Palisades Hudson Financial Group Comprehensive, Objective, Fee-Only Advice and Solutions Tue, 18 Sep 2018 21:09:20 +0000 en-US hourly 1 Taylor Swift Is Her Own Big Machine Tue, 18 Sep 2018 13:00:19 +0000 As Taylor Swift becomes a free agent, will she sign with another label’s team or just play in a league of her own?
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stage setup for Taylor Swift's 'Reputation' tour stop in Minneapolis, Minnesota
photo by Michael Hicks

In early November, Taylor Swift will become a free agent. The looming question is whether she will “Begin Again” with her existing label, take her talents to a new label – or go it alone.

Scott Borchetta, the founder and CEO of Big Machine Records, famously signed Swift when she was 15 years old. At the time, she and the label were both untested quantities. Rolling Stone characterized Big Machine as “more of an idea than a company when [Swift and her parents] signed.” The star and the label rose to prominence together. For many people, Swift effectively is Big Machine, though the label has expanded its roster to include other established acts including Reba McEntire and Cheap Trick. Still, Swift has been Big Machine’s biggest artist by far for years.

But Taylor Swift’s career and the music industry both look very different today than they did when her self-titled debut album arrived in 2006. Variety reported that Swift’s representatives have opened conversations with the major label groups, as well as holding discussions about the possibility of staying with Big Machine.

These days Swift is a “big machine” all on her own. It makes me wonder why she needs to sign a new contract with Big Machine, or any major label, at all.

Any deal Swift would accept will presumably include control of her new masters. And while Big Machine could sweeten the pot by offering the masters of her first five albums, I strongly doubt the label would take this step. A person with knowledge of the business told Variety that 80 percent of Big Machine’s revenue is derived from those albums today. In a streaming-dominant world, giving up those masters might be too big a loss to take, even if keeping them means forgoing the chance to profit on Swift’s future work.

Big Machine may also be betting that Swift has plateaued. Swift’s most recent album, “Reputation,” sold significantly fewer copies than its predecessor, “1989.” The label may feel that it will do better to hold on to the masters for the five albums it has than to give them up just to stay in the Taylor Swift business.

But the fact that Swift sold over 1 million copies of an album in the first week of its release in 2017, as streaming continues to become the dominant mode of music consumption, is still remarkable. “Reputation” was the best-selling album of the year in the United States, and sold 4.5 million copies worldwide. It is little wonder that major labels are still eager to sign a star of Swift’s caliber. And this is before we even mention her touring revenue. Pollstar reported that the first 18 dates on her most recent tour sold out, and Swift reportedly grosses between $5 million and $9 million per concert. Despite initial skepticism over the variable pricing model Swift introduced for the “Reputation” tour, committed fans proved they were still willing to show up in large numbers.

The “360” style contract was not yet widespread when Swift signed with Big Machine, but now a label would almost certainly try to negotiate to enjoy a slice of that concert revenue. Labels today are much more likely to want to insert themselves into every part of an artist’s revenue stream, from merchandise to endorsement deals, as album sales are no longer the dominant moneymaker they once were. Nor are 360 deals limited to unknown artists; Jay Z famously signed a 360 deal with Live Nation in 2008, though in 2017 he renegotiated the terms to cover touring only. While Swift almost certainly has the power to limit the label’s reach into her revenue stream, such limits would be the exception rather than the rule. Even Swift would have to give up some level of control to secure a label’s backing.

While an unknown artist may benefit from the exposure a label can offer, it’s tough to see what a superstar like Swift would truly get out of such a deal. Swift has demonstrated that she has no real need for label’s help with publicity. Today’s music industry focuses much more on fan experience than album sales. As David Turner wrote for “Real Life” magazine, “…music fans aren’t paying for the opportunity to access music — most listeners take access for granted — but instead to integrate it meaningfully into their lives.”

Swift arguably acted ahead of the curve in this sense. Even as she became a superstar, she regularly interacted with fans who tagged her on Instagram and other social media platforms, creating an aura of approachability while maintaining control of her public persona. And she has long been known for unusually warm and personal interactions with her most devoted fans, from curating a playlist for one who was navigating a breakup to inviting another to her home and baking cookies with her. Even in the midst of a social media blackout preceding the release of “Reputation,” Swift continued to “like” posts her fans made on Tumblr, giving them a sense of exclusive access and connection.

Swift is also used to a certain level of artistic autonomy. Variety reported that her in-house team already handles “most of the duties a label would,” including overseeing an album’s development, publicity, album cover design and most of Swift’s music videos. It does not seem far-fetched to imagine she could hire additional staff to cover any gaps.

One of the few compelling reasons that remain for an artist to join a label is to take advantage of the company’s artist development resources. But Swift is an accomplished performer and songwriter, one of the most famous pop musicians in the world. She already has a team she trusts, a huge amount of name recognition, and established channels for interacting with her fans. There is no credible way to argue she needs a label to hold her hand for any of it.

The one thing a label contract could offer her, in theory, is a guaranteed payday. Music industry insiders told Variety that Swift could secure as much as $20 million per album in upcoming negotiations. If Swift is worried that her fans may eventually desert her, the comfort of such a contract may outweigh the potential for greater earnings and the reality of giving up some level of control.

