United Bank & Trust Blog

Effective January 1, 2012, United Bank & Trust along with other Michigan financial institutions, are required to withhold Michigan income tax from distributions from certain retirement accounts (including traditional IRAs and employee benefit plans) made to Michigan residents. Although there are ongoing discussions between the State of Michigan and the Michigan Bankers Association (“MBA”) regarding the date withholding is actually going to be required under the law, we want inform you about this new provision as it is currently drafted. As written, the law provides the following:

For individuals born before 1946 (over age 65), withholding is required on distributions from a private pension or retirement account that in any one year, exceed the sum of $45,842 if single or married filing separate, or $91,684 if married, filing a joint return. Distributions from pension and retirement benefits received from public sources are not subject to a withholding requirement for this age group.

For individuals born between 1946 and 1952 (between ages 59 and 65), withholding is required on distributions from either a public or private pension or retirement benefit account that in any one year, exceed the sum of $20,000 if single or married filing separate or $40,000 if married, filing a joint return. Please note that the withholding requirements for this age group are for distributions from both public and private pension payments.

For individuals born after 1952 (under age 59), withholding is required on all distributions from all public and private pension or retirement benefits. There is no exempt amount.

If you are a United Wealth Management Group client and take distributions from retirement accounts, your relationship manager should be contacting you soon to discuss how United will handle our withholding responsibility requirements. Absent a change in the effective date as referred to above, we will begin withholding the full amount of Michigan income tax (4.35%) from all retirement account distributions beginning on January 1, 2012. We will certainly provide our clients with additional information regarding the discussions over the effective date going on between the State and the MBA as we learn more.

In the interim, if you would like to discuss your specific situation or if you have general questions about this new law, please contact a United Wealth Management Group relationship manager.

Please note that nothing contained in this posting is intended to be tax or legal advice. We are happy to work in conjunction with your tax and legal professionals to ensure you are kept up to date on the latest regulatory changes and serve your needs as your trusted financial advisors.

Some have heard of Special Needs Trusts, but do not fully understand their significance. A Special Needs Trust is like an ordinary Trust in that it acts as a container to hold property and assets for someone else’s benefit. However, a Special Needs Trust is carefully drafted to protect an individual who has a disability and who depends on receiving financial and personal support from the government. In many cases, that person’s receipt of benefits from the government is contingent on how much that individual owns (assets) and how much he or she earns (income).

There are two types of Special Needs Trusts. The first, known as a Self Settled Special Needs Trust, is funded with the assets of the individual with a disability. This is used when the individual in question has assets either through inheritance or as a result of a personal injury settlement. The second type of trust, known as a Third Party Special Needs Trust, is funded with the assets of another person, usually a family member or close friend, who wants to support the individual with a disability. In either case, it is critical that assets and income from the Special Needs Trust are not distributed directly to the beneficiary. Assets and income distributed directly to the beneficiary creates a risk of reducing or eliminating that beneficiary’s eligibility to receive government benefits. Moreover, assets must be distributed for specific purposes and not at the beneficiary’s direction.

There are a variety of government benefits and services offered to individuals with disabilities. These include Supplemental Security Income (SSI), Medicaid, Public Housing, Veterans benefits, and food stamps. In some programs, federal law controls who is eligible to receive benefits, and in others like Medicaid, state law controls these requirements. The rules and procedures differ between programs and change frequently. It is imperative that each member of the team charged with handling the management of a Special Needs Trust understands the laws and the latest developments in special needs planning and administration.

The concept of a Trust can be difficult to understand for someone who is not regularly working with one. Adding into the mix tax laws, fiduciary duties, and reporting requirements, an inexperienced Trustee can quickly become overwhelmed. Special Needs Trust administration adds another layer of complexity because improper management could cause the beneficiary with the disability to lose his or her eligibility to receive government benefits. For this reason it is crucial to appoint a professional Trustee who is experienced in special needs planning and administration.

The Wealth Management Group at United Bank & Trust is proud to offer you licensed and experienced trust administrators. We specialize in serving as trustee of a variety of trusts, including special needs trusts, irrevocable trusts, and revocable grantor trusts.

When it comes to saving for retirement, there is never a better time than today to assess your prospects toward meeting your goals. And with our nation’s leaders declaring Oct. 16 through Oct. 22 as National Save for Retirement Week, you have a great opportunity.

