Given the current malaise in the credit markets, many private lenders have tightened standards and made it more difficult and more expensive for borrowers (both students and parents). At the same time, many families, facing dwindling personal assets and rising college expenses, are searching for strategies to pay the bill. Deciding whether parents or students should borrow to fund a college education depends on each family's individual circumstances.

Federal Student Loans -- Your First Stop

Whether the student or the parent does the borrowing, your first and best option for securing a loan is to go directly to the federal government. Stafford loans designed for students and Parent Loans for Undergraduate Students (PLUS) for parents are the most frequently used federal loans.

The key benefits of Stafford loans include:

• Low, fixed interest rates
• Income-based eligibility (indicated by data filed on the Free Application for Federal Student Aid [FAFSA])
• Repayment deferral until after graduation

Like many borrowing programs, Stafford loans present both benefits and drawbacks. On the upside, they allow borrowers to defer repayment until after graduation. Given the challenging economic climate, the federal government has announced an Income-Based Repayment Plan that caps payments for graduates whose student loan debt is high relative to income and family size. Specific criteria to qualify are available at www.studentaid.ed.gov. The cap was intended as a benefit for graduates who do not earn significant income. On the downside, Stafford loans carry annual borrowing limits that often are not high enough to cover a year of college costs.

What Parents Need to Know

Parents who intend to fill their child's college funding gap via a PLUS loan must undergo a credit check in order to qualify. Those who are deemed creditworthy can borrow up to the full cost of attending college, including the cost of room, board, and books. The interest on a PLUS loan is variable and may change annually. In addition, PLUS loans require parents to begin a repayment schedule immediately.

For students and parents alike, borrowing through the federal education loan program, as well as through private loan issuers, offers tax deductions on interest paid.

Paying for college is a long-term commitment. Determining how to cover the costs should take into consideration a family's current financial needs as well as its short- and longer-term financial goals. Be sure to talk to your financial advisor and tax professional.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

April 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver a local member of FPA.

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Investors often concentrate on accumulating assets, but how much time and energy is spent on preserving those hard-earned assets for future generations? Not nearly enough. Have you considered any of the following strategies to help pass along more of your estate to your heirs?

Nuts and Bolts of Estate Planning

Many people don't begin thinking about transferring their assets until retirement. In reality, effective estate planning is an ongoing process -- often best begun at a much younger age. At the very least, you should have a will to ensure that your final wishes are known. If you have dependent children, also consider naming a suitable guardian for them. After determining the value of real estate, cash-value life insurance policies, and assets held in retirement and investment accounts, a more encompassing plan may also be necessary.

Giving Less to the Tax Man

What can you do to avoid drastically reducing your estate to meet tax obligations? Life insurance may be a tax-efficient way of transferring accumulated wealth. Some types of policies offer current tax benefits and also reduce or eliminate taxes for beneficiaries. And life insurance may also increase the amount passed on to your heirs. Plus, it may also help owners of highly appreciated property or small businesses retain their assets, rather than be forced to sell those assets to pay Uncle Sam.

Trusts may also be appropriate, and there are many types from which to choose. A grantor retained annuity trust (GRAT), for example, allows you to transfer assets to an irrevocable trust and then receive a yearly annuity for a specific number of years. Once the GRAT is dissolved, the remaining assets pass to the beneficiaries, usually free of estate and gift taxes. Charitable remainder trusts are also popular. They can be arranged so that you -- and, if you desire, a named beneficiary -- receive tax benefits and, in some cases, income during life. What's more, the trust also benefits a charity of your choice. If appropriate, trusts are a key part of the estate planning process.

This article just scratches the surface of effective wealth transfer. Contact your financial advisor or lawyer about these and other suggestions to make the most of your assets -- for both you and your heirs.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

April 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.

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Qubes. StreetTracks. HOLDRs. Names of popular rock groups? Not even close. They're all investments called exchange-traded funds (ETFs) and many people use them to build a diversified portfolio. Maybe you should, too -- if you understand the risk/reward trade-offs.

An ETF is a basket of securities, shares of which are sold on an exchange, such as the American Stock Exchange. They combine features and potential benefits of stocks, mutual funds, or bonds. Like individual stocks, ETF shares are traded throughout the day at prices that change based on supply and demand. Like mutual fund shares, ETF shares represent partial ownership of a portfolio that's assembled by professional managers.

Types of ETFs

There are a number of ETFs, each with a different investment focus. Following are some common types of ETFs.

