That’s the headline on David Leonhardt’s column in today’s New York Times, and it delivers a clear and simple summary of who’s suffering and why during the current downturn.

“What does the worst recession in a generation look like?” the Times’ economic columnist asks.

“It is both deep and broad,” he says. “Every state in the country, with the exception of a band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid pace. And even that band has recently begun to suffer, because of the sharp fall in both oil and crop prices.”

He goes on to explain why men, Hispanics and workers without a college degree have been most likely to wind up on the unemployment line.

Click here to read all of David Leonhardt’s column.

Paying all the fees for bouncing a check is costly enough.

Should you also have to put up with a private company tracking you down and demanding that you attend one of its costly personal finance classes to avoid prosecution?

In 2006, Congress passed a law that allowed district attorney’s offices to hire private companies to pursue bad checks that are too small for prosecutors to worry about.

According to cnn.com a company called American Corrective Counseling Services now has contracts to do just than 17 states.

ACCS splits all money it collects to cover the bad checks and fees with the prosecutor’s office.

But it also makes money from financial management courses that cost another $160, and that people who wrote the checks are required by law to attend at their own expense.

We’re not talking about professional criminals here. We’re talking about consumers who have bounced checks for as little as $14 being threatened with prosecution if they don’t pony up to a private company.

Jennifer Osborn, a California student who bounced a $92 check to her college bookstore, told CNN that the ASCS courses are “boring…pointless.” But the company’s contract with at least one prosecutor states those classes are its “principal business activity.”

My take: Hiring a private company to pursue bad checks isn’t all that different from having a collection agency pursue bad credit card debt. It’s unpleasant but probably necessary.

Allowing that company to profit from mandatory personal finance classes of questionable value is unpleasant and unnecessary. We need to put a stop to it.

Here’s another way the recession is hurting all of us — even those of us who still have a job.

A survey by Hewitt Associates shows employers are planning to boost base salaries by less than 3% this year, the lowest average increase since the consulting firm began tracking the data in 1976.

The rapidly deteriorating economy forced half of the 640 major employers surveyed to reduce the raises they’d expected to give since Hewitt’s previous poll in July 2008. Another quarter of employers were considering whether to do so.

For companies scaling back:

• Salaried, exempt employees will receive an average salary increase of 2.5% in 2009, down from an expected 3.8% in July.
• Executive employees will receive 2.2%, down from a projected 3.8% in July.
• Salaried, nonexempt pay will receive 2.6%, down from an expected 3.7% in July.

The companies in Hewitt’s survey also trimmed the amount they plan to spend on what’s called variable pay — bonuses, profit-sharing, leisure trips and other performance-based rewards that are used to recognize their most productive workers.

But the reductions were relatively small, and Hewitt concluded that “companies remain focused on attracting and retaining key employees by reserving a significant portion of their compensation budgets for variable-pay bonuses, or performance-based rewards that must be re-earned each year.”

Judging by what we’ve heard from unhappy Chase credit card holders, the bank has been busy sending out “change in terms” letters the past few weeks.

We already told you about the $10 monthly fee and higher minimum payment imposed on 400,000 accounts.

Now we’re told that interest rates were boosted on “Prime Plus” cards, as well.

The interest rate customers pay is determined by adding a premium (the “Plus” part of the name) to the prevailing prime rate.

Those cardholders might have expected to benefit from the Federal Reserve pushing the prime rate down to 3.25%. But no, Chase is increasing the premium.

The reason? At least Chase is honest about that in its letter: “The principal factor we considered in amending your account is maintaining profitability on your account.”

Of course you can refuse to accept the new terms, but Chase will close your account and void any unused points or miles.

The nation’s largest credit card provider also imposed a $10 monthly fee on 400,000 accounts that have carried a significant balance for more than two years on cards with low promotional rates.

We’ve also heard from Washington Mutual customers whose accounts have been transferred to Chase because it bought the thrift last fall.

One customer told us their rate was being raised from 9.99% to 25.99%.

We can understand why credit card companies come down hard on customers who don’t pay their bills. But it’s tough to imagine why they’re being so tough on so many customers who are paying their bills.

This recession won’t last forever, and when it’s over, folks are going to be remember how they were treated.

Think of this as the upside to falling home prices.

One study that compares housing costs to local incomes says homes are more accessible to the average family than at any time in the past five years.

Roughly 62% of all new and existing homes that were sold in the fourth quarter could be purchased by families earning the national median income of $61,500, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index.

That’s up from the 56.1% of homes that were deemed affordable in the previous quarter. In 2007, only 46.6% of homes were affordable.

Indianapolis, which often leads this survey, was the most affordable large metro housing market during the fourth quarter. Slightly more than 93% of all homes sold in Indianapolis were affordable to households earning the local median family income, $65,100.

New York-White Plains-Wayne, N.Y.-N.J. was again ranked as the country’s least affordable major housing market. Just under 14% of all homes sold during the fourth quarter were affordable for families earning the $63,000 median income.

Why is the Obama administration hesitating to seize big, insolvent banks when it’s already throwing about two, smaller insolvent banks a week into conservatorships?

Just allow the Federal Deposit Insurance Corp. to do its job. The FDIC protects depositors, disposes of the bad loans and other assets that wiped out the bank’s capital, and then sells the remaining assets back to private owners.

Remember last summer, when the FDIC seized IndyMac Federal Bank, the Los Angeles lender that wrecked itself with subprime mortgages?

