I’ve Been Offered a Lump Sum of Money, What Now?

Lately there have been instances where a former employee may have received an option for taking the lump sum distribution on their Pension, or to start receiving their pension benefit early. These companies include Cargill, Qwest (CenturyLink), 3M, NCR and many more. This is a major financial decision that may have a significant impact on your retirement. This article will attempt to provide an in-depth look as to why this is occurring.

Pension plans are becoming the less popular retirement option for companies these days. They would rather shift the liability of maintaining and selecting investments to the employees. This is typically achieved in the form of a 401k plan. This way, corporate profits no longer need to go to fulfill pension fund obligations. For the companies who still have pension plans, previous employees are still on the company books with their defined benefit. With employees living longer than they have before, pension funds are supporting workers longer in retirement and contributing more to cover obligations. Some companies are now offering a chance for you to take a lump sum option for a limited time only.

Why would the company be offering this right now? The informational packet enclosed in the documentation describes that it reduces the administrative costs of the plan and reduces the overall size of the plan. Both answers are true, but don’t answer why you received the packet right now. Why not next month or next year? One reason is contingent on the pension plans expectations of future interest rates.

In order for your pension plan to calculate a lump sum, they need an interest rate to project the Net Present Value of all monthly payments made to you over your lifetime. Their interest rate is based off the yield paid by Investment Grade Corporate Bonds. Prior to 2008, the rate used was strictly the 30 year Treasury rate. From 2008 until 2012, the rate was calculated using a weighted average between the 30 year Treasury rate and the rate of Investment Grade Corporate Bonds. So over the past 5 years, the rate used to calculate your lump sum has risen. The rate of a Treasury bond is essentially guaranteed because it is backed by the full faith and credit of the U.S. Government. A corporate bond is not guaranteed, meaning it’s interest rate, or yield, is to compensate investors for taking additional risk.

When calculating the lump sum, if the interest rate used increases, the value of the lump sum decreases. In any scenario, the higher the interest rate, the further the lump sum amount can stretch. A Pension fund has the liability/obligation to pay you for your lifetime. If interest rates are high, they can afford to pay you a smaller lump sum because that money can be projected to last longer than if the interest rate was lower. So why now? One reason is that the pension fund may expect future rates to be lower. So, if they were to offer you a lump sum in the future, they are assuming it would be higher than it is today.

You do have the option of taking the lump sum, starting your benefit, or doing nothing and wait to collect your benefit later. The right answer depends on your personal situation. This decision should be paired with your overall financial condition to determine the best outcome. This type of lifestyle event deserves an in-depth conversation with an advisor that is looking out for your best interest. In order to make the best decision possible, you should speak with an advisor that will insure your best interests are put first.

FFP Wealth Management, located in Coon Rapids, Minnesota, is the firm that created the Tax SuperSheet™ to provide a simple and accurate way to illustrate the benefit derived from using comprehensive tax strategies. They are not brokers with the intent to sell products. They are a fee only money management and advisory firm with a fiduciary obligation to their clients. The Tax SuperSheet™ can illustrate the benefits of many financial planning strategies related to transactions, accumulation, debt elimination, the transition to retirement or to those who are inheriting retirement plans. Find out how to lower your tax liability by contacting FFP Wealth Management today.


All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Opinions expressed herein are solely those of FFP Wealth Management, and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser or qualified professional before making any financial decisions. We are not affiliated with or endorsed by any government agency.

Feature Article: Medtronic Mission in Motion Grants Program Want to get the most out of your gifting dollars?

The Matching Grants Program through Medtronic was introduced on September 10, 2013. The program was designed to make charitable giving easy, convenient and meaningful for you, the employee or retiree. This philanthropic program matches dollar for dollar employee charitable donations, with the intent to mutually double the impact people make in the communities where they live and work.

This past year, Medtronic philanthropy would match $50,000, dollar for dollar, of your donations. For 2014 they have agreed to increase the match to $100,000 allowing you to make an even greater impact in your local community.

To make the most of this gifting program and to benefit you and your future gifting there are potential tax efficient ways to transfer your Medtronic stock. One way is to transfer appreciated stock to a Donor Advised Fund (DAF).

A Donor Advised Fund is an account that allows taxpayers to establish a charitable fund and receive tax benefits now with the ability to use the fund to meet future charitable giving goals. The taxpayer can avoid the gains on donated stock and use the full value of the donated stock as a deduction so long as the stock is in the DAF when it is liquidated. The donor can direct gifts to their favorite charities such as their church, association, schools and more. There is no minimum or maximum gift per year so the account can provide gifts for decades to come and allow their heirs to continue the legacy after the donor has passed.

