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| - Sustainable Civilization: From the Grass Roots Up Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8 FINANCIAL PLANNING - RESIDENCY AND COLLEGE TUITION. Why are tuition costs different for non-residents? In most states, there is a significant difference in college tuition rates for bonafide residents of the state, and those from outside the state. The general reasoning is that institutions of higher education are funded or subsidized by state taxpayers. Since non-resident students (and their families) generally have not contributed to the source of this funding, they are required to pay fees which more closely represent the actual cost of the education. Beyond residency status consideration, in an era of tightening budgets if states reduce educational subsidies, you can expect tuition to rise for everyone. For the present, qualifying for in state tuition makes a significant difference in what college will cost. For example, tuition costs at the University of Arizona are: Undergraduate Tuition Resident $3,593.00 Nonresident $12,113.00 Who determines college residency rules? In Arizona, the rules and regulations for establishing residency for tuition purposes are defined by the Arizona Board of Regents, which is authorized by Arizona law to set different rates for resident and non-resident students. The requirements to establish residency for tuition purposes are independent from those of other types of residency, such as voting or holding public office. Who qualifies for Arizona resident tuition? Under current law, a resident for tuition purposes is: Adults. An adult (18 years or older) must physically reside in the state for the twelve consecutive months immediately preceding the term for which resident classification is requested, who has demonstrated an intent to "Establish a Domicile" here. Intent to be a resident of Arizona is demonstrated by the absence of ties to the former state of residence for twelve consecutive months, evidenced by such as: Registering a Motor Vehicle here Obtaining an Arizona driver's license Employment history, including assured future permanent employment in Arizona Transfer of major banking services to Arizona Applications for loans, scholarships, grants-in-aid, or other such assistance Date and state in which registered to vote Place of prior attendance in educational institutions, including high schools, and any information held by such schools affecting domicile Marital status and work record of registrant and spouse Change in permanent address on all pertinent records State in which registered with Selective Service Military records Ownership of real property All other material of whatever kind or source, which may have a bearing on determining domicile or resident status Note: any act considered inconsistent with becoming an Arizona resident (such as voting, securing or maintaining a driver's license or automobile registration in another state) will result in a non-resident decision. Exemptions to 12 months residency. There are some specific exceptions to the twelve months rule, which may entitle a person to resident classification if all conditions have been met by the last day of regular registration. Dependent - You will be classified as a resident student if you can establish that on or before the last day of registration you are domiciled in this state AND the domicile of one of your parents is in this state, and the parent is entitled to claim you as an exemption for federal and state tax purposes. Please note, living in Arizona with a relative other than parents or legally appointed guardians will have no influence on residency status. Transferred Employee - You will be classified as a resident student if you can establish that on or before the last day of registration you are an employee of an employer, which transferred you to this state for employment purposes, or you are the spouse of such an employee. Military Stationed in Arizona - Active duty members of the Armed Forces of the United States stationed in this state pursuant to military orders, their spouse or dependent child (as defined in A.R.S. §43-1001) will be considered as an Arizona Resident for tuition purposes. Military Stationed outside Arizona - Active duty members of the Armed Forces of the United States who are per the Servicemembers Civil Relief Act residents of the State of Arizona for the preceding 12 months, even if stationed outside of this state pursuant to military orders, will, along with their spouse or dependent child (as defined in A.R.S. §43-1001) will be considered as an Arizona Resident for tuition purposes. Procedures. The admissions office at each university will determine your residency status when the completed application for admission is received and processed. The decision is based on the information contained in the application for admission, transcripts, and other documents required for admission. The residency status determined at this time remains in effect until the student either (1) fulfills the requirements for residency and petitions for a change of classification or (2) loses residency by his or her absence from Arizona with intent to become a resident of another state. In many instances, active duty military members select a new state of legal residency based on the income tax benefits offered. However, if you are planning the pursuit of a college education, whether for yourself or your dependent, the ability to establish residency for tuition purposes could easily be a significant factor in selection of a school. Financial Planning - Bankruptcy Law Changed in Late 2005 ONE OMINOUS WORD Bankruptcy - a word that previously evoked shame, but which has grown in acceptability, and in generated necessity, such that over 1.6 million Americans filed for bankruptcy last year (American Bankruptcy Institute). The dramatic rise in bankruptcy filings in recent years prompted Congress enacted the Bankruptcy