Tactical Asset Allocation: Fine Tuning a Longer-Term Strategy

Strategic asset allocation, the practice of maintaining a strategic mix of stocks, bonds, and cash, has guided many investors in creating portfolios that suit their risk profile and long-term investing goals.This widely used strategy is a long-term, relatively static tool and is not intended to take advantage of short-term market opportunities.

Proponents of tactical asset allocation (TAA), in contrast, take a shorter-term view. TAA is the practice of shifting an asset allocation by relatively small amounts (typically 5% or 10%) to capitalize on economic or market conditions that may offer near-term opportunities. TAA differs from rebalancing, which involves periodic adjustments to your strategic allocation as a result of portfolio drift or a change in personal circumstances. With tactical asset allocation, you maintain a strategic allocation target, but fine tune the exact mix based on expectations of what you believe will happen in the financial markets.

TAA also can involve shifting allocations within an asset class. For example, an equity portion of a portfolio may be shifted to include more small-cap stocks, more large-cap stocks, or other areas where an investor perceives a short-term opportunity.Note that mutual funds that invest in these areas may impose restrictions on short-term trading, and it is important to understand these restrictions before making an investment.

A tactical approach involves making a judgment call on where you think the economy and the financial markets may be headed. Accordingly, a tactical allocation strategy can increase portfolio risk, especially if tactical allocations emphasize riskier asset classes. This is why it may be a good idea to set percentage limits on allocation shifts and time limits on how long you want to keep these shifts in place.

In addition, when evaluating investment gains that are short-term in nature, such as those on investments held for one year or less, it is important to understand taxes on short-term capital gains. Currently, short-term capital gains are taxed as ordinary income, where the highest marginal tax rate is 39.6%. In contrast, long-term capital gains on investments held for more than one year are taxed at 15% for most investors, 20% for joint filers earning more than $450,000.



1Asset allocation does not assure a profit or protect against a loss.

2Securities of smaller companies may be more volatile than those of larger companies. The illiquidity of the small-cap market may adversely affect the value of these investments.

Required Attribution
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

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Understanding the Fees Associated With Your Retirement Plan

There’s a little secret associated with your workplace-sponsored retirement plan. Most participants think their plan is free — that it doesn’t cost them anything to join, contribute, and invest. Unfortunately, that’s not entirely true.

While employees typically aren’t charged any out-of-pocket costs to participate in their plans, participants do pay expenses, many of which are difficult to find and even more difficult to calculate. New regulations from the Department of Labor (DOL), which oversees qualified workplace retirement plans, should make it easier for participants to locate and comprehend how much they are paying for the services and benefits they receive.

Here’s a summary of the information you should receive.

  1. Investment-related information, including information on each investment’s performance, expense ratios, and fees charged directly to participant accounts. These fees and expenses are typically deducted from your investment returns before the returns (loss or gain) are posted to your account. Previously, they were not itemized on your statement.
  2. Plan administrative expenses, including an explanation of fees or expenses not included in the investment fees charged to the participant. These charges can include legal, recordkeeping, or consulting expenses.
  3. Individual participant expenses, which details fees charged for services such as loans and investment advice. The new disclosure would also alert participants to charges for any redemption or transfer fees.
  4. General plan information, including information regarding the investments in the plan and the participant’s ability to manage their investments. Most of this information is already included in a document called the Summary Plan Description (SPD). Your plan was required to send you an SPD once every five years, now they must send one annually.


These regulations have been hailed by many industry experts as a much-needed step toward helping participants better understand investing in their company-sponsored retirement plans. Why should you take the time to learn more about fees? One very important reason: Understanding expenses could save you thousands of dollars over the long term.

Calculating Fees and Their Impact on Your Account

While fees shouldn’t be your only determinant when selecting investments, costs should be a key consideration of any potential investment opportunity. For example, consider two similar mutual funds. Fund A has an expense ratio of 0.99%, while Fund B has an expense ratio of 1.34%. At first look, a difference of 0.35% doesn’t seem like a big deal. Over time, however, that small sum can add up, as the table below demonstrates.

Expense ratio Initial investment Annual return Balance after 20 years Expenses paid to the fund
Fund A 0.99% $100,000 7% $317,462 $37,244
Fund B 1.34% $100,000 7% $296,001 $48,405


Over this 20-year time period, Fund B was $11,161 more expensive than Fund A.1 You can perform actual fund-to-fund comparisons for your investments using the FINRA Fund Analyzer.
If you have questions about the fees charged by the investments available through your workplace retirement plan, speak to your plan administrator or your financial professional.


1Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Past performance is no guarantee of future results. For more complete information about any mutual fund, including risk, charges, and expenses, please obtain a prospectus. Please read the prospectus carefully before you invest. Call the appropriate mutual fund company for the most recent month-end performance results. Current performance may be lower or higher than the hypothetical performance data quoted. The hypothetical data quoted is for illustrative purposes only and is not indicative of the performance of any actual investments. Investment return and principal value will fluctuate; and shares, when redeemed, may be worth more or less than their original cost.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.


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Life Insurance Ownership and Beneficiary Designations

In general

Two important considerations when purchasing a life insurance policy are selecting the owner and the beneficiary(ies). Who you choose can affect your income, gift, and estate taxes and can create solutions or cause problems for your family. Proper planning can help your family avoid unfortunate tax consequences, while poor planning can leave your family facing tax liabilities with no insurance proceeds to pay them. Too often, family members discover that life insurance proceeds were paid to someone else or are available for collection by creditors. Understanding ownership and beneficiary issues will help ensure that your life insurance proceeds will protect your family as you intend.

Importance of coordinating ownership and beneficiary

Life insurance is often a key component of a financial plan. If you don’t coordinate your policy’s ownership and beneficiary designations, your financial plan may not fulfill its intended purpose. For example, if you purchase life insurance to pay estate taxes, you will likely want to ensure that your policy’s ownership is structured to keep the proceeds out of your taxable estate. For another example, if you want a trust to receive your life insurance proceeds but your policy names your spouse as beneficiary, your trust will go unfunded.

Life insurance ownership


Ownership rights

Life insurance is property with certain implied rights and privileges. The policyowner controls these rights, which are called incidents of ownership. A policyowner can keep or dispose of any or all of these rights. Ownership rights include the following:

  • The right to transfer, or to revoke the transfer of, ownership rights
  • The right to change certain policy provisions
  • The right to surrender or cancel the policy
  • The right to pledge the policy for a loan or to borrow against its cash value
  • The right to name and to change a beneficiary
  • The right to determine how beneficiaries will receive the death proceeds

Owning your own policy

Owning a policy on your own life is the most common form of ownership. With an individual policy, you pay the premiums, you are named as the insured on the policy, and you control all the ownership rights.

Owning a policy on another

Many people never think about life insurance in any way other than owning a policy on themselves. However, any person or legal entity can own life insurance on another person as long as the owner has an insurable interest in that person. An insurable interest exists when one person has a financial interest in another person’s life. Spouses are assumed to have an insurable interest in each other. The same holds true for parents and children. Certain business relationships may also create an insurable interest, such as when a business insures its key employees or when a bank guarantees repayment of a loan with a life insurance policy on the borrower.

Having a trust own a policy

Many people choose to have trusts own their life insurance policies. This arrangement can provide two important benefits: It allows the trust, rather than the beneficiaries, to control how the proceeds will be used, and, if it is set up as an irrevocable trust, it removes the death proceeds from the estate.

Ownership guidelines


Who should own your life insurance policy? The answer depends on why you’re purchasing the policy.

Income replacement

  • Owning your own policy–If the purpose of the policy is to replace your income for your family when you die, you should own your own policy, especially if you have a young family.
  • Having a spouse own your policy–Since nearly half of all marriages today end in divorce, adverse tax consequences could result if one spouse owns life insurance on the other. In some cases, divorce courts have required one spouse to transfer a life insurance policy to the other as part of the property settlement while continuing to pay the premiums. Generally, the IRS does not consider this a transfer for value. If it did, this could result in adverse income tax consequences to the beneficiary of any death benefits.

In addition, if you’re divorcing, the divorce court may require you and your spouse to maintain life insurance policies for the benefit of your children. If you’re alive when the children are grown, you may want to change the beneficiary(ies). If you’ve become uninsurable or a high insurance risk, you may want to keep the existing policy. If an ex-spouse owns the policy, you would lose this option.

Education costs

Faced with today’s high education costs, most families apply for financial aid. When applying for financial aid, parents and child are expected to pay a certain percentage of income and assets for education expenses. Federal financial aid formulas exclude the cash value of life insurance from the countable assets.

Caution:   Private colleges may include the cash value of life insurance in their analyses.

Estate liquidity

Estate liquidity may be a concern, especially if you expect the combined estates of you and your spouse to exceed your combined applicable exclusion amounts. Amounts over the exclusion amount will be subject to federal gift and estate tax (and perhaps state death taxes as well), and if taxes are owed, they will have to be paid within nine months of death.

