Protection for Investors' Brokerage Accounts

Covering your investment assets

Most brokerage accounts are protected by the Securities Investor Protection Corp (SIPC). Unlike the FDIC, which provides coverage for bank deposit accounts, the SIPC is not a governmental agency. Though created by Congress, it is a nonprofit corporation funded by its membership, which is comprised of broker-dealers registered with the Securities and Exchange Commission. (Any broker-dealer that is not an SIPC member must disclose that fact to customers.)

SIPC was created by Congress in 1970 to help return customer property, including both securities and cash in brokerage accounts, should a broker-dealer or clearing firm go bankrupt, become insolvent, or experience unauthorized trading in a customer's securities account. Many brokerages also carry additional private insurance to extend coverage beyond the SIPC limits. Should an SIPC member firm become insolvent, SIPC would either ask a court to appoint a trustee to supervise the transfer of customer securities to another member firm, or act as the trustee itself.

It's important to know the types of accounts and securities that qualify for this protection, as well as the maximum amounts that can be held in each account and still qualify for SIPC coverage. Otherwise, an investor's account might inadvertently have less coverage than expected. And though any excess amounts might be safe, any protection beyond the SIPC limits isn't necessarily assured. On the other hand, if money is distributed appropriately among various types of accounts, an investor may be able to qualify for greater protection at a single institution.

How much is covered?

SIPC covers a maximum of $500,000 per "separate customer," including up to $100,000 in cash, at a given brokerage house or clearing firm. Total coverage can be higher for multiple accounts at one institution, depending on how they're held. For example, a married couple could have two individual accounts with $500,000 of coverage each, plus a joint account that would bring their aggregated coverage for that firm to $1.5 million.

As long as accounts are held by what the SIPC considers "separate customers," each account qualifies for separate SIPC coverage. Categories of separate customers include:

  • Individual accounts: those held by someone in his or her own name, or by an agent for another individual
  • Joint accounts: those held jointly by two individuals with equal authority over the account
  • Accounts held by executors, administrators, and guardians: those held in the name of a decedent, an estate, or an executor or administrator, or guardian (for example, for an UTMA account)
  • Accounts held by a corporation, partnership or unincorporated association
  • Trust accounts: those held on behalf of a valid trust created by a written instrument (trust accounts are considered separately from those of an individual trustee)

Each of your retirement accounts at a given firm also is generally eligible for an additional $500,000 SIPC coverage (including up to $100,000 in cash) in the event that securities in your account are lost or stolen.

Many brokerage firms also carry private insurance to cover problems with amounts above those that qualify under SIPC guidelines.

What qualifies for SIPC protection?

It's important to remember that SIPC does not protect against market risk or price fluctuations; if shares drop in value before a trustee is appointed, that loss of value is not covered by SIPC. The value of securities is determined as of the date upon which a trustee is appointed. In general, SIPC covers notes, stocks, bonds, mutual funds, and other shares in investment companies. It does not cover investments that are not registered with the SEC, such as certain investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, gold, silver, commodity futures contracts, or commodities options.

Tip: SIPC protection applies only if a brokerage firm fails or experiences a theft of assets. It does not cover losses that result from fraudulent investments.

SEC protections

The Securities and Exchange Commission (SEC) also has provisions that can help protect investor assets. For example, the SEC requires brokerage and clearing firms to segregate money and securities in customer accounts from their own proprietary assets and funds. This can help protect customers from being harmed by a firm's own trading activity. Also, firms are required to maintain a certain level of capital reserves that would enable the firm to return customers' securities and cash in the event of a financial failure. The SEC specifies that customer claims are senior to other claims on a firm's assets.

Should the SIPC fund be deemed insufficient to meet investor claims--something that has never happened since the organization was created--SIPC has the authority to tap a line of credit set up with a consortium of banks. And if necessary, the SEC also is authorized to lend SIPC up to $1 billion, which the SEC would borrow from the U.S. Treasury.

