Outside Economics

Offshore Financial Accounts (FBAR) Requirements

Posted by Wendell Brock, MBA, ChFC on Thu, May 29, 2014

Often I am asked about offshore banking and setting up offshore accounts for people or companies, which I have done several times. However this is part of the education process – knowing what you have to report to the government for the privilege to move and protect some your assets off shore. Can it be done successfully? Absolutely. Can you save taxes? Absolutely. Can you protect your assets? Absolutely.

Foreign BankingWe all believe that our government has become so onerous that many people are leaving for other countries simply because Americans are not free anymore. A couple weeks ago I listened to David Barton speak and he said that if you “read 100 pages per day of all federal laws, seven days per week, it would only take you 25,000 years to complete the reading”. We are responsible to follow all those laws – ignorance is no excuse for breaking a law, right? Well here is another example of over-reach and being worked over by the federal government all in the name of protecting us against us. If you think you can hide your money some place, guess again…

Recently, new guidelines were released in a report of the Foreign Bank and Financial Accounts (FBAR). You need to know about these new guidelines if you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account that exceeds certain thresholds. The Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service.

The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. (FinCEN stands for Financial Crimes Enforcement Network).

The FBAR is not filed with a federal tax return. A filing extension, granted by the IRS to file an income tax return, does not extend the time to file an FBAR. There is no provision to request an extension of time to file an FBAR.

            United States persons are required to file an FBAR if:

  1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

(United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.)

There are some exceptions to the FBAR reporting requirements. They can be found in the FBAR instructions, but they include:

  • • Certain foreign financial accounts jointly owned by spouses;
  • • United States persons included in a consolidated FBAR;
  • • Correspondent/nostro accounts;
  • • Foreign financial accounts owned by a governmental entity;
  • • Foreign financial accounts owned by an international financial institution;
  • • IRA owners and beneficiaries;
  • • Participants in and beneficiaries of tax-qualified retirement plans;
  • • Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
  • • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
  • • Foreign financial accounts maintained on a United States military banking facility.

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

Just in case you were beginning to think perhaps you would just ignore all these forms and filing procedures, FinCEN does not mess around when it comes to penalizing non-filers. A person who is required to file an FBAR and fails to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation. There are exceptions to the penalties, such as when natural disasters occur that hinder timely filing. For guidance on those exceptions, see FinCEN guidance, FIN-2013-G002 (June 24, 2013).

FinCEN Notice 2013-1 extended the due date to June 30, 2015 for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity. 

Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. The new Form 8938 filing requirement is in addition to the FBAR filing requirement.   

Last year there were a number of new forms introduced by FinCEN. FinCEN form 114 is the new FBAR form that is to be used in place of the old TD F 90-22.1 form. This form is designed to be an online form through the BSA E-Filing System website. Form 114a is a new form for filers who submit FBAR's jointly with spouses or who have a third party prepare their forms for them. It isn't submitted with the filing, but is kept back with the FBAR records maintained by the account owner in case FinCEN or the IRS requests them.   

The following educational products have been developed for your use in learning more about why, when and where to file the FBAR:

For further help feel free to call us and we can point you in the right direction. We are happy to provide you with outside professionals who can get you answers or other items needed to move and protect your assets properly, while staying compliant with the laws of the land.

Topics: FBAR, Foreign Bank Accounts, Offshore Banking, Asset Protection, Tax Savings

A Make Sense Investment Portfolio Strategy

Posted by Wendell Brock, MBA, ChFC on Wed, May 21, 2014

There are many theories on creating the best investment portfolio. Here is one that is well balanced, and well suited to surviving the financial fluctuations of these times. It is called the 7Twelve® portfolio. It was first formulated by Craig L. Isrealsen,PhD. an Executive-in-Residence in the Financial Planning Program in the Woodbury School of Business at Utah Valley University. Overall, he has over 25 years of experience in the financial industry.