But I would be surprised if Swift approached the deal this way. Even if Swift is concerned that her popularity is waning – which I don’t think the evidence suggests she is – going independent is still in her best interest. She will continue to maintain a large number of dedicated superfans who, as producer and artist Ryan Leslie pointed out years ago, are the true backbone of a successful musician’s career. And clearly the major labels that are salivating at the thought of her becoming a free agent are an indication that industry experts are not concerned with Swift’s future ability to sell music or tickets. The lucrative nature of the deals she is offered should be their own signal that going it alone is not only viable, but preferable.

For artists without a proven track record, deciding whether to go solo or let a label put their fingerprints on all parts of their artistic life is a difficult choice. Artists who aren’t household names will need to weigh the pros and cons carefully. But for someone like Swift, today’s music label offers little that she cannot do better and more lucratively with her own team. The only question that remains is whether Swift is willing to step forward and demonstrate what truly independent music superstardom can look like.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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]]> 0 Anthony Criscuolo in FitSmallBusiness Mon, 17 Sep 2018 21:07:01 +0000 Anthony Criscuolo explains why most people are better off with term life insurance than whole life insurance.
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FitSmallBusiness, September 17, 2018
Anthony Criscuolo explains why most people are better off with term life insurance than whole life insurance.

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Paul Jacobs in FitSmallBusiness Mon, 17 Sep 2018 20:17:40 +0000 Paul Jacobs advises readers on the right time to consider term life insurance.
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FitSmallBusiness, September 17, 2018
Paul Jacobs advises readers on the right time to consider term life insurance.

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The Dreaded Inverted Yield Curve Mon, 17 Sep 2018 13:00:08 +0000 Who’s afraid of the big bad bond market standing on its head? Not the chief of the New York Fed.
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Federal Reserve Bank of New York facade on 33 Liberty Street
The Federal Reserve Bank of New York, New York City. Photo by Wikimedia Commons user Gryffindor.

On Sept. 6, New York Federal Reserve President John Williams boldly said that the Fed shouldn’t hesitate to invert the yield curve.

If the news reached you at all and you are not an investment professional, there’s a more than even chance that your reaction was something like: “What’s a yield curve and why should I care if the Fed inverts it?”

Yields are usually higher for long-term bonds than short-term bonds of equal credit quality. This is because investors are taking on more risk with a longer time horizon. It feels relatively safe to guess how well a government or a bank will be functioning in a year or two, but it becomes much riskier when you measure in decades.

Generally speaking, you can graph the relationship between bond yields and their maturity dates; the result is what economists mean when they describe a yield curve. That’s because the most common result of such a graph is a rising curve that levels out at the top. The yield curve that economists usually focus on is the one measuring the yields versus maturities of certain U.S. Treasury bonds.

Sometimes economic conditions exert enough pressure to change the shape of this graph. As short-term interest rates rise, for instance, increasingly similar yields between short- and long-term bonds can lead to a “flat” yield curve. Bloomberg recently reported that, in the past six months, 10-year Treasury note yields have fluctuated around 2.9 percent, but two-year notes’ yield has risen 0.4 percent, narrowing the difference between their yields to the smallest amount since 2007. By this measure, we are solidly in flat yield curve territory.

If short-term bond yields actually surpass long-term bond yields, the inverted yield curve arises.

Historically, an inverted yield curve has signaled an oncoming recession, because it indicates that investors are deeply worried about the future. While long-term Treasury bonds are riskier than short-term Treasuries, they are still relatively safe investments. If investors anticipate that interest rates are likely to trend downward, they will try to lock in better long-term rates as soon as possible. As a greater number of nervous investors pile into long-term bonds, the yield tends to decrease due to basic supply and demand.

Inverted yield curves have preceded every U.S. recession since the 1960s. While inverted yield curves don’t cause recessions outright, they are often among the first symptoms that one is on the way. And while a flat yield curve is not a problem in itself, it does mean that it would not take much change to tip into an inversion, which is why it worries some economists and investors.

The yield curve is currently flat, in part, because the Federal Reserve exerts greater control over short-term yields than long-term yields. The Fed sets the federal funds rate, which governs short-term borrowing; it has slowly but deliberately raised this rate for the past few years and is committed to continuing in an effort to return to historically normal interest rates. But even as the Fed raises short-term rates, long-term rates haven’t significantly budged. This has caused some economists to raise the alarm, including several regional Fed presidents who have said the central bank should take concrete steps to make sure the yield curve does not invert. Fed Chairman Jerome Powell has said the yield curve is important to watch, though in his view it does not yet indicate any recession danger.

If all of this is true, why would the president of the New York Fed urge his fellow central bankers to keep raising interest rates, even if it could cause an inverted yield curve? Williams’ point was that the Fed needs to consider the state of the economy as a whole when deciding to raise rates, rather than letting fear of an inverted yield curve prevent action. Part of his reasoning is that the global economic picture looks different today than it did in the past. For example, the Fed and other central banks have bought many long-term assets outright, which has arguably pushed down yields on long-term Treasuries artificially. And while the Fed has unwound some of its post-crisis quantitative easing, many other major world economies like Japan and the European Union are still engaged in it, which makes American Treasuries attractive by comparison, even if their yield is low in absolute terms. China alone holds almost $1.2 trillion in U.S. Treasuries.

Williams also noted that between low unemployment and low inflation, “this is about as good as it gets” economically speaking. An inverted yield curve would not immediately undo all the other economic strength the United States currently enjoys. And depressed wage growth for the past few years means, at least in Williams’ view, that the economy still has room to expand.

