Synergy Financial Group
Your Personal CFO
Synergy Financial Group
George Van Dyke
401 Washington Ave #703 Plan for Business Ownership Transitions with a
Towson, MD 21204
410-825-3200 Buy-Sell Agreement
gvandyke@synergyfinancialgrp.com
If you're a co-owner in a business partnership,
closely held corporation, LLC, or other joint
venture, consider what would happen if you or
one of your co-owners suddenly left the busi-
ness, became disabled, or suffered an un-
timely death. For example, what would hap-
pen if a co-owner died unexpectedly? Would
you be forced to work with his or her spouse
or other heir? Or, if you died, could your family
I hope you all are get a fair price for your interest in the busi-
enjoying this fall ness? Leaving such issues unresolved can
result in financial problems and hardship for
weather. Please call
the co-owners
me if you have any
financial or investment and the business
itself. Fortunately,
concerns as we head
into the holidy season. you and your co-
owners can settle
such issues in
advance with a
document known
as a buy-sell
agreement.
What is a buy-sell agreement?
Sometimes referred to as a prenuptial or pre-
marital agreement for business owners, a buy-
sell is a legally binding contract that estab-
In this issue: lishes to whom, under what circumstances,
and at what price a co-owner can sell his or
Plan for Business Ownership her business interest.
Transitions with a Buy-Sell
Agreement
Describes to whom . . .
Separately Managed There are different types of buy-sells. Each
Accounts: Accounts
Customized for You type describes how an interest can be sold in
a slightly different way, depending on the form
Qualified Personal Residence of the business entity and the co-owners'
Trust (QPRT)
goals. The common element among the differ-
Ask the Experts ent types of buy-sells is that the co-owners
are prevented from selling to outsiders without
the consent of the other co-owners. For exam-
ple, with a buy-sell known as a cross pur-
chase plan, a departing co-owner agrees to
sell his or her interest to the remaining individ-
ual co-owners. With a stock redemption plan,
October 2006
used by closely held corporations, a departing
co-owner (shareholder) agrees to sell his or
her interest to the corporate entity.
Of course, funds must be available to buy a
departing co-owner's interest. One way this
can be accomplished is through the purchase
of life and disability insurance policies on each
co-owner.
. . . under what circumstances . . .
Events that trigger a buy-sell typically include
the death or disability of a co-owner, but could
also include a co-owner's retirement, divorce,
receipt of a third-party offer to purchase, or
any other circumstances that you anticipate
would be disruptive to the business or cause
hardship to the co-owners.
. . . and at what price a business interest
can be sold
A buy-sell also spells out how interests will be
valued when they are sold. You and your co-
owners decide in advance how a reasonable
price for the business will be calculated. There
are different valuation methods from which to
choose, including book value, appraised
value, and capitalized earnings.
Smoothing the way
A buy-sell agreement can protect a business
and its co-owners against problems that might
occur due to a change in ownership. A proper
buy-sell will provide for an orderly transition of
ownership, prevent unwanted co-owners, es-
tablish a fair value for the business, and guar-
antee buyers for the business interests.
The decisions you need to make when creat-
ing a buy-sell that works for you are numerous
and can be complicated. Your financial pro-
fessional can help.
Page 2
Separately Managed Accounts: Accounts Customized for You
Mutual funds have been, and continue to be,
a good solution for many investors seeking
professional money management. But when
you buy shares of a mutual fund, your assets
are pooled with the assets of other fund hold-
ers. So even though you gain professional
money management, there is no individual
portfolio management. For investors seeking a
more personal touch, recent advances in
technology and changing advisor business
models have facilitated the growth of sepa-
rately managed accounts (SMAs) as an alter-
native to mutual funds.
What is an SMA?
An SMA is a personal investment account that
is customized and managed for you by a pro-
fessional money manager. As a personal ac-
count, your assets are not commingled with
Assets under those of other investors. Historically a tool for
management in institutional investors and high-net-worth indi-
separately managed viduals, SMAs are now available to a wider
accounts grew by group of investors.
17.7 percent in 2005
to $678.1 billion . . . It was once common for SMA programs to
the continued growth require a minimum of $1 million in investable
puts the industry in assets, but today you can find separately
line to reach $1.5 managed accounts with minimums as low as
trillion by 2011. $50,000. SMAs' lower minimums, along with a
growing appreciation of their unique features,
Money Management have led to their increasing popularity.
Institute
How SMAs trump mutual funds on taxes
Feb 14, 2006
Mutual funds have an inherent lack of tax effi-
ciency. When you buy shares of a mutual
fund, you automatically get a share of its em-
bedded tax liabilities. By law, mutual funds are
required to pay out realized capital gains to all
fund holders, regardless of how long they've
held their shares. The lack of tax efficiency
can certainly be a greater problem for actively
managed, higher turnover mutual funds than it
is for indexed mutual funds.
