portion of these funds as determined by the partner’s wealth strategy) in a long-term retirement portfolio since they represent the value of what the partner has built over the years, and what they will need to live off of after they are done billing clients for their services and time. Many attorneys, CPAs, physicians and other business owners stay so busy serving their clients and building their practices that they don’t find sufficient time to fully and appropriately address this critical wealth planning issue. At Brightworth, we have deep expertise in guiding our clients through the process of answering one of the most important questions regarding

financial independence: how much needs to be accumulated over time to serve as the foundation for retirement income? Each year on an ongoing basis, we can examine the specifics of our clients’ projected current year compensation and design an optimal current year cash flow strategy that meets both their cash flow needs (for expenses and taxes) as well as their long-term savings goals. Taking this disciplined approach and monitoring the progress along the way is by far the most prudent way to keep the lifestyle that a partner has invested thousands of hours to create.

“New Story” continued from page 4

Size of GDP is only the beginning The transformation in China over the last couple of decades, measured in GDP as well as along other lines, is nothing short of amazing. Millions of Chinese have been lifted out of poverty and given hope for a brighter future. But, the breathless commentators who rush to predict the Chinese eclipse of the U.S. in economics and world affairs miss a critical point that is slowly becoming evident here in 2011: there is no shortcut to greatness in nationbuilding. The very process of tripling the size of an economy in such a short period creates tremendous imbalances that threaten, and in my opinion, eliminate the ability to keep growing at high rates. In preview of the coming series of articles, it is the qualitative and structural differences faced by China that represent overwhelming challenges to continued fast-paced growth. These are perplexing both because of the scale of the Chinese economy and the worldview underlying its architects’ vision. The world has never seen an economy so big, managed by so few, philosophically driven by so convoluted a mix of capitalism and statism; Interesting times indeed.


Brightworth VIEWS 7

Knowing Your Options by Nathan Corbitt, CPA, CFP ®, PFS, Financial Planner

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mployee stock options (ESOs) have long been a staple of executive compensation in America, and for good reason: They offer distinct advantages to both the issuing company and the receiving employee. To the company, they offer a preferred and inexpensive means of compensation as well as a method of aligning the interests of the employee with those of the employer. To the employee, they are tax-advantaged and can offer immense upside value. However, with tax rates ranging from 10% to almost 50% on the gains realized from the exercise of ESOs, planning for the tax impact requires either a thorough understanding of the governing tax legislation or working with a specialist who does. Not understanding these rules can be a costly mistake. With the soaring popularity of ESOs over the last few decades, the federal government has issued extensive legislation to govern the taxation of these securities. The result is that while federal regulations are complex and intricate, in most cases there is precedent to support the tax treatment of the gains created. However, many state governments

have legislation that is far less developed. As a result, state taxation of ESOs can be much more complex. For instance, Georgia enacted new regulations on Jan. 1, 2011, allowing the state to tax the exercise of ESOs by certain non-residents. Under this new law, individuals who are granted stock options while working within the boarders of the state may not be able to escape Georgia taxation by changing their residence prior to exercising their options. Consequently, if an individual owning ESOs based in Georgia subsequently moves to another state, any gains recognized from the exercise (exceeding a deminimis amount) could be taxable as Georgia income and would thus incur additional taxes. Further complicating this matter is the fact that the individual’s new state of residence may not follow similar rules when allocating income from the same ESO exercise. In most cases, you might receive an offsetting resident state tax credit for the taxes you paid to another state, but that may not always be the case. For reasons such as this, having a seasoned tax professional who comprehends both the intricacies of ESOs as well as how

to navigate the turbulent waters of multi-state nexus is invaluable to anyone seeking to minimize the tax cost of exercising their options. If you have stock options and especially if you are thinking about moving to another state with them, plan now for the tax impact and adjust your plan for when, how much and ultimately what you’ll net.

Welcome!

Welcome Nathan Corbitt

Nathan joined Brightworth as a Financial Planner in 2011 after spending a number of years in public accounting specializing in taxation of high net worth individuals, executive compensation and tax legislation and research. He received his Masters of Accountancy from Georgia Southern University where he graduated as a University Honors Program Scholar. He is a Certified Public Accountant, a Certified Financial Planner™ practitioner and is accredited as a Personal Financial Specialist by the AICPA. He has also completed the AICPA’s National Tax Education Program. He has served on the board of numerous charitable organizations including the Georgia Southern Wesley Foundation and Believer’s Church of Statesboro.

