Sigcat Software Showcase 1992/SIGCat Software Showcase 1992 - CD-ROM Strategies.ISO/research/docs/summer88.txt

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Tofias
Fleishman
Shapiro                                              Summer
& Co., P.C.                                          1988

Certified Public Accountants

205 Broadway, Cambridge, MA 02139 ■ [phone] ■ 66 Pearl Street,
Portland, ME 04101 ■ [phone]


PERSONAL FINANCIAL PLANNING QUARTERLY

INVESTMENT COMMON SENSE FOR CAUTIOUS TIMES

The October 19 stock market debacle served to remind many investors
of the importance of a prudent, thoughtful approach to investment
planning. The more cautious consensus which has since materialized
emphasizes a return to basic investment wisdom, common sense and sound
planning. The following reminders are in line with this philosophy.

   1. Invest in things you understand. Often the more complicated the
      investment, the less the potential return to the investor.
   2. Plan your investments based on your financial goals, time
      horizon and risk tolerance. Do not risk funds reserved for a short-term
      goal - next year's vacation? - by investing in volatile securities.
      Remember that risk is ameliorated by a long time horizon. Do not
      diminish return by investing funds reserved for a long-term goal
      - retirement in twenty years? - in money market funds, except on a
      temporary basis. Buy stocks for the long term, not in hopes of
      short-term profits. Reevaluate your portfolio periodically.
   3. Diversify your assets. Allocate your investment funds among cash
      equivalents, bonds, stocks and fixed assets to reduce risk in a changing
      economic environment.
   4. Try to buy value. Buy when price is low; sell when price is
      high. In the case of equities, compare book value and earnings to price
      with the rest of the market, currently and historically. If possible,
      check the value of corporate fixed assets.
   5. Buy securities with high yields. Dividends provide a cushion
      against stock volatility.
   6. Dollar-cost-average when buying mutual funds. Invest a fixed
      amount of money on a regular periodic basis to reduce your average cost
      per share. Don't try to time the market.
   7. Buy short-term bonds and CD's or stagger their maturities. The
      prices of bonds with maturities in the three to seven year range are
      less volatile than those of longer bonds. Staggered maturities enable
      you to increase yield while limiting risk.
   8. Invest cash. Don't buy on margin. Limit leverage of fixed
      assets.
   9. Maintain realistic expectations for investment return. Remember
      that investment return is always tied to investment risk. Do not expect
      to increase return without increasing risk.
  10. Don't act on greed or fear.

1987 TAX CHANGES AFFECT 1988 PLANNING

Fall is a good time to review your tax and financial planning for
the current year Highlights of changes affecting individuals made by the
Revenue Act of 1987 are as follows:

   ■ Home Mortgage Interest Expense - Under prior law "qualified
     residence interest" was fully deductible on indebtedness up to the cost
     of the home plus improvements for first and second personal residences.
     Interest on additional debt secured by the home was also deductible to
     the extent the proceeds were used for qualified medical or educational
     expenses. The 1987 Act classifies home mortgage indebtedness into two
     categories - "acquisition indebtedness" and "home equity indebtedness."
     For debt incurred after October 13, 1987, interest expense in connection
     with acquisition debt up to $1,000,000 and home equity debt up to
     $100,000 is fully deductible. Previously incurred debt is grandfathered.
     Boats and mobile homes continue to qualify as personal residences.
   ■ Overnight Camp Expenses - Effective January 1, 1988, costs
     expended to send a child or other dependent to an overnight camp no
     longer qualify for the child care credit.
   ■ FICA - Earnings of children, age 18 or older, and spouses
     employed in unincorporated businesses are now subject to FICA taxes, as
     is the compensation of corporate directors. In addition, the cost of
     employer provided group term life insurance is subject to FICA tax to
     the extent it is included in gross income for federal income tax
     purposes.
   ■ Estimated Tax Penalty Pules - Beginning in 1988, the amount
     of federal income tax which must be prepaid to avoid a penalty is
     increased from 80% to 90%. An exception continues to exist where an
     amount equal to 100% of the prior year's tax is prepaid.
   ■ Publicly Tided Partnerships - Under the 1987 Act, income from
     publicly traded partnerships is treated as portfolio income (not passive
     income) and consequently cannot be applied against losses or credits
     generated by other partnerships. An investor's distributive share of net
     losses or credits can only offset income arising from the same
     partnership.
   ■ Tax Changes For Large Estates - The top estate and gift tax rate
     will remain at 55% instead of dropping to 50% as was previously
     scheduled. The new law also phases out both the graduated rates and the
     unified credit for estate and gift tax on transfers exceeding $10
     million.
   ■ Estate valuation Freezes - Preferred stock recapitalization and
     other "estate freezing" techniques have been curbed as described in an
     accompanying article.


