Saving Your Child’s College Fund Takes Guts And Planning

You’ve heard all the bleak stories. Tuition at private universities is now so high that only the superrich and families willing to bury themselves in debt can afford it. Even parents who set their sights on a lower-cost state school can barely manage to save enough to keep pace with college-cost inflation. As they say, the hurrieder you go, the behinder you get.

Saving for your child's future isn't so simple.

Saving for your child’s future isn’t so simple.

Well, it’s time to re-evaluate. The long U.S. economic boom has made postsecondary education more affordable than it’s been in a long time. Jobs are plentiful, and compensation is up. And while rising college costs continue to outpace the increase in consumer prices generally, tuition inflation has cooled to a more manageable 4.5 percent–about half the pace of the early 1990s.

The stock market, meanwhile, has climbed from one record high to the next. The Standard & Poor’s 500 Index, a broad market benchmark, recorded its fifth consecutive year of extraordinary growth in 1999, and stock mutual funds that track the index have earned 17.9 percent compounded over the past 15 years. If you had managed to start investing $200 a month in a stock index fund when your child was a toddler, today your investment would be worth nearly $143,000 before taxes–about the cost of four years’ tuition, room, and board at the priciest Ivy League university today.

If your college-savings plan is still stuck in dry dock, this report can help. We’ll introduce you to proven techniques that can add ballast to your college savings now, suggest how you can reduce your tax liability as you build your assets, and help keep you from running aground on shoals that could reduce your eligibility for financial aid.


Whether your future college enrollee is still in diapers or already in high school, it’s unrealistic to anticipate that future investment returns will match the exceptional performance of the 1990s bull market. Tracking the past 73 years of market performance, the Chicago-based investment research firm Ibbotson Associates found that stock prices have risen an average of just under 12 percent annually; long-term U.S. Treasury bonds have returned an annual average of 5.3 percent.

Because those returns can fluctuate wildly from year to year, you’ll want to invest in a combination of more-volatile stocks and steadier bonds and money-market funds in proportions you adjust over time to help you ride out the markets’ gyrations. That’s best accomplished by following a disciplined three-phase investment strategy. In phase one, running roughly from the time your child is a preschooler until he or she completes sixth grade, consider putting as much of the money as you can afford to earmark for college in a stock mutual fund–preferably a low-cost index fund whose performance will mirror that of the equity markets as a whole. As your child advances from middle school to high school, start redirecting more of your new savings toward fixed-income securities–phase two of the plan. Finally, in phase three, when your teenager closes in on high-school graduation and the great ivy wall looms, gradually convert your longer-term stock and bond investments into shorter-term, low-risk, fixed-income investments.

Breaking the chore of saving for college into manageable monthly installments will be gentler on your household budget and help keep you on course toward your ultimate goal. The sooner you get started, the more manageable the job will be–though it will still be a formidable task. Even if tuition inflation were to remain at today’s relatively moderate rate, parents of a child born this year would have to start setting aside more than $150 a month (invested 85 percent in a stock mutual fund and 15 percent in bonds earning historical rates of return) to accumulate enough to afford the average tuition, room, and board at a state university. Have your eyes set on the Ivy League? Plan on saving four times as much, or about $600 per month.

Those numbers can be intimidating, but even a modest beginning can yield big dividends. For example, had you put aside just $50 a month for the past 18 years (about what many households spend for cable TV), equally divided between a stock fund and a bond fund, your college savings would have grown to about $26,000. That’s nearly enough to cover the average cost of three years at a public university at today’s prices.


If you haven’t seriously begun investing for college by the time your teenager enters high school, you cannot realistically expect to save everything you’ll need by the time your child meets the bursar. Absent a windfall inheritance or help from a wealthy relative, a bit of financial triage is in order. Here’s where to start:

Find smart ways to boost saving. Cut back spending where you can to free up more of your income for savings. But don’t become so fixated on saving for college that you shortchange your equally urgent responsibility to invest for your own retirement.

If you will reach age 59% while your child is still in college, you may be able to take advantage of tax-advantaged retirement plans to accomplish both objectives. Money you set aside in a Roth IRA accumulates tax-free and can be withdrawn without penalty if you’ve held the funds in the account for at least five years. Even younger parents can tap Roth IRA savings to meet college costs. They can withdraw their original contributions free of taxes and penalties, provided the money has been in the Roth IRA for a minimum of five years. (You qualify to contribute to a Roth IRA if your annual income falls below $160,000 for a married couple filing jointly (or below $110,000 for an individual filer).

You can accomplish much the same goal through your 401(k) plan at work. Provided you are already maxing out your pretax contributions and your employer’s plan permits it, ask the payroll department to withhold additional after-tax income from your paycheck and add it to your retirement account. There it will compound tax-deferred until you withdraw those specially earmarked funds to meet college tuition bills. If you’ve reached age 59, there will be no early-withdrawal penalties, and only the compounded earnings will be taxed at your personal tax rates.

Be realistic about what you can afford. Colleges and universities award some $60 billion in financial aid annually. The distribution of those funds is determined by complex formulas that weigh a family’s income and savings to determine a prospective student’s need–and what proportion of the total cost the family can be expected to pay out of its own resources, a figure the schools euphemistically call the “expected contribution.” The formulas expect high-earning parents with little saved to meet much of the “contribution” out of current income. Absent special circumstances such as high medical expenses, you shouldn’t count on qualifying for need-based aid if your pretax income exceeds $75,000 and you have one child in college at a public university in your state. Parents with only one child in college attending a private university shouldn’t expect help if their total income exceeds $150,000 a year.

You can get an early read on what your tuition obligation is likely to be–and focus on schools whose costs you can manage–by consulting a current edition of a comprehensive college financial guide. One with up-to-date aid formulas is “Paying for College Without Going Broke,” by Kalman A. Chany with Geoff Martz (Random House, $18). To find out how much you could expect to pay each month if you were to bear the full cost out of current income while your child is in school, see the table at right.


Money you save for college goes a lot further when it’s allowed to accumulate tax-free or tax-deferred. Changes to the federal tax laws in 1996 now make tax savings possible in a variety of ways. Here are some of the new opportunities–along with the restrictions that may limit their appeal to you:

Education IRAs. This federal program allows individuals with a household income of $160,000 or less ($110,000 for a single tax filer) to contribute up to $500 a year in after-tax income per child to an account specially earmarked for that child’s post-secondary education bills. While those tax savings can add up over time, Education IRAs come with strings attached. The funds must be used for their intended purpose by the time the beneficiary reaches age 30, or they must be transferred to another qualified family member. If the accumulated earnings are not used to pay education bills, they will be taxed at the beneficiary’s rate and subject to an additional 10 percent penalty.

