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moneywise fall 2003
-piggy back disaster planning onto you estate plan;
-2003 tax legislation;
-the new "do not call list";
-retirement savngs update;
-REITs as an investment option;
-a primer on mutual funds;
-a few short topics.

PIGGY BACK DISASTER PLANNING ONTO YOUR ESTATE PLAN
For as long as I have been providing accounting services, I have stressed the importance of planning to leave your affairs in good order when you die so your assets pass to your intended heirs with the least amount of trouble and expense. You can look back to www.lenemmerman.com and click on ESTATE PLANNING at the bottom of the HOME page to read all that I've written on the topic.

Planning for disaster is an area I have never given any consideration. My cousin is a partner at a major financial institu-tion and has been an active volunteer with the Red Cross for a number of years. He played a major role in the disaster re-covery operation after 9/11. I tell you all of this to let you know that when he talks about this topic, we should pay attention (and I am).
He has been lecturing on the need to plan for a disaster. When I listened to what he was saying, I knew that it was my re-sponsibility to bring this to your attention and to encourage you to follow through with your own plan.

If you have been doing all the things I have asked you to do, adding disaster planning should not require much work. I have asked that you have a will, power of attorney, health care proxy and living will, and a well thought out and current letter of instructions outlining the things I have asked you to consider as well as organizing some basic documents impor-tant to settling your affairs. I tried to impress on you the importance of being certain that somebody knows where this material is located at the time of your death.

Disaster planning adds another dimension that requires special consideration because the assumption is that something happened and you may or may not be alive, but your financial records become temporarily or permanently unavailable.

If you are interested in reading more about this topic, contact me. Michael Emmerman has graciously provided me with a very well done outline for you to begin to develop your own plan.

2003 TAX LEGISLATION
The 2003 tax bill known as the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (in case you want to refer to it by its proper name) has a little something for everybody. If you have dependent children and earn under $110,000 ($75,000 if you are not married), you will receive a tax credit (a dollar for dollar reduction in your tax bill) of $1,000 instead of $600. The $400 was sent to you early if you claimed the credit on your 2002 return. If you had a child in 2003, you will receive the credit when you file the 2003 return. I'll watch to see that you get what you are due.

There was an actual reduction in the tax table percentages. Everybody who pays taxes will pay lower taxes than they did in 2002 (assuming the same taxable income). The standard deduction increased for married people. This effectively reduces the so-called marriage penalty for filers who do not itemize.

Fewer people will get caught by the AMT (alternative minimum tax) because the annual exemption amount was increased.

Long-term capital gains and most dividends will be taxed at 15% (in some cases less than 15%).

Small business owners will be able to deduct up to $100,000 in capital expenses instead of depreciating that amount over a long period of time. The amount in 2002 was $25,000. This means that a lawyer who buys a Hummer to visit his clients and uses the truck exclusively for business can write off the entire cost in one year. What a great country we live in!
All the provisions are good for you. There does not appear to be anything in the act that will cause a taxpayer to pay more tax on the same income than he did in 2002.

My only editorial comment is that the latest trick in the bag of dirty tricks used by our politicians is this new thing they call "sunset provisions," which means that some of the changes are scheduled to be phased out over time. The reason they do this is so they can say there will be no negative impact on the total revenues collected over long periods of time because they build in assumptions of larger revenues in future years to offset the reduced revenues caused by today's tax reduction. The future assumptions are invariably incorrect, but today's politicos don't really care since they are not held accountable for what happens five to tem years from now.

Having said that, enjoy the savings. Go to Home Depot, travel, buy a car. Put it back into the economy.


THE NEW "DO NOT CALL LIST"
If you don't want to be called by telemarketers, you can do something to stop them. Effective October 1, 2003, if you regis-ter by telephoning 1 888 382- 1222 or going to http://www.donotcall.gov, any telemarketer who does not honor the request can be penalized. If you registered before August 31, you can file a complaint if you get a call after October 1; otherwise, you must wait three months after registering.

