EXECUTIVES’ MITIGATION OF PERSONAL FINANCIAL RISKS

G. A. Finch interviews Charlie Russ, a financial representative with Northwestern Mutual .

FINCH:     Charlie, what are some of the strategies you would suggest to clients to manage the impact of taxes today and for the balance of their lives?

RUSS:     If a person has the option of a ROTH IRA or a ROTH contribution to a 401k, we’d advise to take advantage of those options.  Trouble is, many people make too much money and exceed the IRS set income limits for contributing to a ROTH, and very few 401k plans offer that option.  Assuming folks are maximizing their pretax

CHARLIE RUSS

contributions to their retirement plans, the another approach is to use a deferred annuity. The tax deferred treatment of any accumulation can help manage the impact of taxes.

FINCH:     When we met last, you told me about strategies that could materially enhance clients’ retirement distributions.  Would you mind sharing those strategies with my readers?

RUSS:     The key to optimizing retirement distributions is having assets funded in several buckets, and preferably most of those buckets are tax deferred. Anybody retiring now or in the near future is in a panic.  They thought they’d be way ahead in the stock market from where they are now.  They may be in a position to feel as if they’re forced to sell equities at a loss and move to bonds, (as a rule) because they no longer can accept the risk of another 40-60% collapse in the market.  Moving away from equities to bonds affects the long-term yield and can create a very negative tax consequence in the taxable portfolio.  We’re not talking about proper asset allocation within a stock portfolio.

Furthermore, one standard in the financial services industry, sometimes called the safe withdrawal rate, states that one may only draw down 4% of one’s assets if they expect to never run out of money for 30 years.  This assumes a growing market, which we have not faced in 10+ years!  The traditional wisdom of 4% being considered safe is simply not accurate in today’s environment.

FINCH:     We have talked about six risks associated with retirement:  Longevity Risk, Market Risk, Inflation Risk, Tax Risk, Health Care Risk, and Long Term Care Risk.   What kind of strategies have you suggested to clients to mitigate each of these risks?

RUSS:     Again the objective of our practice is optimizing retirement distributions while mitigating risks our clients face.  Therefore it’s critical to address these risks long before retirement; otherwise it is unlikely you will be able to fully mitigate the risks.

Annuities address longevity risk; long-term care planning addresses the financial impact of a long term care event.

Broader asset allocation across accumulation vehicles not in the stock market  is one strategy to address Market Risk;

Running retirement analyses with higher inflation rates and incorporating lifetime incomes through annuities and whole life insurance can help identify a strategy for addressing Inflation Risk;

Placing assets in tax deferred tools with tax free distributions is another way to manage the impact of taxes;

Budgeting for healthcare costs is important to offset healthcare costs; we estimate $1000 per month appreciating with inflation be written in to a retirement analysis in addition to lifestyle requirements;

Addressing potential long-term care needs is prudent unless one can be self insured, which would require considerable assets.

FINCH:     What are your thoughts about handling potential future estate tax liability?

RUSS:     The IRS announced that the estate tax exemption will be raised from $5,000,000 to $5,120,000 in 2012. That’s the good news. The bad news is that it returns to $1,000,000 on 1/1/2013 when the Bush tax cuts expire. Many are gifting the maximum with the thought there will be no “claw back” of prior gifts.  You may not wish to gift that today, for obvious reasons. However, I believe it’s important to consider the need for permanent insurance to cover estate taxes.

What these changes mean in plain English is that all assets, north of $1MM, including real estate and all investments remaining inside the estate at the 2nd to pass will be taxed at ~50% between state and federal taxes.  Those taxes will be due 9 months from the date of the 2nd to pass and will be payable with or without insurance to fund.  You could place all the insurance in an irrevocable trust and avoid estate taxes on 100% of those proceeds.

And, there are some tools which can permit a client to put potentially a substantial amount away on a tax deferred basis keep those assets in the estate and still provide for life insurance to protect against estate taxes.  If you’re worried about estate taxes but cannot afford or choose not to fund an irrevocable trust today because you might need your own money in 50 years, this is a very relevant conversation to have.

FINCH:     Do you have any thoughts about what if any role insurance products might have in seeking creditor protection?

RUSS:     We have a very strong practice among doctors and other professionals who have personal liability from malpractice or on personal loans or other business obligations.  Permanent life insurance is purchased primarily for the death benefit.  Over time, it accrues cash values which are generally protected, similar to the equity in a primary residence or assets in a retirement account from the claims of creditors in Illinois.  Keep in mind creditor protection varies from state to state. Of course one would always need to consult with one’s attorney concerning the applicability for individual circumstances.