State tuition plans. When the cost of college tuition was rising at double-digit annual rates in the late 1980s, several states, including Michigan, Florida, and Alabama, began offering their citizens prepaid tuition plans. Now available in 19 states, these plans guarantee that the invested funds will keep pace with tuition inflation no matter how fast college costs rise. The increase in value will be taxed at the student’s rate when the funds are used to meet education costs. Prepaid plans can offer a lot of peace of mind, but they are less attractive now that tuition inflation is tamer.

There are more appealing options available to parents in the state-sponsored tuition savings plans that have cropped up in 22 states in recent years. (Similar plans are pending in another 12 states.) Most tuition-savings plans use an age-based asset allocation model that invests a larger proportion of funds in equities when the child is young and gradually shifts to fixed-income investments as the child ages. While funds invested in these plans are not guaranteed to generate a specific rate of return, they do benefit from tax-deferred growth of earnings until the funds are withdrawn. The gains are then taxed at the student’s normally lower rate.

Before you sign up for one of these plans, study your options carefully. Some plans invest mostly in fixed-income securities whose low returns may not make the tax savings worthwhile. But if you’re unhappy with the plan’s performance after you’ve committed to the program, you cannot withdraw the funds without incurring a 10 percent penalty and paying taxes on accumulated earnings at the contributor’s personal tax rate. And because these plans are relatively new, you cannot be sure how colleges may count these savings when awarding financial aid years from now. Finally, if you do decide to fund a state-sponsored tuition-savings account or prepaid plan, no funds can be contributed to an Education IRA for that child in the same tax year.

Eligibility rules and details on how these plans work vary from state to state. For more information, contact the National Association of State Treasurers (877 277-6496; The web site has links to all the programs.

And if you don’t save …

Think it’s tough saving for far-off college bills when your child is young? Consider the burden you would face if you saved nothing and had to pay out of current income over the four years your child is enrolled. As this table shows, if your youngster is entering State U. this fall, expect to pay at least $753 a month for tuition, room, and board. Parents of an infant born this fall who have their eyes on an Ivy League education would shell out more than $9,300 a month if school costs rose at a 6 percent rate.

Early Diagnosis Can Help You Save On Hard Drive Repair

If you end up in a situation that many of us do and encounter a hard drive crash – especially due to physical damage, it can be really frustrating. The foremost concern in such circumstances is to recover the data on the damaged hard drive. Instead of panicking, you need to take a few simple steps to find out the root cause behind the hard drive failure. Only with proper diagnosis, you can expect a complete hard drive repair and recover the data on it.

Know what to do when your hard drive fails.

Know what to do when your hard drive fails.

First of all, you should immediately power off the computer and remove the hard disk from it because using a damaged hard drive any further can worsen your case and even make hard drive repair impossible in severe cases. Hard drives, unfortunately, only last so long… Examine the drive carefully and look for any damaged spots or broken pieces. Or else, you might have got a few pins bent. If you have ruled out these possibilities after examination, next step is to check the data connection cable and power cable for any damage. If the problem lies here, simply replacing the cables is all you would need. Another step you can take for diagnosis is to try attaching your hard drive to an external source of power and if it doesn’t work even after this step, you can assume that the circuit board has been damaged and need to be fixed. The last diagnostic step you can safely take on your own to make hard drive repair easy is to fit your drive in another computer. If it works, the problem lies with your computer’s motherboard.

Warnings Provided While Trying To Perform The Hard Disk Recovery

There are sometimes you will not have valid warranties for performing the HDD recovery. Following are some instructions and even warnings while performing the HDD recovery. This is ecause data present in the hard drive is much more valuable than the drive itself.

The following instructions can only be used when you are well versed with the hardware repairing and restoring area.

You have to ensure the task of the data repairing as it is more or less same as a recovering the data is voiding the warranty. These instructions cannot be valid for the data those are logically erased. This instruction is just for the drives, which are physically inoperable along with the intact data. Try finding the required spare parts for repairing the older drives, which is really not easier than the newer drives, even though repair looks quite easier.

Do not look to  This is due to the fact that the drive was working fine for a small period of time prior to its failure. This actually does not describe that it was properly configured. After checking the controller board and the swap, you are left with the probability of 2 hard drives that can go failing, even if you have recovered the data or not. In this case, strictly the 2 drives should not be reused. Usually, it is better to contact a recovery company that understands regular HDD recovery and RAID issues (like this one) when your personal efforts fail.

Data Recovery Services Costs And Other Information You Need To Obtain

It is good idea to leave your data loss problem to the experts so you can reduce the chances of losing the important files. However, searching for a data recovery company can be tricky as there are plenty of firms claiming that they know what they are doing but you end up being duped in the end. Before you fall prey to false claims, you need first to obtain some necessary information such as the background of the company and the data recovery services costs. The company you choose for anything needs to be trustworthy and reliable, but especially for hard drive data recovery as the job that needs to be done needs commitment and serious thought. Do not just focus on the prices, as you also need to dig deeper on other things so you can succeed in finding the right company for the job.

Once you determine the hard drive recovery cost, you should also make sure the company is familiar with your drive brand. They should give you updates so you will be aware whether or not your files can still be recovered. You should ask a series of questions and read reviews for you to find out more about the company’s reputation.

Australia’s ETP A Fine Program Worth Considering In The USA

Redundancy is a time for decisions and making choices. Decisions on what to do with your life. Decisions on where to invest your payouts. In making these choices, you need to ensure your financial needs are met, both now and the future.

It is critical that you understand exactly what payments you will receive when you finish a job, what you can do with each of these and the taxation implications. You need to have a clear idea of your priorities.

The most important payment you will receive when you finish work is your Eligible Termination Payment (commonly known as an ETP). This is a lump sum payment you receive when you leave a job which is eligible for special tax treatment. It includes:

* any superannuation benefits you have accumulated; and

* some employer payments (such as golden handshakes).

ETPs do not include unused annual leave, leave loading or unused long service leave. They also do not include the tax-free portion of an employer redundancy payment.

What can you do with your ETP?

You can take your ETP as a lump sum and pay lump sum tax or you can roll it over and usually defer paying the lump sum tax on the payments. If you rollover an employer payment, 15 per cent tax will be deducted from any untaxed element of a post-30 June 1983 component. This element will be specified on your ETP Rollover Statement.

Lump sum tax is determined by the various components into which your ETP is divided, each with its own tax treatment.

If you are being retrenched, you may receive a bona fide redundancy payment, which is also subject to special tax treatment. Much of this payment may be tax-free (based on your length of service). This amount is not an ETP and cannot be rolled over. However, you may receive taxation advantages by using this money to make a contribution to superannuation.