After six months of spiffing up the balance sheet the government is selling IndyMac to a group of investors led by Steve Mnuchin of Dune Capital Management, and that includes billionaire hedge fund operators George Soros and John Paulson.

That’s good nationalization. It’s not socialism. It’s how the banking system is supposed to work.

It gets rid of insolvent banks, which are like the living dead, just withering away with no money to lend and no hope of attracting new capital, or at least new private capital.

Bad nationalization occurs when the government tries to prop up failed banks the way it has been doing it since Congress was stampeded into passing the bailout bill last October.

Most of that money went to the nation’s 20 biggest banks, some of which were insolvent before the government invested in them and are still insolvent after the government gave them billions of dollars our money.

Wall Street Journal and New York Times reported today that Citigroup has a new deal for the president: Convert $45 billion worth of preferred shares the government obtained through the Bush bank bailout into common shares.

That would leave the government holding a whopping a 40% stake in Citi and make the American taxpayer a full-fledged partner in its disastrous management.

It’s an open-ended commitment that invites Obama to pour even more federal money into a potentially failed enterprise with no assurance it will be enough to restore the bank to financial health.

JPMorgan Chase has started charging 400,000 credit card customers a stiff, new fee of $10 monthly fee — or $120 a year.

The new fee was imposed on customers who had carried a significant balance for two years or more on a card with a low promotional interest rate of something like 4.99%.

Did we mention that Chase is also raising the minimum payment on those cards from 2% to 5% of the balance?

A spokeswoman told USA Today that the nation’s largest credit card issuer is being a “responsible, careful” lender.

Which means what? That customers who qualified for a great deal a couple of years ago are now credit risks, and deserve to pay higher fees, because they wouldn’t reduce their debt?

Cardholders who called to complain were told they could avoid the fee and larger minimum payments if they accepted a higher 7.99% interest rate on the promotional balance.

Many wealthy Americans today are worried about what will happen to their estates after they are gone. Although many different types of trusts have been designed to help alleviate this problem, a new type of trust, called the “inheritor’s trust” has a level of flexibility that is unmatched by other estate planning vehicles. This type of trust is a dynastic trust, similar to many other types of dynastic trusts, except that this trust is a “stand alone” trust that allows for changes in investment strategies, as long as the beneficiary is willing to discuss the situation with his or her grantors.

This type of trust can provide substantial benefits for those seeking long-term, multigenerational planning, such as the type designed to avoid the generation-skipping transfer tax. It can also protect against divorce, creditors and estate taxes. Any parent that is currently gifting assets to their children on any kind of regular basis should seriously consider establishing one of these trusts. The key difference between this type of trust and other trusts is that the beneficiaries must be willing to talk openly with their grantors regarding how they want the money invested or handled.

In order to establish an inheritor’s trust, an empty, irrevocable dynasty trust must be established first. The inheritor is more often than not the trustee, and must usually choose a close friend or confidant to be the distribution trustee. This trustee has absolute control over what kind of distributions is made from income and principal. However, this transference to a third-party trustee is exactly what makes the assets of the trust so secure from creditors. Beneficiaries have absolutely no legal right to force any kind of distribution from the trust, which renders creditors unable to force any type of distribution from the trust as well. It is important to select the correct state to create the trust in, as the validity of these trusts will vary according to state law.

Every year, millions of Americans file their 1040s and end up having to pay taxes, even after all possible deductions have been taken. Many are able to itemize, while others are eligible for dependent care credits or above-the-line deductions for their retirement plan contributions. But those who have enjoyed short-term market gains or other investment income often end up being penalized harshly, especially if they have no losses to offset against them.

But taxpayers that own municipal bonds may be able to use those assets to generate capital losses without altering the overall allocation of their assets. This is a common strategy used by many brokers and investment consultants who have clients that have substantial capital gains or other reportable investment income to declare on their returns. The swapping process itself is fairly simple. Any investor who owns a municipal bond that is currently trading at a discount, meaning less than it’s par, or issued value, owns a security that is trading at a loss. However, bonds issued by different municipalities often have very similar characteristics, such as rate, term, and call features, so exchanging one bond for another will seldom affect the composition of the investor’s portfolio. But this exchange effectively allows the investor to declare the sale of the old bonds at a loss, while maintaining portfolio integrity. For example, assume that a bond investor bought 10 public school bonds at par (which is listed as a price of $100) when the school originally issued them. This means that his original investment amount was $10,000. Now, a year and a half later, interest rates have risen, and the price of the bonds in the secondary market is now $92 per bond. The broker who sold him the bonds will find 10 other municipal bonds from a similar issuer with similar features and “swap”, or exchange them within the portfolio. The replacement bonds may well be trading at a loss as well, but this is largely irrelevant, as the new bonds will vary in price the same as the old bonds. But the investor will be able to declare a long-term capital loss of $800 on his tax return, as he bought the original bonds for $10,000 and sold them for $9200.

As a diligent taxpayer, you probably keep good records so you can make the most of itemized deductions when you or your accountant fills out your tax return. Did you realize though, that those deductions might expose you to an entirely different set of rules that could result in additional taxes?

The alternative minimum tax (AMT) is a tax that could be more than the regular income tax. Congress’s logic for the AMT was to stop individuals with high incomes from using special tax breaks and thus paying little or no tax at all. However, more and more taxpayers are finding themselves subject to the AMT, even though they don’t have extraordinarily high incomes or use many special tax benefits.