Another  important idea around wealth accumulation is contractual guarantees.   The cash values within a whole life contract with Northwestern Mutual are guaranteed by the good faith and credit of the company to never go down year to year. It’s common for people today to be less concerned with the return “ON” capital vs. the return “OF” capital!!!

FINCH:      Charlie, whole life insurance sometimes gets a bad rap in the personal finance press as not being a smart financial investment as compared to term life insurance.  Could you give us your take as to why whole life insurance can be advantageous to an executive or professional?

RUSS:     It’s not a panacea and it has its risks.  We go out of our way to explain and articulate those risks.  We only put whole life plans in place for clients where those inherent risks are minimized.  That said, the truth is that most people need and want life insurance.  Most need and want to grow their wealth, which the cash value build up of permanent life insurance can help accomplish.

The job of our team is to design a financial strategy for our clients which meets their needs today and through their lifetime.  The objectives are most often to minimize or eliminate risks and to accumulate wealth in the most tax efficient tools available.  Your readers should be asking themselves these simple questions.  Do you have a distribution strategy?  What asset will you sell first to try to optimize the yield and manage the impact of taxes on your entire portfolio now and through your lifetime?  If you don’t have an answer, we can work with you to get it answered and identify a plan designed to achieve all of your objectives discussed in this interview.

Charlie Russ

Financial Representative

Northwestern Mutual

312-443-7382

web site:  www.charlieruss.com

 Northwestern Mutual (NM)  is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Charlie Russ is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM. Registered Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM,broker-dealer, member of FINRA and SIPC. There may be instances when this agent represents companies in addition to NM or its subsidiaries.

LEGAL, INVESTMENT AND TAX NOTICE: THIS INFORMATION IS NOT INTENDED TO BE AND SHOULD NOT BE TREATED AS LEGAL ADVICE, INVESTMENT ADVICE OR TAX ADVICE.  READERS, INCLUDING PROFESSIONALS, SHOULD UNDER NO CIRCUMSTANCES RELY UPON THIS INFORMATION AS A SUBSTITUTE FOR THEIR OWN RESEARCH OR FOR OBTAINING SPECIFIC LEGAL OR TAX ADVICE FROM THEIR OWN COUNSEL AND TAX ADVISORS.  THIS POST DOES NOT ESTABLISH AN ATTORNEY-CLIENT RELATIONSHIP AND DOES NOT CONSTITUTE AN ENDORSEMENT.

THE AGE OF ENTREPRENEURS – IT’S NOT WHAT YOU WOULD EXPECT

By G. A. FINCH

I serve on an advisory board of a small company and the president of this company asked me to attend her inauguration as a member of the second cohort class for Goldman Sachs 10,000 Small Businesses in Chicago.  This is an initiative driven by Goldman Sachs and its local partner, City Colleges of Chicago, to generate economic growth and job creation through small businesses by facilitating their access to business education, financial capital, and business support services.

Age Is Just A Number

As I watched the recently graduated first cohort members speak about their exceptional experiences in the program and the second cohort members speak about their dreams, aspirations, and ambitions, I was struck by the ages of these eager beaver entrepreneurs.  Yes there were a few twenty-somethings and thirty-somethings, but a large number of them were middle and advanced middle age.  Some had been in business for 35 years and some even had MBAs.

Judge George Leighton

What did this plurality of older entrepreneurs show me?  It shows me that enthusiasm, energy, motivation, and achievement cannot be limited by age.  It reminds me that when you stop growing and learning, then you are in decline.  You are done. Asian and African cultures put a premium on age and wisdom.   In the U.S., we have become defined and intimidated by a youth-obsessed culture.

Continuous Learning

The fact is that you do not really hit your stride until middle age in terms of competence, confidence and knowledge.  Middle age and older are the stages in life when you begin to reap the dividends of your experience and skill sets.  Most importantly, though, is to continue to broaden your experience and expand your skill sets.  You must always be in a learning mode.

My mother exemplifies the learning mindset in that she went back to college in her late fifties and she is always intellectually and socially curious.  I also saw this energetic mindset when I recently attended the dedication of a courthouse in honor of retired federal Judge George Leighton, who practiced law until he was 98, and will turn 100 in October of this year.  Judge Leighton still plays chess every day.