Professor Isrealsen created this approach to maximize the benefits a diverse portfolio can offer. He likens this approach to a good salsa recipe. “The broad diversification of the 7Twelve® model is more important to its performance than picking the “right” funds. Very simply, the recipe is more important than the ingredients.”

Good ingredients + poor recipe = poor salsa/poor portfolio results

Good ingredients + good recipe = good salsa/good portfolio results

A 7Twelve® portfolio includes 7 core asset classes and consists of twelve different ETF’s or mutual funds (funds). Each of the twelve funds are equally weighted and the portfolio is periodically rebalanced to maintain an equally weighted structure.

Some of the benefits and objectives of the 7Twelve® portfolio include being able to produce long-term equity-like results with less volatility than equities. Compared to equities, this approach minimizes the frequency and the magnitude of losses thus delivering a more consistent performance over a rolling 3-year period of time. Maintaining a consistent portfolio with a philosophy of broad diversification will also help investors avoid fads and performance chasing.      

When assembling a balanced portfolio often its key elements are equities and fixed income assets. The seven core asset groups with their twelve associated funds are: US equity: large-cap US, mid-cap US, and small-cap US; Non-US equity: Non- US developed, and Non-US emerging market; Real Estate: global real estate; Resources: natural resources, and commodities; US bonds: aggregate US bonds, and inflation protected US bonds (TIPS); Non- US bonds: international bonds; and Cash: US money market.7Twelve 1

This arrangement will allocate 8 equity and diversifying funds- which is 65% of the overall portfolio, and 4 fixed income funds- which accounts for 35% of the portfolio. A 65/35 allocation balance will bring together more stability and less risk in a solid combination that, over the long haul, has a proven track record toward steady growth even in volatile times, such as we are experiencing now.

Each of the 12 funds is equally weighted at 8.33% of the portfolio. The equal-weighing is maintained by periodically re-balancing each of the 12 funds back to an 8.33% allocation. Quarterly or annual re-balancing generally produces the best performance, whereas monthly re-balancing is too frequent.

Re-balancing is an important part of the 7Twelve® investment strategy. Re-balancing helps to accomplish the goal of buy low and sell high. As sectors grow some is sold off to bring the portfolio into balance; the other sectors that are performing poorly get some new money to bring them up to the balanced amount. Nearly all sectors take their day in the sunshine, that of being the best performing asset. By keeping the portfolio balanced, each one is ready for their day to shine.

Re-balancing can also be done by simply adding new money to funds to re-create the 8.33% balance; or, if one is in their retirement years to simply withdraw money from the best performers whereby restoring the 8.33% balance.

Let’s face it, we are emotional creatures by nature, and most investors too are emotional about the decisions to buy or sell. Re-balancing is a fantastic tool that may help with the emotional roller coaster. Using systematic guidelines to monitor the portfolio increases the chance for success. Any assistance with the emotionally charged buy/sell decisions that may chip away at an investors overall gains is helpful. Trying to outsmart the market tends to do more harm than good; nobody can beat randomness at any given time. Having a steady plan to follow will help the investor to safely navigate the years it takes to grow their investment.

One of the main challenges of encouraging an investor to build a multi-asset portfolio is that the portfolio will never outperform the best performing individual asset class in any given year. Multi-asset portfolios are steady, not flashy. Nervous investors who are constantly looking over their shoulder may feel the need to chase last year’s best performing asset class and invest some or all of their portfolio into them. However, the winner last year is typically not the winner this year. This type of roller-coaster investing will surely lead to disaster.

Building a diversified portfolio is the only logical investment philosophy—both emotionally and mathematically. The emotional swings caused by chasing the performance of individual asset classes should be obvious, but the mathematics may not be.

The mathematical evidence supporting the wisdom of a steady multi-asset portfolio vs. performance chasing is simply put: asset classes that have huge gains also tend to also have large losses in subsequent years—and the math of gains and losses is NOT equal. For instance, a 50% loss requires a 100% gain to get back to the starting point.

