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Business and Estate
A Publication of Business & Estate Advisers, Inc.

VOL. 13, NO. 1 WAYZATA, MINNESOTA Winter 98/99

Baby Boom at B & E
(Left to Right)
Addison Zahrbock Bowman, born 09/01/98, granddaughter of Dennis and Sue Zahrbock; Chloe Jane Kaelberer born 12/29/98, daughter of Sarah and Darvin; Lindsey Pearl Mattson born 02/06/99, daughter of Michele and Chris.

Education IRA - Rules and Reality

by Sarah J. Kaelberer

With all of these new babies around, what would you expect us to be thinking about? College Education Expenses, of course! With college expenses increasing at a faster rate than inflation, it is important to consider account and investment alternatives and get started saving and investing as soon as possible.

What are the options? Well, there are many these days; but let's explore the latest "buzz" on the subject- the Education IRA. First available in 1998, this new account offers a way to invest money, for college education only, and reap some tax advantages. But, like most tax advantageous accounts, it is not without restrictions. Let look at the rules:

  • An Education IRA allows an account be opened in a minor (under age 18) child's name. Accounts can be transferred to another minor's name, should one child decide not to pursue higher education. Anyone with an adjusted gross income of $160,000 or less for joint tax filers ($110,000 for single filers) can open an account in the name of any minor child.
  • Any individual can make a contribution; however, total contributions for any one account are limited to $500 per year. Unlike other IRAs, contributions to these accounts must be made by December 31st. Contributions can't be made for any child over age 18.
  • Contributions are not deductible. All growth is tax deferred and withdrawals used for the child's qualified higher education expenses are not taxable. For withdrawals not used for qualified higher education expenses, the earnings will be taxed and may be subject to a 10% penalty.

Those are some of the basic "rules". Now let's look at the "reality". Here is what we have found in working with these accounts:

  • Most brokerage firms will not open an Education IRA. It is not effective for them when considering the cost of offering automation, statements and investment services for an account with such a small balance, which generates a minimal fee
  • Many mutual fund companies will not open an Education IRA for any child unless the parent or guardian has a larger account with the fund family. Most will also not accept contributions of less than $500 to an Education IRA.
  • The account, while helpful in saving for college, cannot possibly cover all of the education expenses. A $500 per year investment, for 18 years, at an annual return of 10%, untaxed will grow to about $25,000. The same assumptions, except taxed at the 28% tax bracket, will grow to about $18,500. (This is a hypothetical illustration and not intended to reflect the actual performance of any specific security.) This makes the tax deferred growth an attractive feature. But who can go to college on only $25,000 today, let alone in 18 years, with, as The College Board estimates, the costs of college increasing at an average of 5% per year? This means in the year 2016, 4 years of public college may cost over $70,000 and a private college over $185,000.

In summary, an Education IRA is a viable option, with some legal and operational restrictions. While it is a good start, we don't believe it is the complete answer to the ever-present challenge of college education funding. Call us to discuss some other creative alternatives to saving and investing for college expenses.

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E. Dennis Zahrbock, CFP
What's Happening?

By E. Dennis Zahrbock, CFP

Well, as you can see on our Cover Page, babies are happening! Thanksgiving in Portland gave us a two and a half-month peek at our new Granddaughter Addie. Christmas in Wisconsin was equally outstanding. Many had told Sue and I "wait til you get grandchildren".let me publicly say the MANY were right

Customer Service continues to be a "talked about" event but seldom are we really treated like Kings & Queens. When we purchased our new GMC Denali in October from Swant Motor Company in Rice Lake they truly delivered more then we expected. In appreciation we ran a "thank you" letter in the Rice Lake paper.Guess what, before the letter we were treated with Great Service, after the letter we have been treated like "Kings & Queens". Thank you Swant Motors.

Getting smart continues to be important. During 1999 we are committed to a significant investment in our company's #1 resource.no it's not more computers, more phones, more file cabinets.it's our staff. In 1999 we start a 3 - 5 year program of obtaining Professional Designations for many of our staff. We're also investing in Dale Carnegie style classes so that our staff can offer the best alternatives and answers to our customer's financial questions. I'll keep you tuned to the progress in the area.

After 15 months of development we are very pleased to roll out Business & Estate Adviser's Corporate Brochure. From what we've heard in comments it's one of the nicest most people have ever seen. We'd like to publicly thank Dona Barber and Keith Young at GenMark for all of their support on this production.

Give our office a call if you'd like a copy, they are truly a brochure that describes what Business & Estate does!

December was sad in that we had three of our Advisory Board Members complete their three-year terms. We thank Gary Briggs of Minnetonka Marine, Arlys Stadum of US West Communications and Idelle Schrank of Edina Realty for their service to our company. Joy was also present in December when we announced our new board additions. They are Sharon Nelson of R & S Litho, Bob Hartman of Lindquist and Vennum and Debbie Walters of General American Life Insurance Company.