Maturity As An Asset

There is so much human capital in older executives, entrepreneurs and professionals that can and needs to be continuously exploited.  Our nation cannot afford not to use this older human capital to leverage and grow our economy.  I am comforted to see that older hands are helping to drive the entrepreneurial spirit in our small businesses.  I will be as delighted to see when more older, experienced hands remain in the executive and professional suites using their talents to push our economy forward.  I am glad my own law firm embraces and practices utilizing older talent – that philosophy has helped our firm thrive.

No matter how old we are, as long as we can do it, we should be in “the hunt” for business and professional development, success and achievement.

LINKEDIN REVISITED

BY G. A. FINCH

I have been using LinkedIn for about three years with mixed results.  I have advocated that executives’ using LinkedIn is critical to maintaining visibility in an increasing virtual world.  People do indeed research others on the internet and having a website and a LinkedIn bio is important to provide positive and relevant information about your business, organization or profession.  Executive and corporate recruiters definitely use LinkedIn and are probably the main generators of revenue streams for the LinkedIn business model.

LinkedIn Keeps Growing

More and more people are signing up as evidenced in more and more requests that I receive from persons who wish to become one of my connections.   I now have 600 connections and counting.  This large number does not make me feel either popular or especially connected. Many of the requestors I do not know well and there are several that I do not know at all.  That’s okay.  I am again an open networker, so I rarely decline a request to connect.

Mixed Bag

I find that I do not have time to keep up with all the daily updates, and I would guess that maybe one out of  50 updates I do find interesting.  Not that my own occasional updates are terribly compelling or interesting.  My updates usually involve telling folks about what kind of legal matters that I am working on.

The affinity groups are uneven in their being current and substantive.  Some discussion groups are better than others.  The biggest problem: Who has the time to check in and keep current?  I know that I suffer from time scarcity and lingering on LinkedIn can’t be a priority for me.

Positives

I do like the business news feed that is on my home page, and I actually try to read the articles when I am there.

LinkedIn also provides a portal to my blog, which is convenient for its distribution.

The best feature about my “connections” is that it keeps me current on people’s job changes and e-mail contacts.

The introductions via connections are awkward and they seem more personable to accomplish via private e-mail exchanges between the interested parties and their mutual connection.

You need an enhanced paid account in order to do direct in-mail communications with persons to whom you are not connected.  In-mail communications from strangers may come across as intrusive.

I am not negative about LinkedIn.  I do think that it has not lived up to either its promise or potential.  The key thing is for LinkedIn to develop more content to make it attractive as a destination website.  Interactivity will have to revolve around compelling common interests like a cause, an alumni group, or a trade or professional group continuing-education matter.

Must Keep Using

Should you forgo LinkedIn?  I think not.  You want to make it easy for potential customers, clients, employers, recruiters and business partners to research you.  LinkedIn, through internet search engines, has become a primary source to do that.  As I have said in previous posts, it’s your free billboard.

TERMINATION FOR CAUSE: MORAL TURPITUDE

BY G. A. FINCH

Employment contracts may have a termination-for-cause provision.  This kind of provision may include the term “moral turpitude.”  The following are two different examples of a termination-for-cause definition clause containing moral turpitude:

  • Employee’s conviction of, or guilty plea or nolo contendere plea to, or confession of, a Class A-type felony or felony involving moral turpitude.
  • The Employee’s conviction of, or plea of guilty or nolo contendere to, (a) a felony (other than traffic violations), (b) a crime involving moral turpitude, or (c) a criminal act which adversely affects the business or reputation of Company, its parent or its subsidiaries.

These typical for-cause termination clauses that the use term “moral turpitude” do not define the concept.

The term turpitude means vile, depraved, shameful, or base.  It has a grave meaning, and even the sound of the word suggests a perverseness.  You add the word “moral” before “turpitude” and it suggests an egregiously bad act or conduct.  While we have a textbook definition of “moral turpitude” as being reprehensible conduct, what can it mean in practice?  Who knows?  However, an executive should care.

The term is too vague and subjective.  Crimes come in varying degrees of wrongdoing.   Felonies involve varying degrees of criminality.  Some are worse than others. In order to avoid arbitrary results and inconsistent employer or judicial application, we ought to discard this hidebound term altogether.  When representing executives or organizations seeking to enter into employment contracts, I discourage the use of this term.  I prefer an itemized list of causes for termination and plain language like the following clause:

  • Employee’s commission of any act (i) involving (A) misuse or misappropriation of money or other property of Corporation or (B) a felony or repeated use of drugs or intoxicants; or (ii) which disparages the business integrity of Corporation, its parent Corporation or subsidiaries or affiliates or their officer directors, employees or customers, and materially and adversely affects the business reputation of Corporation.