• Diamonds follow the 30 large-cap companies that make up the Dow Jones Industrial Average.
• Standard & Poor's Depositary Receipts (Spiders) mirror the S&P 500, an index of 500 of the largest companies in the United States. They also track select sectors of the S&P 500.
• iShares hold baskets of stocks in specific regions of the world, select countries, or sectors, or follow U.S. corporate or government bond securities. 1
• Qubes track the 100 largest businesses of the technology-driven Nasdaq Composite Index.
• StreetTracks replicate various indexes focused on sectors, countries, or investment style. 1
• Holding Company Depositary Receipts (HOLDRs) are ETFs with a twist. They usually focus on narrow, emerging sectors -- companies building the Internet infrastructure, for example -- and their baskets hold only about 20 stocks to begin with. Stocks will never be added, and over time a HOLDR's basket can become even more concentrated, as stocks that are lost due to mergers aren't replaced. HOLDRs also differ from most ETFs in that they only trade in lots of 100 shares and shareholders can exchange their shares for the underlying stocks at any time by paying a fee.

Investors should note that because many HOLDRs are narrowly focused, they can be more volatile than other types of ETFs. Also, HOLDR investors will receive annual reports and other investment-related information for each of the 20 stocks in their HOLDR basket. On the other hand, they'll only pay one brokerage commission instead of 20.

Different Structures

Originally ETFs were organized as unit investment trusts (UITs). In a UIT, an investment company buys a fixed portfolio of securities and then sells shares of that portfolio to investors. This type of structure results in dividends being held in an interest-bearing account, which are deposited into the ETF once each quarter. The delay in investing dividends can have a slightly negative effect on the total return of the ETF because the dividends are held as cash instead of being invested. Spiders, Diamonds, and Qubes are all organized as unit investment trusts.

Other ETFs, such as iShares, Select Sector Spiders, and StreetTracks, are structured as open-end funds. This arrangement follows the typical mutual fund structure in that new shares are continually offered and redeemed by the investment company. An open-end structure allows dividends to be reinvested immediately.

ETFs

Advantages

• Potential tax efficiency
• Low expense
• Trade throughout the day
• No minimum investment
• Can be sold short and bought on margin

Disadvantages

• Brokerage commissions incurred
• Capital gains occasionally distributed
• Flexibility may encourage frequent trading, potentially negating the tax-efficient edge

Evaluating ETFs

These investments offer a number of potential advantages, including:

Tax efficiency -- ETFs may be more tax efficient than some traditional mutual funds. A mutual fund manager may trade stocks to satisfy investor redemptions or to pursue the fund's objectives. Selling shares may create taxable gains for the fund's shareholders. Because ETFs are like stocks, redemptions aren't an issue. In addition, managers of index-based ETFs only make trades to match changes in their index, which may mean greater tax efficiency.

Low expenses -- ETFs that are passively managed (managers usually only trade shares to mirror underlying benchmarks) may have lower annual expenses than actively managed funds.

Flexible trading -- Like stocks, ETFs are sold at real-time prices and trade throughout the day. Mutual funds, on the other hand, do not have this flexibility: Their pricing is based on end-of-day trading prices.

Can be sold short and bought on margin -- Because ETFs trade like stocks, investors can use them in certain investment strategies, such as selling short and buying on margin. Traditional mutual funds do not allow shorting of stock or margin trading.

No minimum investment -- Most mutual funds require a minimum investment, whereas an investor can usually purchase as few shares of most ETFs as desired.

Diversification -- An ETF may be a good way to add diversification to your portfolio. Buying shares of a technology sector ETF, for example, could potentially be less risky than purchasing shares of one technology stock -- an ETF may own shares of many different technology companies.

Inquiring Minds Want to Know ...

There are a number of Web resources that you can turn to for more information about ETFs. For all of the following sites, click on the Exchange Traded Funds (ETFs) heading in the top toolbar.

• NASDAQ ® (www.nasdaq.com) -- Updated frequently and contains trading quotes on specific ETFs.
• ETF Connect (www.etfconnect.com) -- Includes prices, performance statistics, commentary, and tools for analyzing ETFs.
• ETF MarketPro (www.etfmarketpro.com) -- Education, prices, research, and other tools specifically for ETFs.
  

Of course, as with all investments, ETFs may involve risks and other potential drawbacks. Consider these factors before investing:

The trading flexibility of ETFs may encourage frequent trading. That could lead to the possibility of mistiming the market (moving stocks in and out of the market at the wrong times).