Treasury Secretary Steve Mnuchin, too, has said that he is not worried by the prospect of an inverted yield curve. In late August, he told CNBC, “I think [the yield curve is] a market condition, and for now having a flat yield curve with us issuing long-term debt is something we’re perfectly content with.”

As I have written before, recessions are a normal part of the economic cycle. But an inverted yield curve is not a curse that will magically turn clear economic skies stormy, either.

If an inverted yield curve arrives, investors should bear a few things in mind. First, don’t panic. An inverted yield curve correlates with the potential for a recession, but as every beginning statistics student can tell you, correlation does not equal causation. Otherwise, we would have to seriously look into whether people were getting divorced in Maine because Americans were eating too much margarine.

That said, the connection between an inverted yield curve and a recession is not entirely spurious. An inverted yield curve can affect the probability of a recession to a degree, in that it poses the risk of a self-fulfilling prophecy. Investors who see an inverted yield curve as a surefire recession signal may change their behavior accordingly. As demand shifts, bond yields will move in response.

Perhaps more importantly, an inverted yield curve can make banks more reluctant to lend. Banks borrow at short-term rates and lend at long-term rates; the difference is usually where they make their profit. If they can’t earn a reasonable return on mortgages or other long-term loans, banks will be reluctant to lend freely, especially to riskier borrowers. And when banks are less willing to lend, small and medium businesses may end up delaying or canceling plans to expand because they lose access to credit. This can push the economy toward recession.

However, if the economy is otherwise healthy, the Federal Reserve raising short-term interest rates far enough to invert the yield curve will not instantly and automatically trigger a recession. The bond market is only one element of a much larger picture.

Even if an inverted yield curve does signal a recession, it is not a reliable indicator of its timing. As Aaron Anderson, senior vice president and head of research at Fisher Investments, pointed out in a column for The Street, historically the economy can grow for many months after an inversion begins. The time from an inversion to a recession can stretch as far as a couple of years, as it did prior to the most recent recession. The yield curve inverted in January 2006, and stocks didn’t begin their descent until 2008.

Investors should not, however, simply ignore an inverted yield curve. At the very least, they should calmly and thoughtfully evaluate their portfolio’s bond allocation in light of the upside-down circumstances an inverted yield curve indicates. You may or may not want to make a change, but it is worth at least asking why you should hold on to your long-term bonds in an environment where short-term alternatives offer both lower risk and higher yield.

An inverted yield curve is a strange and rare phenomenon. Even when it arrives, it does not usually last very long. Regardless of what it may or may not tell us about the economy’s near future, an inverted yield curve is a good signal for investors to make sure their basic financial plan is sound and that they are prepared to keep their focus firmly on the long term.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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]]> 0 After The Storm, Part Two Fri, 14 Sep 2018 13:00:01 +0000 Just because your insurance company gives you a check doesn’t mean you are free to spend it as you choose.
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hands with nail polish and a ring writing out a paper check

Yesterday, I wrote in this space about how it took seven months, one lawsuit and a platoon of field adjusters to extract a settlement from our insurance carrier for the damage our Florida vacation home suffered last year from Hurricane Irma.

Even after that battle was over, my wife and I did not get to cash the check for another four months – meaning it took 11 months from when I first filed a claim until we were finally paid. You must be wondering why it took so long to get our money once we settled our case.

Funny you should ask. The problem we encountered – which is one that untold thousands of other claimants likewise experience after every disaster – is that even when the insurance company gave us our money, it wasn’t actually our money until our mortgage lender agreed to let us have it.

It was merely an annoyance in my situation, because if anyone who suffers a hurricane loss can be called “lucky,” the description applies to me. The home that Irma damaged in 2017 (and that Matthew damaged in 2016, making me doubly lucky) is not our primary residence. Even the damaged property was perfectly habitable. More important, I did not need to wait for insurance money to make repairs. I could afford to hire contractors on my own dime while awaiting reimbursement. This put me at the head of the line to secure labor and materials that were at a premium after hurricanes Harvey, Irma and Maria created havoc from Puerto Rico to Texas, and across most of my home state of Florida.

Hurricane Florence was trekking toward the Carolinas as I wrote this post a couple of days ago. If the dire forecasts pan out (and there is little reason to believe that they won’t), a combination of high wind, phenomenal rainfall and saltwater storm surge will spread destruction from the beaches to the Appalachian mountaintops, and possibly beyond. Florence will likely rank high on the list of most expensive natural disasters in the country’s history.

Once the storm subsides, tens or hundreds of thousands of people will need to begin restoring their lives and property. Insurance adjusters and agents will flood the disaster zone, eager to help ease the dislocation and to take the liability off their corporate books. They will be ready to write checks, in some cases on the spot. But as my experience after Irma showed, getting a check from an insurance company is not always the same as getting money you can spend on repairs or emergency living expenses.

Why not? Because if you have a mortgage on the damaged property, the insurance check will most likely be made payable jointly to you and to your lender. Most mortgages require that the lender be named an “additional insured,” and in many cases the bank monitors the insurance policy to make sure it remains in force while the mortgage is outstanding. Banks often pay the premiums themselves from the borrower’s escrow account.

There are good reasons for this, but only up to a point. Your bank wants to ensure that its financial interest is protected by restoring damaged property to its original condition. Bankers fear that, left to your own devices, you might take the insurance proceeds and relocate to North Dakota, where hurricanes don’t happen. By naming themselves as insured parties under the policy that you pay for, banks can get between you and your money. Without some exonerating provision in state law, the insurance company would be in breach its contract if it made the settlement check payable only to you.