You can file complaints using the same phone number or web site. The registration process is being administered by the FTC (Federal Trade Commission) and will be enforced by the FTC and the FCC (Federal Communications System).

Beginning January 1, 2004, telemarketers will be required to have their names and phone numbers appear on you caller ID.

RETIREMENT SAVINGS UPDATE
It is time to begin thinking about your 2004 saving plans. The maximum limits for the various retirement programs are changing on January 1, based on the schedule Congress designed in 2001. If you participate in a 401k, 457, 403b or a sal-ary reduction SEP, the limit will be $13,000 ($16,000 if you will be 50 by the end of 2004).

If you are self-employed, you may be able to contribute up to $40,000 to your SEP or Profit Sharing plan. The amount may be more if the IRS announces an adjustment based on the CPI. I will be looking for an announcement. I'll update you in the next MONEYWISE.

If you still have a Money Purchase plan, you should telephone me. There is no reason to have this plan, since the laws were changed in 2001.

SIMPLE plan contributions will be limited to $9,000 ($10,500 if you will be 50 by the end of 2004).

The IRA contribution limit has not changed for 2004. It is still $3,000 ($3,500 if you will be 50 by the end of 2004).

Please plan to take advantage of this tax-favored way of saving for your retirement. In most cases, you will need to contact a pension administrator to alert him that your want to increase your contributions.

RETIREMENT SAVINGS UPDATE
It is time to begin thinking about your 2004 saving plans. The maximum limits for the various retirement programs are changing on January 1, based on the schedule Congress designed in 2001. If you participate in a 401k, 457, 403b or a sal-ary reduction SEP, the limit will be $13,000 ($16,000 if you will be 50 by the end of 2004).

If you are self-employed, you may be able to contribute up to $40,000 to your SEP or Profit Sharing plan. The amount may be more if the IRS announces an adjustment based on the CPI. I will be looking for an announcement. I'll update you in the next MONEYWISE.

If you still have a Money Purchase plan, you should telephone me. There is no reason to have this plan, since the laws were changed in 2001.

SIMPLE plan contributions will be limited to $9,000 ($10,500 if you will be 50 by the end of 2004).

The IRA contribution limit has not changed for 2004. It is still $3,000 ($3,500 if you will be 50 by the end of 2004).

Please plan to take advantage of this tax-favored way of saving for your retirement. In most cases, you will need to contact a pension administrator to alert him that your want to increase your contributions.


REITs AS AN INVESTMENT OPTION
Much of the commercial and large residential real estate in the world is owned and managed by REITs (Real Estate Invest-ment Trusts). These are publicly held companies that are much like stock companies, except that their business is to own and operating real estate. These trusts trade like stocks. In fact, you can buy a trust just like you would buy an individual stock. You can also (and I would recommend it) buy a mutual fund of REITs. You could look at the Fidelity Real Estate Fund, T. Rowe Price Real Estate Fund, Vanguard REIT Index, and TIAA-CREF Real Estate Fund as representative exam-ples of trusts. You can look at a company like Vornado Realty (NY Stock exchange listing VNO) as an example of a REIT that might be owned by one of the REITs funds. Buying a fund gives you the advantage of having people who have some expertise selecting which individual REITs to buy.

This type of investment, like all stock investments, is dependent on market perception for the value of the share price. When real estate values are high, they do well. Many pay high dividends compared to corporate stocks. A downside is that these dividends are generally not eligible for the 15% dividend rate available to corporate dividends.

I generally recommend you buy a REIT fund and suggest that you consider making it about 10% of your portfolio. Tele-phone me if you'd like to discuss this. I'd suggest you ask for a prospectus from one of the funds and look at an overview of an individual REIT.

A PRIMER ON MUTUAL FUNDS
If you understand what a mutual fund is and how it operates please feel free to skip this piece. I was motivated to write this article after reading about the investigations into mutual fund practices conducted by New York State Attorney General El-liot Spitzer and publicized by the press in the past few weeks. It occurred to me that many of us have most of our money in these funds but don't really understand what they are.