The Taxpayer Advocate Service, an independent organization within the IRS, reported that the AMT affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2010. Inflation is a big reason more and more individuals may be hit with the AMT since the threshold for AMT doesn’t move automatically with inflation unlike the rest of the tax regulations.

Especially exposed are those with incomes between $100,000 and $500,000. However, don’t think that just because your income is less, you won’t have a problem. In the coming years, the share is expected to expand the most for taxpayers with incomes between $50,000 and $500,000.

The AMT has its own rules that are not as generous as the regular rules to determine how much a taxpayer should pay. If you are paying at least that amount, you don’t have to worry about the AMT. But if your regular income tax is below the AMT, you’ll have to pay the extra tax.

There are a number of items that cause you to have an AMT liability. These include:

· Exemptions for a spouse and dependents

· Medical expense deductions

· State and local taxes, including property and income taxes

· Interest on second mortgages, unless the money was used to buy, build, or improve the home

· Interest on home equity loans, unless the money was used for home improvements

· Miscellaneous itemized deductions

· Certain credits

· Capital gains

· Incentive stock options

· Tax-exempt interest from private-activity bonds

· Tax shelters

Tax planning is the key to making sure that you pay no more than necessary, whether you are subject to the standard rules or AMT rules. For instance, you may find that you might have to pay the AMT in some years but not others. One strategy would be to “bunch” some of these deductions, such as miscellaneous itemized deductions and medical expenses, in non-AMT years, since they won’t be of benefit in years in which AMT applies. It is strongly recommended that all investors consult with their own qualified tax and financial advisors prior to making any investment decisions.

While you would probably love to be able to reap the gains of the stock market, you may not be willing to endure the risk and volatility that comes with that territory. At this point, you may be too close to retirement to be willing to subject your portfolio to a possible market downturn. However, you may also be concerned that your savings are not growing fast enough to provide for your needs in your later years, particularly if your portfolio growth is not staying abreast of the current rate of inflation.

Fortunately, there is a way to participate in the gains of the stock market without the downside risk. The banking industry has been kind enough to create a hybrid type of security called a market-indexed certificate of deposit. This unique investment alternative is conceptually similar to an equity-indexed annuity, except that it does not grow tax-deferred. It does not pay a set rate of interest of any kind, but simply invests the principal into one of the major stock market indices, such as the S&P 500 or the NASDAQ 100, or even precious metals such as gold and silver. Of course, these CDs are FDIC insured, just like their traditional cousins. The only risk that the investor assumes with these instruments is the possibility that he or she will only receive their principal back, without posting any kind of gain. This would obviously happen if the markets performed badly during the term of the CD, which in most cases will run from 3 to 7 years. But there is no chance that an investor can lose his or her principal in a market-indexed CD; no matter what the markets do, the FDIC will guarantee the investment up to $100,000, just like any other CD.

Of course, if the markets perform poorly and only the principal is returned, then the investor has “lost” the interest that would have been paid from a traditional CD. One other possible disadvantage that these CDs present is a greater lack of liquidity than interest-bearing CDs. Many market-indexed CDs are illiquid for the first year, and thereafter are only accessible by paying a steep penalty. But the risk-to-reward tradeoff inherent in this type of CD may be hard to beat.

You’ve worked hard all of your life to provide for your family and loved ones. Now you can relax, knowing that they will be taken care of once you’re gone. Or will they? If you are assuming that your assets and personal effects will automatically go to your spouse, you may be in for a surprise. Even if you have a proper will made out, it will not protect your estate from intestacy, which means that no clear heir has been designated. At this point, your assets must undergo a process called probate. This is a standard legal procedure that will provide a clear title to your heirs and pay off all debts and other obligations of your estate. However, virtually all of the decisions made regarding how this procedure is accomplished will be determined either by state law, or else the decision of an impersonal judge, if there is any kind of disagreement among your prospective heirs as to how your assets should be distributed. There are a number of reasons why probate should be avoided, if at all possible:

1. This process is completely open to the public. Anyone who wishes to find out everything about your estate once you’re gone will have complete freedom to do so. Thanks to modern technology, a complete listing of your assets will probably be available online for the world to see.
2. As stated before, this process is totally beyond your control-and the control of your spouse or other prospective heirs. You may assume that all assets will simply go to your spouse, but this is usually not the case. Most states will automatically divide your assets equally between your spouse and your children, regardless of whether your children are ready to take ownership of their share.
3. Probate also offers anyone wishing to contest your will an opportunity to do so. This, of course, can lead to expensive legal proceedings that drag on for months. The costs involved in this will also be borne by your heirs.
4. There are many possible expenses that can be incurred in the probate process, including court costs, appraisal costs, executor’s fees, legal and accounting fees, and even surety bond fees in some cases. The typical cost of probate can often run between 3 to 7 percent of the value of the estate (and much more in some cases.)

If you or a loved one has a child or other heir that is mentally or physically disabled, then you may have major concerns about how to provide for that person once you are gone. Statistically, the odds of becoming disabled are much greater than the chance of an untimely death. Furthermore, the financial impact of disability can be far more devastating than death, as someone who is incapacitated will continue to require ongoing care for the duration of the disability.