Reform Act (BFA), in October 2005. While the BFA is viewed by some as harsh or unfair treatment of debtors, others view it as leveling the playing field for creditors by making bankruptcy filing more difficult and expensive, especially for unscrupulous borrowers to simply walk away from incurred debts. During the past 40 years, there has been a dramatic increase in pressure for the average American consumer to obtain and maintain good credit. Gone are the days when the only items financed were houses and automobiles and only a small portion of society had credit cards. Today, everyone is expected to have at least one credit card and one can purchase most anything, large or small, on credit. In a perfect world, people would only borrow what they could afford to pay back. This is not the reality in the world today, which heavily promotes a “have now – pay later” way of life. In basic terms, bankruptcy is a court process which provides a mechanism for debts to be modified or eliminated when it is impossible for the debtor to fulfill their financial obligations. According to the U.S. Supreme Court, this would allow the debtor, “a new opportunity in life and a clear field for future effort unhampered by the pressure and discouragement of pre-existing debt.” TWO DIFFERENT METHODS Before going over the changes, note that bankruptcies can generally be described as "liquidations" or "reorganizations." Both kinds of bankruptcy have numerous rules -- and exceptions to those rules -- about what kinds of debts are covered, who can file, and what property you can and cannot keep. Chapter 7 bankruptcy is the liquidation variety -- property is sold (liquidated) to pay off as much of your debt as possible, while leaving you with enough property to make a fresh start. A court appointed trustee will negotiate with your creditors, handle the selling of all nonexempt property, and split the proceeds amongst the creditors. Normally, exempted property can include a portion of your residence or property allowance, immediate personal possessions, household utensils, tools (if related to your occupation), and provisions to support a family for six months. Oftentimes, however, creditors are not paid in full and the remaining debt, including most credit card debt, is canceled. Under normal circumstances, a person can only file for Chapter 7 bankruptcy every six years. Chapter 13 is the most common type of "reorganization" bankruptcy for consumers -- you repay your debts over three to five years. Under this program, the court appointed trustee creates a repayment plan to the creditors which is submitted to, and must be approved by the court. If approved, all disposable income is paid to the trustee, who in turn makes all distributions to the creditors. Although this plan is designed to have the debtor to live a “bare bones” lifestyle, it is not totally rigid. The court may modify the required payments given good cause. THREE KEY CHANGES The new 2005 changes place a greater burden on the debtor to prove their debts cannot be paid, and to ensure that bankruptcy is used as a “last resort”: 1. Debtors must first complete a court-approved credit counseling course, at their own expense, within 180 days of filing. 2. Debtors must undergo an extensive and complicated “means test” administered by the court to determine bankruptcy eligibility. 3. Significant changes to the “homestead exemption” rule. Under the previous rules, the home could, depending on state law, be made safe from being affected by bankruptcy. The federal law requires a “home history check”, which only allows for homestead exemptions of up to $125,000, for any property bought or acquired within 40 months of the bankruptcy filing. This prevents people from trying to hide their assets by buying expensive properties at the last moment and incurring further debt. MOST ASKED QUESTIONS: 1. Are there other financial assets that I can protect, or will I have to forfeit most all of my accounts to pay off my debt? Under the new law, certain types of assets, such as IRA’s and 401(k) plans may be exempt. Additionally, college savings plans (529s) are also exempt if held for at least two years, or up to $5,000 if held between one and two years. 2. Can my spouse file bankruptcy without my consent? Yes. 3. If I file for bankruptcy, are all my debts dissolved and will I be completely debt free? Under the new law, certain types of debts are normally not discharged. These types of debts include taxes owed, student loans guaranteed by a government institution, alimony, child support, property obtained under false pretenses and debts not listed in the bankruptcy petition. 4. If I have a joint account with someone, and I file for bankruptcy, does the entire debt or loan go away? No. Your co-signer will not be released from the debt. 5. How long can a bankruptcy negatively affect me? Bankruptcy filings may remain on all your credit reports for up to 10 years. 6. My personal finances are my personal business, so how can it affect my employment with the government? Military personnel and all other U.S. Government employees with a security clearance should understand that both the accumulation of large debts and bankruptcy have a negative impact on your clearance, as fiscal conduct is an important aspect in obtaining and maintaining a security clearance. For many occupations in the U.S. Government, to include military service, the lack of a security clearance, and the inability to get one, could result in discharge or job termination. 