Berman CapitalManagement & ResearchTed C. BermanMichael J. Basso, CFP3077 W. Jefferson StreetSuite 200Joliet, IL 60435815-725-8300tedberman@afpadvisor.comwww.bermancapitalmanagement.com

November 2014Financial Myths, Mistakes, andMisunderstandings

Helping Your Parents Manage Their Finances

Leaving Assets to Your Heirs: Income TaxConsiderations

Do I have to pay an additional tax oninvestment income?

Berman Capital Management NewsFinancial & Investment InsightsFinancial Myths, Mistakes, and Misunderstandings

See disclaimer on final page

Throughout our financial lives, we may beinfluenced by myths, mistakes, andmisunderstandings (MMMs). Here are just afew.

In the beginning . . ."I don't invest because Idon't know much aboutit." It's time to learn,because a basicunderstanding ofinvesting concepts canhelp you make moreinformed financialdecisions.

"Wow, they'll give me that much credit! Imust be able to handle it." Just because thecredit-card company or bank extends a largeamount of credit to you, it doesn't mean youshould use all of it. The more you borrow, thelarger the monthly payments, and before youknow it, you've bitten off more than you canchew. Figure out how much you'll owe basedon the amount you borrow and determine if itwill fit within your budget. Generally speaking, ifyou can't afford the payment, don't incur thedebt.

"I'm young. I'll worry about retirement whenI'm older." Planning for retirement involvessaving enough by a desired age to enable youto support yourself without having to work. Ifyou wait to begin saving for retirement, you'llhave to sock more away or put off retirement toa later date. So the earlier you begin saving,the better.

Go figureSometimes we think we know something andrely on it as being correct, when in fact itcouldn't be further from the truth.

"I know my finances like the back of myhand. I don't need to write them down."You'd be surprised how often we think we knowhow much we can afford until our bills start toexceed our income. If you write down yourexpenses and income (e.g., create a spendingplan or budget), you'll know how much you canspend.

"I'll dip into my retirement account andmake it up later." First, if you borrow from your401(k), you'll likely pay fees and interest. If youtake money from a traditional IRA, you'll payincome tax on the amount you take andpossibly a 10% penalty. Remember, theseaccounts are intended for retirement. Takingmoney out now increases the risk you might runout of money during retirement.

"My child will pay back the money I loanedto him or her." Good luck. That "loan" isprobably going to turn into a gift, which isn'tnecessarily a bad thing if it really helps yourchild, but be sure you can afford the loan/giftbefore making it.

And later on . . .As we get older, we may fall prey to someMMMs that can be the source of needlessangst, such as:

"I won't need as much income inretirement." Maybe, but it might be a mistaketo count on it. In fact, in the early years ofretirement, you may find that you spend just asmuch money, or maybe more, than when youwere working, especially if you are still paying amortgage. And don't forget to factor inincreasing health-care costs.

And speaking of health care, "the newhealth-care law cuts my basic Medicarebenefits and services." Just the opposite istrue. The Affordable Care Act (ACA) mandatesthat no guaranteed Medicare benefits are cut.In fact, the ACA expands Medicare benefits toinclude a free annual wellness assessment.

And finally, "If I die without a will, the statewill get my assets and property." This isn'tnecessarily true. Each state has intestacy laws,which determine who gets what when someonedies without a will. But those laws generallydeal with assets in your name at your deaththat don't have a designated beneficiary or jointowner. In any case, if you want to have somesay in who will inherit your assets after yourdeath, you need to prepare an estate plan,which probably includes a will.

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Helping Your Parents Manage Their FinancesAs the U.S. population gets older, more people,particularly baby boomers, are confronting adilemma. As parents age, their ability tomanage their own finances may decline. Thatcan make it more likely that they may neglectthe life savings they've worked so hard toaccumulate or make costly mistakes with them.Even worse, they're more likely to fall victim toone of the fraudulent schemes that frequentlytarget seniors. "Financial Fraud and FraudSusceptibility in the United States," aSeptember 2013 report prepared for the FINRAInvestor Education Foundation, found thatseniors were 34% more likely to lose money tofraudsters than were those in their 40s.