So if you buy shares in a mutual fund right
before a distribution date, you may receive a
distribution and have to pay capital gains
taxes even though you may have held the
fund for only a short amount of time.
And, a fund can have a capital gains distribu-
tion even when the fund's net asset value is
declining, as the fund may have unrealized
capital losses but realized capital gains.
By contrast, with SMAs, each security held in
the account has an individual cost basis,
which allows you to make specific tax-
motivated moves. For example, you can
generally request that your manager sell a
position with an unrealized loss in order to
offset capital gains. Those capital gains may
be from trades made for the account, or capi-
tal gains on other assets, such as a gain from
real estate.
How SMAs compare with mutual funds on
trading costs and fee structures
Unlike traditional brokerage accounts, SMA
fee structures are asset-based instead of
commission-based. The SMA fee structure
typically covers the investment management
fee, trading costs, custody, reporting, and
financial planning services.
One thing to consider when comparing mutual
fund expenses against SMA fees is the
"invisible" trading costs incurred by mutual
funds. Mutual fund expense ratios cover fund
management fees, administrative costs, and
other operating expenses. However, they
don't cover trading costs, which include bro-
kerage commissions. Although these trading
costs can vary significantly by mutual fund
(depending in large part on their annual turn-
over rates), estimates of these costs range
anywhere from .5% to 1%.
To get an "apples to apples" expense com-
parison between SMAs and mutual funds, you
need to determine the total amount of fees,
including trading costs, for both investment
vehicles. Your financial professional can help
you with this.
How SMAs can be customized for your
specific situation
Another important feature of SMAs is their
ability to allow you to exclude certain securi-
ties, like the stock of the company you work
for. You can also set sector guidelines, such
as excluding a sector you might disapprove of
(e.g., tobacco or casino stocks). This flexibility
allows you to better tailor your asset allocation
for your own unique circumstances and de-
sires--key considerations for many investors
with concentrated stock positions.
The bottom line
For investors who place a priority on control
and tax efficiency, and have the necessary
capital, an SMA program may make a lot of
sense. Your financial professional can help
you crunch the numbers, look at your overall
financial picture, and determine if an SMA
might be right for you.
Synergy Financial Group
Qualified Personal Residence Trust (QPRT)
If you own a home and expect to have a large
taxable estate, you may want to consider this
popular estate planning tool that can minimize
federal gift tax and eliminate federal estate
tax.
What is a qualified personal residence
trust (QPRT)?
A qualified personal residence trust (QPRT,
pronounced "Q-Pert," and sometimes referred
to as a grantor retained interest trust, or GRIT)
is an irrevocable trust into which you transfer
a primary residence or vacation home while
retaining the right to live there rent free for a
specified number (term) of years. At the end
of the term of years, the property passes out-
right to your children (or whomever you've
named as the trust beneficiaries).
Tax advantages of a QPRT
When you transfer a home into a QPRT,
you're considered to have made a taxable gift
to the trust beneficiaries. However, the value
of the gift isn't the full fair market value of the
home, as it would be with an outright transfer.
Rather, the gift can be discounted to reflect
your retained interest (i.e., your right to live in
the home).
Note: You can leverage your $1 million life-
time gift tax exemption, to the extent it has not
already been used, to offset any gift tax that is
due.
Another tax benefit of a QPRT is that, as long
as you outlive the term of years, the value of
the home (plus any appreciation) will avoid
estate tax because, when you die, it won't be
includable in your gross estate.
Finally, you get to keep all the income tax
benefits of homeownership during the term of
years.
Deciding on the term of years
One disadvantage of a QPRT is that if you die
before the term of years ends, the full fair mar-
ket value of the home at the time of your
death will be includable in your gross estate.
So, deciding on the term of years becomes a
tradeoff. The longer the term of years, the
smaller the gift to the beneficiaries (and the
smaller the gift tax), but the greater the likeli-
hood you won't outlive the term, defeating the
purpose of the QPRT.
One further consideration: If you decide to
continue living in the home after the term of
Page 3
years ends, you may do so, but you'll be re-
quired to execute a written lease and pay fair
market rent to the beneficiaries.
Capital gains tax savings tradeoff
If you own a
If your beneficiaries were to receive the home home and
at your death, they would receive an income expect to have a
tax basis that is "stepped up" to fair market large taxable
value. With a QPRT, however, because your estate, you may
beneficiaries receive the home at the end of want to consider
the term of years, they'll receive a carryover this popular
basis (i.e., your basis). If the home has appre- estate planning
ciated substantially in value, the increased tool that can
capital gains tax your beneficiaries will owe minimize federal
upon the sale of the home may offset any gift gift tax and
tax savings you will enjoy. eliminate federal
estate tax.