There are variations on the design I am about to present, but after reading this you should have a general idea about how a fund is created, organized and reported. I will use the Vanguard funds as an example because I think of them as an exam-ple of all that is good about the fund industry.

Vanguard (like Fidelity, T. Rowe Price and many others) is a corporation that is in the business of organizing individual funds. There is a Board of Directors composed of outside business people who are paid to oversee each of the funds organ-ized and operated by the Vanguard Group. These directors typically meet a few times each year to review the portfolios and performance of each of the fund managers as well as the expenses incurred to run each fund. They decide whether to retain investment managers or replace them. These directors are paid; some are very highly paid. This was one of the things discussed by Spitzer. There appears to be no relationship between the fees paid to directors and fund performance. In fact, some are saying that the pay for the Board of Directors is an area of abuse much like some areas of executive compensation.

An example that illustrates the point is the Putnam Voyager Fund, a fund operated by the Putnam Group. This fund has lost 18 percent annualized over the past three years. Directors' fees allocated to that fund was increased by almost 30% from $398,000 in 1999 to $509,000 in 2002; assets under management have fallen a bit during the same period from $24.8 billion to $23.9 billion.

When the Board of Directors decides it is time to open a new fund, it first must decide on the objective for that fund. If they promote the fund as a small cap growth fund, they are required to build a portfolio of that type of security. The next step in the process is to build or contract with an investment management team. Some fund companies build their own team; some hire outside investment firms to manage their portfolio. Vanguard does both for its 75 different funds. If the team is ex-pected to manage an active portfolio, the cost will be relatively high when compared to a fund whose objective is to match an index, which only requires computer modeling.

The management team gets money from investors. Some funds get their money by advertising that their funds are available and publishing factual information that would entice an individuals or institutions to invest. The SEC regulates what a fund publishes. I have not heard of abuses in reporting requirements. I do trust the information published by funds. The problem is that there is so much of it and we have so little time and so little inclination to study the information that it gen-erally does us no good. Funds that sell shares this way are called no-load funds. If you send them $1,000, they invest $1,000.

Some funds are sold through networks of brokers or salespeople. These people earn commissions from the funds they sell you. An investment of $1,000 generally means that you have given about $50 to the salesperson and $950 to the fund to invest for you. There is no correlation between paying a commission and fund return.

The fund managers purchase and sell securities on a daily basis. At any given moment, the total value of the portfolio di-vided by the number of shares outstanding gives us a price per share. If you want to buy or sell your shares, you will gener-ally get the price at the end of the day.

The expenses incurred by the fund include the regular operating expenses of any bushiness: clerical payroll, trading fees, rent, and supplies. It also includes the management fee paid to the investment managers and the share of the directors' fees charged to each individual fund in the group. One of the figures to look at is the ratio of expenses to total assets. The higher the expenses of operating a fund, the lower the return for the investor.

When you decide to buy a mutual fund instead of buying individual shares of stock, you are making a decision to let some-body else try to make your investment grow by making better decisions than you can make. The job of the directors is to make sure that happens or to make the necessary changes. It is your job to be sure the Board of Directors is doing its job in making the investment manager do his job efficiently and profitably.


SHORT TOPICS
-The car of my dreams. You might want to take a look at the new Toyota Prius. It is a hybrid car (runs on either gas or electricity. The car decides which to use.) It is a cute car, goes about 50 miles on a gallon of gas and you get a 10% credit ( a real reduction in your taxes) based on the cost of the car in the year you buy it. Effectively a government rebate.

-Families of WTC victims who have not filed with the Victims Compensation Fund by 12/22/2003 will lose the right to file for money from the fund. If you know anybody who has not filed, please have him or her either contact the fund at the following web site http://www.usdoj.gov/victimcompensation/ or contact me. Anybody entitled to this money should take advantage of it. As I understand it, the claim does not have to be completed and correct; it just needs to be filed.