The impact of a sale or merger cannot be answered with a guess or by rule of thumb of a 15% capital gain tax rate. The increased capital gain tax on large gains, the Medicare tax on investment income, the alternative minimum tax (AMT), reduction or elimination of personal exemptions and deductions caused by high income, and state income tax could result in tax liabilities exceeding 45% of the capital gains.

While every household is different, the combination of avoiding gains and the charitable deduction for high income earners could result in tax savings potentially as high as 80% or more of the value of the donated stock. The matching funds could double the gift and further reduce the net cost of a gift. Using this account in the future can provide further benefits when compared to using current income to make charitable gifts.


Time is running out!

Great care must be taken to generate the biggest tax break with your charitable contribution. It takes time to gather all of the data such as cost basis per lot. Holding your shares at a transfer agent such as Computershare could cause a delay in the transfer of the shares potentially up to a month. Waiting until the last minute could result in the loss of the planning opportunities as the shares need to be selected and postured for quick action. In addition, each household needs to determine their current and future charitable goals. The amount of the gift, the lot selection and the timing of the gift are critical.


FFP Wealth Management is one firm who can be your best ally in this decision making process.

FFP Wealth Management in Coon Rapids, Minnesota is a firm that has created the Tax SuperSheet™ to provide a simple and accurate way to illustrate the benefit derived from using complicated tax strategies. They are not broker’s whose intent is on selling products. They are a fee only money management and advisory firm with a fiduciary obligation to their clients. The Tax SuperSheet™ can illustrate the benefits of many financial planning strategies related to transactions, accumulation, debt elimination, and the transition to retirement or to those who are inheriting retirement plans.

Danger: Taxes Ahead! Plan Your Detour Now!

Is your company planning to merge with another, as in the case of Medtronic and Covidien?  Recent mergers have shined a light onto the scope of the tax consequences faced by shareholders when these corporate actions occur.  In the case of the Medtronic /Covidien merger, an entirely new entity is being created to purchase all of the shares of both companies.  This means that shareholders on both sides of the merger will be facing an unplanned tax liability because of the transaction.

It does not matter if the stock is held in an ESPP or if you hold them in a brokerage account, once the transaction closes, you will pay taxes on all of your capital gains.  For those who have shares in an ESPP the 15% discount is treated as ordinary income and taxed accordingly, which is usually a much higher rate than capital gains.  Additionally, while stock held in your retirement plans will not incur an immediate tax for you, the transaction may eliminate the possibility of implementing certain strategies that could otherwise have yielded tremendous tax savings.

Thankfully, Medtronic has encouraged employees and retirees to seek the advice of a financial or tax advisor, but do not wait until the last minute.  Seeking advice far in advance of the date the merger will be  completed will provide you the best options to reduce the taxes that will be illuminated on the tax return filed the year after the deal closes.

The tax code is very complicated, so beneficial financial advice cannot be based on a simple tax estimate, or a rule of thumb, as is common during a free phone based tax interview.   Every aspect of your unique personal finances could provide a detour to legally avoid unnecessary tax liabilities.  Be sure to seek the advice of a financial firm that understands how to find the best options based on your unique household financial situation.

There is an underlying sense of urgency, whether you feel it or not.  The Medtronic and Covidien transaction is projected to close in the 4th quarter of 2014, or early 2015, and the 4th quarter began last Wednesday, October 1, 2014. Once it is complete, any opportunity you had to decrease your tax liability, or fund your long-term goals at a reduced cost, is lost and you will simply pay your taxes.  Shareholders may be able to save even more in taxes by splitting the sale between two tax years.  In some cases, these strategies can be complicated and are best executed under the guidance of someone who is knowledgeable on the subject.

There are many options that can be focused on your unique goals and objectives that could reduce the taxes looming. You stand at an important fork in the road.  Doing nothing is always an option, but it can be expensive. The advisors of FFP Wealth Management have helped thousands of families reduce the taxes caused by many life events including corporate mergers.

FFP Wealth Management has a competitive advantage as they have created a proprietary tool called the TaxSuperSheet®, which can produce an accurate comparative tax and cash flow analysis showing the benefit of various strategies available to each taxpayer.

When considering a financial advisor, your needs must come first.  Do not be afraid to ask a financial advisor you are interviewing how they are paid.  This single question may reveal conflicts of interest that might skew their advice away from your best interests in favor of their own.  An advisor who is a member of the National Association of Personal Financial Advisors (NAPFA) does not sell financial products, does not earn commissions and does not receive referral fees.

Contact FFP Wealth Management to set up a free initial consultation to determine if you might benefit from a tax-savings strategy before the decision to do nothing is made for you.


“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.  Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.  Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Judge Learned Hand 1935