DO YOU UNDERSTAND YOUR HOMEOWNER'S POLICY?

Although most homeowners, and many renters, carry some form of
homeowner's insurance policy, this coverage is among the least
understood forms of insurance. Unfortunately, many persons discover the
range and limitations of their coverage only after the need to file a
claim has arisen.

A homeowner's policy is a composite of various types of protection.
A standard policy protects both the structure of your house and its
contents, insures you against personal liability, regardless of fault,
including damage to the property of others and medical payments, and
will compensate you for expenses incurred should your house become
uninhabitable. The amount of coverage on your personal property is
typically 50% of the coverage amount on the structure. There are
separate limits for specific types of valuables, such as jewelry, furs
and art, but these limits may be lifted through endorsements, or
"floaters:' covering separately scheduled items of property.

There are several basic types of homeowner's policies, often
identified by number, HO-1, HO-2, HO-3 and so forth. Some types are
specifically designed for renters or condominium owners. It's important
to determine whether your existing coverage is "basic" (HO-1), "broad
form" (HO-2), or "all risk" (HO-3), since this indicates the range of
perils from which you are protected. Basic coverage provides protection
against fire and lightening, windstorm and hail, explosion, riot,
vehicles, aircraft, smoke, vandalism, glass breakage and theft. Broad
form protects against the additional perils of falling objects, weight
of ice, snow or sleet, building collapse, discharge or overflow of water
or steam, explosion of steam or hot water system, freezing of plumbing,
heating or appliances and artificially generated electric currents. All
risk coverage protects against any perils not specifically excluded and
is the most desirable form. It should be noted that floods and
earthquakes can only be covered by separate endorsement.

The amount of your coverage is as important as the type. It should
be related to the replacement value (cost to replace) of the structure
and the contents, rather than the depreciated value. You should
periodically reevaluate your policy to be sure that the coverage remains
equal to at least 80% of replacement value. If your coverage drops below
this level, you will be unable to collect the full amount of even a
partial loss but instead will receive a formula-determined percentage of
the loss's cash value. If your policy contains a "replacement cost
endorsement:" the insurer must guarantee that you will be reimbursed for
the full replacement value of any loss. Replacement cost insurance
carries a higher premium but provides much better protection against
financial loss than policies which reimburse losses based on cost less
depreciation.

Losses are covered above some "deductible" amount, often $250. For
many persons increasing the deductible to $500, or even $1,000, will
work no hardship and may result in a significant premium reduction.

Comparison shopping is necessary to obtain the best bargain in
homeowner's insurance. In addition, all available discounts, such as
those for deadbolt locks and smoke alarms, should be taken.

Personal Property - If you own collectibles or have unusually
valuable personal property, you may wish to increase your personal
property coverage limit above the usual (50% of structure) coverage
and/or separately schedule certain items. Current appraisals should be
obtained as needed. It is also important to maintain a current inventory
of your personal property. A room-by-room itemization including
photographs or video-tapes of contents of each room and all drawers and
closets, along with a listing of model/serial numbers, prices and dates

of purchase may prove invaluable both in comparing costs between
policies and in collecting claims. In most cities, you can now hire a
professional to prepare a household inventory for you. In any event, the
finished product should be stored in a safe place away from your residence.

Liability - Most homeowner's policies carry a liability coverage
limit of $100,000. This represents a bare minimum in today's environment
and fails to offer the substantial protection necessary for peace of
mind. A better level of liability coverage in connection with your
homeowner's policy is $300,000. Individuals with significant assets or
income should also purchase an "umbrella" liability policy which
coordinates with the liability coverages of both homeowner's and
automobile policies to provide protection up to at least $1,000,000,
more if assets/income are substantial. Umbrella coverage is relatively
inexpensive. A $1,000,000 policy will cost approximately $100 to $150 a
year; a $5,000,000 may cost from $300 to $400. Umbrella liability
coverage is easiest to obtain when both homeowner's and auto insurance
are purchased from the same company.

Title Insurance - Title insurance, which is purchased at closing,
protects your mortgage lender against any title defects. For a small
additional charge paid at the same time, you can protect yourself with
owner's title insurance.

NEW RULES LIMIT ESTATE VALUATION FREEZES

Prior to passage of the 1987 Revenue Act, a technique often used by
owners of closely held corporations to freeze the value of the business
and thus reduce the amount of future estate tax liability was a
"preferred stock recapitalization" Such a recapitalization was
accomplished by swapping the corporation's common stock, usually 100%
owned by the older generation, for a combination of newly issued common
and preferred stock in a tax-free exchange. The preferred stock was
issued at a par value approximately equal to that of the surrendered
common stock, carried voting rights and paid a dividend. The common
stock was usually non-voting, had little current value and was gifted to
members of the younger generation. The key to the strategy's success was
that all future appreciation in the value of the business would be
absorbed by the common stock and thus out of the estate of older family
members.