Therefore, avoiding large losses is one of the key reasons for building a broadly diversified portfolio. Individual asset classes have great years (such as US stocks in 2013) but next year may not produce similar results. A steady, well diversified portfolio will win in the end. 

The 7Twelve® portfolio recipe for investing has a proven track record and is well worth looking into if you haven't already. Give us a call if you think this portfolio model will help you, and as always, do your own homework before you decide to invest.


7Twelve is a registered Trade Mark by Craig Israelsen and is used by Wendell Brock by a licensing agreement.

Topics: 7Twelve, Investment Portfolio, asset classes, equities, Fixed Income, Craig Israelsen

Disability Insurance

Posted by Wendell Brock, MBA, ChFC on Wed, May 14, 2014

There are a few types of insurance coverage that are essential to have in this day and age. Disability insurance is one of those. If you die, your life insurance will take care of your family; but if you get hurt and become disabled, then what? The average monthly benefit from Social Security disability is $1,004 a month. Will that be enough to take care of your current needs?DDApic

Many people live such active lifestyles that the risks of a serious injury is very real. We all know someone who has been injured playing one sport or another, an auto accident, or simply injured falling off a ladder trimming the tree! It happens all the time – that is why we have Emergency Rooms at the hospitals!

Disability insurance helps protect a portion of your income and provides financial protection if you become disabled for an extended period of time. If you are permanently disabled, not only will you be unable to work, but you may also need financial resources to be cared for. Anyone who depends on their income to pay the bills or maintain their lifestyle should consider disability insurance protection.

Many companies offer great rates on disability insurance to their employees. You can also shop around for private insurance companies to find out their rates and policies. Make sure 65-70% of your current income is covered for an extended time period, usually until death or age 65.

A simple rule of thumb is the M.U.G.® Plan = Mortgage, Utilities, & Groceries. Do you have enough disability insurance to cover these three very important expenses? Think of it this way, which job would you prefer:

Monthly Income Job A Job B
While Working $6,000 $5,900
If Disabled $0 $4,000

There are some key features of disability insurance that are important to be aware of. A disability insurance policy can complement existing disability benefit coverage that may be available to you. A disability insurance policy is fully portable; you own the policy and so you can take it with you throughout your career. There are policies that offer flexible solutions for various income levels. Also, depending on how the policy is set up, the benefits may or may not be tax-free.

Determining whether your benefits are taxable depends on a few factors. These factors include what type of benefits you receive, whether the premiums were paid with pretax or after-tax dollars, and who paid the premiums (you or your employer).

The rules surrounding taxation of individual disability income insurance benefits are generally simple. When you pay the premiums with after-tax dollars, the benefits you receive are tax free. When you pay your premiums with pre-tax dollars, your benefits will be taxed. This rule of thumb is the case whether you are enrolled in a group plan, a cafeteria plan or a medical reimbursement plan. However, unlike health insurance premiums, you can't deduct premiums paid for disability insurance as a medical expense.

If you are enrolled in a group disability insurance plan sponsored by your employer, the tax-ability of your benefits depends on who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax free. On the other hand, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable. If your premiums are split by you and your employer, then your tax liability will be split as well.

It comes down to this: If you never use your disability benefits, you'll save money by paying your premiums with pretax dollars. But if you do use your disability benefits, using after-tax dollars to pay your premiums places you in a better position.

Different rules apply to an employer who pays for a disability insurance policy on an employee. This may be the case if there is a key employee in the business. If the employer gets the benefit, then the premium is not deductible to the company, and the benefit is not taxable when received by the company.

All, part, or none of the disability benefits you receive through government disability insurance programs may be taxable. How much of the benefit is taxable and under what circumstances depends on the type of government disability benefit you are receiving. These government benefits include Social Security disability income, Medicare benefits, worker's compensation, veteran's benefits, military benefits, and Federal employee's retirement system benefits.