How securities are returned to customers

In the event a firm is liquidated, any securities that are registered in a customer's name or in the process of being so registered (as opposed to being held in "street name," the most common form in which securities are held today) are returned to customers first. Assets held in street name make up what's known as the "fund of customer property." That fund is divided on a pro rata basis, with the assets shared in proportion to the size of claims. Only if securities are still missing after the pro rata distribution would SIPC coverage be applied to make up the difference, up to the statutory coverage limit. In the event of a liquidation, individual customers must file a claim with the designated trustee to ensure that their assets are recovered. Claim forms are available at www.sipc.org, where you also can check on the status of a liquidation proceeding.

Example(s): In the process of liquidating ABC Company, the trustee discovers that 97% of the pool of customer assets is intact, but 3% cannot be accounted for. Each customer would receive 97% of the property in his or her account, and SIPC would then make up the remaining 3% up to the applicable coverage limits.

Help protect your assets

  • Know whether or not your brokerage accounts are at SIPC member firms, and consider the coverage limitations for each account and for aggregated amounts.
  • Review and check all documentation, including trade confirmations and account statements, to ensure accuracy.
  • Make payments to the firm rather than to an individual, and send them to the appropriate business address.
  • Ensure that all records, such as addresses and beneficiary forms, are up to date and accurate. If dealing with a trustee for a failed firm, make sure the trustee has your correct, current address.
This article was provided by Forefield and distributed by Lawrence Sprung.

Teaching Your Child about Money

Ask your five-year old where money comes from, and the answer you'll probably get is "From a machine!" Even though children don't always understand where money really comes from, they realize at a young age that they can use it to buy the things they want. So as soon as your child becomes interested in money, start teaching him or her how to handle it wisely. The simple lessons you teach today will give your child a solid foundation for making a lifetime of financial decisions.

Lesson 1: Learning to handle an allowance

An allowance is often a child's first brush with financial independence. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants.
It's up to you to decide how much to give your child based on your values and family budget, but a rule of thumb used by many parents is to give a child 50 cents or 1 dollar for every year of age. To come up with the right amount, you might also want to consider what your child will need to pay for out of his or her allowance, and how much of it will go into savings.
Some parents ask their child to earn an allowance by doing chores around the house, while others give their child an allowance with no strings attached. If you're not sure which approach is better, you might want to compromise. Pay your child a small allowance, and then give him or her the chance to earn extra money by doing chores that fall outside of his or her normal household responsibilities.

If you decide to give your child an allowance, here are some things to keep in mind:

  • Set some parameters. Sit down and talk to your child about the types of purchases you expect him or her to make, and how much of the allowance should go towards savings.
  • Stick to a regular schedule. Give your child the same amount of money on the same day each week.
  • Consider giving an allowance "raise" to reward your child for handling his or her allowance well.

Lesson 2: Opening a bank account

Taking your child to the bank to open an account is a simple way to introduce the concept of saving money. Your child will learn how savings accounts work, and will enjoy trips to the bank to make deposits.
Many banks have programs that provide activities and incentives designed to help children learn financial basics.

Here are some other ways you can help your child develop good savings habits:

  •  Help your child understand how interest compounds by showing him or her how much "free money" has been earned on deposits.
  • Offer to match whatever your child saves towards a long-term goal.
  • Let your child take a few dollars out of the account occasionally. Young children who see money going into the account but never coming out may quickly lose interest in saving.

Lesson 3: Setting and saving for financial goals

When your children get money from relatives, you want them to save it for college, but they'd rather spend it now. Let's face it: children don't always see the value of putting money away for the future. So how can you get your child excited about setting and saving for financial goals?

Here are a few ideas:

  • Let your child set his or her own goals (within reason). This will give your child some incentive to save.
  • Encourage your child to divide his or her money up. For instance, your child might want to save some of it towards a long-term goal, share some of it with a charity, and spend some of it right away.
  • Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the difference between short-term and long-term goals.
  • Tape a picture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the connection between setting a goal and saving for it.
  • Finally, don't expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.

Lesson 4: Becoming a smart consumer

Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren't born with the ability to spend it wisely. Your child needs guidance from you to make good buying decisions.