One key component to planning for this unpleasant contingency could be drafting a special needs trust. This type of trust is similar to most other trusts in many respects, and is almost always used in conjunction with Supplemental Social Security income and Medicaid. Therefore, one of the main functions of the trust is to ensure that the funds it pays out do not coincide with benefits that are paid from the public sector. The assets of this trust also cannot exceed a specified amount, or the trust becomes defective.

Generally, special needs trusts can be funded with the same types of assets as most other trusts, such as cash, stocks and bonds, mutual funds, personal property, real estate and even life insurance. Cash value life insurance is in fact often used to fund these trusts, as many donors are not able to adequately provide financial support by any other means once they are gone. Annuities are also often used as an alternative investment if the grantor/donor is uninsurable.

Another type of irrevocable trust, called a “payback” trust offers the ability to bypass the standard Medicaid rules excluding benefits for those who had assets transferred to them any time in the 36 months before application. There is an exception written into the laws stating that any disabled person under age 65 can remain eligible for Medicaid as long as they transfer their assets to this type of trust. However, the law also mandates that upon the death of the disabled beneficiary, any remaining assets in the trust revert back to the state. This aspect of the trust differs from the special needs trust, which may have a remainder beneficiary.

Millions of Americans are more than willing to purchase life insurance on themselves and their loved ones in case of death, disability insurance in case of disability and long-term care coverage to cover assisted living expenses. However, many of them are not aware of simple legal document that can greatly aid their families in the event that they become incapacitated.

This document, called a durable power of attorney, allows a designated person to make decisions regarding your assets and property if you should become mentally unable to do so for any reason. Having one of these drawn up while you are mentally sound is highly recommended by both financial and estate planners. Failure to do so can result in the gross mismanagement of your assets, either due to neglect or to the actions of a judge-appointed conservator who may or may not have any idea what he or she is doing. The power of attorney should have a “springing” feature that outlines the circumstances under which the power will “spring” into effect. You can designate virtually anyone, from a trusted friend or family member to your financial advisor to make material decisions on your behalf if you become incapacitated. However, many experts suggest that a joint designation between a family member and an attorney or other professional financial advisor may be the best course of action. This combination provides both expertise and an emotional perspective-both of which may be needed to make the decisions that you would approve of. If you have assets in more than one state, then you will probably need to have your attorney draft a separate power in each state of ownership. Each financial institution should have a copy of the power as well, so that there will no contention regarding who is authorized to make transactions on your behalf.

A final note to remember with durable powers of attorney is that they do give virtually unlimited powers to the designee, powers which can only be limited with a revocable living trust. But the POA will allow the executor to handle any assets that are titled in the name of the trust. Therefore it is important to choose your designee wisely.

Millions of Americans that save money in their IRAs or qualified plans have no intention of withdrawing that money until after they reach age 59 ½. Unfortunately, there are times when circumstances dictate that this is absolutely necessary. Any number of of misfortunes, such as medical expenses from an uninsured accident or an extended period of unemployment can leave all other sources of liquid assets depleted.

Of course, your retirement assets are probably the last source of assets that you want to draw on in the event of a financial hardship, but at times you may have no choice. At all costs you would like to avoid the 10% early withdrawal penalty inherent in any kind of premature distribution. However, the IRS has allowed for several exceptions to this rule over time, although the rules for traditional and Roth IRAs versus qualified plans differ somewhat. These exceptions can be broken down as follows:

Traditional IRA:

• Death
• Total and permanent disability
• 72(t) distribution (a series of substantially equal and periodic payments)
• IRS levy of the plan
• Medical expenses
• Qualified higher education expenses
• First-time homebuyer expenses up to $10,000
• Health insurance premiums for the unemployed

Roth IRA:

• The same exceptions as for the Traditional IRA, except for the first-time homebuyer exception

Qualified Plans

• All of the exceptions that apply to Traditional IRAs
• Separation from service from your employer at age 55 or later
• Distributions made to your ex-spouse due to a qualified domestic relations order (QDRO)
• Dividend distributions from employee stock ownership plans (ESOPs)

The IRS has allowed these exceptions as both a means of relief and encouragement. The relief comes for the dead, divorced and disabled, while those who are trying to better themselves through education or trying to purchase a home can receive encouragement in the form of penalty-free distributions. Of course, these exceptions fall into a different category than other more common penalty-free transactions, such as rollovers or transfers between accounts or plans.

Hedge fund activity currently constitutes approximately 30 percent of all equity trade volume. So if you have any experience with equity trading, or even a slight interest in this type of venture, then you’ve probably been tempted to get involved with one of these notorious private investments funds. And make no mistake, hedge funds and those who run them have made a name for themselves in recent years.

Hedge funds have been all over the mainstream news media of late, whether it’s due to huge successes, shocking defeats, or the way that their managers seem to treat billions of dollars as if it were Monopoly money.

Hedge funds are private by definition and only certain investors qualify to partake in them. If you’ve climbed your way into this category as a result of a strong record in equity or futures trading, you might feel compelled to throw your money in with the über-rich, thinking that it’s a sure way to become one of the elite. But be warned, hedge funds are not all that they are cracked up to be. In fact, for an educated and conscientious investor, hedge funds can be a nightmare.

These four curious characteristics of hedge funds make them different than many standard investments. If you don’t bat an eye at this list, then go for it and you’ll at least enter the fray with your eyes wide open. But if anything in this description of hedge funds surprises you or makes you the least bit uncomfortable, then it might be best to stick with what you know.