  • Owning a policy on your spouse–No estate liquidity benefits currently exist from owning a policy on your spouse.
  • Ownership by your children–A seemingly easy approach is to have your children own the policy. You can pay the premiums and have an unwritten agreement with them that they’ll use the funds to pay the estate’s obligations, although you can’t require that or you’ll retain an incident of ownership, thereby bringing the proceeds back into your estate. However, with human relationships being what they are and with your children possibly facing competing needs for the proceeds, children are rarely named as owners of their parents’ insurance. Use of the insurance proceeds by your children, however, may subject them to gift and estate tax for amounts paid to your estate.
  • Ownership by an irrevocable life insurance trust (ILIT)–One commonly used trust arrangement is called an irrevocable life insurance trust (ILIT). If a life insurance policy is transferred to a properly structured and funded ILIT, it guarantees that the death proceeds will not be included in your gross estate. In establishing an ILIT, you set up or transfer the incidents of ownership to the trust, thereby allowing you to create a source of cash to provide estate liquidity without adding to your estate. Joint life (second-to-die) policies are frequently used in ILITs. These policies cover two lives and pay off at the death of the survivor. They are usually bought to provide cash to pay estate taxes. If the insured individuals owned the policies rather than the trust, the proceeds would be included in their gross estates.

Caution:   If you transfer a policy to a trust, the three-year rule applies. This requires that if you die within three years of transferring the policy to the trust, the IRS will include the value of the transferred policy in your gross estate.

Life insurance beneficiary designation


In general

Just as a life insurance policy always has an owner, it also always has a beneficiary. The beneficiary is the person or entity named to receive the death proceeds when you die. You can name a beneficiary, or your policy may determine a beneficiary by default. If you don’t name a beneficiary, your estate often becomes the beneficiary. When a policy is issued on your life, your beneficiary must have an insurable interest in you to avoid adverse income tax consequences.

Primary beneficiary

The primary beneficiary is the person or entity you name to have first rights to receive your life insurance proceeds when they become payable at your death.

Contingent beneficiary

The contingent beneficiary is the person or entity you name to receive your life insurance proceeds if the primary beneficiary dies before you.

Temporary beneficiary

As a policyholder, you generally reserve the right to change a beneficiary at any time. A revocable beneficiary is one that you can cancel anytime before you die. This means a revocable beneficiary’s rights do not vest during your lifetime.

Permanent beneficiary

An irrevocable beneficiary is one you cannot cancel unless he or she consents. In other words, once you name an irrevocable beneficiary, you can’t change it. An irrevocable beneficiary’s rights to your death proceeds vest during your lifetime. This means that you may not exercise your ownership rights without written permission of the irrevocable beneficiary. You cannot borrow against the policy, pledge it as collateral, receive dividends, or surrender the policy.

Multiple beneficiaries

You may name multiple beneficiaries if you choose. There are no legal restrictions–and few company restrictions–on the number of beneficiaries you can designate. You can later change your beneficiaries provided you have retained that ownership right.

Tip:  If you name multiple beneficiaries, you must also specify how much each beneficiary will receive (you may not want to give each beneficiary an equal share). Because of the numerous interest and dividend adjustments the insurance company must make, the death benefit check often does not equal the policy’s face value. Thus, it’s wise to distribute percentage shares to your beneficiaries or to designate one beneficiary to receive any balance.

Income, gift, and estate tax considerations

In general

The death proceeds of a life insurance policy are generally not subject to income tax. However, interest paid to your beneficiary from the date of your death to the date of payment of the death proceeds is income taxable to your beneficiary, although it’s not included in your gross estate.

Owning your own policy with spouse and children as beneficiary

Owning your own policy is the most common form of ownership and the most predictable as far as your beneficiaries are concerned. In most cases, when you own your own policy and the beneficiaries are your spouse or children, the death proceeds that they receive will not be subject to income tax.

Caution:   However, the death proceeds are included in your gross estate. If the beneficiary is your spouse, you enjoy a special tax break called the unlimited marital deduction. This allows you to transfer as much as you want to a surviving spouse free from federal gift and estate tax. This transfer generally only delays the estate tax liability, however. When your surviving spouse dies, the estate he or she passes to your children or other beneficiaries may be subject to gift and estate tax because the proceeds will not be eligible for the unlimited marital deduction.

Caution:   If you are divorced and own a policy with your children as beneficiaries, the proceeds may be subject to gift and estate tax because they will not be eligible for the unlimited marital deduction.