The decision about what to do with your ETP payment is vital, because once you take your payment in cash, the tax you pay is final. Many people often make a rushed decision. By being too eager to access the money, you can end up paying thousands of dollars extra tax.

A financial planner can help you work out the tax you will need to pay if you take any or all of these components as a lump sum. There may be good reasons for doing this such as paying your mortgage. Remember, if you roll over your benefits, the lump sum tax can be deferred and retirement savings will build up.

Replacing Your Income

If you are being retrenched or have secured a voluntary separation payment, your key concern is to make sure that you have enough money to pay your bills and maintain your standard of living while you are not working.

Money to meet daily living expenses can come from one or more of the following sources.

* Existing savings and investments

* Long service leave/holiday pay

* Redundancy payments

* Superannuation payments

* Unemployment benefits

* Part-time or spouse’s income

If you believe it will be some time before you are employed again, the first thing you need to do is apply for NewStart Allowance (or NSA) with Centrelink. This allowance will provide a valuable source of income while you are not working, but it can take a few weeks or even months before you receive your first payment. Rolling your ETP into a superannuation fund can help improve how much you receive.

If you are changing jobs with a minimal period between employment, it is still important for you to review your financial position.

Restructuring Your Debts?

Debt restructuring is an important strategy to consider when reviewing your financial plan. This may help reduce your expenses in the long term, as well as during the period in which you aren’t working.

There’s no doubt that paying off all or part of your mortgage has benefits. The following graph illustrates the effect of making a lump sum payment of $25,000 on a $50,000 mortgage, thus reducing it by half. The mortgage is initially for 25 years at 7.5 per cent interest.

If you halve your repayments to $185 per month after making your lump sum payment, your total interest bill will still be substantially reduced. However, if you decide to maintain your current repayments (that is, at $370 per month), you will have the debt paid off in just over six years and importantly pay only $6,895 — a fraction of the interest.

The benefits of repaying debt needs to be weighed up against the lump sum tax payable to cash your ETP. There are a few issues to consider in determining how best to restructure your debts.

Comfort Factor

Consider how comfortable you are with your present level of debt. Some people like the enforced savings approach by establishing a routine of regular repayments.

Others dislike the overhang of debt, and would do almost anything to remove it because they feel more secure when they are debt-flee.

If you belong to the latter category, you will probably want to repay as much of your existing loans as possible with part of your superannuation payment. However, caution should be exercised here. You won’t know how long you may be out of work, so you will need access to some of your money. Cashing out your superannuation incurs lump sum tax and may reduce your eventual retirement savings.

What money to use when repaying your debts

If you are repaying debts from your lump sum, consider the order in which you take out the various components of your redundancy payments.

Typically, you should use your non-ETP payments first such as annual leave, long service leave payments and the tax-free amount of your redundancy payment (if applicable) before withdrawing from your superannuation benefits. This will allow the maximum amount of your superannuation benefits to be rolled over and minimise taxation liability.

Invest Any Special Payments

Now that you have considered your immediate income needs and how to best restructure any loans, you should consider how to invest the remaining special payments, which you receive when you leave your job.

The key to successful investing is planning. Consider your short and long-term lifestyle and financial objectives, and then assess the investments to suit your time frame and the level of security you require.

ETPs can be rolled over into investments that are treated very favourably by the Australian Taxation Office. These tax-favoured investments are called rollovers.

A financial planner can guide you through the decision making process and will help you make the right choices. How, what and when you invest will depend on whether you intend to return to the workforce.

Your Next Step

Changing jobs can be a time of anxiety and uncertainty. Fortunately, it can also offer a tremendous opportunity if you can manage the financial aspects to your best advantage.

You need to develop a financial plan that will provide security while you are not working and well beyond and make the most of changing jobs.

Why It Is Beneficial to Hire San Diego Internet Marketing Companies

imsdSan Diego is home to several companies that provide internet marketing services to all kinds of businesses. San Diego Internet marketing companies have been responsible for the rising popularity of several businesses in San Diego. These include a fitness facility, a sports club, an insurance company, and a computer store.

There are several reasons why using internet marketing services  is highly beneficial. First, these companies are well-equipped in terms of manpower to provide the best internet marketing services to clients. They utilize bulk email campaigns that can reach millions of potential clients as well as social media marketing, which is now considered to be very effective. These companies employ the best people in the field of internet advertising and product promotions. Through their efforts, their clients have become known both offline and online and they have brought more potential customers to their clients. Second, these companies have established their names in the field of internet marketing as evidenced by the testimonials of their clients whose visibility in the internet and customer database have increased. Last, clients are given a free consultation so that the internet marketing services provider will know what advertising strategy to use. With the help of SEO companies like this, business owners can concentrate on making their business grow.

Search Engine Optimization Companies Are Developing Content Marketing

While some countries in the world are still studying search engine optimization and are trying to implement its principles in developing their internet marketing, the San Diego search engine optimization companies are already reaching their peak in this field of industry. Some even say that SEO is becoming old and that new things need to be done when it comes to content marketing, but the experts who are better experienced say that search engine optimization will exist for long time. As long as there is Google, Bing and other search engines, companies that offer SEO services do not have to be afraid that they will lose clients.

Indeed, the term content marketing is changing and the meaning of search engine optimization does not mean the same as it meant five or even more years ago. Nowadays this term means also social networking and blogging, because that is all part of SEO. Each San Diego search engine optimization company will tell you that and if someone does not recommend you being active on Twitter or Facebook, you should think twice before hiring that person. Modern SEO combines many activities, but customer does not have to think about that if the SEO company is thorough and agrees to take care for each part of SEO.

Search Engine Marketing Enables You Advertise Your Business Easily

The most and important rule in marketing is consistency and in order to attain this constant repetition must be one of your marketing strategy so you must be diligent in making follow up since single short marketing never work except if you are lucky enough. Search engine marketing enables you advertise every time, in building a brand you need repetition. For a product to acquire more and more customers, it must be visible all the time meaning that you must be persistent in advertising, a follow up reinforces the efficiency of your market strategy. Like others, search engine marketing San Diego helps you ensure your products are present for customer viewing so that they can take time to test you products and services due to consistent presence of the product customers can give it a try.

Your first piece can only go up when there is a next one pushing it upwards, the more pieces you put beneath the first one, the deeper the real marketing message travels into your prospective customers. By setting repetition in motion and start sending direct mail pieces and other follow-up marketing pieces, you will find the odds gradually transforming into solid opportunities. This is the important tool in marketing that you will never successes without being put in place. Many successful businesses use the same tool to make their products and services known to the potential customers and the community.