This clause makes it readily understandable, among other acts, what kind of crime would be cause for termination, i.e. a felony. In the moral turpitude clauses above, the term crime or felony is modified by the term “moral turpitude” and, consequently, makes the felony or crime more vague and difficult to determine its applicability.

The use of term moral turpitude is anachronistic and should be eliminated from employment contract termination-for-cause provisions.

Copyright © 2012 by G. A. Finch, All rights reserved.

 

REINVENTION

By G. A. Finch

In the first few days of last year (2011), I wrote a post titled “Resilience.” The post was inspired by the life story of a masseuse at a spa that my wife and I visited. In short, the terrible challenges which she had overcome and her upbeat, “can do” perspective on life was a clarion call to me that despite the economic pain and suffering the country had endured since 2008, the trait of resilience was essential to a person’s recovery and success.

In this new year, my wife and I went to another spa and my young masseur’s story of his work trajectory revealed his reinvention and adaptability. He was from the Detroit area and had never finished college. He had picked up some IT skills and got a job working for Accenture in Chicago doing automated payroll process consulting. He felt Chicago offered cosmopolitan excitement and economic opportunity that Detroit could not. He worked crazy hours and made good money. He was a very young twenty-something who did not like the work stress and office politics. When his department functions were being moved to San Antonio, he decided not to move, took a severance package, and trained to be a massage therapist. Although he likes his job and his less pressured life style, he intends eventually to go to school to become a physical therapist. It will take him five years to get a master’s degree. He knows there is job growth in healthcare. His father, a railroad retiree, does not understand his desire to change careers every few years.

This kid represents the realities of the new economy and alternative career paths. He knows instinctively that he has to keep reinventing himself and be mobile. He does not resent this fact and this is all he has ever known in his short career.

He is not an executive or highly educated professional, but his situation is instructive. We must all reinvent ourselves and become adaptable in order to continue to be useful and relevant in the marketplace. If a person remains static, he will eventually be out of a job or lose his business.

I am glad that twenty years ago, as the result of my part-time appointment as an Illinois Human Rights Commissioner, I became involved in employment legal matters even though I had been a business, real estate and construction attorney. So as the real estate and construction industries cratered in the last recession, my long ago diversification into executive employment contracts has benefited my law practice. This “reinvention” and my longtime receptivity and relatively early adaptability to technology like laptops, the internet, and social media have kept me relevant and in the game over the years. This all, to be sure, is the result of a combination of serendipity and purposefulness.

My take away from the kid is that reinvention is constant and seems to be accelerating.This whole phenomenon reminds me of one of my father’s favorite admonitions: “Don’t rest on your laurels.”

 

 

Copyright © 2012 by G. A. Finch, All rights reserved

EXECUTIVES’ EXCEPTIONALISM: AMERICA IN NEED OF SUPERHEROES

BY G. A. FINCH

 

Where Do We Go From 2011?

2011 has been a mixed year with the economy technically growing but the employment rate stubbornly ranging from eight to twelve percent depending where one lives in our great country.  We now have terms like “Occupy Wall Street, Occupy Chicago, and Occupy Oakland” that now have more to do with notions of income inequality, unemployment, and financial industries’ excesses and bailouts than with any physical possession of geography.   Sovereign debt defaults keep looming making for nervous financial markets and for doomsday scenarios by pundits.  Americans are also war weary.

For too many Americans, Reality TV personalities, Dancing with the Stars winners, and American Idol contestants have more street cred than poets, philosophers, physicists, farmers or clergy, let alone business people and economists.

Congress seems incapable of reasoned compromises.  The president said, “What you see too often in Washington and elsewhere around the country is a system of government that seems incapable of action. You see a Congress twisted and pulled in every direction by hundreds of well-financed and powerful special interests. You see every extreme position defended to the last vote, almost to the last breath by one unyielding group or another. You often see a balanced and a fair approach that demands sacrifice, a little sacrifice from everyone, abandoned like an orphan without support and without friends.”  No, President Obama did not say that.  That quote was from President Jimmy Carter from his infamous “malaise” speech of July 15, 1979.  Sounds eerily contemporary does it not?