A lot relies on your income, perhaps even more than you think. If the unexpected happens – if you become too sick or hurt to work – would your savings or the disability benefits you receive through your employer be adequate?  As always, consult a trusted professional for advice.

I know what your saying, "It will never happen to me!" Right?

Topics: life insurance, Social Security, Medicare, Disability Insurance

Private Banking and Insurance

Posted by Wendell Brock on Wed, May 07, 2014

Most people have never thought that they could become their own “private bank” or that acting as your own personal lender was an option; but with the private banking concept, you are able to make this a possibility and have the opportunity for more financial freedom. This concept borrows the term “private banking” from the banking industry simply because of the similarities of creating a pool of money that you privately control that can be loaned out as needed. Having this money available allows you to remove the traditional bank from the equation and essentially you become your own personal bank.

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There are many benefits to setting up your own private bank. Private banking has over 200 years of history. It is successful in part, because it has endured over a dozen recessions and the great depression.

A private bank is protected from investment losses as well as from taxes. It grows tax-free, you can use it tax-free and you can retire on the funds tax-free. Because your own private bank is set up through a whole life insurance policy, the IRS considers the dividends earned a return of the policyholder’s premium, thus allowing the dividend to remain a tax-free benefit of the policy.

The cash build up may be taxable if used and then the policy is canceled; any gains above the premium deposits would then be taxable as long term capital gains.

Typically there are no limitations on how much you can put in, or when you have to take it out. The policies on the whole demonstrate a consistent growth between 3.5 to 7.0 percent. While volatility abounds everywhere, this remains the most consistent, predictable place for growth. It’s your money, use it when and how you want to. 

As was mentioned above, the primary vehicle by which an individual can participate in this concept of private banking is through the use of a whole life insurance policy, which acts as the individual’s lending vehicle. The whole life insurance policy becomes your bank. Whenever you need to make a large purchase, you borrow money out of the policy like you would a bank. However unlike traditional financing, you are earning the interest, rather than the bank.

For those who would argue to simply save up the money in a savings account, this notion of earning interest is the crucial detail that gives private banking a huge advantage. When you take the money out of savings, you don't make anything on the money you pulled out. The bank stops paying interest when the money leaves the account. When you take a loan from your own private bank, you still earn interest and dividends on the money as if you never took out the loan. 

Another one of the great benefits of having a private bank through life insurance is the level of additional asset protection that it provides its clients and their beneficiaries. This type of policy set-up has protected the assets of many people from frivolous law suits, bankruptcy or other creditor problems that may arise in our litigious society. In short, the values of life insurance – both the cash value and the death benefit – are protected from creditors under specific conditions. It’s important to note that the level of protection varies in every state so it warrants your further research on this subject.

In a nutshell, with these contracts, you build up tax-free capital for all of your own borrowing and financial needs; and, as a nice bonus, your family (or estate) can receive a substantial built in tax-free inheritance (death benefit), should you die; and you could receive a large, tax-free retirement income, should you live. In part, it all depends on how well you decide to fund, or over-fund, your own bank.

It is very important to understand and to appreciate that these unique policies are not the typical whole life policies sold by many life insurance agents. Instead, these policies are individually created for each person's own financial circumstances. These policies are specifically designed only by mutual life companies – not stock life insurance companies. There are only about a few dozen or less of these companies left in the United States.

As always, it is in your best interest to consult a trusted financial adviser before setting up your own private banking policy. Be aware of their credentials and make sure they know the ins and outs of creating such an individualized policy for you. This concept may not be for everyone, so be sure to study it out and decide if it is right for you.