Planning Your Pension: Be Smart And Stay Flush

pypbsDefined benefit plans — more commonly called pensions — are typically available automatically to any employee who meets the minimum requirements. Because the employer usually contributes the money to fund the plan, it is usually the administrator — not the individual employee — that is responsible for investing the funds. However, the employee may have representation through a union or through the employer on a committee that makes investment and plan structure decisions.

Unlike defined benefit plans, defined contribution plans are funded by the employee (although, in some cases, the employer contributes matching funds). Most public sector employers offer a 457 or deferred compensation plan, but they also use plans — 403 (b), 401(k) or 401(a) — from other IRS code sections.

The issues to watch in the two plan types are quite different. In defined benefit plans, it is critical to pay attention to the length of service and the average salary amount, which will determine the amount of the benefit. In a defined contribution plan, however, level of contribution, the length of time money will be invested and how it will be invested are important.


The most important distinction between the two tools supporting retirement is the level of employee involvement that each demands. Because the employer typically manages a defined benefit plan, an individual’s decisions are normally limited to age of retirement and timing of benefit withdrawal. In contrast, a defined contribution plan creates several important decisions for employees throughout their careers that can have a dramatic effect on the value received.

First, employees must decide whether to participate at all. Despite the long-term benefit, some employees do not participate in defined contribution plans. They might not appreciate the plan’s value, or they may have more immediate needs. For instance, car payments or mortgages may overwhelm their budget’s margin for savings.

Secondly, employees must make investment decisions. That involves more than simply picking a mutual fund. Employees need to think about their financial goals, their level of risk tolerance and the amount of time they have to save. The best-administered plans include educational material that guides participants in understanding each of those dynamics.

Finally, employees need to have a sense of their withdrawal strategy — at what point will they begin drawing on their defined contribution plan and how aggressively? In particular, many public sector plans have special distribution rules that are different from those for private plans.


Communication with employees is essential for retirement plan participation and success. Employees should know why plan participation matters, be comfortable with their investment options and understand withdrawal options.

It is no accident that San Jose has more than 70 percent participation in its defined contribution plan. The city offers numerous brown bag lunch sessions at which employees learn about the plan, in addition to 15 sessions annually that focus solely on investments.

“The initial questions are always, `Can I lose my money’ and `What should I do?'” Mathus says. “They get polarized sometimes between the different options and want us to tell them what to do. Our answer is to explain their options and give them ownership of the plan.”

An employee can look to either type of plan to help meet his retirement goal, but knowing that goal — the level of income he will need to retire — is the step that participants in all types of plans tend to miss. Last year, 53 percent of American workers said that they have tried to calculate how much they will need to retire, according the Washington, D.C.-based Employee Benefits Research Institute’s Retirement Confidence Survey. That percentage has grown from just 35 percent in 1993.

With either type of plan, employees need financial education and open communication to understand what they have. The value they find in their retirement plan is often defined by how much they know about what the plan achieves.


Both plan types are going through important changes. For example, some defined benefit plans are evolving so that benefits accrue more steadily over time, instead of accumulating largely in the last 10 years before an employee’s retirement.

In some circumstances, an employee leaving an organization with a defined benefit plan can get a lump sum payment in lieu of a benefit at retirement. In part, the portability of benefits reflects the interests of young workers who expect to change jobs more frequently than older workers.

With defined contribution plans, the percentage of income that can be deferred to the plans has grown with new tax laws. The plans are relatively young — only about 20 years old — and continue to move in a direction that encourages active saving. Proposals being actively debated now in Congress could further change the landscape significantly, especially with regard to contribution limits and the ability to move money between retirement vehicles.


Plenty of technical detail associated with both defined benefit and defined contribution plans exists. Benefit calculation specific to defined benefit plans can be highly complex. On the defined contribution side, investment and withdrawal strategies require decisions and educated assumptions. But participants in either type of plan need not get lost in the details. Their retirement goals provide the framework for decisions in either case.

The individual decisions that matter with each plan type are different. Length of service is the core concern in defined benefit plans. Length, level and manner of investment are central in defined contribution plans. When participants know those basics and have thought about retirement goals, they likely can succeed with either plan or a combination of both.

How Stone County takes advantage of NACo plan

Since 1992, Stone County, Mo., has participated in a deferred compensation plan that has allowed county employees to set aside pre-tax earnings in a retirement fund. The county adopted the plan, created by the National Association of Counties, at a time when it had no other means of offering a retirement program to its employees.

NACo instituted the plan, underwritten by Columbus, Ohio-based Nationwide Life Insurance and administered by Columbus-based Nationwide Retirement Services (NRS), to provide deferred compensation benefits to counties that could not otherwise afford them. More than 380,000 county employees from approximately 1,900 counties currently participate in the plan. NACo offers the program at no cost to the counties.

The Stone County Commission voted to join the deferred compensation program in August 1992. “It was the feeling of the county commission at the time, as it is today, that this was an opportunity for our employees to set aside funds for the future,” says County Administrator Ron Housman.

The program offers employees several investment options, including two fixed annuity options and a variable annuity of differing investment styles and risk levels. As part of the program, NRS provides marketing, record-keeping, customer support and account management, as well as a regular enrollment and education seminars for employees. Employees also may enroll individually through NACo. An advisory committee, composed of county officials from participating counties nationwide and supervised by NACo, monitors the program’s investments, communications and policies.

County personnel may contribute up to 25 percent of their salaries, with a cap of $8,500, to the plan each year. “We have employees that set aside $10 to $20 a pay period, and others contribute much more,” Housman says. “No matter what the amount is, it allows them to set something aside and start planning for their futures.

“The results have been wonderful,” he notes. “[The program] allows them to defer any tax ramifications until a future date, and, in the interim, those dollars are earning dollars for them. It has been a tremendous benefit for our employees.”

Staying Strong Through A Downturn

sstaRemember that cash reserve you’re supposed to have for an emergency? The money you always meant to save but never did? For tens of thousands of us, the emergency may be at hand. In the current business downturn, you or your spouse may be laid off. You may lose overtime you’d counted on. Your company may increase the cost of your health benefits or reduce your bonus. You may have to help a child who is suddenly out of work.

Fortunately, the slowdown isn’t expected to be severe. But this uncertain time should serve as a wake-up call for any families living at the edge of their incomes or beyond. Here are some ways to keep yourself safe:

* Watch your spending It’s only human to buy more stuff when you’re doing well. But when the economy starts flashing yellow, pare your shopping list to things you need right now. Every postponed purchase adds to the money you can save. Also, watch the little things. For example, I do a lot of Internet and catalog shopping because it’s easy and quick. But shipping costs are high, and you don’t find the range of sales that you do in stores. Lately, I’ve figured out I save money by building a multimonth shopping list, then spending a couple of intense hours at the mall.