7. Where can I go to seek help if I have a debt problem? Most military installations, to include Yuma Proving Ground, have both a financial / budget advisor at the Army Community Service, and the installation Legal Assistance attorney who can provide assistance to authorized customers. Additionally, there is a bevy of other alternatives one should try prior to filing for bankruptcy, such as negotiation with creditors, debt consolidation loans, or challenging a disputed debt in court. Remember, bankruptcy should be the last stop in attempting to overcome a severe debt problem, not an easy fix to become debt free. FINANCIAL PLANNING - MEMBERSHIP IN PRIVATE ORGANIZATIONS AND CLUBS Are you a member, official, or organizer of a club, or some other type of private organization? Do you know what the basic legal organization of your club is? Do you know what your personal legal liability is regarding activities of the club, or other members of the club? Consider: If your club owes taxes, fees, rent, etc. to some other private entity or the government, who can be required to come up with the payment? In a worst-case scenario, if a club member while on an errand for the club has an accident and causes serious damage, or a death, against whom could a Court judgment for the costs and damages be placed? Risk of an Informal Structure for a club. In general, if two or more people start to work together on a common goal, whether a business, or a club to share a common interest (say flower gardening) absent some other clearly established structure for of organization (discussed below) legally the club will be considered a partnership. In a partnership, the general rule is that every partner is "jointly and severally" liable for all of the debts of the partnership. That means that anyone the club has a debt to can sue any and every member of the club for the full amount of the debt. If one club member is wealthy, and the rest are without assets, a judgment for a debt can be taken completely from the sole member with money. In the accident and death scenario mentioned above, every club member could be named as a defendant in a lawsuit, even if they had nothing to do with club management, sending the other member on the errand, etc. Benefits of Incorporating. If your club operates as a corporation, and properly follows the rules for corporations, in general lawsuits would be against the corporation, and the member who causes damages. The other members have at least some level of protection from being personally sued, as they are not the owners of the corporation. Members just own membership certificates in the corporation and thus have the right to vote in the election of corporate directors. Consider federal income taxes in a situation where your informal club does fundraising to regularly provide gratuitous good or services to others. If you did this absent official non-profit status, you could easily find yourself at the wrong end of an IRS audit that determines your "business" was a "hobby", your deductions are denied, and you all owe taxes and penalties. Beyond providing a level of safety for your personal finances, incorporating and obtaining non-profit status from the Internal Revenue Service (IRS) provides tax benefits, and depending on the activities of your club, the ability to receive tax-deductible donations. Creating a non-profit entity. This article provides only general information, and is far from a legal guide or checklist. The links are provided merely as reference sources. If this brief article arouses your interest, I suggest you contact an appropriately licensed and experienced attorney in the state you would like your charity to primarily operate. The State of Arizona has available forms and instructions for creating an Arizona non-profit corporation online at it's website: If you would like to read the Arizona statutes regarding corporations, they are online at: What does Arizona non-profit corporation designation mean? While Arizona makes it relatively simple to CREATE a "non-profit" corporation, it doesn't yet mean you're exempt from taxes, it's just the framework of your organization. With our multi-level government the state and federal levels are completely distinct. Once you have obtained your state non-profit corporation, you've got to file for federal tax-exemption with the Internal Revenue Service. There must be a meeting of directors and members, by-laws written and approved, and membership certificates issued. The IRS will want your by-laws submitted. While the IRS requires you be a non-profit entity to apply for tax exempt status, the state non-profit status DOES NOT mean you have reached tax-exempt status until you receive your IRS designation. You will not even be considered for state tax exemption until you have been approved by the IRS. Why go thru the hassle of qualifying as a "Charity"? If you would like to solicit for donations to your organization, and be able to provide your benefactors the ability to deduct their donations from their individual income taxes, you must file an application with the IRS for 501(c)(3) status. Until and unless you receive a 501(c)(3) exemption letter from the IRS, you are NOT yet a charity. IRS Publication 557 discusses what organizations qualify, and application procedures, and is available online at: The related application package is online at: The major benefit of 501(c)(3) status is the ability to solicit tax-deductible donations. Within Arizona, it also provides other benefits, such as the ability to legally operate fundraisers such as "bingo" games and raffles, which would be criminal under Arizona law without the charitable designation. There may be other benefits of qualifying as charitable under 501(c)(3), such as qualifying under U.S. Postal regulations for special bulk mail rates Charitable Disadvantages If you want to lobby legislators, or advocate for legislation to the public, don't do it with your 501(c)(3) entity. Don't use your charity to assist in any way candidates for elected office or to political parties. Limits are covered in IRS Publications 557 and 578 What qualifies as a charity? Section 501(c)(3) organizations are nonprofit corporations which are formed exclusively to accomplish one or more of the following purposes: 1.Religious purposes, 2. Charitable purposes, 3. Scientific purposes, 4. Literary purposes, or 5. Educational purposes. "Charitable purpose" is broadly defined as anything that aids the public. Examples of charitable purposes have been: 1. Protecting the environment. 