Brokerage commissions are incurred. For this reason ETFs may be better suited for a buy-and-hold investor or someone who is buying a large number of shares at one time, rather than for an investor who uses a systematic investment program.

There may be capital gain distributions. At times some ETFs have distributed taxable capital gains usually because the managers have needed to buy or sell stocks to match their underlying benchmarks. Additionally, government bond ETFs are subject to federal income tax.

You should carefully consider the risks of different ETFs. Many sector ETFs, for instance, will tend to be more volatile than an ETF that tracks the broader market. Check with a financial professional to be sure that you understand the risks and have the most up-to-date information before investing in an ETF.

Points to Remember

1. Exchange-traded funds (ETFs) offer potential benefits and risks of both mutual funds, stocks, or bonds.
2. ETFs have different types of structures: Some are set up as unit investment trusts. Others are structured like open-end mutual funds, and dividends are continually reinvested.
3. Advantages of ETFs include potential tax efficiency, low expense ratios, flexible trading, and portfolio diversification.
4. Disadvantages of ETFs include occasional distribution of capital gains, brokerage commissions, and the potential for frequent trading, which could lead to mistiming the market.
5. ETFs may be better for a lump-sum investor with a long time horizon than someone who trades frequently and/or invests at regular intervals.
   

1Investors in international securities are sometimes subject to somewhat higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities. Sector funds are subject to increased volatility due to their limited diversification compared with other stock funds.

© 2011 McGraw-Hill Financial Communications. All rights reserved.  

April 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.

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If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.

Why It Matters

The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers' compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.

Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

The Difference Between Employees and Independent Contractors

Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

Example: Sam Smith, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. He is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if he works more or less than 400 hours to complete the work, Sam will receive $6,400. He also performs additional electrical installations under contracts with other companies that he obtained through advertisements. Sam Smith is an independent contractor.

Employees provide work in an ongoing, structured basis. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. A worker is still considered an employee even when you give them freedom of action. What matters is that you have the right to control the details of how the services are performed.

Example: Sally Jones is a salesperson employed on a full-time basis by Rob Robinson, an auto dealer. She works 6 days a week, and is on duty in Rob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Rob. Rob also pays the cost of health insurance and group term life insurance for Sally. Sally Jones is an employee of Rob Robinson.

Independent Contractor Qualification Checklist

The IRS, workers' compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is, though their means of categorizing workers as independent contractors are similar.

One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS. The IRS considers the following:

1. What instructions the employer gives the worker about when, where, and how to work. The more specific the instructions and the more control exercised, the more likely the worker will be considered an employee.
2. What training the employer gives the worker. Independent contractors generally do not receive training from an employer.
3. The extent to which the worker has business expenses that are not reimbursed. Independent contractors are more likely to have unreimbursed expenses.
4. The extent of the worker's investment in the worker's own business. Independent contractors typically invest their own money in equipment or facilities.
5. The extent to which the worker makes services available to other employers. Independent contractors are more likely to make their services available to other employers.
6. How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.
7. The extent to which the worker can make a profit or incur a loss. An independent contractor can make a profit or loss, but an employee does not.
8. Whether there are written contracts describing the relationship the parties intended to create. Independent contractors generally sign written contracts stating that they are independent contractors and setting forth the terms of their employment.
9. Whether the business provides the worker with employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. Independent contractors generally do not get benefits.
10. The terms of the working relationship. An employee generally is employed at will (meaning the relationship can be terminated by either party at any time). An independent contractor is usually hired for a set period.
11. Whether the worker's services are a key aspect of the company's regular business. If the services are necessary for regular business activity, it is more likely that the employer has the right to direct and control the worker's activities. The more control an employer exerts over a worker, the more likely it is that the worker will be considered an employee.
    

Minimize the Risk of Misclassification

If you misclassify an employee as an independent contractor, you may end up before a state taxing authority or the IRS.

Sometimes the issue comes up when a terminated worker files for unemployment benefits and it's unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.

There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:

• Familiarize yourself with the rules. Ignorance of the rules is not a legitimate defense. Knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.
• Document relationships with your workers and vendors. Although it won't always save you, it helps to have a written contract stating the terms of employment.
  

If you have any questions about how to classify your employees, please give us a call. We can help guide you in the right direction in the eyes of the IRS.

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