What Else Is New About America?

Tough times, no doubt.  Is America new to tough times? Of course not.  We endured the Revolutionary War, the Civil War, two World Wars, the Great Depression, the Civil Rights struggles and more.  Will prosperity return?  Yes, of course.

Reinvention, Re-imagination, Re-whatever

But our recovery will be uneven and America must reimagine its economic and social structures to accommodate those segments of the population that cannot be meaningfully employed as low skilled, un-automated jobs continue to disappear.   New kinds of jobs that we have not even thought of and that require unheard of skills will continue to emerge to both create and fill the demands of the marketplace.

Atypical and Exceptionalism

What does all this have to do with the typical executive, professional, or entrepreneur?   It has nothing to do with the “typical” and everything to do with the “exceptional” executive, professional, or entrepreneur.  Let’s call them the exceptional ones.  Superheroes of sorts.  I saw the movie Captain America last night.  In that fantasy story, a superhero was created with new technology to overcome the heretofore unimagined challenges of World War II.  After the movie, my little son ran upstairs, donned his Captain America costume and came back down to vanquish America’s imaginary foes, in this case his villainous stand-in was his dad.

In adversity, there is often opportunity.  The resourceful, inventive, relentless and curious executives, professionals and entrepreneurs can lead the way.  The exceptional ones must learn new skills, expand or change their networks, be comfortable with rapid and continuous change and alter their ways of thinking.  Apple entrepreneur Steve Jobs personified what we must become.  The iPod changed the way we consume music as the iPhone changed the way we communicate and access information.  What changes will the exceptional ones birth and implement?

It Is About Business and More

These superheroes must also be compassionate and inclusive.  The one per centers should not be penalized for performance or their good fortune.  Neither should the 99 per centers be penalized for macro-economic forces beyond their control or for their misfortune.  The trick for the exceptional ones is to expand opportunities for the middle again so we do not have such extreme disparities in wealth.

Extraordinary executives, professionals, or entrepreneurs are not solely limited to their efforts in private enterprise, but also can serve the enterprises of government and not-for-profits.  All sectors can benefit from the know-how and grit of these kinds of executives, professionals and entrepreneurs.  Our country needs their energy, discipline and imagination to propel us through the second decade of this millennium.  We can view them not so much as captains of industry but as real captains of a reinvigorated America.

Go forth superheroes.

THE EFFICACY OF HOLIDAY GREETING CARDS

I finally sent my holiday cards last week.  Despite my law firm’s new sophisticated contact system, ContactEase, my getting my holiday cards out has only gotten slightly easier and a little less time consuming.

Every year I face the same questions: Who should get a card? Does it matter?  Will my card even be noticed in the flood of holiday mail?  Is the time spent justified?  Is the cost justified?  Am I forgetting somebody? Am I killing a tree or two to create the paper greeting cards and envelopes?  Should I use electronic greeting cards?

I still come down on the side that the time and expense of sending cards are worth it.  It is, indeed, a pain in the neck keeping addresses current. I would guess that every year there is a 15% change in addresses arising from job changes, residential moves, and, sadly, from death.  Invariably, I will forget to include someone who should be on my list.  I am sure most of my cards get buried in the crush of holiday mail, but I do get a couple of people who will mention they got my card or will email me that they did and that they appreciate the recognition. I appreciate their acknowledgement and it makes my efforts feel worthwhile.

My main purpose for sending out cards on my business mailing list is to let people know that I am thinking of them and to stay in touch, even if it is just once a year.  A physical card is a more concrete, satisfying way to reach out to someone rather than a global broadcast of an update on Facebook or LinkedIn or an email blast.

I do not mind receiving electronic holiday cards as some of them can be quite clever and artistic.  I might even start sending them myself one day.

Ideally, I would love to be able to write a note to everyone on my list, but the time spent doing it would take me to next Christmas, and so I have to be content with just signing my cards.

Is it mandatory for an executive or professional to send out holiday cards?  It is a nice touch, but not necessary.  People will certainly remember if and how well you did something for them more than the fact that you sent them a holiday card.  A card is neither the cake nor the icing, but a nice sprinkle on the icing.

If you did not receive a holiday card from me this year and you thought you should, please pardon me and accept this post as my heartfelt holiday greeting to you and yours.

 

Copyright © 2011 by G. A. Finch, All rights reserved.