Client Newsletter
November 1999

• Should You Take Out Life Insurance For Your Children?
• If An IRS Agent Calls, Get It In Writing
• Notices From The IRS Require a Response
• How To Avoid Becoming a Victim of Credit-Card Fraud
• Housecleaning Can Bring You A Tax Deduction
• Making A Will Is Just The Start Of Estate Planning
• A List of Financial Planning, Dos and Don'ts

Brief:

• Redeem Mutual Fund Shares Into Money Fund First
  
  

  Financial Strategies is intended to provide generalized information that is appropriate in certain situations.  However, because of the complexities of the applicable laws and regulations and the continuing developments in these areas, the contents of this newsletter should not be acted upon without specific professional guidance.

Since the purpose of life insurance is to provide for dependent survivors, children generally need only enough life insurance to pay burial expenses and medical debts. Yet 25% of the cash-value life insurance policies sold cover the life of a child under 18.

Should kids have policies? Let’s take a critical look at why people buy life insurance for their children ­ in many cases, unwisely:

1.    Investment. In some cases, a life insurance policy might be used as a long-term savings vehicle. Some parents or grandparents buy kids a variable universal life policy, in which part of the premiums is put toward a tax-deferred portfolio of stocks, bonds, and money-market funds. The investment is kept over the long term, and the child can borrow from it later, usually at a better-than-market rate.

TIP: Because of  the death benefit feature of life insurance, there are extra costs to the policy that eat into your returns. Thus, a mutual fund is almost always a better long-term investment for a child’s savings. Parents can invest in funds that pay out little or no taxable income (e.g., growth stock funds), thus mimicking the tax-deferred feature of the life insurance policy.

2.    Low Cost. Advocates of children’s life insurance argue that coverage for children is much less costly than comparable coverage for adults. True, but the premiums are paid over a much longer period (if they start when the insured is a child) and the coverage during childhood is of limited value (since the economic loss from the death of a child is usually minimal).

3.     Ensuring future insurability. Maintaining a cash-value policy on a child will ensure that he or she will have coverage later—even if the child becomes uninsurable. Thus, the purchase of a minimum amount of insurance for this purpose—and to cover burial expenses—might be a good idea.

	TIP: Other ways of covering the costs of a child’s death include (1) using funds already set aside for college and (2) taking out a rider on a parent’s policy (if available).
	Related Financial Guide: LIFE INSURANCE: How Much And What Kind To Buy.

IRS Agents are required to notify you in writing if your tax return is to be examined. It seems, however, that some Agents are telephoning taxpayers selected for audit prior to sending written notice. If you receive this type of call from an Agent, do not get into any discussion with the caller because:

• You have no way of knowing if the caller is really an IRS Agent;
  
• You may inadvertently divulge information which the Agent is not entitled to; or
  
• You may make an offhand comment which might be misinterpreted by the Agent, causing him or her to adopt a position that will take considerable time and effort to overcome.

TIP: If someone claiming to be an IRS Agent calls, saying that your return has been selected for audit (or for any other reason), ask for written notification. If you receive it, talk to your tax advisor before proceeding further.

The Internal Revenue Service mails out millions of notices to taxpayers every year. Some of these notices are valid requests for information or taxes due. Some are incorrect and should never have been mailed.

A notice from the IRS must be responded to in a timely manner. If the notice was sent in error, that should be easy enough to clear up. If it is a valid request for information or additional taxes, a timely response is even more important. A prompt reply may avoid a penalty. These notices can't be ignored, perhaps in the hope they will go away. That just isn't going to happen.

If you have any doubts about what the IRS is asking or if you doubt the validity of an IRS request, call us. We deal with the IRS on a regular basis. We speak their language and will gladly assist you with all further correspondence until the matter is settled.

IRS notices don't need to be frustrating; just leave them to us. We are here to help you.

Credit cards are very convenient but they do expose you to fraud if you are careless. To reduce the possibility of becoming a victim of credit card fraud, take the following precautions:

• Make sure the purchase is recorded accurately before you sign your receipt.

• Verify that the card handed back to you is your card.

• Make sure the clerk destroys any carbons or destroy them yourself.

• Take all receipts home with you. (Thieves can use a casually discarded receipts to make fraudulent charges against your account.)