Last year in our first Adviser addition we boldly picked the 1998 market to be up 10-12%. By the end of the 3rd quarter we were looking pretty stupid in the "negative" sense.like we were 10-12% low. Goes to show how difficult it is to predict our market. I'm sure our clients are happy with the results.four years in a row with over 20% returns has never been done before. So what do we pick in 2000.again don't hold me to this.it is my "gut" call that we will be in a range of -5% to plus 5% for 1999.let's hope I'm wrong again in the "positive sense".if I'm wrong in the "negative sense" we could be in for some very interesting times.

For Sale
We have re-configured our office space and this results in "extra" modular office furniture. We have over 60' of partitions, desks, shelves, etc. All of the hardware is included. Call us if you or someone you know has an interest. We will sell it at a bargain price.

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November 1998

Dennis was invited to St. Louis to serve as an "actor" (Must have heard about Red Barn Theater last summer) playing the part of a business advisor seeking to know a prospective business owner client. This was in conjunction with the GenMark Business Advisor School.

December 1998

Dennis attended a one-day committee session on how GenMark and the Council of Growing Companies can better benefit from their national relationship.

January 1999

International Forum Meeting held in San Francisco but Dennis unable to attend this year. However, he had another trip to St. Louis for advanced ESOP training.

February 1999

Dennis, Sarah, and Lisa attend computer club and GenMark Conference in Colorado Springs, Colorado.

March 1999

Sue and Dennis head for Jamaica for their second annual Mission Jamaica project. Returning to do further work on a Kingston School is the plan. Again the two will be "block layers" for a week.

April 1999

AALU meeting in Washington and Sue and Dennis will again be in attendance. Great time to visit our Nations Capitol and try to impact our nations leaders.

May 1999

A trip to Seattle for Sue and Dennis to witness goddaughter and niece Erin Larson's wedding. Then off to GenMark's conference of champions to be held in Florida and Nevis, West Indies. Dennis and Sue will be gone 10 days. Dennis ranks in the Top 5 for the conference Qualification. Also, mark your Calendars - May 24, 1999 for Skip-A-Day XV

June 1999

Dennis & Sue will be traveling to New Orleans to the 1999 MDRT meeting. Dennis will be a featured speaker at the meeting.

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A Trip to the Tattoo Parlor

As many of my readers are aware my left arm, from the wrist to the elbow is covered with Tattoos! Before explaining what they are and how they got there, let me digress a small amount.

In June of 1995 I rearranged my life. Instead of business first, family second and God third, I changed to God first, family second and business third. This is not to say I now neglect my business, to the contrary, our business is better then ever.

When I reflect I now know why.the tattoo is still going to be explained.first off I gave back to God my

Business, which I had thought, was mine. I now work for Him and he's the best Boss I've ever had. He taught me to do three things: #1: Be with our clients to build trusting relationships. #2: Explain complex financial matters to our clients with the goal of only using one sheet of paper. And #3: Work with our vendors to deliver "better then expected" results for our clients.

When God taught me only to concentrate on these three areas it allowed my work week to decrease from 6-7 days to 3 days (plus a couple of evenings) leaving 3 days for family, relaxation, and spiritual thought.

The next thing God did with his company was to "narrow the market". We now work exclusively in three areas: 1) 401(k) retention of our clients and 401(k) expansion by repairing plans that aren't working with other providers 2) Doing Business & Estate plans for owners of companies that have 401(k) plans through us and 3) working in all areas of financial services with clients that request to do business with us (we've been around long enough that many people call us to help solve their problems).

Last, God sent me to the Tattoo Parlor. On the top of my wrist are tattooed God the Father, God the Son and God the Holy Spirit. This is to remind me of who's in charge and whom I report to work for. Next are Sue, Steph, Lori, Rache and their spouses and children. This reminds me how much I love and care for them each and every day. Finally, and very importantly, all of my customers are tattooed so that whenever I'm anywhere in the world and an idea that can benefit them comes up I can quickly review just whom the idea may work for.

The tattoo is permanent; it cannot be removed without immense pain. Of course, it's invisible to all others but God and me but when all is said and done it benefits all three areas of my life. I never thought I'd like tattoos but I like mine.

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Business & Estate Adviser's
"Tips for Teens"

Volume 2 Issue 1

Edited and Revised by Business & Estate Advisers, Inc. as an insert to our newsletter

By: E. Dennis Zahrbock, CFP

In our last issue we discussed the "Defensive Team" in a financial plan. In the preceding issue it was the "Offense". Today, we'll take a look at the "Rule Book", the "Referees", and the "Interference Team".

The "Rule Book" is the laws of our land, starting with the Constitution and proceeding to the most recent session of either Congress or our State Legislature. We are a nation "by the people, for the people and of the people". What this means is our Congress and Legislature try to pass and maintain laws for the good of the vast majority of the people.

