The transition from one generation to the next is considered to be one of the biggest risks to the survival of a family-owned business, so it’s somewhat surprising that 47% of family firms have no formal succession plan.2

A thoughtful succession strategy not only outlines when and how ownership should be transferred but also takes tax implications, family relationships, and other sensitive issues into account.
Management Succession

Think realistically about who is most capable, motivated, and/or prepared to run the business. Because it may take several years to groom a successor, it’s important to identify potential candidates early. If no family members are interested in leading, you may want to consider tapping someone competent from outside the family.
Ownership Succession

Family members who are not willing to take on significant operating roles may still want to retain a stake in the company. How you decide to divide your ownership shares among your heirs and business partners could have a major influence on the future of the company. Involving family members in the process may help promote a smooth transition.
Keep Taxes in Mind

Because tax laws tend to change frequently, it can be critical to stay on top of potential estate tax issues. Trusts, buy-sell agreements, and/or insurance policies may be used to help reduce taxes or provide the funds to help pay them.

It’s a shame that some businesses must be sold either to pay estate taxes or because family members can’t agree on how to move forward. Forming a plan well before you intend to retire could help ease the transition to the next generation.

1–2) PricewaterhouseCoopers, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Because the AMT is not indexed to inflation, it has grown to affect millions of taxpayers (see chart), including many who may not fit the definition of wealthy. In 2009, about 23% of AMT payers had AGIs ranging from $100,000 to $200,000, and 5% had AGIs ranging from $50,000 to $100,000.2

Although Congress frequently enacts temporary patches to exempt low-income and middle-income taxpayers from being subject to the AMT, it’s important to stay abreast of current developments because there is never a guarantee that Congress will continue limiting the AMT’s reach.
Expanding Scope

The AMT is a separately calculated tax that eliminates certain credits and deductions to help ensure that taxpayers with higher incomes pay a minimum amount of tax. Taxpayers subject to the AMT must pay any AMT obligation in addition to their regular tax liability.

The 2010 Tax Relief Act adjusted AMT exemption levels for 2010 and 2011 to prevent an estimated 21 million middle-income taxpayers from being subject to the tax.3 The 2011 exemption amounts are $48,450 for single filers and $74,450 for married taxpayers filing jointly.4 Even with this temporary change, it’s projected that 4.3 million taxpayers may be subject to the AMT in 2011.5

When the current patch expires, as many as 31.2 million taxpayers may be affected by the AMT in 2012 and almost 55 million by 2022.6 However, if recent history is any indication, it seems likely that Congress could enact another patch for 2012.

Regardless of your income, it would be prudent to consider the potential effect of the AMT on your tax liability. Before you take any specific action, be sure to consult with your tax professional.

1) Tax Foundation, 2011
2) Congressional Budget Office, 2010
3–4) CCH, 2010
5–6) Tax Policy Center, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

The American Recovery and Reinvestment Act of 2009 was intended to help states cope with short-term revenue shortfalls caused by a deep recession. Since the act was passed, the federal government has provided more than $250 billion in temporary emergency aid to the states, but the amount of federal support will ramp down considerably in fiscal year 2012, falling to less than $24 billion. Unfortunately, unemployment levels and demand for state-funded health-care programs and social services remain high, and tax collections have not improved enough to make up for the loss of Recovery Act dollars.3

Here’s a closer look at the financial pressures facing the states, and how the methods used to address their budget shortfalls could ultimately serve as a drag on the national economy.
Mounting Concerns

Most state governments are required to pass balanced budgets, a task that has become more difficult because of low tax revenues. Many states have resorted to emergency measures such as issuing more general obligation bonds, underfunding employee pensions, and tapping “rainy day” funds to deal with imbalances.4 Twenty states have depleted their reserves almost entirely, reporting less than $7 million in cash.5

Heavy borrowing and underfunding pension funds will shift some of the burden to the future and could also have other financial consequences. Higher fixed debt payments and growing pension liabilities could eventually take up a larger portion of available revenue and leave even less for critical public services down the road.
Feeling the Effects

Now that federal stimulus dollars and cash reserves are more limited, many states are planning to cut spending on education, social services, and local governments and to reduce their payrolls. State and local governments were expected to cut a record number of jobs (up to 110,000) in the third quarter of 2011.6 In addition to layoffs, pay cuts and furlough days could reduce the earnings of many public employees. In more than half of the states, workers could also be required to contribute more of their own salaries toward their pensions.7

Laid-off public workers could conceivably join the ranks of unemployed and/or cash-strapped consumers who are unable to afford their mortgages, food, clothing, and other necessities. In hard-hit areas, local businesses could also feel the effects of government downsizing as both consumers and agencies cut back on spending. States employ more than 19 million people — or 15% of the U.S. workforce — and state spending accounts for 12% of gross domestic product.8

It’s not unusual for state and local government finances to take longer to recover in the wake of a recession.9 However, if the pace of business hiring is unable to make up for government job losses, it’s possible that large-scale cutbacks at the state level could be a significant setback for the broader economy.