-Beginning in 2004, self-employed people will be able to deduct 100% of their medical insurance premium from gross in-come. This is up from 70% for 2003. This is what it means in real dollars: if you are paying $8.000 per year, your real tax savings from 2003 to 2004 would be about $675. It will be greater if you file in New York (not New Jersey).

-It looks like the maximum earnings for Social Security will be increasing from $87,000 to $88,000. The rate will remain at 6.2%. If you are earning at least the maximum, your actual Social Security payment will be increased by $62.

-If you will be over 70½, I remind you to be sure to take your required IRA, 401k, 403b, 457, Keogh or SEP distributions before December 31. The only exception is that you can wait until April 1 of the year AFTER you are actually (and ex-actly) 70½. If you do that, you must take a contribution on April 1 and another by 12/31 of that year. Please telephone me if you need some direction. When you call, you will need to give me the December 31,2002 balances of all the ac-counts I listed above. With few exceptions, you must not take money from these accounts until after you are 59½.

-The New York State Department of Taxation issued an Advisory Opinion on December 16, 2002 answering a petition from a retired high school teacher requesting guidance on the inclusion of his TDA distributions in his New York taxable income. The conclusion is that TDA distributions should not be included in New York taxable income. It should get the same treatment as the pension provided by New York City, tax-free in New York and New York City. This is a very good thing. For New York residents, this is a good reason not to move your TDA into an IRA.

REITs AS AN INVESTMENT OPTION
Much of the commercial and large residential real estate in the world is owned and managed by REITs (Real Estate Invest-ment Trusts). These are publicly held companies that are much like stock companies, except that their business is to own and operating real estate. These trusts trade like stocks. In fact, you can buy a trust just like you would buy an individual stock. You can also (and I would recommend it) buy a mutual fund of REITs. You could look at the Fidelity Real Estate Fund, T. Rowe Price Real Estate Fund, Vanguard REIT Index, and TIAA-CREF Real Estate Fund as representative exam-ples of trusts. You can look at a company like Vornado Realty (NY Stock exchange listing VNO) as an example of a REIT that might be owned by one of the REITs funds. Buying a fund gives you the advantage of having people who have some expertise selecting which individual REITs to buy.

This type of investment, like all stock investments, is dependent on market perception for the value of the share price. When real estate values are high, they do well. Many pay high dividends compared to corporate stocks. A downside is that these dividends are generally not eligible for the 15% dividend rate available to corporate dividends.

I generally recommend you buy a REIT fund and suggest that you consider making it about 10% of your portfolio. Tele-phone me if you'd like to discuss this. I'd suggest you ask for a prospectus from one of the funds and look at an overview of an individual REIT.

A PRIMER ON MUTUAL FUNDS
If you understand what a mutual fund is and how it operates please feel free to skip this piece. I was motivated to write this article after reading about the investigations into mutual fund practices conducted by New York State Attorney General El-liot Spitzer and publicized by the press in the past few weeks. It occurred to me that many of us have most of our money in these funds but don't really understand what they are.

There are variations on the design I am about to present, but after reading this you should have a general idea about how a fund is created, organized and reported. I will use the Vanguard funds as an example because I think of them as an exam-ple of all that is good about the fund industry.

Vanguard (like Fidelity, T. Rowe Price and many others) is a corporation that is in the business of organizing individual funds. There is a Board of Directors composed of outside business people who are paid to oversee each of the funds organ-ized and operated by the Vanguard Group. These directors typically meet a few times each year to review the portfolios and performance of each of the fund managers as well as the expenses incurred to run each fund. They decide whether to retain investment managers or replace them. These directors are paid; some are very highly paid. This was one of the things discussed by Spitzer. There appears to be no relationship between the fees paid to directors and fund performance. In fact, some are saying that the pay for the Board of Directors is an area of abuse much like some areas of executive compensation.