* Build your cash savings If you haven’t been putting money aside, start now. Ideally, your cash reserve should get you through at least three months without pay. In real life, beginners should aim for a one-month cushion. After that, use your money to pay off debt.

* Reduce high-cost debt This means credit cards. If you’re postponing purchases, your debt shouldn’t increase, and you’ll have enough cash to double or triple each month’s payment. To lower your interest costs, consolidate debt on a low-rate card or home-equity loan.

* Try to lower your mortgage payments An economic slowdown means lower interest rates, and since May, fixed mortgage rates have dropped by about 1.5 percentage points. If you have a fixed-rate loan and plan to stay in your house for several more years, this might be a good time to refinance. Check out the closing costs and compare them with the amount you’ll save each month. Refinancing is worth it if you can make up the closing costs in two or three years.

You also might consider an adjustable-rate mortgage, whose rate changes once a year. Many borrowers avoid ARMs because they hate the uncertainty. If you’d taken an adjustable loan in 1999, your rate would have risen about one half to one and a half percentage points. Still, over that period you’d generally have paid less than people who took fixed-rate loans.

* Don’t sacrifice retirement savings
In fact, bump them up. If you’re contributing, say, 3 percent of your pay to a 401(k), try for 4 or 6 percent. The more you put in, the more you might get from your employer in matching funds. If you leave a job, don’t liquidate your 401(k) even if the amount is small. Keep the money in the company plan or roll it into an individual retirement account at a bank or in a mutual fund. Tap the account only if you really need the money to pay bills.

* Rethink your investment strategy
In recent years, it’s been “cool” to trade individual stocks, especially tech stocks and dot-coms. It seemed easy to pick ones that then went up. Even after last year’s tech wreck, you might still expect stocks to soar again. Maybe they will. But the next stocks to soar may not be techs. In 2000, investors made pots of money in natural gas stocks, HMOs, drugs, and retailers, to name a few, while the techs came crashing down. Surprises like this are reason to keep your serious, life-changing money in well-diversified mutual funds-not tech funds, but funds that buy all kinds of different stocks. Over the long run, diversification wins.

Will that dot-com be there tomorrow?

With Internet companies dropping like flies, think hard about the firm you’re dealing with online. What protection do you have if the dot-com fails? For example, a three-year-old site called had trouble suddenly, late last year. The stocks were safe, but for a couple of days investors could handle their accounts only by mail or phone. I see two morals here: 1. Before opening any kind of online account, find out who’s holding your money and what would happen to it if the Web site failed. 2. Trust major companies, with real locations, over those that exist solely online. That includes merchants as well as financial dot-coms. You don’t want your Me-store to fail while you’re waiting for your purchase.

Financial Education, Military Style

femsWhat are you doing about personal financial issues in your EAP? Are employee financial problems very significant in your workplace? Are they even recorded? What are the symptoms? Does your payroll department report any employees using garnishment as a form of debt management?

Our experience with the U.S. Navy’s equivalent of a civilian EAP suggests that for every financial problem we see in our Fleet and Family Services Center (FFSC) in Hampton Roads, Va., there are nine more we do not see. Eventually, these nine will make their presence known, often in ways that affect work performance and productivity.

We all know intuitively (and too often from experience) that financial wellness is clearly related to mental, emotional, and physical health. The violent tragedy in Wakefield, Mass., apparently over garnishment issues, is only the most recent brutal reminder of the powerful connection between money and health.

But what is the cost of promoting financial wellness and avoiding employee financial problems? The answer to this question depends on how personal finance issues play out in the average EAP. The bottom line seems to be whether personal finances surface as a primary or underlying issue and whether employees can get appropriate professional assistance before their problems escalate.

Teachable Moments

The need for personal financial education in the workplace, whether in the Navy community the military in general, or the civilian population, is really not in doubt, though it is vastly underestimated and frequently ignored. It is the proverbial elephant in the living room. For many the subject of personal finances is still taboo, perhaps because it is too personal and too close to home.

The level of discussion about personal finances is probably similar to the level of discussion about sex in the 1950s, but at least we are beginning to talk. As one warrant officer aboard the aircraft carrier John Fitzgerald Kennedy explained to a visiting White House official who asked why regularly paid sailors have problems with money management, “Ma’am, first you might want to look at the pay scales. Also, when it comes to discussing personal matters, sailors are more likely to talk about their sex lives than their money, and have been known to stretch the truth on that.”

Navy-wide community needs surveys (Hayes, 1995; Caliber, 1996) have found that personal finance and related issues dominate the top 10 issues for Navy “employees” and their families, and this year personal finance was the top issue in a Navy leadership survey Nearly a third of Navy families have difficulty making ends meet every other month (Caliber, 1996), though that alarming figure is no worse (and often is better) than the comparable statistic for the civilian population, partly because Uncle Sam provides a steady paycheck to service members.

So compelling is the perceived need for financial education that the comptroller of the Navy announced a multimillion-dollar commitment in November 2000 to build the current highly-regarded personal financial management program into a truly life-cycle preventive education program. The other armed services are following suit.

Just how does the Navy educate its service members about personal finance? The first Fleet and Family Services Center was created in Norfolk in 1979 in response to the hard personnel lessons of the Vietnam era. The program development process for FFSCs has been characterized by almost constant internal growth and expanded services to meet the unique and difficult challenges of the Navy lifestyle. That development process is dynamic and continues today

Retention and recruitment are, and always have been, at the core of the FFSC’s mission. The truism, “a sailor enlists, but a family re-enlists or leaves,” has tremendous validity Deployments, relocations (frequently to overseas locations), and low levels of pay are the working realities of Navy employees and their families. Families will stay in the Navy as long as the quality of family life is acceptable. What the FFSC provides is central to the Navy’s mission of operational readiness, not an employer fringe benefit.

The modern FFSC provides specialized support services not anticipated even by its visionary founders. For instance, special teams of clinicians and educators board ships and ride with sailors as they complete the last legs of their deployments. The role of these “return and reunion” teams is to seize the “teachable moment” and help facilitate the transition back to everyday life. The programs they deliver are designed to help sailors prepare to successfully reintegrate into their families and society and include single-sailor programs, returning-to-children sessions, and the consistently popular pieces on money management and car-buying strategies.

Natural Entry

We know from these “teachable moment” experiences that personal financial concerns are a natural entry into the world of other support services and programs for our employees and their families. EAPs in the civilian world likely would find this to be true as well. The reality is that most people are naturally very interested in taking control of their personal finances, so financial education programs are attractive to them.