1. Lack of oversight:
The SEC does not require a private investment fund to register with them or any other regulatory body if it is comprised of fewer than 100 investors. Combine this with these funds’ tendency to lean heavily on offshore investments and hedge funds are operating in a virtual vacuum. While too much government oversight can hamper the performance of an investment vehicle, too little means that the people handling your money aren’t accountable to anyone, including you.

2. Managers with little to lose:
When investors are invited to contribute to a hedge fund, the manager sets a high-water mark for returns. If your manager meets this goal, he will retain a full 20 percent of your returns, in addition to the couple of points in assets that he is already collecting on an annual basis. And what happens if your fine manager doesn’t meet this lofty goal? With all that he has to gain, failure must destroy him, right? In fact, you and your fellow investors will eat all of the losses and your manager will merely move on and set up shop somewhere else, none the worse for wear.

3. Totalitarian mindset:
When you invest in a hedge fund, you are putting your assets entirely in the hands of one single person, and that is a dicey proposition any time that that person isn’t yourself. The manager of the fund makes all of the investment decisions that determine the success or downfall of the fund, and even a manager with a great track record is fallible. If your manager gets in a fight at home or catches a flu bug, your portfolio could suffer. Worse yet, if your manager steps down and hands the reigns to someone completely new, you and your fellow investors could be in serious trouble

4. Short life spans:
The average life of a hedge fund is only three years, which means that employing this vehicle is unwise if you have a long-term strategy in place. One out of every ten hedge funds collapses each year, making this industry as volatile as almost any other venture out there. An investment with such a short shelf life might not be the way to go if you are a typical investor who has the long haul in mind. Maybe better to keep your money in a high interest savings account instead.

For millions of Americans, fixed annuities provide safety of principal, tax deferral and higher rates than those offered by banks and other traditional savings institutions. However, one disadvantage inherent in most fixed annuity products is their inability to keep up with inflation over the long term.

For example, assume that you invest $100,000 into a single premium immediate fixed annuity. A current contract from a major carrier would then pay out $658.59 per month, for a total of $7,903.08 for the year. The problem is, if the rate of inflation is 3%, then the purchasing power of these payments will decline from one year to the next. Obviously, $7,903 will not buy in a future year what it can now.

One way that annuity investors can deal with this problem is to purchase a cost-of-living rider on the contract. This rider is designed to ensure that the income from the annuity stays abreast of the rate of inflation over time. For example, the same SPIA contract with a 3% inflation protection rider will only pay $499.06 per month initially. But this amount will increase by 3% each year for the duration of the payout, thus providing some protection from inflation. Of course, it is plain to see that there is a cost to this rider, as the initial monthly payment is $159.53 less than the contract without the COLA rider. However, if the annuitant should live long enough to receive payments for the next 20 years, then the payment by year 20 would be $901.36 per month, or $242.77 per month more than the straight-life contract payout.

COLA riders can come in different forms, with some riders having a specific cost, while others (such as the one shown above) merely affecting the dollar amount of the monthly payout. Different rates of increase are also generally available, depending upon how much inflation protection the contractholder desires. For example, the contract shown above also has a 6% inflation protection rider option, which would result in the contractholder receiving a proportionately lower payment each month to begin with, and a higher payment at the end of the term.

A certificate of deposit that is issued in a U.S. market by a branch of a foreign bank. Most Yankee CDs come from New York. Yankee CDs are negotiable with a minimum face value of $100,000. As a negotiable certificate of deposit, a Yankee CDS is guaranteed by the bank and can be sold in derivative markets. They are usually bought by large investors as a low-risk, low-interest security. Yankee CDs usually cannot be cashed in before their maturity.

Like most Americans with assets that they intend to leave to their heirs, you have worked hard to accumulate what you have. And while you can feel good about leaving your designated heirs with a financial legacy, you may have some reservations about their ability to use their inheritances wisely. One way that you help them to make the right choices is by establishing an incentive trust. This type of trust can provide financial rewards to your heirs for accomplishing certain objectives that you consider beneficial.

An incentive trust resembles other types of trusts in many respects; it is established and funded by a grantor. In this case, the grantor is usually an older member of the family who wishes to pass on some or all of his or her wealth to younger family members-as long as certain goals are achieved. This type of trust can also make specific provisions regarding distribution of trust assets to beneficiaries.

As stated previously, the main advantage of an incentive trust is that it allows the grantor leverage to either financially reward or punish the behavior of the trust beneficiaries, within broad legal limits. Conditions such as age, education, lifestyle choices and employment are fair game in terms of criteria for this type of trust. For example, an incentive trust can restrict access to its assets to family members over age 25, or increase access for those who get a college degree. There could be a reward for carrying on a family business, or achieving some other personal or professional goal. Conversely, destructive behaviors, such as gambling or drug addiction can cut off trust assets as well.

However, if not written wisely, these trusts can also present your heirs with problems. Making unreasonable demands of your beneficiaries can lead to resentment and create other problems for them. For example, if the trust will only pay assets to an heir that is willing to continue the family business, then a beneficiary that happens to have other aspirations in life will be faced with what may be a rather substantial dilemma.

The key to successful incentive trust planning is flexibility. Remember that your heirs have their own goals and desires, which may never match up with yours. Choose the criteria for rewards and punishments wisely, and be sure to allow for contingencies such as disability or other misfortunes that could affect your beneficiaries’ ability to achieve the goals prescribed in the trust.