An example that illustrates the point is the Putnam Voyager Fund, a fund operated by the Putnam Group. This fund has lost 18 percent annualized over the past three years. Directors' fees allocated to that fund was increased by almost 30% from $398,000 in 1999 to $509,000 in 2002; assets under management have fallen a bit during the same period from $24.8 billion to $23.9 billion.

When the Board of Directors decides it is time to open a new fund, it first must decide on the objective for that fund. If they promote the fund as a small cap growth fund, they are required to build a portfolio of that type of security. The next step in the process is to build or contract with an investment management team. Some fund companies build their own team; some hire outside investment firms to manage their portfolio. Vanguard does both for its 75 different funds. If the team is ex-pected to manage an active portfolio, the cost will be relatively high when compared to a fund whose objective is to match an index, which only requires computer modeling.

The management team gets money from investors. Some funds get their money by advertising that their funds are available and publishing factual information that would entice an individuals or institutions to invest. The SEC regulates what a fund publishes. I have not heard of abuses in reporting requirements. I do trust the information published by funds. The problem is that there is so much of it and we have so little time and so little inclination to study the information that it gen-erally does us no good. Funds that sell shares this way are called no-load funds. If you send them $1,000, they invest $1,000.

Some funds are sold through networks of brokers or salespeople. These people earn commissions from the funds they sell you. An investment of $1,000 generally means that you have given about $50 to the salesperson and $950 to the fund to invest for you. There is no correlation between paying a commission and fund return.

The fund managers purchase and sell securities on a daily basis. At any given moment, the total value of the portfolio di-vided by the number of shares outstanding gives us a price per share. If you want to buy or sell your shares, you will gener-ally get the price at the end of the day.

The expenses incurred by the fund include the regular operating expenses of any bushiness: clerical payroll, trading fees, rent, and supplies. It also includes the management fee paid to the investment managers and the share of the directors' fees charged to each individual fund in the group. One of the figures to look at is the ratio of expenses to total assets. The higher the expenses of operating a fund, the lower the return for the investor.

When you decide to buy a mutual fund instead of buying individual shares of stock, you are making a decision to let some-body else try to make your investment grow by making better decisions than you can make. The job of the directors is to make sure that happens or to make the necessary changes. It is your job to be sure the Board of Directors is doing its job in making the investment manager do his job efficiently and profitably.

A PRIMER ON MUTUAL FUNDS
If you understand what a mutual fund is and how it operates please feel free to skip this piece. I was motivated to write this article after reading about the investigations into mutual fund practices conducted by New York State Attorney General El-liot Spitzer and publicized by the press in the past few weeks. It occurred to me that many of us have most of our money in these funds but don't really understand what they are.

There are variations on the design I am about to present, but after reading this you should have a general idea about how a fund is created, organized and reported. I will use the Vanguard funds as an example because I think of them as an exam-ple of all that is good about the fund industry.

Vanguard (like Fidelity, T. Rowe Price and many others) is a corporation that is in the business of organizing individual funds. There is a Board of Directors composed of outside business people who are paid to oversee each of the funds organ-ized and operated by the Vanguard Group. These directors typically meet a few times each year to review the portfolios and performance of each of the fund managers as well as the expenses incurred to run each fund. They decide whether to retain investment managers or replace them. These directors are paid; some are very highly paid. This was one of the things discussed by Spitzer. There appears to be no relationship between the fees paid to directors and fund performance. In fact, some are saying that the pay for the Board of Directors is an area of abuse much like some areas of executive compensation.

An example that illustrates the point is the Putnam Voyager Fund, a fund operated by the Putnam Group. This fund has lost 18 percent annualized over the past three years. Directors' fees allocated to that fund was increased by almost 30% from $398,000 in 1999 to $509,000 in 2002; assets under management have fallen a bit during the same period from $24.8 billion to $23.9 billion.