Here are a few things you can do to help your child become a smart consumer:

  •  Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she really wants rather than buying something on impulse.
  • Just say no. You can teach your child to think carefully about purchases by explaining that you will not buy him or her something every time you go shopping. Instead, suggest that your child try items out in the store, then put them on a birthday or holiday wish list.
  •  Show your child how to compare items based on price and quality. For instance, when you go grocery shopping, teach him or her to find the prices on the items or on the shelves, and explain why you're choosing to buy one brand rather than another.
  • Let your child make mistakes. If the toy your child insists on buying breaks, or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you're not there to give advice.

Deducting Sales and Excise Tax on a New Vehicle Purchase

If you recently purchased a new vehicle, or intend to purchase one by the end of the year, you may benefit from a temporary new deduction created by the American Recovery and Reinvestment Act, which was signed into law in February.

As a result of this legislation, if you purchase a new passenger automobile, light truck, or motorcycle (vehicles must have a gross weight rating of no more than 8,500 pounds) on or after February 17, 2009, and before January 1, 2010, you'll generally be able to deduct any state or local sales and excise tax you pay on the purchase on your 2009 federal income tax return. New motor home purchases can qualify as well.

Individuals who itemize deductions on Form 1040, Schedule A, can include state or local sales and excise tax as part of their deduction for taxes paid. If you don't itemize deductions, you can deduct the qualifying sales and excise tax as part of your standard deduction.

There are, however, a couple of limitations:

-The amount of sales and excise tax that you can deduct is capped at the amount that would be paid on a vehicle with a purchase price of $49,500. So, if you purchase a $100,000 motor home, only the sales and excise tax attributable to the first $49,500 of your purchase price is deductible.

-You're not entitled to a deduction if your modified adjusted gross income (MAGI) is greater than $135,000 ($260,000 if you are married and file a joint return). And you're only entitled to a partial deduction if your MAGI is between $125,000 and $135,000 (between $250,000 and $260,000 if you are married and file a joint return).

Note: For 2009, you already had the option to deduct general state and local sales tax in lieu of state and local income taxes--the new rules allow you to deduct the state or local sales and excise tax attributable to a new vehicle purchase in addition to state and local income tax. The new rules are also more generous in cases where your state imposes sales tax on a new vehicle purchase at a rate that's higher than the general sales tax rate: the temporary deduction rules allow you to deduct the actual tax paid (subject to the limits noted above) instead of limiting you to the tax that would have been paid under the general sales tax rate.

Determining the Need for Life Insurance: How Much Is Enough?

What determines your life insurance need?

Life stages and circumstances

When determining your life insurance need, you should first consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, your career stage, and your intentions to pass on your property are all factors to consider. Your need for life insurance changes as the circumstances of your life change.

Starting out

In the "starting out" stage of life, you may be just beginning your career or family. You may not have children or other dependents at this stage, but that doesn't mean you have no obligations. For instance, if you paid for your college education with student loans, you likely had a cosigner for your loan--maybe your parents or a grandparent. The same may be true of your car loan. If you were to die before the loan is paid, your cosigner would be obligated to pay the debt. Under law, a cosigner is responsible for full payment of a debt in the event of default. Death doesn't erase the debt obligation.

Single adult

A growing percentage of the population now falls into the single adult demographic group. This group covers a broad spectrum of ages, lifestyles, and obligations.

Family obligations--Parents

Although you may not have a spouse, your death could have a serious financial impact on other family members. If, like many adults, you are supporting your parents (either financially or with care), your death could have a major impact, both emotionally and financially. They would not only lose the support you have been providing to them, but they would also need to come up with the money for your final expenses.

Family obligations--Children

If you are a single parent, the primary financial support for your children would die with you. If you are lucky, you may have family members who would step in and help your children if you died. If you are even luckier, they will be able to provide your children with the education and lifestyle you had hoped for them to have. Your need for life insurance as a single parent is even greater than that of a dual-parent, dual-income household, which would still have one income if one parent died. Life insurance is a cost-effective way to make sure that your children are protected financially should anything happen to you.

Debt obligations

In this stage of life, you may still be paying for or even still accumulating education loans. You may have purchased a house or condo with a cosigner. If you died, your cosigner would be legally liable for the payments on the debt.