If the settlement is small, your lender may just endorse the check and send it back to you, which is not a big problem in most cases. But if the amount is fairly large – I have seen the cutoff range from $5,000 to $20,000 or so – the bank may turn the tables. It may demand that you endorse the check to the bank, which will hold the money until it is satisfied with your repair arrangements. It might even force you to borrow funds to pay for the repairs before it releases the cash your insurer has already paid to cover those expenses.

In my case, the repairs were already complete by the time I settled my dispute with my insurer. My mortgage lender, U.S. Bank, had even inspected the property to verify that it was restored. But when I received my settlement check, the bank still told me to endorse it and send it in – so it could return my money to me whenever it felt ready. I told the ever-changing cast of representatives on the bank’s phone lines that this would never happen. Eventually the bank agreed to simply endorse the check and send it back to me.

So I sent the check with a return FedEx envelope to allow for tracking. U.S. Bank did not use the FedEx envelope. Instead, it mailed the check back to me, and the check got lost in the mail. I had to go back to my lawyers to have them get a replacement check from the carrier. As you can imagine, that took considerable time. There were several other twists and turns along the way. By the time everything was settled and the money landed in our bank account, it was mid-August. That was 11 months after the storm and four months after the settlement.

Things would have been much worse for me if I had needed access to the insurance money to make repairs, or if the damaged home was my only available dwelling. For untold numbers of other storm victims, both of these conditions are true.

I want to see legislators in Florida and elsewhere establish a default rule under which insurance companies may, or perhaps must, pay homeowners directly without regard to “additional insured” status of lenders. Lenders should be given control over funds only when it is reasonably necessary to protect the lender’s interest.

It could work like this: Suppose you buy a house for $100,000, borrowing $80,000 from a bank. A month later, a windstorm causes $10,000 in damage, thereby reducing the value of the property to $90,000. This is still more than the amount you owe the bank; it is really you, not the lender, who has suffered the insured loss.

Generally, mortgages obtained with less than 20 percent down payments are covered by mortgage insurance, so the lender is already protected from a default. The state legislature could mandate that if an insurance claim is less than 25 percent of the value of the original mortgage, the insurance company may (or must) pay the homeowner without involving the lender. In our example, 25 percent of $80,000 is $20,000, which is the equity you contributed when you bought the home. Any claim up to $20,000 ought to be payable directly to you.

Every major storm produces an outpouring of sympathy for its victims. Everyone wants to relieve the suffering and stress of those who lose their possessions or livelihood. Here is something elected officials can do to make life easier for those who are rebuilding. It would scarcely cost anyone anything. As policymaking goes, it’s as close to a slam-dunk as things get.

Property owners pay insurance premiums to protect themselves first, and their lenders only incidentally. They deserve to get what they paid for without undue hassle or delay.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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]]> 0 When Spouses Live In Different States Thu, 13 Sep 2018 18:45:11 +0000 Popular wisdom holds that our world is shrinking. But for married couples who live apart much or all of the time, long distances still present unique challenges and pitfalls. Many of these are emotional, but there are a few financial hazards too. Luckily couples can largely mitigate the financial problems, at least, with some careful planning and foresight.
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Popular wisdom holds that our world is shrinking. Travel is faster, and technology increasingly bridges the gap even between people who are physically distant.

But for married couples who live apart much or all of the time, long distances still present unique challenges and pitfalls. Many of these are emotional, but there are a few financial hazards too. Luckily couples can largely mitigate the financial problems, at least, with some careful planning and foresight.

Long-distance marriages are on the rise in the United States. According to the U.S. Census Bureau, the number of married couples who live apart more than doubled between 1990 and 2015. An estimated 3.5 million couples live at different addresses. The causes vary.

A common culprit is divergent professional needs. It has long been expected that members of the military will often need to relocate, sometimes with their families and sometimes without them. Similarly, professors and high-level academics – especially those married to one another – may have to physically split up temporarily in order to secure work in their chosen fields. Danielle Lindemann, research director at the Center for Women and Work at Rutgers, observed that in previous decades, it was often taken for granted that wives would follow husbands whose careers took them to new places, even in households where both partners worked. Today, it is more readily accepted that working women may not want to sacrifice their own professional lives.

Some couples reside at different addresses due to family concerns, too. Parents of young children may not want to uproot them from schools or friends if one spouse’s reason for moving is temporary – for instance, acceptance into a two-year master’s degree program at an out-of-state school. Or one spouse may need to care for aging parents in a situation where it is not practical for both people to relocate. Some couples who live apart report that the first spouse moved, either for professional or family reasons, and the other lingered in order to sell their home – but they found it took longer than expected to find a buyer.

Couples who are married and living apart may be at any stage of life, with a variety of financial circumstances in play. But if couples live across state lines, they should take special care to make sure that they have a handle on their tax situation.

Income Tax

The first order of business for the spouse who moved is to determine whether his or her domicile has changed, especially when splitting time between two states. Domicile and residency are different but related tax concepts. An individual may reside in multiple states, but can have only one domicile – that taxpayer’s fixed, permanent home. Individuals domiciled in a state are automatically considered state residents for tax purposes, which in most cases means the state is entitled to tax that individual’s worldwide income. Given the differences in state tax regimes, this can have major consequences for a couple’s finances.