National Save for Retirement Week is the first congressionally endorsed, national event formally calling on all employees to take full advantage of employer-sponsored retirement plans.

Experts predict that retirees will need from 80% to 100% of their pre-retirement income to maintain their lifestyle after retirement. Yet, surveys show that most Americans remain unprepared for retirement.

Many workers already participate in company sponsored retirement plans, which provide a foundation for retirement saving. And many workers will also be eligible for Social Security benefits at retirement age. But, that may not be enough. They will need to add additional retirement savings in order to live comfortably and securely during their retirement years – to fulfill their dreams.

For many Americans today it is important to begin saving for retirement – or increasing contributions to meet their goals. National Save for Retirement Week is dedicated to showing how important it is meet retirement objectives by contributing regularly and investing wisely for the long term.

Here are a few simple examples of what it takes to prepare for when it’s time to retire:
• Save just $10 per week in a deferred compensation plan for 40 years and earn an average rate of return of 7 percent, and you will have an account with over $100,000. That just shows the power of tax-deferred savings.
• If you start a little later, don’t be discouraged. You can still save more than $73,000, by setting aside $60 a month in a tax-deferred savings account for 30 years and at a 7 percent return.
• If you are saving now, and you increase your contributions, you can really make a difference in your final total. Over 30 years, adding $25 to your $100 biweekly contribution can increase your account from $264,327 to more than $330,409, assuming you earn 7 percent.
• Saver’s Credit. Sometimes saving seems really hard, especially if your income is limited. The government has a special Saver’s Credit just for you. If you are eligible, you can actually receive money back when you file your tax return.

There are many resources available on the Internet to provide you with the information you need to plan for retirement. Here are a few sites that will help you get started:
• Social Security Administration – You will find calculators to determine what your benefit will be, information on how to apply for benefits and other information about the government retirement system.

• American Savings Education Council – A useful calculator helps you estimate how much you need to save to meet your retirement goals as well as a number of savings tips and useful brochures.

If you would like assistance in establishing your retirement savings goals, please contact me at United Bank & Trust. I am here to help.

In a historic move late Friday night (8/5/11), Standard & Poor’s sovereign debt rating committee downgraded the United States’ credit rating one notch from AAA to AA+. While bold, this move was certainly not unexpected. Months ago, S&P fired a shot across the bow, announcing that the government’s AAA credit rating was in peril. They later stated that Congress and the Administration needed to address the growing deficit and pass a debt ceiling law that reduced the deficit by $4 trillion. Congress failed to get that done. S&P responded as they said they would and downgraded the US credit rating.

So what happens now? In reality, not much. US Treasuries are still the global safe haven when uncertainty exists in the financial markets. Both Moody’s and Fitch, the two other major credit rating services in the US, continue to rate US debt as AAA. Unfortunately, Congress still needs to address the deficit issue, most likely with a balanced approach that considers both entitlement spending cuts and revenue increases. That won’t be easy. This Congress has become the poster child for political gridlock. Fiscal policy, like any other government policy, is the result of the political process. In a divided two-party government, that typically requires compromise. But compromise does not mean “give me what I want, how I want it.” Compromise means taking the best ideas from both sides and formulating a policy to move the country forward. Let’s hope they can do that.

It’s important to keep this all in perspective. Don’t panic. We do have budget deficit and long-term debt issues that needs to be addressed. That is for sure. But we also have an economy that is sputtering along, trying to recover from a very long and deep recession. Typically, economic growth could help us address the problem. Today, it is another issue that needs help. It appears that the major factor lacking in this economic recovery is demand. The major reason there is little demand is a lack of confidence. With 2/3 of the nation’s economic growth coming from consumers, consumer confidence is very important. A well thought out and well crafted bipartisan fiscal policy could go a long way to improving that confidence.

In the meantime, let’s keep a few issues in mind:

• The S&P rating downgrade of the US credit in no way affects the country’s ability to pay its bills. Typically, a rating downgrade would increase cost of borrowing for a debtor, but initial market response actually lowered treasury interest rates.
• Moody’s and Fitch both continue to give US debt their highest AAA rating.
• Initial market response supports the US Treasury’s role as a safe haven investment.
• Warren Buffett, the world’s most successful investor, said S&P erred and the US should be rated “quadruple-A.”
• AA+ rating is still very high quality, the only higher rating is AAA.
• This could act as a wake-up call for Congress and the Obama Administration to get a comprehensive debt reduction package passed.