Protect your insurability

Another reason to buy life insurance at this stage of your life is to protect your future insurability. Once you buy a permanent, cash value life insurance policy, it remains in effect for your entire life (assuming the premiums are paid), even if your health changes. If you were to experience a serious change in health, you might not be able to buy additional insurance coverage, but you would still have the permanent coverage you already own.

Dual-income couple or family

If you and your spouse both earn an income, it is possible that if one of you died, the other may be able to cope financially on the remaining income. If there are mortgages, joint credit cards or other debt, or children in the picture, the loss of one income could be much more difficult to overcome. The more people who depend on your income while you are alive, the more life insurance you should own. If you died today with insufficient or no insurance, your mate could be forced to give up the residence or lifestyle for which you have both worked. When there are children involved, the loss of one breadwinner could mean a setback in the daily way of life, not to mention any plans for private school or college.

Parent of grown children

Just because your children have grown up and left the nest doesn't mean you have no need for life insurance. You may have spent your entire adult life building an estate that you intend to pass on to your children, grandchildren, or favorite charity. You can use life insurance to ensure that the bulk of your estate passes to your heirs or designated charitable organization subject to certain tax advantages.

Part of overall financial planning

Determining your life insurance needs should not be done in isolation. Instead, it should be looked at as part of your overall financial plan, with consideration given to your goals for savings and retirement, as well as tax and estate planning. As your life changes, your financial goals may change, as well as your need for life insurance, making it important to also periodically review your coverage.

Methods of calculating life insurance need

Several methods are used to calculate the appropriate level of insurance for you and your situation. While they all share common features, some methods strive to be more simplistic, while others involve more sophisticated calculations. Some of these differences are illustrated in the Table of Alternatives. You may want to determine an amount on your own, using one of the simpler methods. This can provide a basis for your discussions with your financial planner.

Insurable interest

Before you begin calculating your insurance needs, it is important to determine insurable interest. Basically, having an insurable interest in a person's life means that you would suffer emotional or financial harm or loss if that person were to die. It is always assumed that you have an insurable interest in your own life. However, to prove an insurable interest in someone else's life, you must have a relationship to that person based on blood, marriage, or monetary interest. You must have an insurable interest before you can purchase an insurance policy.

Family needs approach

The family needs approach is one of the more comprehensive methods of calculating your life insurance needs. It assumes that the purpose of life insurance is to cover the needs of the surviving family members. This method takes into account the immediate and ongoing needs of the surviving family members, as well as income from other sources and the value of assets that could be used to help defray the family's expenses (such as bank accounts and real estate).

Capital retention approach

The capital retention approach is one of two calculation methods under the family needs approach. This approach assumes that life insurance principal will support the family indefinitely into the future. Because you will purchase more life insurance under this method, you will be in a better position if the surviving spouse lives longer than expected.

Capital liquidation approach

The capital liquidation approach is the second of two calculation methods under the family needs approach. This method does not provide as much continuing capital for the surviving spouse or for heirs after the death of the surviving spouse. However, it does allow you to spend less money by purchasing a lesser amount of life insurance coverage.

Estate preservation and liquidity needs

The estate preservation and liquidity needs approach attempts to determine the amount of insurance needed at death for items such as taxes, expenses, fees, and debts while preserving the value of the estate. This method considers all the variables of family lifestyle and the total cash needed to maintain the current value of the estate while providing adequate cash needed to cover estate expenses and taxes.

Income replacement approach

The income replacement calculation is based on the theory that the purpose of insurance is to replace the loss of your paycheck when you die. This analysis determines an economic or human life value and factors in salary increases and the effects of inflation in determining the appropriate level of coverage. While more comprehensive than the rules of thumb, this method still fails to consider special circumstances or financial needs and operates on the premise that the current level of income provides a satisfactory standard of living that will remain level throughout the future.

Rules of thumb

The rules of thumb are extremely basic calculations. They provide a starting point but fail to recognize special family circumstances or needs and focus only on the most basic components. One rule of thumb dictates that multiplying your salary by a certain number will provide an adequate level of insurance, while another calculates need based on normal living expenses.