Consider a hypothetical couple, Jack and Anne. Since their marriage, they have shared a home in Georgia. Anne accepts a job offer in Florida, but Jack is not ready to relocate, because he is helping to care for an ailing parent who lives nearby. They decide that for the time being, Anne will move to Florida but will return to spend most weekends with her husband.

Because Florida does not tax income, it would be beneficial for Anne to establish herself as a Florida resident. She would then only owe Georgia tax on any income she earned in Georgia – possibly none, depending on how she and Jack have set up their finances. However, to effectively re-establish domicile, Anne will need to be aware of several potential pitfalls, especially since Georgia’s tax authorities have a strong motive to prove that she remains a Georgia resident.

The first thing Anne will need to do is to check the residency rules for both Georgia and Florida. State residency rules can usually be found on the website for the state’s department of revenue. Like many states, Georgia has a residency law, which means that individuals who spend more than a certain number of days in the state are automatically residents. (In Georgia’s case, that number is 183 days per any continuous 12-month period.) Therefore, Anne should keep a careful record of any time she spends in the state, along with receipts, travel confirmations and other evidence of her movement. Even if she successfully establishes domicile in Florida, she could end up a “statutory resident” in Georgia and still owe tax on all of her income.

Apart from actual presence in a state, the other major factors in establishing a change in domicile are demonstrating an intent to remain in the new state and an intent to abandon a former domicile. These are harder to prove than physical presence, and there is no one factor that tax authorities consider conclusive. Given that Jack remains in Georgia, Anne will likely have to work especially hard to prove her intentions, but doing so is not impossible. Potential steps might include moving her voting registration and voting in local elections; changing the address connected to her personal bank and investment accounts; changing her driver’s license, car license and registration; establishing relationships with professionals such as doctors or accountants in Florida; or updating any professional licenses she might hold. While no one action will make or break a domicile claim, taxpayers are wise to offer as much evidence as possible to tax authorities.

If Anne is in a position to make a convincing argument for Florida domicile and doesn’t trigger statutory residency in Georgia, she may not need to file a Georgia state income tax return at all. (If she has income sourced to Georgia – or any other state – she will still need to file a return there as a nonresident.) Assuming Anne files as a nonresident or does not file in Georgia at all, Jack will need to file his state return as “married filing separately,” even if he and Anne file a joint federal return. To do this, Jack will likely need to prepare a mock “married filing separately” federal return if he is preparing his own taxes. He will not file this mock federal return, but will use it to prepare his state return so that only his income and his half of the federal deductions are included.

In some cases, the resident spouse may still want to file a joint return, in order to secure more favorable rates, or particular credits or deductions. However, certain states require spouses living in different states to file separately. It is best to consult a tax expert about the most beneficial way to file if you are unsure, but at a minimum, you should make sure you know what your home state legally requires.

You may not be able to avoid filing for both spouses, regardless of residency concerns, if either of you are domiciled in a community property state. Such states may require you to share and then split family income evenly. If either spouse lives Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington state or Wisconsin, both individuals should take special care to understand the rules. This may be a case where you are better off consulting a tax professional; at the very least, the situation will require careful research.

If either spouse must file as a nonresident, either because of community property rules or to report income sourced to the nonresident state, couples should also check for any reciprocity agreements between the states in question. Some states have agreements that allow workers to pay taxes only where they live, not where they work, which can be valuable when tax rates vary significantly. Whether such agreements apply will depend on a couple’s particular situation, but it is important to make sure you know what options are available.

Other Tax Concerns

Wherever you live, you should be aware of particularly sensitive areas of state tax law. These matters will be specific to the state or states involved, but can end up being costly if you navigate them incorrectly.

For example, in Anne and Jack’s case, the couple will have to take care if Anne plans to claim a homestead exemption on her Florida residence. Because the exemption is a valuable one, Florida tax authorities tend to take fairly aggressive positions as to who is eligible to claim it. Florida allows only one homestead exemption, either inside the state or elsewhere, per individual or “family unit.” In a 2016 court case, a wife claimed an exemption on a home she solely owned in Florida, while her husband claimed a homestead exemption for a home he solely owned in Indiana. Each spouse was a legal resident of the state where they claimed their respective exemption. However, the courts found that because the couple comingled their finances, the wife was receiving the benefit of her husband’s exemption, even though she did not jointly own his Indiana house. Therefore, instead of claiming homestead exemptions in both states, Jack and Anne likely will need to work out which exemption is more valuable and forgo the other one.

Especially for long-term separations, you may also need to consider the potential impact on your estate planning. While any plans based on the federal gift and estate tax need not change, some states impose their own estate or inheritance taxes. Jack and Anne are lucky; neither Georgia nor Florida imposes such a tax. But 12 states and the District of Columbia impose estate tax, and six states impose an inheritance tax. (Maryland has both.) Washington state levies an estate tax and is also a community property state, which could complicate planning even further. It is smart to discuss your plans with your attorney, your financial planner and any other professionals you have involved in your estate plan to keep them up to date with your dual residency. They can warn you about any potential issues ahead of time and suggest methods for working around them if possible.

Couples sometimes must make hard decisions, and these can often include the choice to live apart for a couple of years, or even longer. But with some thoughtful planning, their finances don’t need to become one more source of stress in navigating a long-distance marriage.

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After The Storm, Part One Thu, 13 Sep 2018 13:00:12 +0000 Claiming insurance after a storm can be a lengthy slog – and getting a check doesn’t mean the money is yours to spend.
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hurricane-damaged buildings in Everglades National Park
Damage to the Everglades National Park's Gulf Coast District from Hurricane Irma.
Photo courtesy the National Park Service's Eastern Incident Management Team (Eastern IMT).