2. Providing food to the elderly. 3. Providing education. 4. Providing medical services to the indigent. 5. Operating a museum. 6. Operating a library. 7. Operating a park. 8. Operating a hospital. A charity is permitted to make money from its activities. It is permitted to pay employees. It is just not permitted to distribute the money earned to any shareholder or member. The profits of the charity must be used to achieve or further the charitable purpose for which the nonprofit corporation was formed. There are two types of 501(c)(3) tax-exempt organizations: the public charity and the private foundation. The main difference between a public charity and a private foundation is who runs it and where does it get its money. A public charity must receive a minimum amount of support from the general public or governmental agencies. In addition, public charities must have boards which are open to the public. By comparison, private foundations do not have fixed minimums for public or government support. In addition, the boards for private foundations are often closed to input from the public. Non-profit but not a charity If you don't need to accept deductible charitable donations or can't qualify as a charity, you may consider 501(c)(4) status, which provides that organizations which exist exclusively to "promote social welfare" or employee associations which are composed of employees from one employer for "charitable, educational or recreational purposes can be tax exempt. Examples: volunteer fire companies, search and rescue companies, homeowners associations, etc.. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are usually not deductible to the donor. Such contributions can be deductible only when they are to be used exclusively for public purposes rather than to benefit the members of the organization. State Tax-Exemption Both 501(c)(3) and 501(c)(4) provide exemption from federal corporate income tax. Arizona policy is that your charity will also be exempt from Arizona income taxes, but it is not automatic. You must submit a copy of your federal exemption and corporate by-laws to: Arizona Department of Revenue Corporate Income Tax Section 1600 Washington Avenue Phoenix, AZ 85007 (602) 542-3345 ext. 116 Retail sales made by a non-profit charitable organization that is recognized by the IRS and the state as a non-profit charitable organization should be exempt from collecting Arizona state "sales tax". (Note, purchases by the organization are not exempt.) Federal Annual Tax Returns (Form 990 or 990-EZ) Federal tax "exemption" does not necessarily mean you don't have to file. Check with your accountant regarding the annual filing of Form 990 or 990-EZ, the Exempt Organization Annual Report Form, and the right date for your entity to file, as it does not generally match the individual filing date. Even though an organization holds federal tax-exempt status, an income tax may still be applicable. The "unrelated business" income tax applies to otherwise tax-exempt organizations when they engage in activities regularly that are like those of commercial entities. Again, see your accountant. Annual State Returns Also check with you accountant for the specifics of filing a non-profit state income tax return. Should you go thru the process? Incorporating, obtaining, and maintaining legal status as a non-profit requires more effort and attention to detail than an informal organization. But the protections and other benefits should clearly outweigh the costs and time involved. Unfortunately, while I can provide a "preventative law" brief on the risks inherent on club membership, management, and organization, actually providing one-on-one personal assistance on creating or operating such an entity appears beyond the scope of services authorized by regulations. FINANCIAL PLANNING LIFE INSURANCE Overview - Life insurance is a means of providing financial security for your family should you die prematurely. In general therefore, the purpose of life insurance is to provide for a sum of money, payable should you die, that will replace your prospective earnings and retirement income. So how much life insurance do you need? It's really a personalized calculation, based on a combination of factors, such as: How old are you now? Based on your health, and information such as your family history, what is your expected lifespan? Do you smoke? Even if you never smoked before, and you just lite "one"cigar before a life insurance physical, don't be surprised if your rates are the higher "smoker", for at least five years. How much are you earning now, and how much do you expect your real earnings to rise during your anticipated career? What expenses do you have that you want to ensure are covered? (Do you want to leave your family a fully paid for home, money for college for the kids, etc.?) Based on your understanding of the economy, what do you believe is going to happen to prices of goods and services in the relevant future? Into what type of investments do you expect your heirs will place the life insurance payment? What other benefits are available for your survivors, such as the Survivor Benefit Plan and Social Security. In particular for service members thinking of life insurance from a commercial company, specifically ask if the policy has a "war clause." Such clauses typically allow insurance companies to avoid payment on a contract of insurance if the service member is killed in war or by a "military service hazard." An example to demonstrate determining the amount of insurance needed: John is 25 years old, active duty, married to Jane. They have two children Jack (age 4) and Jill (age 2). John is E-5 with 7 years of service. Jane does not work. John's base pay is around $2130/month. He expects he will retire as an E-7, and then move on to a private sector job earning about the same as