When the Board of Directors decides it is time to open a new fund, it first must decide on the objective for that fund. If they promote the fund as a small cap growth fund, they are required to build a portfolio of that type of security. The next step in the process is to build or contract with an investment management team. Some fund companies build their own team; some hire outside investment firms to manage their portfolio. Vanguard does both for its 75 different funds. If the team is ex-pected to manage an active portfolio, the cost will be relatively high when compared to a fund whose objective is to match an index, which only requires computer modeling.

The management team gets money from investors. Some funds get their money by advertising that their funds are available and publishing factual information that would entice an individuals or institutions to invest. The SEC regulates what a fund publishes. I have not heard of abuses in reporting requirements. I do trust the information published by funds. The problem is that there is so much of it and we have so little time and so little inclination to study the information that it gen-erally does us no good. Funds that sell shares this way are called no-load funds. If you send them $1,000, they invest $1,000.

Some funds are sold through networks of brokers or salespeople. These people earn commissions from the funds they sell you. An investment of $1,000 generally means that you have given about $50 to the salesperson and $950 to the fund to invest for you. There is no correlation between paying a commission and fund return.

The fund managers purchase and sell securities on a daily basis. At any given moment, the total value of the portfolio di-vided by the number of shares outstanding gives us a price per share. If you want to buy or sell your shares, you will gener-ally get the price at the end of the day.

The expenses incurred by the fund include the regular operating expenses of any bushiness: clerical payroll, trading fees, rent, and supplies. It also includes the management fee paid to the investment managers and the share of the directors' fees charged to each individual fund in the group. One of the figures to look at is the ratio of expenses to total assets. The higher the expenses of operating a fund, the lower the return for the investor.

When you decide to buy a mutual fund instead of buying individual shares of stock, you are making a decision to let some-body else try to make your investment grow by making better decisions than you can make. The job of the directors is to make sure that happens or to make the necessary changes. It is your job to be sure the Board of Directors is doing its job in making the investment manager do his job efficiently and profitably.

SHORT TOPICS
-The car of my dreams. You might want to take a look at the new Toyota Prius. It is a hybrid car (runs on either gas or electricity. The car decides which to use.) It is a cute car, goes about 50 miles on a gallon of gas and you get a 10% credit ( a real reduction in your taxes) based on the cost of the car in the year you buy it. Effectively a government rebate.

-Families of WTC victims who have not filed with the Victims Compensation Fund by 12/22/2003 will lose the right to file for money from the fund. If you know anybody who has not filed, please have him or her either contact the fund at the following web site http://www.usdoj.gov/victimcompensation/ or contact me. Anybody entitled to this money should take advantage of it. As I understand it, the claim does not have to be completed and correct; it just needs to be filed.

-Beginning in 2004, self-employed people will be able to deduct 100% of their medical insurance premium from gross in-come. This is up from 70% for 2003. This is what it means in real dollars: if you are paying $8.000 per year, your real tax savings from 2003 to 2004 would be about $675. It will be greater if you file in New York (not New Jersey).

-It looks like the maximum earnings for Social Security will be increasing from $87,000 to $88,000. The rate will remain at 6.2%. If you are earning at least the maximum, your actual Social Security payment will be increased by $62.

-If you will be over 70½, I remind you to be sure to take your required IRA, 401k, 403b, 457, Keogh or SEP distributions before December 31. The only exception is that you can wait until April 1 of the year AFTER you are actually (and ex-actly) 70½. If you do that, you must take a contribution on April 1 and another by 12/31 of that year. Please telephone me if you need some direction. When you call, you will need to give me the December 31,2002 balances of all the ac-counts I listed above. With few exceptions, you must not take money from these accounts until after you are 59½.

-The New York State Department of Taxation issued an Advisory Opinion on December 16, 2002 answering a petition from a retired high school teacher requesting guidance on the inclusion of his TDA distributions in his New York taxable income. The conclusion is that TDA distributions should not be included in New York taxable income. It should get the same treatment as the pension provided by New York City, tax-free in New York and New York City. This is a very good thing. For New York residents, this is a good reason not to move your TDA into an IRA.