As millions of Carolinians can attest, you get a sinking feeling when a catastrophic storm is bearing down on your home, and there is nothing you can do except hunker down or get out of the way.

I know this from recent personal experience, although my experience is nothing like the misery that so many have suffered from the brutal storms of the past two years. Don’t waste any pity on me. I offer my own story only to help others deal with some of the frustrations and red tape that will inevitably come after the storm has passed – and also to offer some suggestions for legislative changes that could make it easier for property owners to put things back in order after future storms.

I planned to post this column this week long before Hurricane Florence set its sights on the Southeast coastline. The timing is just a sad coincidence.

My wife and I own a vacation home near the beach in northeastern Florida. We suffered considerable damage when Hurricane Matthew passed just offshore in October 2016, and then even more damage when Irma raked her way up the state one year ago this week.

Most of Matthew’s destruction came from water. Once property owners were allowed to return to the evacuated shoreline, I discovered that the dunes that formerly stood between our home and the beach now were sitting, three feet high, in my driveway, complete with anxiously skittering crabs. About 18 inches of salt water had intruded in the garage, signaling a slow demise for our water heater. The outdoor heat pump and air conditioning compressors were ruined, and the deck needed shoring.

Regular homeowners insurance covered none of this carnage. Fortunately for us, the home’s living space was elevated above the garage and was untouched. We have federally sponsored flood insurance, but this only covers the building and contents – not the excavation of tons of sand, or the restoration of landscaping beneath. Our damages were in the tens of thousands of dollars. The flood insurance reimbursement for the air conditioning and water heater was $1,231 after deductibles.

Then came Irma, which passed west of our town – well inland from us – but which nevertheless produced about 12 hours of tropical-storm-force winds directly off the ocean. There was much less storm surge; when I returned to the house (exactly one year ago today), I found less than a foot of sand on the property. Still, it was enough to wreck all the newly restored landscaping. And Irma added to the mischief by peeling sections of siding off the house, and by blowing out a vent cover so rain could pour into the attic. I had an “uh-oh” moment when I spotted the missing vent cover from outside. Sure enough, I found that the rain had caused the ceiling to collapse in an upstairs bedroom, ruining the wood flooring below it as well.

Because the damage to the structure was caused by wind rather than flooding, my homeowners’ policy was applicable, and I was eventually paid – but it took 11 months, five field adjuster visits, two checks and one lawsuit before everything got settled. Despite the considerable aggravation, I am very fortunate. I could afford to hire contractors without waiting for the insurance company to pay my claim. This allowed me to get a head start in the race to secure scarce labor and materials. Aside from the one damaged bedroom upstairs, the home was perfectly habitable once my indomitable landscapers dug me out (again). It was not my full-time residence anyway. Most people are not nearly so lucky.

It turned out that extracting money from the insurance company was just the first challenge. Next I had to get the banks that hold a security interest in the property to let me cash the checks. I will write about the banks tomorrow. For now, with Florence threatening to cause devastation from the coastline to the Blue Ridge and maybe beyond, I want to offer a little advice to folks who will soon be dealing with many of the same issues I faced after Matthew and Irma.

Start by making sure you have a reliable mobile device with a good data plan. Ideally, you should be able to share your phone’s internet with another device, such as a laptop. Cell towers tend to perform pretty well during storms, and they come back online quickly after they are knocked out. Cable and other landline internet service can take much longer. The first thing I did last Sept. 13, once I got back to my property after Irma, was get onto my insurer’s website to file a claim. Using my laptop with my phone’s data service made this much easier.

Take pictures of everything, and save every receipt for money you spend as a result of the disaster. You can never have too much documentation.

Keep a record of every contact with the insurer and with every adjuster who visits your property. Many adjusters are freelancers. When a major disaster strikes, they will flood into an area from all over the country to meet the demand. Still, they can be overwhelmed. It took three weeks just for me to get the first adjuster to visit my property after Irma. Keep the adjusters’ names and phone numbers. They may become witnesses if you get into a fight with your insurer.

Contractors and cleanup specialists will also flood into an area following a disaster. Always deal with someone who is licensed and insured. When possible, use someone local – and ideally, someone you regularly work with or whose reliability can be attested to by someone you trust. Local contractors will naturally take care of their regular customers before serving foul-weather friends, who are apt to abandon them once things settle down.

Above all, don’t endorse or deposit an insurance settlement check labeled “full and final,” or with similar language, unless you are satisfied that the payment is, in fact, full compensation for the damages (less deductible) that should be covered under your policy.

It took 10 days for my insurance company to acknowledge receiving my claim after I reported the damage from Irma. Two more weeks passed before an adjuster could visit me, and another two weeks before she filed her report. Then things got weird.

Field adjusters send their notes to an “inside adjuster,” who adjudicates a claim. My inside adjuster called me on Oct. 21 to say she was processing the report. But the next day a different field adjuster called to schedule another visit to the property. The inside adjuster then said the first adjuster’s report was not in their computer, and that the first field rep no longer worked with that insurance carrier.

The damaged flooring upstairs posed a problem because it was made from a pecan wood product that is no longer manufactured. In mid-November the insurer sent another adjuster – the third field agent to handle this claim – to take a sample. In the meantime I replaced the flooring with a maple product of a similar grade. In the end, the company allowed about the same amount as I spent on the replacement, so that turned out not to be an issue.