And yet many seniors, especially those whohave always been independent and/ormoney-savvy, may be reluctant to acceptadvice or help from their children, or evendiscuss living expenses, health care plans,investments, or general estate planning. Sadly,postponing that discussion can increase thedifficulty of tackling whatever problems mayeventually arise.

What's behind parental reluctance?Suggesting that parents might benefit fromassistance, either from their children or aprofessional, may remind them of their ownmortality. People are living longer; if they're stillactive and involved, they may have difficultyaccepting that their current good health andfinancial comfort may not always continue.

Also, some seniors may be reluctant to discussfinances because it can reinforce a sense ofloss; this could be especially true if they can nolonger drive or participate in activities theyenjoy. Admitting that they need help withfinancial issues may make them feel as thoughone more area is no longer under their control.If this is the case, they might respond to theidea that addressing important issuesnow--planning for ill health or anincapacity--could give them greaterdecision-making power over their quality of lifelater.

Parents also may be uncomfortable discussingfinances with only one child, preferring toinvolve all siblings. In this case, you may needto either try to reach a consensus about whichchild is best equipped to help, or divideresponsibilities among siblings. For example,one child might assist with billpaying andday-to-day expenses while another reviewsinvestments or handles health insurance,Medicare, and Social Security.

In some cases, parents may respond to theidea that taking action sooner rather than latercan help prevent the loss of much of their

hard-earned savings to taxes or scams. Ifthey're uncomfortable discussing finances withyou, you could suggest working with a thirdparty who can review their situation and makerecommendations that could then be discussedjointly.

When to offer helpHere are some signs that a parent might needsome assistance: confusion about whetherdirect-mail offers are advertising or bills; failingto pay bills or file documents properly,especially if someone has always been highlyorganized; complaints about being unable tomake ends meet; talking about the merits ofcertain investments, especially unfamiliar onesand especially if a parent hadn't previouslyexhibited much interest in investing; unusualbehavior, such as making unexpected largepurchases or spending a lot of time gambling.

Be sure to rule out other physical problems,such as an infection or difficulties with vision orhearing, before assuming that mental confusionis automatically a sign of dementia.

A start is better than nothingIf parents are reluctant to discuss specificfigures, try to make sure that key information,including online account information andpasswords, is on paper, and that someone elseknows the location of those items and will beable to access them if necessary.

You might start providing assistance in stages.Offer to review checking account statementsand/or credit card bills to ensure they're notpaying for services they want to cancel or didn'trequest; this may give you insight into theoverall state of their finances. Because seniorsmay be more willing to discuss issues such ashealth insurance and preferences regardinglong-term care or end-of-life decisions beforeother topics, building trust in these areas couldincrease comfort levels on both sides with othermatters.

If a trust has been set up, a trustee might bethe logical person to handle finances, since heor she may eventually have to deal withtrust-related issues anyway. The same is truefor someone who has been granted a durablepower of attorney, even if he or she doesn't yethave full responsibility for managing finances.And in a worst-case scenario, children canpetition a probate court to name a conservatoror guardian. Whatever approach you take, oneof the key challenges of this process is torespect a parent's dignity while protecting his orher ongoing well-being.

Postponing a discussionabout helping a parent withhis or her financesincreases the odds thatproblems could arise beforethat discussion takes place.

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Leaving Assets to Your Heirs: Income Tax ConsiderationsAn inheritance is generally worth only what yourheirs get to keep after taxes are paid. So whenit comes to leaving a legacy, not all property iscreated equal--at least as far as federal incometax is concerned. When evaluating whom toleave property to and how much to leave toeach person, you might want to consider howproperty will be taxed and the tax rates of yourheirs.