Topics: tax free, Private Bank, Whole Life Insurance

Alternative Investments

Posted by Wendell Brock, MBA, ChFC on Thu, May 01, 2014

With bonds yielding almost nothing and stocks looking fully valued by most measures, investors need more choices. Fortunately, they’re out there. For decades, the biggest institutional investors have used alternative investment strategies to generate higher returns, with less risk, than standard portfolios.  Today, most of these strategies and asset types are available to Main Street, often through ETF’s or mutual funds or similar investor-friendly formats. But, like any investment, you need to inform yourself.alternative assets

Master Limited Partnerships

MLPs (master limited partnerships) are a type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.

One of the most crucial criteria that must be met in order for a partnership to be legally classified as an MLP is that the partnership must derive most (~90%) of its cash flows from real estate, natural resources and commodities.  Congress established these special vehicles in the '80s to spur investment in energy infrastructure, and that’s just what this rapidly expanding industry needs today: money for drills, pipelines, and storage, etc. The advantage of an MLP is that it combines the tax benefits of a limited partnership (the partnership does not pay taxes on the profits - the money is only taxed when unit-holders receive distributions) with the liquidity of a publicly traded company.

Long/Short Funds

Long/short funds are the mutual fund industry's attempt to bring some of the advantages of a hedge fund to the common investor. Most long/short funds feature higher liquidity than hedge funds, no lock-in period and lower fees. However, they still have higher fees and less liquidity than most mutual funds. Unlike most mutual funds, long/short funds often require a minimum investment of more than $1,000.

Long/short funds aren't allowed to use as many derivative and short positions nor as much leverage as hedge funds, but they do provide some diversification to the average investor in down markets. Today, several high-quality mutual funds offer access to this strategy but still provide all the usual mutual fund benefits, including daily valuation and liquidity. While these funds won’t keep up with the market during big bull runs, they should significantly outperform it on the downside.

Private Equity

Private equity has been the top performing asset class for big investors for a long time, but it has been a tough area for regular investors to participate in. That’s changing. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a de-listing of a publicly traded entity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.


Most collectible assets classes -- memorabilia, jewelry, cars -- should be looked at as hobbies with an upside. These can be fun to get into, but they’re really not suitable for people just looking for returns. This type of investing requires an extremely deep understanding of the particular collectible, the market and the capital. This can be a very illiquid area of investing. I knew a fellow early in my career, who had an amazing collection of over 500 Lugar Pistols, many had been owned by famous people, but he couldn’t sell the collection. A nearly $500,000 investment with no way to convert it to cash.

Art may be an exception. Art has been recognized as a store of value for centuries in almost every civilization, and there are several high quality funds that specialize in this (some even lend out its art to its investors). The trick is to invest behind someone who is both a true expert and an experienced, trusted fiduciary.

Angel Investing

An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.

Angel investing is exciting but risky. Most angel investors will tell you they expect a return ratio of one third, one third, one third. One third of his/her investments make money, one third go bust, one third plod along. But stats indicate that serious angels can achieve internal rate of return of well over 20%, which is obviously very attractive. Probably the best way into the field for new investors is to join a professional angel group.  To find a group to join, you can go through the Angel Capital Association.

If you’re going it alone, make sure a start-up can clearly explain the problem they’re solving, the solution they propose, why their team can handle it, the size of the market, and what the competition looks like. Two more tips: the first money into a start-up should be from a small “friends and family” round (not from you!). And the second is to be sure to keep more money ready for the next round, because the start-up will need it and you may want to invest more.

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Like any investment, it is important that you know exactly what you are getting involved in and it is critical to clearly understand the exit strategy – how do you get out of the investment? Or how do you cash out? This and the time commitment arvery important, are you committing your money for 3 years, 5 years, or 10 years, the longer the commitment period the greater the return should be. You will want to counsel with an experienced financial consultant who is experienced in the type of investment you are pursuing.

Topics: Bonds, Master Limited Partnerships, MLP's, Collectibles, Angel Investors, Private Equity, Stocks, Institutional Investors, MLPs


Wendell W. Brock, MBA, ChFC

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