Congress then appoints "Referees" that watch to see if the laws are carried out. For the nation the referees work for either the Internal Revenue Service (IRS) or the Department of Labor (DOL). For the state the referees work for the State Revenue Department. As a general rule, the DOL is the most strict at calling fouls; they tend to look at the written word definition not the intent of Congress. The IRS falls close behind the DOL and the state usually looks at "intent" and then definition. If we and the DOL, IRS, or State Disagree we can hire professional arguers (lawyers) to argue our point in the nations courts. Judges then determine which party is right!

The "Interference Team" is composed of magazines, partially informed advisers and well meaning friends. For example if a magazine article illustrates money invested with an offense oriented investment that earns 10% per year for ten years it would say "$1.00 invested 10 years ago would be $2.59 today". In reality this is not true as Congress has passed laws saying we owe taxes, if taxes are 40% then 40% of our 10% earnings are lost each year to taxes. After taxes our "$1.00 invested 10-years ago might only be worth $1.79 today".

The solution to a good financial plan is to create an "offense" that understands the "Rule Book" and how the DOL, IRS and Revenue Departments interpret the law.

There are times when an "offense" that invests in Investment "A" can earn less before taxes but still be more after taxes then Investment "B".even when "B" claims to pay a higher return.

It is also important to understand that the "Rule Book" has four different taxes that affect investments. They are ordinary income taxes, capital gains income taxes, gift taxes and estate taxes. Some investment's shine at some taxes but are dismal at others. Let's look at a couple examples.

You invest $10,000 in bare land real estate. Over 20 years it appreciates to $110,000 (about 13% growth). Had you invested the $10,000 via an Individual Retirement Account (IRA) the entire $110,000 may be subject to 40% ordinary income taxes thus meaning you net $110,000 minus $44,000 = $66,000. On the other hand if you invested $10,000 of your non-IRA money you would have owed some tax in year #1 (approximately $6,666 in tax to have $10,000 non-IRA money after ordinary income tax). However, when you sell the property your capital gains income tax (20%) would be $20,000 (20% of $110,000 minus $10,000 original investment). Total tax would be $26,666 with $20,000 deferred for 20 years. Would it be worth it. The truth is the $6,666 invested at 10% would be worth around $40,000 so in this example the investment and return in either tax is about the same! *These are hypothetical illustrations and not intended to reflect the performance of any actual security.

Another common error in "offense investing" is to automatically believe "tax free bonds" (special bonds that the rulebook says you owe no ordinary income tax on) are the best deal around. It is true that bonds are "ordinary income tax free" but they are subject to estate tax. An alternative to a "tax free bond" may be "tax deferred life insurance". For example if you invested $25,000 per year for 15 years in a "tax free bond" it may grow to $566,000 free of income tax (at 5% growth), but if you then died it may be taxed at 50% in your estate so your heirs only get $283,000!

On the other hand if you paid a $25,000 premium to a life insurance company for 15 years the total cash value could be about $566,000 (about same as "tax free bond" but now held as "tax deferred cash values"). Again, if you were to die, estate taxes could be 50% but life insurance would add about $334,000 to your value (total $800,000) so your heirs net $400,000 (40% more!)

Today's Quiz:
True False
  1. The IRS represents the state in collection of income taxes. T F
  2. If an "interference team member" stated a 10% return it can be more relied upon the more credible the magazine publisher may be. T F
  3. A "tax free" investment in special bonds defined in the "Rule Book" is ordinary income tax free and capital gains tax-free. T F
  4. An investment in a "tax free or tax deferred" environment is the best choice to avoid estate taxes. T F
  5. If your father (who has $10,000,000 in stock which he paid $1.00 for) gives you $1,000,000 in stock which of the following will likely be the results:
    • You will owe about $500,000 in gift tax.
    • Your father will decrease his estate by approximately $1,500,000
    • Your father will receive an income tax deduction of $1,000,000
    • You will need to add $1,000,000 to your income the year you receive the gift

Fax your answers to (952) 475-0816 with your name, address, phone & e-mail (if available) for a free prize if all answers are correct.

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Business and Estate
Business & Estate Adviser, published periodically, is composed on a personal computer utilizing Microsoft Word 97 and Times New Roman typeface. Camera-ready copy is generated on a Hewlett-Packard LaserJet III printer. Gray-shades and printing by Wallace Carlson Company, St. Louis Park, Minnesota. For additional copies or information, please contact Michele Mattson at (952) 475-0440. Copyright © 1990-1999 Business & Estate Advisers, Inc. All rights reserved.

282 East Wayzata Boulevard
Wayzata, MN 55391
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Business & Estate Advisers, Inc and B&E Investment Advisers, Inc. are separate entities from ValMark Securities, Inc.

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