• Check receipts against your monthly statement to verify accuracy.

• If you don't keep your statements, destroy them before discarding them.

• Do not give your card number to a merchant to validate your check. (Many states have laws prohibiting this practice.)

• Do not reveal any personal information when using your credit card. (Most credit card companies prohibit merchants from requiring you to provide personal information, such as your address or telephone number, as a condition of accepting your card. Once the credit card company approves the purchase, the merchant is protected.)

• Be careful in giving out credit card numbers over the phone. If you are not familiar with the merchant, get its full name and address and check it out with the Better Business Bureau before placing the order.

• Keep a record of your credit card numbers in a secure place, and report a missing card to the issuer immediately to avoid responsibility for unauthorized charges.

	Related Financial Guide: CREDITS CARDS: How To Choose and Use Them Most Effectively.
	Related Financial Guide: YOUR CREDIT CARD RIGHTS: What To Do If You Have A Problem.

Once or twice a year, most people undertake a household clean-up campaign, discarding clothing, books, furniture, toys, household and lawn equipment, etc., that are no longer needed. Many people have discovered that donating such items to a charity can be much better tax-wise than throwing them out or attempting to sell them to junk dealers. At the same time there is the satisfaction of knowing that some needy persons have been helped.

Example. You have some clothes that are still in good condition but are out of style. A secondhand dealer will pay you only $20 per garment, expecting to resell them for $100 each-their approximate value. If, instead, you donate the clothes to a charity (and get a receipt showing the valuation), you can probably cut your tax bill by more than $20 per garment, and you don't have the bother of arranging for the sale.

Problem: Many charitable organizations refuse to place a value on  donated property, and if they do, they state that the values are those ascribed by the donee. Charitable organizations that do place a value on the donated property should be used if substantial amounts are involved.

Having a will drawn up is just the beginning of effective estate planning. Here are some other steps you should take to protect your family:

Step 1: Keep your will up to date by reviewing it at least once a year. You may need to make changes to reflect such events as births, deaths, and new property acquisitions, and to take advantage of changes in the tax law. (An up-to-date personal financial statement can be very helpful in estate planning.)

Step 2: Inform your spouse about your business and investment assets. You don't have to discuss all the details, but your spouse should at least have a working knowledge of your pension or profit-sharing plan, your securities and investment goals, and your insurance policies. You should also acquaint your spouse with a trusted adviser or associate that he or she can turn to for help, especially in regard to your business.

Step 3: With the aid of a financial advisor, prepare a list of your major assets and documents along with their locations. (Make sure that your family knows where this list can be found.) The list might include, in addition to your tangible assets, an itemization of your securities, insurance policies, credit cards, safe deposit boxes, and important papers (such as your will, marriage license, titles to your home and automobiles, military discharge papers, etc.). In addition, include (as appropriate) the names and addresses of your accountant, attorney, banker, insurance broker, real estate broker, and stockbroker.

Step 4: With the aid of your financial advisor, prepare what is referred to as a "last letter of instruction" or "post-mortem letter" to your spouse or other close relative. The letter should include the names of people to contact upon your death, spell out funeral arrangements and so forth. It could include the list discussed under Step 3; if not, it should remind the reader of the list (and of its location).

	Related Financial Guide: ESTATE PLANNING: How To Get Started.
	Related Financial Guide: POST-MORTEM LETTER: How To Prepare It And What To Include.

Here are a few financial planning suggestions that can add to your peace of mind about financial matters and simplifying your life:

• At least once a year, write down your investment goals and what strategy you will use to reach them. This will keep you focused.

• Instead of giving money to many different charities, pick a few that are important to you, and give them a larger amount. This type of directed giving not only makes more sense, but will make it easier to track your donations at tax time.

• Inventory your household possessions, with a camera or camcorder if you desire. Keep the inventory at work or in a safe-deposit box. This inventory will help should you need to submit a homeowner’s insurance claim.
  
• Use one insurance agent and one financial adviser for your transactions.

• If you have doubts about entering into a transaction, don’t do it. You’ll probably save yourself money, time, and aggravation.

Brief

Redeem mutual fund shares into money fund first. If you want to redeem shares in a stock or bond fund that is part of a group with a telephone-switch capability, you'll probably find it easier to first switch to the money fund and then write a check for your money.