he was on active duty when he reached retirement. He plans to work until he is 62, and then retire. He wants to be able to fund college for his two children, and ensure that Jane does not have to work, at least while the children are still in school. Aspects to consider: Interest rates are around 4%. Replacing 13 years of John's military salary (I’m using just base pay). Replacing 24 years of John's private sector earnings. Replacing 42 years of John's military pension (assume a lifespan to 80) Provide for Jack's 4 years of college starting 14 years from now. Provide for Jill's 4 years of college starting 16 years from now. If John expects to make E-7 early enough for his retirement "high three" to count it, he needs to make it by 17 years. Projecting his promotions as more or less evenly, the present cash value of his base pay thru to retirement is: $352,000 If John retires at age 38 as an E-7, 50% of high three, and expects to live an additional 42 years, the present cash value of his active duty retirement checks are: $270,000 If John expects to work from age 38 to 62 at the same pay as he retired at, the present cash value of his private sector wages is: $408,000 Therefore the minimum insurance needed to replace John's wages and pension, if all done by insurance, is $1,030,000. Today, a Bachelors Degree from a local institute will cost around $10,000 in tuition, well below the national average, which is about $40,000. Add room, board, books, etc. and the present cost ranges from $30,000 to $120,000. If John wants to have college for both children covered, and not effect the other monthly income of the family, he needs an additional $250,000 of insurance, for a total of $1,280,000. Even though Jane is not working, that doesn't mean the family does not need insurance on her life. As the primary caregiver for the children, Jane is raising the children, watching out for them, teaching them motor skills, play, basic language, etc. If Jane were to die, John could not simply go off to work every day and leave the children alone. The minimum to consider would be daycare, projected here as around $180 per week, per child, until the child is say twelve. (Without Jane, the kids are probably going to be in some sort of pre or after school program, at least until they are teens.) Merely to provide the limited daycare for the children set out above requires present cash value of life insurance on Jane of around $141,000. (The formulas to calculate "Present Cash Value" or "Future Cash Value" are generally available in spreadsheets.) You have the right to name any person(s) you choose as the beneficiary(ies) of your life insurance policy(ies). If you specifically want a portion to be used to provide for your child's education, you may not want to leave the money directly to the child. (What would YOU have done if you turned 18 and had $100,000 paid to you…) Instead, you could leave a portion to someone as Trustee for your child. For a family of modest earnings to purchase insurance in the above amounts probably requires the purchase of "term insurance", which is what the SGLI program is. Term insurance provides a much higher amount of coverage, for much less cost, because it has no "investment" aspect. As with SGLI, when the policy ends, nothing remains. The "term" aspect generally refers to the period of time during which the company has agreed to provide insurance coverage and the costs for that period. Your first priority must be the above "safety net" for your family. After the safety net is met, whole life can then be considered as one of they many means (including also the world of "TSP", "Individual Retirement Accounts", mutual funds, money market accounts, real estate, etc.) available for investing for your future. A "whole life" investment type policy is one where the policy accumulates some "cash value" which can be "borrowed" or considered as a form of investment. It is generally a type of life insurance where the coverage can be maintained for your entire lifetime. The documents presented to you as part of the "sales pitch" often include projections of significant profits within the policy. Read the details carefully, and look for the amounts that the company guarantees, rather than mere estimates. (The fact that any particular class of investment advanced significantly in the PAST, does not necessarily mean it will do so in the future.) In general, after establishing your safety net my recommendation is that considering "whole life" insurance as an investment should be at or near the bottom of your investment priorities. Financial Planning - Warning on Misleading Life Insurance Programs We have received a 26 page report from the Congressional General Accountability Office, entitled ACTIONS NEEDED TO PROTECT MILITARY MEMBERS, on "flawed" financial products sold to military consumers and the questionable techniques being used to sell them. At a Senate Banking Committee hearing, in his opening remarks, Senator Richard C. Shelby, Republican of Alabama and the committee's chairman, alerted the Pentagon representative at the hearing that he would be in for tough questioning about why the Defense Department "has not moved more aggressively in this area heretofore." It appears that last year a New York Times article documented a decades long series of the sale of insurance and other "financial products" on some military facilities, sanctioned by military leaders, that were clearly contrary to the best interests of the members convinced to make the purchases. The report appears to particularly disdain a practice of selling to soldiers high-cost, low payout "life insurance" policies with savings components (typically referrred to as whole life). The report points out that those who need insurance beyond SGLI would be financially better off with anther lower cost term insurance policy, then "banking" the difference in cost in the Thrift Savings Plan. 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