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Volume 15, Issue 8

What You Need to Know About Financial Fraud

America’s older generation grew up in a different world. It was customary to be friendly, courteous, and trusting. Today, these exemplary standards of conduct can get older individuals into trouble. Con artists, offering a variety of too-good-to-be-true investment “deals,” are banking on the willingness of older Americans to seal their shady scams with the proverbial handshake. Unfortunately, many seniors today are experiencing financial difficulties, thus making them more vulnerable to financial fraud.

With the multitude of contact options, ranging from the phone to the Internet, scammers have virtually an unlimited number of opportunities to obtain another individual’s personal information. Common scams include e-mailed chain letters that promise a pyramid of payoffs that always fall apart once the victim has bought into the system. Another is one in which a Nigerian prince, doctor, or chief e-mails the victim and claims to need assistance transferring his riches to an American bank account. The victim is promised as much as 30% of the transferred millions and is asked to pay the perpetrator a fee to prove his or her honesty.

Fake charities are another common scam. Kind-hearted donors are swindled into becoming victims by paying ridiculous sums to a cause that benefits only the con artist. Phone calls and postal mail are often used to offer individuals the chance to “win” the lottery or claim a sweepstakes prize. In the end, these supposed winnings only end up causing financial loss and heartache. Topping off all of these scams are fraudulent investment opportunities wherein the victim is promised fantastic returns on capital from “lucrative” oil and gas leases, penny stocks, rare coins and metals, etc. The list is endless.

Too often, these scams go unreported because of the shame victims experience once they realize they have been had. And that’s just what scammers are banking on. The FINRA Investor Education Foundation teamed up with WISE Senior Services and the AARP to study economic fraud. In a report entitled “Off the Hook Again: Understanding Why the Elderly Are Victimized by Economic Fraud Crimes”(April 2005), several discoveries were made, including the psychological tactics typically used by cons. These tactics increase the con artist’s success rate and decrease their chances of being reported. Victims may be led to believe that their only option is the one being presented in the scam, or the scammer may befriend the victim, knowing that people are less inclined to ask friends hard-hitting questions. Another ploy is a request for help from the scammer, thus tapping into the victim’s sympathy. Or, the scammer may claim famous investors, like Donald Trump, are also buying into the property, or the product is in such high demand and so rare that the victim is lucky to have heard about it in the first place.

Con artists may also use their assumed authority to coerce victims into allowing the con to make the decision for them; offer no-risk, guaranteed results; intimidate victims by playing on their fears; or procure more and more payments by telling victims they are committed to the investment and must continue to invest in order to not lose the sums they have already paid.

On paper, these tactics might seem transparent. But in reality, they are often extremely effective. The FINRA study also revealed that fraud techniques are often tailored to the psychology of the individual. Financial education alone will not be enough to put an end to senior fraud, since one of the study’s major findings indicated that senior fraud victims are more financially educated than non-victims and more willing to listen to sales pitches. In addition, victims are more likely to have experienced negative life events, such as job loss, divorce, or the death of a spouse.

Anyone approached with a “must-act-now” deal should take the time to walk away and do some research. Be skeptical, question why the offer is being made to you at that time, and contact the Better Business Bureau to learn more. Don’t waste time listening to cold-call sales pitches. Make sure to get second opinions from friends and family before taking action on any hot deal. In the end, follow the old adage: If it sounds too good to be true, it probably is. Visit www.consumerfraudreporting.org to learn more.

Charitable Giving: Good for the Heart and Your 1040

If you are like most people, you probably want to minimize taxes and increase savings. Charitable donations can play a valuable role in your tax-reduction strategies. A well-planned gift to charity could provide:

  • The chance to be more involved in charities close to your heart
  • An income tax deduction or reduction
  • A reduction (or avoidance) of estate tax

But, your donation could also mean:

  • The ability to exercise control over assets during your lifetime and after death
  • The opportunity to take care of your heirs in the manner you choose

You will need a plan designed according to your circumstances, but let’s look at some of the possibilities. The following strategies can be mixed, matched, and combined to provide the appropriate plan for you.

Gifts of Appreciated Property

Give appreciated property to charity and escape the capital gains tax (which you would incur upon sale), while receiving an income tax deduction, usually at fair market value (FMV). You also remove that asset from your estate, thereby reducing your potential estate tax burden.

Charitable Remainder Trust (CRT)

Need the security of some money coming in for a period of time, or don’t want to give up your vacation home until the grand kids are grown? A charitable remainder trust (CRT) may be the charitable vehicle for you. CRTs work particularly well with appreciating assets, such as stock in a family-owned business or real estate. No income tax is imposed on income remaining in the trust. You also get a current income tax deduction (based on the future value when transferred to charity), and you remove the remaining value of the asset from your estate, reducing your potential estate tax. As a result, you obtain the tax benefits of giving to charity while postponing when they will receive it.