Insurance mistakes

No insurance

The worst mistake you could make concerning life insurance is having a need and not having any insurance at all. Very often, people can find all sorts of excuses for not buying life insurance. It's no fun to plan for your death, for one thing. For another, there's the tendency to think that dying won't happen to you, only to some person you read about in the obituaries. But how many times have you heard about a young, apparently healthy person dying suddenly in a car accident, leaving behind a spouse, a young child, and no insurance? Sadly, it happens, and when it does, the family faces not only emotional trauma but possibly an extremely difficult financial situation, as well.

Not enough insurance

The majority of people with insurance are underinsured. Insufficient coverage can occur as a result of buying what is affordable instead of what is needed. Failure to review your coverage periodically could also result in insufficient insurance, even if you started out with adequate levels. Inflation rates, your career, and your lifestyle may have changed. Your family could be faced with a large financial gap and left unable to maintain the current lifestyle if you died today. Consequences could include loss of the family home, scaling back of college plans, and possibly years of financial difficulty.

Too much insurance

If you purchased a large policy during one point in your life and then didn't adjust your coverage when your insurance need was reduced, it is possible that you have too much life insurance. This is another good reason to periodically review your coverage with your financial planning professional. Periodic reviews of your insurance coverage can reveal opportunities to change your levels of coverage to match your current and projected needs.

Understanding Probate

When you die, you leave behind your estate. Your estate consists of your assets--all of your money, real estate, and worldly belongings. Your estate also includes your debts, expenses, and unpaid taxes. After you die, somebody must take charge of your estate and settle your affairs. This person will take your estate through probate, a court-supervised process that winds up your financial affairs after your death. The proceedings take place in the state where you were living at the time of your death. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate.

How does probate start?
If your estate is subject to probate, someone (usually a family member) begins the process by filing an application for the probate of your will. The application is known as a petition. The petitioner brings it to the probate court along with your will. Usually, the petitioner will file an application for the appointment of an executor at the same time. The court first rules on the validity of the will. Assuming that the will meets all of your state's legal requirements, the court will then rule on the application for an executor. If the executor meets your state's requirements and is otherwise fit to serve, the court generally approves the application.

What's an executor?
The executor is the person whom you choose to handle the settlement of your estate. Typically, the executor is a spouse or a close family member, but you may want to name a professional executor, such as a bank or attorney. You'll want to choose someone whom you trust will be able to carry out your wishes as stated in the will. The executor has a fiduciary duty--that is, a heightened responsibility to be honest, impartial, and financially responsible. Now, this doesn't mean that your executor has to be an attorney or tax wizard, but merely has the common sense to know when to ask for specialized advice.

Your executor's duties may include:

  • Finding and collecting your assets, including outstanding debts owed to you
  • Inventorying and appraising your assets
  • Giving notice to your creditors (e.g., credit card companies, banks, retail stores)
  • Filing an estate tax return and paying estate taxes, if any
  • Paying any debts or other taxes
  • Distributing your assets according to your will and the law
  • Providing a detailed report of how the estate was settled to the court and all interested parties

The probate court supervises and oversees the entire process. Some states allow a less formal process if the estate is small and there are no complicated issues to resolve. In those states allowing informal probate, the court may be involved only indirectly. This may speed up the probate process, which can take years.

What if you don't name an executor?
If you don't name an executor in your will, or if the executor can't serve for some reason, the court will appoint an administrator to settle your estate according to the terms of your will. If you die without a will, the court will also appoint an administrator to settle your estate. This administrator will follow a special set of laws, known as intestacy laws, that are made for such situations.

Is all of your property subject to probate?
Although most assets in your estate may pass through the probate process, other assets may not. It often depends on the type of asset or how an asset is titled. For example, many married couples own their residence jointly with rights of survivorship. Property owned in this manner bypasses probate entirely and passes by "operation of law." That is, at death, the property passes directly to the joint owner regardless of the terms of the will and without going through probate. Other assets that may bypass probate include:

  • Investments and bank accounts set up to pass automatically to a named person at death (payable on death)
  • Life insurance policies with a named beneficiary (someone other than the estate)
  • Retirement plans with a named beneficiary
  • Other property owned jointly with rights of survivorship

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