The siding was a different story. The first two field adjusters, and my contractor, agreed that all siding on the north and south sides of the building needed replacement, because it was not possible to make spot repairs that would match the undamaged portions. They were not even able to identify the original product. But the insurance carrier balked and sent yet another field adjuster – that’s number four if you’re counting – to collect a sample. Later, the carrier would claim that a laboratory had identified the damaged siding, although they never backed that up with any sort of report. I was offered far less than the $20,000 or so it cost to replace the material on two sides of the house.

In late December, more than three months after the storm, the inside adjuster sent me her report. By my count, the covered damages should have been around $32,000, leaving me entitled to about $25,000 after the hurricane deductible. The company granted $11,600. A check arrived in January. It did not have any “full and final” language and the company was still willing to negotiate over the disputed items, so the money was available to me with the bank’s approval. (Tune in tomorrow.)

It soon became apparent that the carrier had no intention of paying for the appropriate siding replacement. Florida offers a mediation process, which insurers will push customers to use. But Florida also has a statute, F.S. 627.428, that makes insurers liable for legal costs when they improperly deny a valid claim. That makes hiring a lawyer a no-lose proposition if an insurer fails to hold up its end of the bargain.

I found a good insurance lawyer in Miami (John Lanpher III of the Morgan Law Group). I hired him in January and told him my goal was to take my problem and make it his. He agreed to this offer. John’s first step was to send still another adjuster (number five) to reinspect the home and identify a few other claimable items that I had overlooked. He then filed suit on my behalf against the carrier, knowing that he would end up negotiating a settlement with the carrier’s attorney.

That is exactly what happened. In April the insurer agreed to an additional $18,000 payment on top of the original $11,600. The lawyer’s fees were paid separately. Even so, we did not actually receive that money until August 13, exactly 11 months after I first filed my claim.

Tomorrow’s post will explain the four-month delay.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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]]> 0 Private Equity For All Wed, 12 Sep 2018 13:00:18 +0000 With fewer companies going public, should the SEC allow more people to invest in companies that are still private?
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yellow Caution tape detail

Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth.” If the Securities and Exchange Commission isn’t careful, it may be investors who end up with a black eye.

SEC Chairman Jay Clayton said in an interview with The Wall Street Journal that the commission wants to make it easier for individual investors to invest in private companies such as Uber or Airbnb. The SEC will issue an extensive report known as a “concept release” in coming months, a process that will include seeking public comment on its proposed changes. But Clayton seemed to be eager to get changes in place as soon as possible.

Under Clayton’s guidance, the SEC has turned its attention to the shrinking number of public companies in the United States. In part because going public is an expensive and invasive endeavor, many successful ventures resist doing so for as long as possible, and the number of companies listed on U.S. exchanges is currently at its lowest point in almost 50 years. Clayton has vocally encouraged more companies to go public, but now he seems to be prepared to try a new tactic: letting more people invest in companies while they are still private.

Right now, not just anyone can invest in a private company. Most private companies can only sell stock to investors that the SEC considers “accredited investors” or “qualified purchasers.” The current definition of a sophisticated investor of either type is based on a straightforward criterion: money. The SEC defines an accredited investor as an individual with a net worth of at least $1 million or an annual income of $200,000, or $300,000 for married couples, for at least three years. A qualified purchaser is usually an individual or a family business with more than $5 million in investments, though other entities like trusts can also achieve the designation.

The idea is that big spenders are more likely to have experience, access to expert advice or both, so they can avoid making a major mistake through ignorance. But the values involved are necessarily arbitrary. Is an individual with $4.5 million in investments necessarily less qualified, or someone with an annual income of $199,000 automatically less worthy of accredited status, all else being equal? Of course not. In this sense, making the qualification to invest in private equity something other than an investor’s wealth is worth considering.

The question becomes what qualifications the SEC will use instead. We make people take a road test before we issue a driver’s license. Some sort of exam or licensing process before letting investors enter the more dangerous waters of private equity does not seem outrageous. In fact, Congress has already taken steps in this direction. The House passed the JOBS and Investor Confidence Act in July; if the bill makes it into law, it will expand the definition of an “accredited investor” to include registered brokers, investment advisers, and those with “demonstrable education and experience” relating to investments. The SEC, too, has said it may expand accredited investors to include individuals with relevant professional licenses or education.

On the other hand, if the SEC’s new requirements are flimsy – say, having an investor sign a waiver stating that he or she understands the risks – the commission could inadvertently create a free-for-all environment in which it is almost inevitable that some individuals will lose a great deal of money.

In order to have an initial public offering, a company must comply with various disclosure and transparency requirements. Private companies do not have to meet these same guidelines, which is why their shares are only available to investors who, presumably, have the resources and experience to properly evaluate the risks involved in a more opaque investment. Funds would offer greater built-in diversity, and thus less risk, than investments in individual companies, but would do nothing to mitigate the lack of transparency.

Private companies can and do go under, even those that were once rising stars. The Wall Street Journal reported that Theranos Inc. will soon dissolve, completing the startup’s long and public fall from grace. The blood-testing enterprise was once valued at more than $9 billion; many touted its founder, Elizabeth Holmes, as the next Steve Jobs, a perception Holmes actively cultivated. But journalists, and eventually investors and regulators, questioned Theranos’ underlying technology. Holmes and former president Ramesh Balwani were indicted on multiple counts of fraud in June. Theranos failed to find a buyer and recently breached the terms of a $65 million loan, and it now plans to pay unsecured creditors its remaining cash before closing its doors. Equity investors will get nothing.