While many older Americans are afraid of the stock market with its risk and volatility, their perception of bonds and other fixed-income securities are often very different. Even though the values of many fixed-income investments fluctuate in the secondary market, the interest that they pay remains constant. Furthermore, the rates on many of these instruments are higher than those offered by banks or other traditional savings institutions.

But many investors are unaware of certain features inherent in many fixed-income securities known as “call” and “put” features. The issuer of a fixed-income security generally uses these features for one of two reasons: in order to either entice new investors or protect the issuer against a drop in interest rates. The call feature tends to fall into the latter category, while put options generally coincide with the former.

In and of itself, a “call” feature is simply a built-in provision that allows the issuer to recall the security and refund the money to its investors at a given window of time in the future (such as five years.) The issuer would do this if interest rates were much lower at the time of call than at the time of issue. For example, if interest rates were to hypothetically drop substantially by the time the call feature window opens, then the issuer will call the security. The logic behind this is obvious: why should the issuer continue to pay a higher rate to its holders when the rest of the market is paying less? Of course, the bondholders will receive their principal back in return from the call, and some issuers may even pay a premium to their investors as well.

Put features represent the other side of the coin. If a security is issued with a put feature, then the investor has the option of “putting” the security back to the issuer either at par or occasionally at a premium. This means that investors would receive not only their principal but a bonus amount as well if they turn the security back in to the issuer. This can protect investors from from being “locked” in to a lower-paying security in a rising interest rate evironment. For example, if interest rates have hypothetically risen by 3% when he exercise window of the put feature opens, then the investor will most likely turn the bonds back in to the issuer. The logic is again obvious. No investor will want to hold onto a bond paying a rate that is less than the prevailing market rate. Of course, having this option makes the bonds much more attractive to investors-and therefore much easier for the issuer to sell.

It should be noted in conclusion that a bond with a call feature will often pay a higher rate than an equivalent security that does not have this feature, and a put option will often lower the rate offered by the issuer on bonds that contain them as well.

The last several years have seen an explosion in the equity-indexed annuity arena, with a growing number of companies offering more and more products in this category. But while these hybrid annuities can provide many benefits to investors for whom they are suitable, they can also pose some risks to those that do not understand them.

By definition, an equity-indexed annuity is currently considered a cross between a fixed annuity and a variable contract. These vehicles allow investors to participate in a set percentage of the gains of the stock market without any downside risk. A minimum guaranteed rate is usually also included.

Of course, there are a great many competent, legitimate agents and advisors who work with equity indexed annuities and match them appropriately with their clients’ needs. Unfortunately, there has also been a growing trend among some insurance agents and brokers to aggressively market these contracts to senior citizens as the only viable investment alternative available to them in these uncertain times. There are also numerous crediting methods used by many different insurers to determine the return on capital for the investor. While this type of annuity can offer higher returns than traditional fixed annuities, it also often contains a number of provisions that investors can find very confusing. For example, many equity-indexed contracts have very long surrender periods, such as 12 or even 15 years. While many of these products contain an initial free-look period that may last up to two years, they can become substantially illiquid once this period has expired. Contractholders that need to liquidate their investment after the free-look period and before the end of the contract term can face early withdrawal penalties of up to a whopping 35%, plus forfeiture of all gains within the contract. However, many companies will now allow investors to withdraw up to 10 or 15% of their contract value each year without penalty.

Prospective investors should carefully consider both the benefits and drawbacks of these complex instruments. While indexed annuities can be an excellent vehicle for some investors, those who may need greater liquidity may want to consider other alternatives.

From simple colds and viruses to life-threatening diseases, any kind of health problem can put a huge strain on your pocketbook. By adopting certain habits you cannot only save money on fewer doctor’s visits and medications, you can preserve your cash in other ways.

Below are eight frugal living tips that will actually lengthen your lifespan.
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For millions of Americans, the choice between term and permanent insurance can be a confusing one. A number of variables factor in to whether one is more appropriate than the other for most consumers, such as debt level, health and longevity, and the size of one’s estate. There are a number of arguments on both sides stating why one is better than the other but in virtually all cases, there are a couple of situations where permanent insurance is usually the best choice.

One situation where permanent, or cash value insurance may be best is when there is a real chance that the insured or potential insured may become uninsurable in his or her later years due to health conditions. This is particularly true for those with estate tax issues that generally require life insurance to recify. For example, high net-worth individuals or couples may need to establish life insurance trusts in order to provide needed liquidity and relief from estate taxes. But this strategy is, of course, predicated on the ability of the insured(s) to pass initial underwriting requirements. And this ability can diminish with age for many consumers, who may have family histories of health problems that have surfaced for other members in their later years. Because term insurance requires its insureds to submit to new underwriting requirements at the end of each term, those in this category may no longer qualify for adequate (or even any) protection that may be vitally necessary to preserve the estate.

Another somewhat similar situation involves business buy-sell agreements. These agreements generally require that each partner in a business to purchase life insurance coverage on each of the other partners, so that when one partner dies, the death benefit from the insurance will be sufficient to buy out the deceased partner’s share of the business for the surviving owners. But again, it is absolutely necessary that the coverage be in force upon death, which may not be possible with term insurance. Therefore, some form of permanent coverage is generally used for this purpose.