Charitable Lead Trust (CLT)

A charitable lead trust (CLT) is the flip side of a CRT. Essentially, you give the charity the use of an asset and the right to the income generated for a period of years. Then the asset can revert to you, or to whomever you choose. Possible assets could be income-producing stocks and bonds, your rare book collection, or a painting that you transfer to a museum for a certain length of time. You receive a current income tax deduction for the value given to charity (but the trust pays income tax on its income). If a CLT is created upon your death, potential estate tax is reduced.

Give Away Your 401(k)

Instead of leaving your retirement plan assets to your heirs, think about leaving the balance in your 401(k), or other retirement plan, to charity. The recipient charity isn’t taxed on the income, and your estate gets an estate tax deduction for the value of the assets passing to charity. Consider leaving your heirs something that won’t be taxed, such as appreciated capital gain property for which they get a basis step-up at your death. They could then sell the property with no taxable gain.

Early tax planning can help you make the most of your savings opportunities. If it’s a question of supporting the Internal Revenue Service (IRS) or supporting a favorite charity, most people opt for the charity. So, why not plan for charitable giving and take advantage of these added benefits? Consult your qualified tax, legal, and financial professionals for specific guidance.

The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

Financial Considerations for Unmarried Couples

Unmarried couples choose to handle their finances in various ways. Some couples may maintain separate finances. Others may share some costs, while keeping income and other expenses separate. Still others may pool all income and expenses. Without the legal protection granted to married spouses, the “safest” approach may be for unmarried couples to maintain separate finances. However, this is not always convenient, and it may not promote a positive, trusting relationship, either. An awareness of the potential pitfalls of combining finances, without the legal protection provided to married couples, can help those who are unmarried to create an appropriate arrangement that will work for their unique situation.

Mapping the Road To Retirement

Many people in their prime earning years don’t save enough for retirement. One advantage of being relatively young when you start a retirement savings program is that you can amass a potentially larger nest egg due to your longer planning horizon. The more you accumulate before you retire, the less you may need to worry about working after you retire to maintain your desired lifestyle. For these reasons, it is important to spend time now developing a well-organized plan—or “road map”—for retirement.

What does such a road map look like, and how can it help you reach your financial destination? Try using these five signposts as guides:

1. Determine your retirement needs and resources. With people living longer than ever before, a sound retirement strategy may need to provide you with an income stream, indexed for inflation, that can last anywhere from thirty to forty years. Even with a 4% annualized rate of inflation, the cost of goods and services will triple in about 29 years. With this in mind, compare the amount of income you receive now to the amount you will have during retirement.

Once you’ve analyzed this information, you will need to develop financial strategies to help provide you with your required income stream. What assets do you currently have? What savings plans do you have in place? As you review your retirement program, how will you fill any gap between what you have saved to date and your future retirement needs?

2. Recognize that Social Security and pension benefits may not meet all of your needs. In the past, Social Security and a company pension have been significant sources of retirement income. However, the days of “living off” a pension or Social Security have passed. If you depend solely on Social Security or your pension, you may find your income is insufficient to meet your retirement needs. Developing a retirement savings program can help you address any anticipated shortfall.

3. Increase your personal savings. One way to boost your savings is to set money aside on a regular basis. Stay disciplined, and consider adjusting your budget to save more as your financial situation changes.

4. Take advantage of your company plan. If your employer sponsors a retirement program, consider contributing the maximum amount. This can help you take advantage of pre-tax contributions and accumulations on a tax-deferred basis. In addition, many employers match employee contributions—usually up to a maximum percentage. For example, suppose you contribute 10% of your income to your 401(k) plan and your employer matches 50% of your contribution. Thus, for every dollar you contribute, your employer adds 50 cents. Consequently, your account receives 50% more money than you actually contributed.

5. Use personal tax-efficient alternatives. Individual Retirement Accounts (IRAs) allow you to save on a tax-deferred basis. Contributions to traditional IRAs may be pre-tax, and funds accumulate on a tax-deferred basis; however, income taxes are due when distributions from the IRA are taken. On the other hand, contributions to Roth IRAs are made with after-tax dollars; funds accumulate tax free, and no income tax is due when distributions are taken. For tax year 2009, contributions to an IRA, or combination of IRAs, are limited to $5,000 ($6,000 for individuals age 50 or older). In addition, cash values of a life insurance policy and annuities may also provide tax-deferred opportunities.

Retirement may seem a long way down the road, especially when you have immediate and pressing family concerns. However, the younger you are when you begin taking advantage of your saving opportunities, the better off you will likely be when your retirement day dawns. Why not pause now to review your long-term strategies? When you reach retirement age, you will have hopefully navigated any bumps or potholes and secured a more comfortable financial future.

The information contained in this newsletter is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2009.



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