While the chances of another recession have increased slightly, we think that is still unlikely. US economic growth should continue in the 1 – 2% range for the next few quarters. This will be slow, uncomfortable growth, but it will be growth. And although the stock market values plummeted the first few days of August, underlying market fundamentals remain okay. Corporate profits are solid, with almost 75% of companies meeting or beating 2nd quarter estimates, and many companies are awash in cash. Valuations are below their long-term averages and interest rates should remain low for some time. That means the market should have upside potential if corporate profits continue to grow.

We will continue to monitor this dynamic situation and its affects on our investment strategy and our clients’ portfolios.

To raise, or not to raise the US debt ceiling, that is the question.

It is also the dilemma that has led to the current showdown between Congress and President Obama, which must be resolved by August 2nd, or the US risks defaulting on its debt for the first time in our nation’s history. Since inception, our country has never missed a payment on its debt. And, in order to maintain our top-rated status and AAA credit rating, we must never allow ourselves to do so.

This is no political rant and you will hear no rhetoric from the extreme ‘left’ or ‘right’ in the following paragraphs. Rather, this post was authored by an investment manager who is concerned about the ramifications and potential catastrophic consequences that could occur if our leaders in Washington fail to raise the debt ceiling by August 2nd.

What I think some fail to realize in Washington – and around the country – is that there are billions of investment dollars in pension funds, money markets, mutual funds, and other entities and vehicles that are mandated by policy to be maintained in AAA-rated securities such as US Treasury bills, notes and bonds. If we continue to play this game of chicken down to the 11th or 12th hour, fail to raise the debt ceiling, and lose our AAA status, we risk a potential sell off in US Treasuries that would make the most recent financial crisis look minor in comparison.

Some argue that we should allow the debt to default – even temporarily – to restore discipline and fiscal responsibility to our nation, but I would counter that the price to teach that ‘lesson’ is much too high. We are currently playing a dangerous game of roulette with our nation’s credibility and standing in the world. The potential damage to our reputation is something the world would not soon forget.

What is the debt ceiling?

Back in 1917, the US Congress first passed a law setting the national debt limit initially at $11.5 billion. Of course, since they have raised that ceiling many, many times, today it sits at $14.294 trillion. It is a cap on the public debt and debt owed to trust funds like Social Security and Medicare. At a minimum, the ceiling serves as a periodic reminder of our fiscal situation and the fact that at some point we must address our longer term structural issues to change our economic path. By August 2nd, though, our government must either raise the debt ceiling or stop spending more than it takes in. If the ceiling is not increased, we risk not being able to pay our bills and defaulting on our debt payments. The gyrations caused by such an event would certainly be felt in financial markets around the world.

We actually reached the ceiling back in mid-May, but thanks to some rearranging of payments and financial maneuvering, US Treasury Secretary Tim Geithner was able to postpone a potential default until August 2nd.

Today we see the era of massive stimulus winding down with the Federal Reserve’s program of QE2 ending in June. Fiscal austerity seems to be the path that we are now embarking down. While we need to instill discipline to our nation’s fiscal house, I do question the timing of any severe spending cuts given the fragility of the current economic recovery. In the short term, however, we must raise the debt ceiling. To get it passed, we will likely see some kind of intermediate to longer-term framework created to cut spending and address the structural issues of the budget deficit and national debt overall. If an outline to address our longer-term structural issues is developed and the debt ceiling is raised, those would be very positive developments.

How will this end?

When one looks beneath all of the rhetoric, I believe most people recognize the magnitude of the decision that must be made in the coming weeks. I have faith (and hope) that our leaders will eventually come up with a compromise and get the debt cap raised.

Upon thorough examination, it appears that the two most likely potential options are:
1. Congress will raise the debt ceiling sufficiently to get us through the 2012 election cycle
-OR-
2. Congress will pass a temporary measure to get us just into next year – in which case we would see the showdown replay around this time next year

Though the political posturing and rhetoric will no doubt heat up in the next few weeks, I expect that the ceiling will be raised in the end, because the consequences of not doing so are simply too dire.