Once the civilian population has stabilized its behavioral risk management procedures for substance abuse, and perhaps even before, personal finance probably will emerge as a major corporate concern, as it did in the armed services. In a test of basic economic principles, adults scored only 57 percent, while high school students scored even worse at 48 percent (Brenner, 1999). Your new employees and our new service members will come from these populations.

The bottom line for the Navy is operational readiness through personnel support at a reasonable cost. I suspect that with expanded Navy support for financial education and a concomitant community response to reduce the costly fallout from sailors at risk due to personal financial problems, there will be increased emphasis on examining the cost avoidance/investment ratios in preventive financial education efforts.

Your sisters, brothers, sons, and daughters who choose to risk their lives for our freedoms deserve the best employee assistance services available to help keep them focused on their jobs. In the Navy, that includes financial education services in the workplace.

Getting Employees to Own Their Finances

My first introduction to the Navy’s Alcohol Rehabilitation Comm and (as it was called at the time) was part of my orientation as a financial educator in Norfolk, Virginia, home of the U.S. Atlantic Fleet. My mentor was a retired senior chief who had invited me to see how he conducted business.

I took a seat in the back of the classroom as he set up on the center stage, a 12-step poster behind him and a white board to the side for illustrating key points. Five minutes before the training session was to begin, only a few students were present, and dozens of plastic chairs were stacked around the room. Within the next four minutes, more than 50 uniformed students wearing hand-written nametags crowded into the room. What followed was as much a lesson for me as an overview of practical personal financial concepts for recovering substance addiction patients.

The instructor explained that he had a prepared script for developing a personal budget, but that he was really there to answer questions and challenge attendees to think about their money, their habits, and what they were going to do differently. This approach made it “their” program, and anything they wanted to know about money (or wished they had known before joining the Navy) was fair game. What followed was a lively discussion, with questions ranging from “What qualifies you to tell us what to do with our money?” to “How do I ‘fix’ my credit?” to “How do I ‘fix’ for bankruptcy?” In the background, murmurs of I don’t have any money” were heard over and over.

The connection between substance abuse and personal finance has been reinforced regularly in my 12 years of revisiting the renamed Navy Addictions Rehabilitation Detachment. Over the years we have continued to present one session per group, for 15 to 20 groups per year. While the outcomes have not been measured by quantitative research, I am confident that if only half of those who ask for specific community referrals follow through, some significant first steps are being taken to gain control of personal finances.

The core presentation, “Developing Your Spending Plan,” while basic, often reveals a lot about the surfacing concerns of service members (it is an all-services facility) as they go through treatment. Their questions–ranging from “How do I get out of debt?” to “How do I talk to creditors?” to “How do I invest?”–clearly show what employees want in terms of professional guidance on basic money matters. Many times they approach us after presentations and tell us poignantly, “I wish I had this 17 years ago when I first joined the Navy,” or “Everyone should get this lecture!”

Thanks to persistent efforts in providing these and related financial education services and alerting leadership to the clear need for (and related benefits of) preventive financial education, the Navy is now funding a comprehensive life-cycle approach to personal financial management. The Navy’s structured education, training, and counseling program might provide some lessons for the civilian EAP community as it charts new strategies, partnerships, and service delivery opportunities for the new century.

Budgeting In College: Some Tips

bicstPlanning for college is about making choices, and those choices go way beyond choosing your school. Deciding how to manage your money is a choice you’ll want to handle early and with care.

This is a lesson some students learn too late. Take Jen’s friend Jason, who lived down the hall from her at Boston College. With a new credit card in his wallet and newfound independence, Jason charged $500 worth of pizzas during the first month of school. “He used to ask everyone in our hallway if they wanted some,” Jen recalls. Now, six years later, “he’s probably still paying it off!”

If Jason had thought about a budget before getting to school, he would have realized that topping off most days with a pizza was more than he could afford.

Obvious? Most people would think so. But there are lots of hidden expenses at college. Most students end up feeling overwhelmed by all the costs. Moira, a recent graduate of Southern Connecticut State University, warns, “Don’t underestimate how broke you’ll be.”

Learn to make smart money choices. It’s never too early to start estimating your college budget. Step into Budgeting 101, where class is in session.

Lesson 1: How Much Will You Have?

Creating a budget requires knowing how much money you have–your income–for the things you want or need to buy. The first step is estimating what your income will be while you’re in college.

Possible sources of income are scholarships, loans, summer job savings, parents, and money from a job at school. Most of this money may be going toward tuition, fees, and room and board. These are usually paid at the beginning of each semester. When estimating income for your personal budget, focus on the money you will manage yourself during the semester.

Once you have estimated your total income, divide it by either the number of weeks or months you’ll be at school. A monthly budget can help you plan for monthly bills, such as your phone bill or a birthday gift. A weekly budget may be better for keeping track of daily expenses, such as snacks and entertainment.

Recent college grads recommend getting a part-time job on or near campus for extra spending money. Keep in mind that on-campus jobs, especially the good ones, fill up fast. So apply as soon as you get to campus. Be sure that any job you take is flexible enough so you can concentrate on your classes and social life.

Lesson 2: Where Will It Go?

Once you have estimated your income, make a list of what you will spend it on–your expenses. There are two types of expenses: fixed, which come regularly and are the same amount each time (examples include Internet access and your car payment); and flexible, which may vary in frequency and amount (examples include entertainment, clothing, transportation, and long-distance phone charges).

“There are always more expenses than you plan for, and sometimes they sneak up on you,” says Dr. Mallary Tytel, president and CEO of Education and Training Programs, Inc., creators of the Power of Plastic, an educational program for students on responsible credit card use.

Here are some often-forgotten expenses: haircuts, shampoo and other personal products, trips with friends, gifts for holidays and birthdays, bank fees, and extra supplies. Dr. Tytel suggests budgeting a certain amount each week for these “phantom expenses,” which can quickly add up. Also, overestimate what you’ll spend on entertainment.

To find the amount you can spend, take your total income and subtract your total expenses. If the expenses are higher than your total income, you’ll have to make some adjustments to your flexible expenses.

Lesson 3: Starting Out on Your Own

Your college years are independent years, especially with your finances. According to one recent survey, 47 percent of high school and college students said they rarely or never discussed budgeting with their parents before they went to college.

Parents can be a big help in getting you settled financially. Ask them to help you set up a checking account at a bank near your college. Learn how to balance your checkbook monthly. If you’re getting a credit card, apply early so you’re familiar with the billing statements.