Favorable tax treatment for heirsRoth IRAs

Assets in a Roth IRA will accumulate incometax free and qualified distributions from a RothIRA to your heirs after your death will bereceived income tax free. An heir will generallybe required to take distributions from the RothIRA over his or her remaining life expectancy.(Of course, your beneficiaries can alwayswithdraw more than the required minimumamounts.) If your spouse is your beneficiary,your spouse can treat the Roth IRA as his orher own and delay distributions until after his orher death. So your heirs will be able to continueto grow the assets in the Roth IRA income taxfree until after the assets are distributed; anygrowth occurring after funds are distributed maybe taxed in the future.

Note: The Supreme Court has ruled thatinherited IRAs are not retirement funds and donot qualify for a federal exemption underbankruptcy. Some states may provide someprotection for inherited IRAs under bankruptcy.You may be able to provide some bankruptcyprotection to an inherited IRA by placing theIRA in a trust for your heirs. If this is a concernof yours, you may wish to consult a legalprofessional.

Appreciated capital assets

When you leave property to your heirs, theygenerally receive an initial income tax basis inthe property equal to the property's fair marketvalue (FMV) on the date of your death. This isoften referred to as a "stepped-up basis,"because basis is typically stepped up to FMV.However, basis can also be "stepped down" toFMV.

If your heirs sell the property with a stepped-up(or a stepped-down) basis immediately afteryour death for FMV, there should be no capitalgain (or loss) to recognize since the sales pricewill equal the income tax basis. If they sell theproperty later for more than FMV, anyappreciation after your death will generally betaxed at favorable long-term capital gain taxrates. If the appreciated assets are stocks,qualified dividends received by your heirs willalso be taxed at favorable long-term capital

gain tax rates.

Note: If your heirs receive property from youthat has depreciated in value, they will receivea basis stepped down to FMV and will not beable to claim any loss with respect to thedepreciation before your death. You may wantto consider selling depreciated property whileyou are alive so that you can claim the loss.

Not as favorable tax treatment for heirsTax-deferred retirement accounts

Assets in a tax-deferred retirement account(including a traditional IRA or 401(k) plan) willaccumulate income tax deferred within theaccount. However, distributions from theaccount will be subject to income tax atordinary income tax rates when distributed toyour heirs (if there were nondeductiblecontributions made to the account, thenondeductible contributions can be receivedincome tax free). An heir will generally berequired to take distributions from thetax-deferred retirement account over his or herremaining life expectancy. (Of course, yourbeneficiaries can always withdraw more thanthe required minimum amounts.) If your spouseis the beneficiary of the account, the rules maybe more favorable. So your heirs will be able todefer taxation of the retirement account untildistribution, but distributions will generally befully subject to income tax at ordinary incometax rates.

Note: Your heirs do not receive a stepped-up(or stepped-down) basis in your retirementaccounts at your death.

Even though distributions are taxable, yourheirs will nevertheless generally appreciatereceiving tax-deferred retirement accounts fromyou. After all, they do get to keep the amountsremaining after taxes are paid.

Toxic or underwater assets

Your heirs might not appreciate receivingproperty that is subject to a mortgage, lien, orother liability that exceeds the value of theproperty. In fact, an heir receiving such propertymay want to consider disclaiming the property.

Always nice to receiveLife insurance and cash

Life insurance proceeds received by your heirswill generally be received income tax free. Yourheirs can generally invest life insuranceproceeds and cash they receive in any way thatthey wish. When doing so, your heirs can factorin how the property will be taxed to them in thefuture.

An inheritance is generallyworth only what your heirsget to keep after taxes arepaid. Here we have focusedprimarily on federal incometaxes. Depending on yourcircumstances, you maywish to also considerfederal estate tax and stateincome, estate, andinheritance taxes.

Note: It is generallyrecommended that youdesignate IRA and otherretirement planbeneficiaries, their shares,and any backupbeneficiaries on the planbeneficiary form. This willhelp assure that retirementplan benefits pass as youwish at your death and thata beneficiary will be able tostretch distributions overhis or her remaining lifeexpectancy.