Nathan and his wife, Melissa, have a son and reside in Dunwoody. They are active members of Buckhead Church. Nathan enjoys reading, skiing, tennis and golf.


8 Brightworth VIEWS

Stuck in a Trust by Lisa Brown, CFP ®, CIMA®, Wealth Advisor

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hen you have significant assets that you desire to protect and pass down to the next generation, a trust is often a tool used to accomplish this goal. Placing assets in a trust can help reduce estate taxes, avoid probate, provide for management of the assets if the grantor or beneficiary becomes disabled and can help keep assets in the family for many generations. Trusts can also protect the beneficiaries both from themselves (i.e., a young person getting their hands on too much money, all at once) and from their creditors, ex-spouses, etc. Estate attorneys can tailor trust documents to accomplish most or all of your personal goals for how you’d like your particular assets handled both now and in the future, and they can also include language in the trust document to allow for a reasonable amount of flexibility. Having some flexibility is important to help maximize both your personal enjoyment of these assets during life and also your intended beneficiaries’ use of the funds. One example of flexibility that has been receiving an increasing amount of attention over the past few years is the bifurcation of trusts. This is essentially allowing the administration of the trust (i.e., making payments to beneficiaries, collecting trust income, filing the fiduciary tax return and general trust accounting) to be handled by one group of professionals whereas the investment management (implementing, monitoring and adjusting the proper mix of stocks, bonds, alternatives and cash) is handled by another group of professionals, often at a separate investment management firm. The

investment manager can often serve as the local point of contact for the family and coordinate with the administrative trustee on behalf of the family. They’ll often develop the multi-generational wealth strategy for the family, which can help ensure the investment strategy is coordinated with the estate plan, risk management strategy and family’s cash flow needs. Having trust assets administered and invested by the same company might seem convenient, but it does not

guarantee enhanced or expedited service. The company that may be the best at administering trusts may not have the most competitive investment platform or group of investment professionals to oversee the growth and income needs of the portfolio for its beneficiaries. With all of the change and consolidation in the financial services industry these past few years, for some it has become quite apparent that the group entrusted to administer and/ or invest a family’s trust may not be the right solution for tomorrow or even the next generation. The people change, the firm changes/ merges and the administrative and investment processes and procedures morph over time. Keep in mind that what is right for today may not be the best solution for the next 10, 20, or even 50 years. As such, with a more flexible trust document beneficiaries can be given the freedom to hire and

fire investment managers, remove a trustee and designate a successor, and avoid becoming trapped in their trust. To determine whether a bifurcated trust relationship would be beneficial to your family’s situation, consider whether having the trust assets coordinated with your or your beneficiary’s personal assets and wealth strategy is important, whether your family prefers to have relationships with different groups of specialists, the geographic location of beneficiaries and their advisors, etc. If a bifurcated structure is something that you could benefit from, work with your estate attorney to include certain language in your trust document to allow for separation of these responsibilities, which includes selecting a state the trust would be located in that recognizes the bifurcated structure. Even if you have a Trust in place today, speak with your attorney to determine how your Trust would treat this division, if it’s possible, and whether any changes can be made to the Trust document to address this provision. If you are dissatisfied with your Trust provider, it doesn’t necessarily mean you are stuck with that relationship. Review the Trust document with your attorney and understand your options to select the groups of financial professionals who will work in your best interest and have the expertise, service level and efficiency you deserve. Implementing and funding a Trust can require time, effort and financial investment, which could have many positive outcomes for both this generation and the next. As such, careful planning and forward thinking may enhance your and your beneficiary’s experience and control, rather than feeling stuck and succumbing to someone else’s decisions for your money.


Through the years, our partners and firm have been honored with numerous industry awards, including:

• 100 Most Exclusive Wealth Advisors – Robb Report Worth magazine • Top 100 Financial Advisors – Mutual Funds magazine • Top 100 Independent Advisors – Barron’s magazine • Top 150 Wealth Managers – Bloomberg Wealth Manager magazine • Top 150 Financial Advisors for Physicians – Medical Economics magazine • Top 28 Best Managed Firms – Charles Schwab Institutional

brightworth.com Terminus 100 3280 Peachtree Road NE, Suite 2075 Atlanta, Georgia 30305 404-760-9000 ©2011 by Brightworth. The information contained in this newsletter is intended to be educational and informational in nature. It should not be construed as specific investment, legal or tax advice for your particular situation. Please consult a Brightworth Wealth Advisor with any questions. Also remember that in investing, past performance is not a guarantee of future results.

Views - Spring 2011  

The Spring 2011 issue of the quarterly Brightworth newsletter