Once you get to school, begin recording every penny you spend, so you’ll know right away if you’re going over your budget. Simply being aware of where your money goes is often enough to help you want to spend less. Adjust your budget to match your income and expenses.

Lesson 4: Sticking to Your Budget

One common budget pitfall is trying to keep up with your friends. Remember that each person has a unique budget, and you may have less spending money than someone else. “It is OK not to have the latest in computer or fashion accessories,” says Dr. Tytel. “Being different and independent and unique really is its own reward.” So pat yourself on the back for knowing what your means are and living within them.

If you do go over your spending limit one week, try to make up for it by spending less the following week. Then you won’t find yourself short on cash at semester’s end.

Here are some other tips from recent grads:

* Stick to your meal plan for food.

* Look for free entertainment on campus.

* Always buy used books.

* Track your ATM use to avoid extra fees.

* If your parents are sending you money, ask them to send it in small, regular amounts instead of in one lump sum.

* Make long-distance phone calls during off-peak hours, such as late evenings and Sundays.

Success in school depends partly on how well you manage your money. Put creating a budget on your to-do list, and you will find college much easier to manage.

Will Your Savings Run Out: A British Case Study

wysroAccording to recent research undertaken for the Department of Social Security, about half of people of working age are not making any contributions to a non-state pension at the moment. Nearly half of these were not working at the time of the interviews, but the rest were — either as employees or, less commonly, self-employed.

This, and the “ageing” of the British population, has prompted the Labour government to launch its stakeholder pension. What exactly is it? Will it appeal to people with inadequate provision for their old age? Will pension providers want to offer it? In short, will it help to combat financial and social exclusion among tomorrow’s pensioners?

The stakeholder pension is an oddity. It is a financial product whose detail has been designed by government, but it will be supplied by the private sector. This is both its strength and a potential weakness. It has been designed to meet the needs of people with incomes of between [pound]10,000 and [pound]20,000, although anyone can take one out if they wish. Like other personal pensions it is a funded investment, with individuals building up their own pension fund, which they will invest in an annuity to bring them a regular income in old age. But there the similarities end. Two of the key differences between personal and stakeholder pensions are charges and flexibility.

Charges on stakeholder pensions are not only capped at 1 per cent but that percentage is based on the total value of the fund. So someone who can afford to save [pound]100 a month into a stakeholder pension will pay [pound]12 in charges in the first year, with the amount increasing as the fund builds up. This is a far cry from the front-loading of charges on personal pensions, where many people find themselves contributing for some time before much of that money finds its way into their investment fund. Moreover, all stakeholder pension schemes must set their minimum monthly contribution no higher than [pound]20 (they may choose to set a lower minimum). So people with only modest amounts to invest will not be excluded.

Stakeholder pensions are also designed to be flexible, so fundholders can start and stop their payments without incurring extra charges; they can also increase or decrease their contributions. In other words, it can accommodate the work patterns of people such as Jane, who spend longish periods out of the labour market, Pete, with his fluctuating income, and Tom in insecure work. It has been estimated that one in ten people of working age fall within the target income range for a stakeholder pension and do not pay into a non-state pension.

Jane, Pete and Tom may qualify, but will they want a stakeholder pension? All the evidence suggests that, although awareness is low, people in the target income group do like the design of the product. They particularly like the flexibility because it matches the instability in their lives, according to research carried out separately for Pearl Assurance and the DSS. Women in particular liked being able to make small contributions, although men doubted whether it would be worthwhile in the long run if their contributions were too low. Costs were much less of an issue, but only because they couldn’t see why there would be any costs in the first place, let alone understand how they are usually calculated.

So far, so good. But the Pearl research showed that the stakeholder pension still has some significant shortcomings. People want a clear projection of the income they would get in their old age. And, in the light of past mis-selling of pensions and endowments, they want a guaranteed minimum income from their investment. They also want to be able to get access to their money should an emergency arise before they reach retirement age.

The DSS survey revealed that only four in ten of those in the target income group said they were likely to take out a stakeholder pension. Women tended to be more interested than men; employees more than the self-employed, and the under-40s more than older people.

Among the reasons given for this reluctance to take out a pension, the easiest to tackle is lack of information, cited by a quarter of people in the DSS research. Other barriers will be much more difficult. A third of people say they are happy with the arrangements they have for their old age, even though they are not contributing to a non-state pension. Focus groups show that a significant proportion of people, especially men, either do not expect to reach retirement age or to live for long if they do. They have seen relatives die young, and say that a life of hard work and, in many cases, of smoking is not a recipe for long life. Some think the state pension will be adequate as their needs will be far fewer in old age, while some self-employed people intend to continue working for as long as possible. Finally, a minority expect their retirement to be comfortable financially, but have given no thought at all to how this might be attained.

The other main reason why people do not expect to take out a stakeholder pension has to do with affordability, linked to short-term horizons. But the reasons for this differ across the age groups. Young people below the age of 30 prefer to spend their money on other things. Later, people begin to recognise the importance of pensions, but have other calls on their money. This is when people on moderate incomes are taking out a mortgage and having to meet children’s needs — often on reduced household incomes because the wife is working part-time or not at all. Most are only too aware that they have inadequate pension provision, but they put it to the back of their minds. By the time the children have left home and the proportion of income eaten up by mortgage payments has fallen, it is too late to start a pension. Contributions are unaffordably high and, in any case, people fear that they are at greater risk of redundancy in their fifties. In other words, people are too young, too hard up, or too old.

Pension providers are all too aware that most investment products have to be sold; they do not walk off the shelves. And here is the nub of the problem with the stakeholder pension. With charges fixed at no more than 1 per cent of the value of the fund, pension providers will make little or no money from people who make modest contributions. Indeed, one pension provider has calculated that the administrative costs on a stakeholder pension would be in the region of [pound]25, so they would make a loss in the first year on anyone paying in less than [pound]200 a month. And this makes no allowance for the up-front costs of selling the pension in the first place. Moreover, several big-name companies that have traditionally sold products to people on low and moderate incomes have recently cut their home sales forces.

Offering stakeholder pensions through the workplace will reduce costs and overcome some of the marketing difficulties, and is an attractive proposition for many employees in the target income group. But this has its limitations: enterprises with fewer than five employees are exempt from the need to offer a stakeholder scheme. So Jane could miss out. Nor do workplace pensions help the self-employed such as Pete. Tom may be luckier, but his unstable work history makes it unlikely that he will choose to set money aside for a pension. Experience has taught him that he needs to save all he can while he is working at the shipyard to tide him over the periods when he is not. In any case, he would need to build up a pension fund of [pound]60,000 or more to be any better off than he would be if he relied on the state pension and associated benefits.