Many investors are constantly looking for ways to increase their investment returns, particulary in their IRA accounts. Those who have stock in their IRAs can use a simple option trading strategy to increase the returns they are getting from their stock holdings. This strategy, known as covered call writing, is a conservative way to generate an additional regular flow of income. It is, in fact, the only kind of option trade that is permitted inside an IRA.

Options themselves are considered to be derivatives; that is, securities that derive their inherent value from another security (namely, the underlying stock.) Options always involve two parties, a buyer and a seller. The buyer of a “call” option on a stock believes that the price of the stock will rise, and therefore purchases a call option that will allow him or her to buy the stock at a given price for a given period of time. If the stock price does rise, then the buyer can exercise the option to buy the stock at the preset price of the call, instead of the current higher market price. Then the buyer can turn around and sell the stock at the higher market price and thus make a profit. However, if the stock price does not rise, then the call will eventually expire worthless-and the buyer is out the cost of the call premium that was paid.

Conversely, those who sell covered calls do not feel that the price of the stock will rise; they believe that it will either remain steady or drop. Therefore, they are willing to be paid a premium in order to risk having to deliver the stock for less (perhaps much less) than the current market price. However, since covered call writers already own the stock that they are getting paid a premium to risk delivering, they can simply deliver that stock instead of buying it on the open market at a higher price and then delivering it to the call buyer at the lower option price. Therefore this type of option strategy is considered to be “covered”, because there is no chance that the seller will have to come up with a large sum of money in order to cover his or sale.

If you count yourself as one of the masses that is sick and tired of the daily grind of your mindless job, then getting out and starting your own business is a real possibility. It may seem like a daunting task; but you can get into business on your own with as little as $5,000.

Erase the notion that you need hundreds of thousands or millions of dollars to make it on your own. If you can get your boss (read: spouse) on board then you’re on your way to a liberating experience. Here are some tips for you to get started on opening your own business:

1. You’ll need more than an idea.
Once you’ve created your business model you’ll have to develop the skills necessary to make it in this nitty-gritty world of the unknown. Pure smarts aren’t enough to be successful. You need to rely on determination, guts, tough skin and confidence. You are sure to encounter many roadblocks along the way and you have to be ready to face these head on.

2. Scrape together your dough.
You have to assess how long you can get by with little or no income. Aside from turning into a frugal being, you have to be completely honest with yourself when it comes to your personal finances. Make sure you credit is in good order as this will help you when it comes to applying for bank loans.

3. Cut corners.
As much as you’d want to have a luxurious office you have to be reasonable. Work out of your home and set up an office that has all the amenities minus the rental costs. If you need space for conferences or meetings then ask around friends and see if you can share their space for cheap. Remember you will have to have some face-to-face meetings, so plan accordingly.

4. Make do with what you’ve got.
A new computer system could cost upwards of $2,000 so maybe what you’ve already got could be sufficient. If you need a new system then lease instead of buy.

5. Think outside the box.
There are many ways to be frugal without looking cheap. Search bargain outlets for office materials, scour the internet for deals and just keep your eyes and ears open for opportunities as they come knocking because the best deals aren’t advertised but are found out through word of mouth!

Like most other Americans that are saving for retirement, you probably need to make adjustments in your investment or retirement portfolio from time to time. Of course, making these changes will have tax consequences, unless they happen inside a tax-deferred account or plan.

However, if you own any type of life insurance or annuity, then you do not have this restriction, thanks to the extremely powerful lobby group that the life insurance industry has in Washington. Regardless of whether your contract is inside an IRA or qualified plan or not, the IRS will allow you to move your policy or annuity into another contract without taxation. The rules for doing so are similar to those for IRA transfers or rollovers, meaning that the exchange must be done directly. The owner cannot take constructive receipt of the policy or contract proceeds. Therefore, if you have a life insurance policy that you want to move from one carrier to another, then the current carrier will simply cut a check directly to the new carrier for the amount of the policy.

There is a considerable amount of freedom in how 1035 exchanges can be done. One annuity can be exchanged directly into another, the same as for life insurance. Life insurance can also be exchanged into an annuity contract as well. However, this provision does not work in reverse. The IRS does not permit annuity contracts to be transferred directly into any kind of cash value life insurance. Finally, a 1035 exchange can be combined with new money to create a larger new contract. For example, assume that you have a $100,000 fixed annuity that has come due. If you would like to transfer the contract to another annuity company that is paying a higher rate, then you also have the option of adding more money to the new contract. If you were to put in another $100,000, then that will be combined with the incoming contract to make a single $200,000 annuity. Of course, in this case, if the current contract is contained inside an IRA or qualified plan, then any additional money put into the contract would be limited by the appropriate contribution limits. These rules hold true for fixed, indexed and variable insurance products.

If you are like millions of other Americans, you are working hard to save money for your retirement, and perhaps also to leave a legacy for your heirs. But of course, while any beneficiary is likely to appreciate receiving an inheritance, some beneficiaries are obviously much more capable of managing their money than others. Some beneficiaries may have mental or psychological issues that prevent them from being able to make sound decisions, while others may have debt or other financial issues that could result in seizure of the inheritance by creditors.