The new law provides that if an individual holds a substantial
interest in an enterprise and transfers, after December 17, 1987,
property having a disproportionately large share of the potential
appreciation in the enterprise interest while retaining a
disproportionately large share in the income of, or rights in, the
enterprise interest, the retention of the interest will be considered a
retention of the enjoyment of the transferred property. The value of the
transferred property will be includible in the individual's gross estate
if the decedent has retained an interest for life, or for a period not
ascertainable without reference to his or her death or for any period
which does not end before death. In addition, a retained interest which
is transferred within three years prior to death will be included in the
estate. Only that portion of transferred property bearing a
disproportionately large share of appreciation will be included,
however.

The attribution rules apply to recapitalizations, so the individual
will be deemed to own interests held by other family members, including
the individual's spouse, any lineal descendent of the individual or the
spouse and any parent or grandparent of the individual or his or her
spouse.

A "substantial interest" in an enterprise (a business or other
property which may produce income or gain) is defined as the ownership,
directly or indirectly, of 10% or more of its voting power or income
stream. A "disproportionately large share' of potential appreciation is
any share greater than that borne by the property retained by the
transferor.

The new provisions are effective for decedents dying after December
31, 1987, but does not apply to transfers completed before December 18,
1987. Both corporation and partnership interests are subject to the
changes.

FINANCIAL RECORD KEEPING: GETTING ORGANIZED

One of the questions most frequently heard by financial planners
is, "What records should I keep, and what can I throw away?" Keeping
financial and other records in a usable form, while necessary, is not
easy. However, establishing a workable system can make the job of
record-keeping considerably less unpleasant. Any record-keeping system
will work best if it is individualized to meet your special needs and
preferences. Following are some general suggestions for what should be
included.

Establish a master file containing a list of your assets and of all
important documents (wills, trusts, passports, various certificates).
Note the location of all items, along with other pertinent information,
such as account numbers. List also your primary financial advisors,
along with their addresses and phone numbers.

Have a separate file for each calendar year in which you maintain
personal tax data (records of income, taxable transactions such as
property sales and itemized deductions). Record contributions to
Individual Retirement Plans and Keogh accounts. Also list deadlines
and investment maturity dates occurring during the year (Documentation
relating to any tax item should be kept in the same or a separate file.)

Other Files: What to Keep.

Banking records. When reconciling bank statements, transfer any
cancelled checks needed for tax documentation to the current year's
files. After the statement has been reconciled and all funds have
cleared, non-tax related checking records may be shredded or otherwise
safely discarded.

   ■ Stock and other asset accounts. It is best to maintain a separate
     file for each account. The most current periodic statements should be
     maintained, along with purchase and sale confirmations. Prior years
     account statements not needed for tax documentation may be discarded.
     Form 1099 should be transferred to past-year tax documentation. Keep all
     cost information relating to investments.
   ■ Insurance policies. Keep the most recent policy, along with any
     endorsements or addenda, for your homeowner's, auto, life, health and
     any other insurance. Outdated policies should be discarded. Records of
     pending and paid health insurance claims for the current and prior years
     should be maintained in a separate file.
   ■ Credit records. Retain the loan agreements and/or purchase slips
     and billing statements until debts are paid off. Also maintain a list of
     your credit card account numbers and phone numbers to call in the event
     the cards are lost or stolen.
   ■ Real estate documents. Closing papers, settlement sheets, deeds,
     titles and the like should be maintained in a separate file for each
     property. Be sure to maintain complete records of the cost of all
     improvements made to each property.
   ■ Ownership papers. Purchase records, receipts and other items
     pertaining to ownership of cars, R.V.'s, boats and other large equipment
     should be separately filed.
   ■ Employment records, Information relating to employee benefit
     plans and the like should be maintained for reference.

   ■ Past years' tax returns. Copies of prior year tax returns, along
     with supporting documentation, should be maintained indefinitely, but
     for no less than six years.
   ■ Warranties. File warranties until they expire. ■ Personal data.
     The original copies of birth and marriage certificates, divorce decrees,
     military discharge papers, passports and the like, with the exception of
     wills and trust documents, should be stored in a bank safe deposit box.
     The original copies of wills and trust documents are best kept in some
     other safe place, since safe deposit boxes are generally sealed upon
     death.
   ■ Property titles. The originals of all titles to property, deeds
      and certificates of ownership should be kept in a safe deposit box.

The technical information contained in this publication is of a
general nature. Consultation with our personnel is recommended before
taking action based upon any of this information.