So where does that leave the stakeholder pension? In many respects it is a perfectly designed product from the consumer’s point of view. But it highlights all too clearly a more general dilemma in tackling financial exclusion, which is the net cost of delivering financial services to people on low or moderate incomes through the private sector. Companies might be coerced into making appropriate products available but they will inevitably choose to sell them to the customer from whom they will make the biggest returns.

More people on moderate incomes will make provision for their old age as a result of the stakeholder pension, just as more of them have taken out IS As than took out either Tessas or PEPs. But like these savings products, the main beneficiaries of stakeholder pensions could well be those on higher incomes. After all, why pay more for an inflexible personal pension?

QTIP, Sheltering Estate Taxes And You

qtipSuppose each of your clients has a will that provides that the survivor will receive property that will qualify for the marital deduction only to the extent necessary to bring down to zero the estate tax owed by the estate of the first to die. In that case, any property that does not qualify for the marital deduction will not be subject to estate tax in the estate of the survivor.

* Preventing property from qualifying for the marital deduction. Here are a few ways to prevent property from qualifying for the marital deduction.

1. Leave part of the estate to someone other than the surviving spouse. This can be done outright or in trust for the benefit of the beneficiary or beneficiaries.

2. Leave part of the estate in a trust that gives discretion to the trustee (who is not the surviving spouse) to allocate income among the surviving spouse and other individuals, e.g., children of the deceased spouse.

3. Leave part of the estate in a trust that provides that all the income from the trust will be paid to the surviving spouse at least annually, and specifies how the principal of the trust is to be distributed on the surviving spouse’s death. As long as the surviving spouse does not have a general power to appoint the principal of the trust during either her life or by will, the property left to the trust by the deceased spouse will not automatically qualify for the marital deduction.

However, if the trust provides that no person has the power to appoint any part of the property to any person other than the surviving spouse during the surviving spouse’s lifetime, this trust will also qualify as a qualified terminable interest property trust, or QTIP.

To the extent that the executor or other fiduciary of the deceased spouse elects, all or part of the property that is left to the trust will qualify for the marital deduction. To the extent that the election is not made, the trust will qualify as a credit shelter trust. The advantage of a QTIP trust is that it gives the executor a second chance to determine what needs to be done to minimize estate taxes to the maximum extent possible.

Example: Your client’s wife died on Nov. 15, 2000, leaving an estate of $2 million after deducting necessary administration expenses. She had never made any taxable gifts, so there are no gifts that have to be taken into account when determining the estate tax or the amount of the available unified credit. She made bequests worth $300,000 to her only son, and $200,000 represented her interest in jointly held property with your client that passed to him by operation of law and that which qualified for the marital deduction. The balance of her estate of $1.5 million was left in a QTIP-credit shelter trust.

For decedents dying in 2000, the unified credit exemption equivalent amount (i.e., the amount of the taxable estate that will yield an estate tax equal to the unified credit) is $675,000. Thus, to reduce the taxable estate to $675,000, the marital deduction will have to be increased from $200,000 to $1,325,000. This can be done by having the executor make the QTIP election with respect to 75 percent of the property left to the trust ($1,125,000). The balance of the property left to the trust ($375,000) will be treated as being in a credit shelter trust, and will not be subject to estate tax when your client dies.

Observation: To the extent that part of the property in a QTIP trust is treated as being in a credit shelter trust, any increase in the value of the trust will not be taxed in the surviving spouse’s estate. Thus, in the previous example, if the value of the trust doubles to $3 million by the time your client dies, $750,000 (25 percent of the total trust value) will not be taxable to her estate, and $2,250,000 (75 percent of the total trust value) will be taxable. On the other hand, If the value of the trust declines to $1 million, $250,000 of the amount in the trust will be excluded from taxation, and $750,000 will be taxable.

Observation: Though QTIP trusts and credit shelter trusts are usually designed to bring down to zero the estate taxes on the estate of the first spouse to die, there may be situations where it will be beneficial to have part of that spouse’s estate subject to tax. This would be the case where the surviving spouse is not expected to live long or will be in a higher estate tax bracket than the first spouse to die.

In that case, a rigid formula in the will of the first spouse to die that would bring the estate tax down to zero may cause more taxes to have to be paid than would otherwise be the case. The use of a QTIP credit shelter trust would enable the executor to make a decision regarding how much to qualify for the marital deduction given the facts and circumstances after the death of the first spouse.

* Combining a qualified disclaimer with a QTIP credit shelter trust. In some situations, spouses may prefer to leave as much property as possible outright to the survivor. One way to do this, while at the same time seeking to minimize estate taxes, is to have each spouse leave all or most of his or her assets to the surviving spouse. At the same time, have the will set up a QTIP credit shelter trust to take any assets that the surviving spouse disclaims. If the surviving spouse disclaims his or her interest within nine months of the death of the other spouse, the disclaimer will be a qualified disclaimer and the interest will be treated as going directly from the deceased spouse to the trust. Thus, no gift tax will be due from the survivor as a result of the disclaimer.

In effect, this offers two separate looks after the death of the first spouse. The surviving spouse will normally disclaim just enough, so that the amount that goes into the QTIP credit shelter trust will reduce the marital deduction by an amount that will still leave the estate taxes owed at zero or such other amount as is desired.

Normally, the election to treat part of the amount in the trust as subject to the marital deduction will not be made since the surviving spouse would only put property in the trust that was not intended to qualify for the marital deduction.

On the other hand, if a mistake was made, and too much property was disclaimed, the executor can still elect to treat part of the property in the trust as marital deduction property in order to increase the marital deduction to the required amount. Also, if the surviving spouse’s health has declined, he or she may prefer to have more of the property administered by a trustee. In that case, the QTIP election will have to be made to reduce the estate taxes to the required level.

Example: Your client’s wife died on Dec. 1, 2000, leaving an estate worth $1 million after deducting debts and administration expenses. She leaves her entire estate outright to her husband, but her will provides that if her husband disclaims any part of her estate, the part disclaimed will pass to a QTIP credit shelter trust.

After her death, her husband decides that he’d prefer to have most of the property that he inherited administered by a trustee. Accordingly, he disclaims his interest in all the property he inherited except for some tangible personal property, such as jewelry, furniture, paintings, etc., worth $100,000. The $100,000 qualifies for the marital deduction. The remainder of the estate of $900,000 is treated as having passed directly from your client’s wife to the QTIP credit shelter trust.

To get the value of the marital deduction up to $325,000 (the amount necessary to bring the exemption equivalent amount down to $675,000), the executor will have to elect to treat 25 percent of the trust ($225,000) as marital deduction property. If the election is made, the balance of the trust ($675,000) will be treated as a credit shelter trust.