QPRT rules
To qualify for beneficial QPRT tax treatment,
the trust must conform to many rules and
regulations, including:
1. Can't transfer more than one home to a
QPRT
You can't transfer more than one home to a
single QPRT. However, you're allowed to set
up two QPRTs, transferring one home (a pri-
mary residence or vacation home) to each
trust.
2. Home must be occupied by you, your
spouse, or your dependents
You, your spouse, or your dependents must
occupy the home for the entire term of years.
The home must be used as a residence at all
times, and generally can't be sold or used for
any other purpose.
Because it is
3. No other property can be held by the
irrevocable, a
QPRT
QPRT can also
Generally, a QPRT can't hold any property be used as an
other than the home (and related buildings asset protection
and land reasonably appropriate for residen- tool, even if
tial use). However, a QPRT can hold cash, taxes are not a
subject to certain conditions, for limited pur- concern.
poses, such as the initial purchase of a home,
the replacement of an existing home, or the
payment of certain related expenses.
Plus, asset protection
A QPRT can help minimize gift and estate
taxes, and because the trust is irrevocable, it
can also be used as an asset protection tool,
even if taxes are not a concern. If you're in-
terested in learning more about QPRTs, talk
to your financial professional.

Synergy Financial Group
George Van Dyke
401 Washington Ave #703
Towson, MD 21204
410-825-3200
gvandyke@synergyfinancialgrp.com
Linsco/Private Ledger Member
NASD/SIPC
Copyright 2006 Forefield Inc.
All Rights Reserved.
Ask the Experts
How can I gauge an investment's volatility?
Even though two invest-
ments or portfolios might
produce the same average
annual return, one might
get there with a lot of ups
and downs along the way, while the other
might be less volatile from year to year.
Let's say you're interested in a mutual fund
that has had an average annual return of 8%
over the last 10 years. In evaluating the fund,
you should also look at its year-to-year re-
turns. You might see that the annual return
during some of those years has been much
higher than 8%. In other years, the fund might
actually have lost money. (This is a hypotheti-
cal example, of course, and actual returns for
your fund might be very different.)
There's also a statistic that can help you un-
derstand how volatile an investment has been
over time. "Standard deviation" measures the
size of an investment's ups and downs--how
much its returns have deviated from time to
time from its own average.
I'm retired. How can I minimize fluctuations in my income?
Look at your asset allocation. Though it
doesn't guarantee a profit
or insure against a loss, a
diversified portfolio im-
proves your chances of
having some investments
that perform well when
others don't.
Maintain a financial cushion. That may help
you avoid having to sell income-producing
assets unexpectedly, which could reduce your
future income.
Investigate noncallable bonds. Bonds, espe-
cially those with fixed rates that pay interest
every six months, have traditionally been an
important income provider in a retirement
portfolio. However, the higher the interest rate
and the longer a bond's maturity, the greater
the chance the issuer will call the bond and
pay off its debt early, ending that income.
You'll have to reinvest your principal else-
where, possibly at a lower interest rate. With a
noncallable bond, that can't happen.
Buy bonds with various maturity dates.
"Laddering" bonds can help even out your
income stream. As each one matures, you
can reinvest the principal. "Laddering" can
The higher an investment's standard devia-
tion, the bumpier the road. A low standard
deviation is like driving across desert flats; a
high standard deviation is like crossing a
mountain range. When you select invest-
ments, you want to know which type of trip
you might be taking.
Why is understanding standard deviation im-
portant? Because if you aren't able to stay
invested during down periods--for example, if
you're risk-averse, or if you must sell unex-
pectedly--you're less likely to match an invest-
ment's average return figure. The closer you
are to using the money you've invested, or the
lower your risk tolerance, the more consistent
you'll probably want your returns to be.
Though past performance is no guarantee of
future results, standard deviation is one of
several statistics that can help you understand
the level and type of risk involved in a specific
investment. For mutual funds, those figures
often are listed under "volatility measure-
ments" or "risk measurements."
give your portfolio smoother transitions and
greater flexibility, even though interest rates
(and thus your income) will still change over
time as you reinvest in newer bonds. Another
option is a series of zero-coupon bonds with
maturity dates that match a set schedule.
"Zeros" pay interest only when they mature,
but you'll know in advance exactly how much
you'll receive from each one and when. If you
invest in municipal zeros, you generally won't
owe federal taxes on the interest.
Set up a baseline income. A fixed annuity can
distribute specified payments over a given
time period, your lifetime, or the lifetime of
both you and your spouse. That could provide
a stable foundation that allows you to invest
other assets differently. Your financial profes-
sional also may suggest a systematic sched-
ule for liquidating assets or taking distributions
from an IRA or retirement plan.
Study dividend histories. If you invest in
stocks, consider companies with a long-term
track record of stable or increasing dividends.
These are only a few ideas for managing the
income roller coaster. Your financial profes-
sional has more, and can suggest which ones
might make sense for you.