There are several ways to remedy situations like this. The most obvious solution would be to establish a trust for an unreliable beneficiary that would prevent him or her from being able to access the principal, or else define other limits for the use of the money. But creating a trust can be expensive and time consuming. There is another alternative that you may want to consider. Many annuity and life insurance companies now provide beneficiary restriction options on their contracts. These options allow policy or contract owners to specify the terms under which their beneficiaries can receive their money. This restriction can be either partial or total, and can come in the form of an arbitrary settlement option, such as straight life or life with period certain. For example, assume that you intend to leave $100,000 to your beneficiary, and he or she has $50,000 of debt that must be paid as soon as possible. If your policy or contract has a restriction option, then you could use that to specify that $50,000 could be paid out in a lump sum, while the remaining balance is converted to a lifetime income stream.

While restriction options cannot be used to create specific customized solutions for beneficiaries on the same level as a trust, they also do not cost anything and only take a moment to complete. The only other real disadvantage they have is that they are not available from every insurance company or with every contract.

If you are like most other Americans that are saving for retirement, then at least a portion of your portfolio is invested in mutual funds. In most cases, this means that you are probably paying some sort of sales charge for your investment. This fee can range anywhere from 2 or 3 percent up to 8.25%, the legal limit for mutual fund sales charges. The average mutual fund company assesses sales charges ranging from approximately 4.25% to 5.75%. However, fund companies are required to offer volume discounts to their shareholders that allow them to pay less for larger dollar investments. These discounts, called breakpoints, are designed to entice investors into purchasing larger share amounts. A hypothetical schedule of breakpoints is shown below:

$0-25,000 – 5.75% sales charge

$25,000 - $50,000 - 5.25% sales charge

$50,000 - $100,000 - 4.75% sales charge

$100,000 - $250,000 - 3.75% sales charge

$250,000 - $500,000 - 3% sales charge

$500,000 - $1,000,000 - 2% sales charge

$1,000,000 and up - sales charge is waived

This hypothetical schedule shows a fairly typical breakpoint schedule for the average mutual fund company. A key issue to remember here is that breakpoints are offered within a single fund family’s entire selection of funds, so an investor who constructs a portfolio of funds within a single company will be eligible for all breakpoint discounts. For example, if someone invests $100,000, $25,000, $150,000 and $50,000 with four different funds offered by the same fund company, then the investor would be entitled to a breakpoint reducing the sales charge to 3%, according to the hypothetical schedule listed above. Therefore, investors must take this issue into account when choosing between various mutual funds to invest in. While cost is obviously not the only issue to consider, it should be taken into account in determining how to allocate one’s portfolio. If an investor wishes to invest in a selection of funds from different fund families, then the portfolio’s expected performance must be enough to offset the higher sales charges that will be assessed versus what the would be paid if the portfolio choices were limited to a single fund family.

For many investors looking for higher returns and portfolio diversification, mutual funds are ideal investments. They offer a combination of professional management, liquidity and reduced volatility that makes them excellent vehicles for both growth and income investors. However, some investors follow simpler investment strategies that do not require active portfolio management, and therefore do not need to pay the high sales charges and ongoing management fees assessed by many funds.

There is, however, an alternative for those in this category. Unit investment trusts (UITs) provide diversification similar to mutual funds, but without the internal portfolio turnover. A unit investment trust is simply a set portfolio of securities that have been selected according to either a specific set of characteristics or perhaps a specific investment strategy. Just as a share of a mutual fund represents an undivided interest in each of the funds’ holdingd, each unit of the trust represents an undivided interest in each of the securities held within the trust. Each trust will hold the securities for a set term and then mature. Upon maturity, the securities in the trust are reset according to the trust’s objective if necessary. The process is then repeated. There are many types of this kind of trust; one of the most common examples of this is UITs that follow the “dogs of the Dow” strategy. The ten highest dividend-yielding stocks from the Dow Jones index are purchased within the trust and held for 13 months. Then the stocks within the trust are adjusted according to this strategy, and a new trust is issued for another 13 months. Because they are not actively managed, UITs do not generate capital gains or losses of any kind, except at maturity. They can pass through interest and dividends periodically, depending upon the investment objective of the trust. There are many different types of UITs that meet various investment objectives, such as growth, income, or sector exposure.

UITs also generally cost less to invest in than actively managed investments. Although most UITs generally have a nominal sales charge, they have no annual expense fees of any kind, due to their passive management. Even their initial fees tend to be fairly low. Many of the trusts that follow the “Dogs of the Dow” strategy usually have an entrance fee of around 1%. Although this fee is charged every time the trust resets, the aggregate cost is still often below that of a comparable mutual fund investment.

Your last Social Security statement contained three key numbers that you may still not know which is best to pick. One number was the benefit amount you will receive at age 62; the second was your benefit amount at your normal retirement age and the third was the amount you will receive if you work until age 70. While there are a number of factors that can affect both the final amount of your benefits and when you should begin taking them, the possibility of coming out ahead by simply investing the money should be examined. If you begin taking early or even normal distributions and invest them, chances are you will come out ahead of where you’ll be if you choose to wait. The following table breaks this down clearly:

Cash flow comparison of Social Security benefits, assuming life expectancy to age 90

However, the information in table 1 is not final, as the amounts from column II and IV must be combined in order to arrive at the correct final comparison. Taxes are not taken into consideration here either, but those who are eligible to make Roth IRA contributions will come out much further ahead of those who cannot.

^{Remember, while the differences in cash flow from the tables above may not seem that large, the growth scenarios at age 62 and 66 produce approximate liquid assets of $136,000 and $78,000, respectively. These are available to the participant for any reason at any time, such as to pay off a mortgage. (Of course, liquidating this balance will have an effect on the amount of benefits ultimately realized.)}