1, 3, 5) The National Association of State Budget Officers, 2011
2) Bloomberg, June 24, 2011
4) CNNMoney, June 6, 2011
6, 9) CNNMoney, June 5, 2011
7) The New York Times, June 15, 2011
The Wall Street Journal, May 18, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

In recent weeks, yields on 10-year Italian bonds spiked to 7.4%, suggesting that the sovereign debt crisis was spreading into larger economies and eluding the efforts of the European Union (EU) to contain it.2 After bond yields in Portugal and Ireland exceeded 7%, they were forced to seek financial bailouts.

Here’s an update on the precarious situation in the eurozone, and a closer examination of how the political risks may be driving market volatility in the United States.
Nations on the Brink

Despite higher borrowing costs, Italy is still solvent and should be able to meet its obligations in the short term. Fiscal and economic reforms may help improve the nation’s longer-term prospects. However, the fear that the EU would not have enough money to rescue Italy — as it has other beleaguered nations including Greece, Ireland, and Portugal — is a significant cause for concern.3

Some uncertainty also remains as to whether the government in Greece will push through strict austerity measures as a condition to remain in the eurozone. If faced with a disorderly default, Greece is likely to abandon the euro, and the conversion to cheaper drachmas could result in a run on banks.4

Many U.S. investors are concerned that if Europe falls into a deep recession, it could take a toll on U.S. exports. And in the event of widespread defaults, large European financial institutions could suffer major losses. The threat of bank failures along with a large-scale credit contraction could result in another global financial crisis.5
A Single-Minded Obsession
The unpredictable nature of government policies has been weighing heavily on the financial markets. Consider how the following news events prompted dramatic stock market moves in the United States.

October 26–27: European leaders forge a deal to bail out Greece. Dow rises 4.29%.6–7
October 31–November 1: Greek Prime Minister George Papandreou plans public referendum for rescue terms. Dow falls 4.69%.8–9
November 2–3: Greek referendum canceled and European Central Bank cuts interest rates. Dow rises 3.32%.10–11
November 9: Yields on Italian bonds surpass the 7% level that triggered bailouts for other nations. Dow falls 3.19% in one day.12–13
November 10–11: Italy passes austerity measures, and Prime Minister Silvio Berlusconi departs; Greece seats new prime minister. Dow rises 3.16%.14–15
November 16–17: Fitch Ratings agency warns that U.S. banks are sizably exposed to European sovereign debt. Dow falls 2.69%.16–17

Political Uncertainty Rules

Europe’s problems may stem from the fact that a common currency and economic zone were established without a means to ensure that member nations adopt consistent fiscal policies. As a result, economic weakness and high sovereign debt levels sparked a series of political crises over the last year and led to the fall of governments or leaders in more than five EU countries.18

It is widely believed that the eurozone will either establish a more powerful central body or begin to break apart. It could take many months or even years for European leaders to restore financial stability, so related market volatility may continue for some time.19

Political crises are macroeconomic risks that also tend to cause the prices of stocks and other investments to move in sync, temporarily eschewing the fundamental factors and valuations that typically drive individual security prices.

Market conditions that seem to offer few “safe havens” can unnerve even the most seasoned investors, but they may also present buying opportunities. Having a sound, long-term investing strategy that fits your risk tolerance may help you avoid emotional decisions and stay focused on pursuing your financial goals.

Investments are subject to market fluctuation, risk, and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

1) The Wall Street Journal, November 18, 2011
2–3, 12) The Wall Street Journal, November 9, 2011
4) Associated Press, November 16, 2011
5) CNN.com, November 14, 2011
6) CNN.com, October 27, 2011
7, 9, 11, 13, 15, 17) Yahoo! Finance, Dow Jones Industrial Average for the period 10/26/2011 to 11/28/2011
The Wall Street Journal, November 1, 2011
10) The Wall Street Journal, November 3, 2011
14) CNNMoney, November 11, 2011
16) The New York Times, November 16, 2011
18–19) Los Angeles Times, November 10, 2011

Fluctuating interest rates can be challenging for bond investors. When bonds mature during a period of low rates, bond investors may have to accept lower yields when they reinvest their money. On the other hand, if rates rise at a time when their principal is tied up at lower interest rates, they may not be able to take advantage of higher yields.

Fortunately, there is a strategy to help manage the risks associated with fluctuating interest rates.
Climbing the Ladder

One upside of bond investing is that the interest rate on an individual bond is generally fixed throughout the life of the bond, providing the bondholder with a fairly predictable income (unless the bond issuer defaults). When the bond matures, however, the amount of future income the bondholder can expect from reinvesting the principal is highly dependent on the current interest-rate environment.

One way to help manage reinvestment risk is by staggering the maturity dates within a bond portfolio so that at least one bond matures every year or two. This strategy, known as a bond ladder, may help limit exposure to falling interest rates while also increasing the likelihood that at least some principal may be available to reinvest when rates are rising.

A bond ladder is a form of diversification because it helps spread risk over a period of time. Of course, diversification does not guarantee against loss; it is a method used to help manage investment risk.

The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

Building a bond ladder has no effect on the underlying risk of the bonds themselves. However, ensuring that only a limited portion of a bond portfolio matures at any given time may be an effective way to help manage reinvestment risk.

1) Federal Reserve Bank of New York, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.