Owning a policy on another

Some people still believe that it’s beneficial for spouses to own life insurance on each other. However, since tax law changes created the unlimited marital deduction, there are no estate tax benefits and few income tax benefits from this arrangement.

Example(s):          If Barry owns life insurance and dies leaving his wife, Blossom, as the sole beneficiary, the life insurance proceeds are included in his estate. However, due to the unlimited marital deduction, any assets Barry leaves Blossom are exempt from federal gift and estate tax.

If Blossom owned the policy on Barry’s life, the death proceeds would generally not be subject to income tax and would not be included in Barry’s estate and thus not subject to gift and estate tax. In other words, the tax effect would be the same as if Barry had owned the policy, with Blossom, his spouse, named as beneficiary. However, if Blossom owned the policy and cashed it in during Barry’s lifetime, she might see a small income tax saving if she and Barry file their income tax returns separately and she is in a lower income tax bracket.

Caution:   A serious potential gift and estate tax problem can arise if there is a three-way split in ownership, insured, and beneficiary. If one spouse owns a policy on the other with the children named as beneficiaries, the IRS treats the spouse owning the policy as having given a gift to the children. Any gifts over the annual gift tax exclusion may be subject to federal gift and estate tax.

Caution:   A problem can also arise if a divorce court requires one spouse to transfer a life insurance policy to the other as part of a property settlement, yet requires the transferring spouse to continue to pay the premiums. It’s possible that the IRS could consider this a transfer for value, resulting in adverse income tax consequences for the beneficiaries of any death benefits.

Transferring ownership

If you transfer ownership to anyone who doesn’t have an insurable interest in your life, the transfer will generally lead to income taxation of a portion of the death proceeds.

Giving life insurance as a gift

Life insurance is subject to gift and estate tax rules that are not applicable to other types of property. If you transfer your life insurance policy as a gift (regardless of its value) during the three years before your death, the death proceeds will be included in your estate. However, you may give any other property free of gift and estate tax as long as it doesn’t exceed the annual gift tax exclusion amount per person in a given year.

Example(s):  If you give a $5,000 life insurance policy to your son today and you die in two years, the death proceeds are included in your estate. However, if you give your son any other property as long as it doesn’t exceed the annual gift tax exclusion, it won’t be included in your estate or be subject to gift and estate tax.

Effect of beneficiary on your estate

It was stated that if you retain any incidents of ownership in a policy at your death, the proceeds will be included in your gross estate. However, even if ownership is held outside your estate, you must also be sure that you don’t require your beneficiary to benefit your estate in any way if you want to keep the proceeds out of your estate. Whenever proceeds are paid to or for the benefit of an estate, they are included in the estate and subject to gift and estate tax. For example, if you name your estate’s executor as the beneficiary, and he or she is legally obligated to use the proceeds to pay expenses for the benefit of the estate, then the proceeds will be included in your estate and subject to gift and estate tax.

Tip:  You can avoid this problem by establishing an ILIT to own the policy. As long as the terms allow it, the ILIT can lend money to the estate for the executor to pay the expenses, thereby allowing the proceeds to remain outside your estate.

Minor as beneficiary

One of the greatest mistakes you can make is to name minor children as beneficiaries, yet the most common combination of beneficiaries is a spouse followed by minor children. The courts generally will not allow minor children to directly receive the proceeds of a life insurance policy. If you have not established a trust or named a guardian for your children in your will, the courts may require a trust to be set up or a guardian to be appointed to manage the proceeds. Trustees will make all spending decisions and may not approve the use of funds as you would have preferred. There is a cost associated with establishing a trust that will vary depending on the trust’s complexity and other factors.

Tip: If you have a large estate, you should consider establishing a trust to receive the proceeds for minor children. The trust can hold the proceeds until the children are 25 to 35 years old. This may encourage your children to begin making their own way in life before inheriting substantial wealth.

Securities and advisory services offered through Mutual of Omaha Investor Services, Mutual of Omaha Plaza, Omaha, NE 68175-1020. Member FINRA/SIPC. The information provided is general in nature. It has been obtained from sources believed to be reliable, but no warranty is made as to its accuracy, timeliness or completeness. The information is not intended, and should not be construed as legal, tax or investment advice, or a legal opinion. Consult with your legal, tax or investment professional before taking any action based on this information. This information is not an offer to buy or sell any security. Past performance is not a guarantee or prediction of future returns. Potential investors should review all prospectuses before investing. There is no contractual relationship between Family Wealth Management Advisory,LLC and Mutual of Omaha Investor Services.

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