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Berman CapitalManagement & ResearchTed C. BermanMichael J. Basso, CFP3077 W. Jefferson StreetSuite 200Joliet, IL 60435815-725-8300tedberman@afpadvisor.comwww.bermancapitalmanagement.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

Ted C. Berman & Michael J.Basso, CFP - Investment AdvisoryServices and Securities offeredthrough Ausdal Financial Partners,Inc., and S.E.C. RegisteredInvestment Advisor and RegisteredBroker/Dealer, MemberFINRA/SIPC. Ausdal FinancialPartners, Inc. and Berman CapitalManagement & Research areseparately owned and operated.

I just learned that my credit- and debit-card informationwas part of a data breach. What should I do?Now, more than ever,consumers are relying on theconvenience of credit anddebit cards to make everyday

purchases, such as gas and groceries, and tomake online purchases. With this convenience,however, comes the risk of having your accountinformation compromised by a data breach.

In recent years, data breaches at majorretailers have become commonplace acrossthe United States. Currently, most retailers usethe magnetic strips on the backs of credit anddebit cards to access account information.Unfortunately, the account information that isheld on these magnetic strips is also easilyaccessed by computer hackers.

While many U.S. banks and financialinstitutions are in the process of replacing theolder magnetic strips with more sophisticatedand secure embedded microchips, it will taketime for both card issuers and retailers to get upto speed on these latest card securitymeasures.

In the meantime, if you find that your accountinformation is at risk due to a data breach, youshould make it a priority to periodically review

your credit card and bank account activity. Ifyou typically wait for your monthly statement toarrive in the mail, consider signing up for onlineaccess to your accounts--that way you canmonitor your accounts as often as needed. Ifyou see suspicious charges or account activity,you should contact your bank or credit-cardcompany as soon as possible.

In most cases, your bank or credit-cardcompany will automatically issue you a newcard and card number. If not, request to havenew cards and card numbers issued in yourname. As an additional precaution, you shouldalso change the PIN associated with the cards.

Whether you will be held liable for theunauthorized charges depends on whether thecharges were made to your credit- or debit-cardaccount and how quickly you report them.

For more information on your rights if you areaffected by a data breach, visit theFederal Trade Commission andConsumer Financial Protection Bureauwebsites.

Do I have to pay an additional tax on investmentincome?You might, depending on afew important factors.

A 3.8% net investment incometax is imposed on the

unearned income of high-income individuals.The tax is applied to an amount equal to thelesser of:

• Your net investment income• The amount of your modified adjusted gross

income (basically, your adjusted grossincome increased by an amount associatedwith any foreign earned income exclusion)that exceeds $200,000 ($250,000 if marriedfiling a joint federal income tax return, and$125,000 if married filing a separate return)

So if you're single and have a MAGI of$250,000, consisting of $150,000 in earnedincome and $100,000 in net investmentincome, the 3.8% tax will only apply to $50,000of your investment income.

The 3.8% tax also applies to estates and trusts.The tax is imposed on the lesser ofundistributed net investment income or theexcess of MAGI that exceeds the top incometax bracket threshold for estates and trusts

($12,150 in 2014). This relatively low taxthreshold potentially could affect estates andtrusts with undistributed income. Consult a taxprofessional.

What is net investment income?Net investment income generally includes allnet income (income less any allowableassociated deductions) from interest, dividends,capital gains, annuities, royalties, and rents. Italso includes income from any business that'sconsidered a passive activity, or any businessthat trades financial instruments orcommodities.

Net investment income does not includeinterest on tax-exempt bonds, or any gain fromthe sale of a principal residence that isexcluded from income. Distributions you takefrom a qualified retirement plan, IRA, 457(b)deferred compensation plan, or 403(b)retirement plan are also not included in thedefinition of net investment income.

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