In an opinion column for Bloomberg, Stephen Gandel argued that while hype for trendy startups can easily get out of proportion, rules restricting who can actually invest in them has limited the economic damage of such misplaced optimism. “The private market’s ability to limit hype and investment is a feature, not a bug,” Gandel observed. Done right, changing the rules about who can invest in private firms could allow access to investors with a good understanding of the associated risks, even if they have less cash. Done carelessly, it could be a recipe for a serious investment bubble, or an invitation for fraudsters to operate on a greater scale.

The rules that limit private equity investment to sophisticated investors aren’t perfect, but they exist for a reason. Congress created these rules in their basic form as a response to the Great Depression, before which most investors and firms were free to do as they pleased without oversight. Before moving forward, Clayton should consider who he is really trying to help: mom and pop investors or large private companies that need fresh capital. And the SEC as a whole should think carefully before removing any investor safeguards.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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]]> 0 The Post-9/11 Generation Tue, 11 Sep 2018 13:00:02 +0000 People now entering the workforce have no memory of the events that etched today’s date into the national consciousness.
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detail of 9/11 Memorial, with white rose
9/11 Memorial, New York City. Photo by M!G Photography.

The rest of my career will be spent working with people who are too young to remember anything at all about Sept. 11, 2001.

My youngest colleague, whom we just hired as a part-time assistant in our Fort Lauderdale, Florida office, was only two months old that day. I have worked with entertainers who were not even born at the time, and others who were preschoolers.

I suppose today’s young people relate to 9/11 much the way I relate to Dec. 7, 1941. I always note the date but I have never shed a tear over it. Because I was born in 1957, it happened to someone else. Gettysburg and the Titanic happened to someone else. I sympathize with victims of those mass tragedies, but there have not been many moments in my life when I really felt those events. Those moments only come when I encounter a gravestone or an artifact that turns “someone else” into a flesh-and-blood fellow human being.

But when I go to the Vietnam Veterans Memorial in Washington, D.C., or to the 9/11 Memorial & Museum in Manhattan, the sadness is as alive as the relatives who stand alongside me. The crowd always contains children who lost parents, spouses who did their best to carry on, siblings who could not grow old with a brother or sister, and a shrinking supply of fathers and mothers who never filled the chasm that was opened. When a middle-aged woman leans on the wall in Washington while rubbing a copy of the name of her lost father, it is an act so intimate that observing it makes me feel as if I am invading her privacy, right in the middle of the National Mall.

Dates like Dec. 7 and Sept. 11 have their familiar rituals – the tolling of bells, the reading of names, the laying of wreaths, the official ceremonies and condolences the nation offers to the survivors. We retell the stories of suffering and sacrifice and heroism, so the next generation grows up knowing what happened. Knowing something doesn’t translate automatically into feeling it, however. It comes more easily for me when I translate it into more personal terms.

My father was 15 when Japanese forces attacked the U.S naval base on Oahu, Hawaii. As soon as he turned 17, in May 1943, he enlisted in the Navy. He was practically the smallest recruit in his basic training class in Newport, Rhode Island. He saw action offshore at Normandy, then transferred to the Pacific theater. In between those two assignments, he met my mother at a Halloween party in New York City in 1944. My existence is truly a matter of chance.

My brother and I were raised in the Bronx. After attending college in New England, my brother became a police officer in Connecticut. He never sought to return to New York City, which is why he was about 100 miles from the World Trade Center on 9/11. The fatalities at Ground Zero that day included 23 city and 37 Port Authority police officers, along with 343 firefighters and paramedics.

My niece was born eight months later. My brother, who retired after 27 years on the Middletown police force, has recently enjoyed taking his daughter on her first college visits. There are other first responders’ sons and daughters who were born around the same time as my niece, but who will not get to tour campuses with their parents. We have watched these children grow up on television every year, reading the names of parents who will never see them go to college, find a job, get married or start a family.

Some of my young friends may not even know that Rudy Giuliani was not always Donald Trump’s lawyer. On Sept. 10, 2001, he was the mayor of New York City, and not very popular in many circles. He was perceived as arrogant and divisive. He was especially unpopular in minority communities. These facts will probably strike them as unsurprising.

But on Sept. 11, he became “America’s mayor.” It may seem hard to believe now, but in that brief period after 9/11, Democrats liked Giuliani just about as much as Republicans. He guided the city, and to some extent the country, compassionately and efficiently through the crisis and the early stages of the recovery.

The people who are too young to remember 9/11 are also too young to remember a time when it did not seem we were always vilifying someone who doesn’t look, vote, sing, think, salute the flag or otherwise act the way we think they should. I hope they never live through anything like 9/11, but I think those of us who did can pass along something worthwhile from our experience. For today, at least, I suggest we speak a bit more softly to one another, act a bit more kindly, and bear in mind that the things that divide us are far less important than the things that don’t.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

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]]> 0 Shomari Hearn in The Simple Dollar Mon, 10 Sep 2018 15:02:09 +0000 Shomari Hearn suggests that individuals with significant earning power consider using umbrella insurance to protect assets against liability claims.
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The Simple Dollar, September 10, 2018
Shomari Hearn suggests that individuals with significant earning power consider using umbrella insurance to protect assets against liability claims.

The post Shomari Hearn in The Simple Dollar appeared first on Palisades Hudson Financial Group.