Life Insurance Can Make Your Charitable Giving More Effective

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1 ADAMS BANK & TRUST Your Financial Services Center 1 st Quarter 2005 Life Insurance Can Make Your Charitable Giving More Effective Nebraska Brule Chappell Grant Imperial Indianola Lodgepole Madrid North Platte Ogallala Sutherland Colorado Berthoud Colorado Springs Corporate Toll-Free Telebanc Toll-Free in Ogallala info@abtbank.com World Wide Web One of the unexpected bonuses of accumulating some measure of wealth in your lifetime is the satisfaction that comes when you are able to give a significant financial gift that makes a major difference in the operations of a worthy charitable cause. There are literally dozens of different reasons why people give to charity obtaining recognition, creating a legacy, achieving a form of immortality and taking advantage of tax breaks are among them. But one of the main overriding reasons people give is because it just seems right to return a portion of a life s blessings to the community that played a part in those blessings. The trouble is, despite generous intentions, having wealth does not mean you are able to give a portion of the wealth to charity. If a lot of the wealth is held in the form of stocks and bonds and other liquid investments, sure, it s fairly easy to make a meaningful gift. But the wealth of many people is not liquid; it s wrapped up in a family business or real estate or some investment that, if it were to be liquidated, would incur significant taxes. Even among the very wealthy, it is a rare individual who can just sit down and write out a check for $100,000. So, how can you make a significant gift to the charities of your choice now, during your lifetime, if your assets are not in liquid form? Giving through life insurance Life insurance offers an easy and economical way to make a substantial future gift to charity by making small, manageable premium payments over time. There are two main ways to use life insurance for a charitable gift: 1. You take out a policy on your life with yourself as the owner but the charity named as beneficiary. You make the premium payments and when you die the charity receives the proceeds from the policy. 2. The charity itself takes out a policy on your life. The charity is the owner of the policy as well as the beneficiary, and the charity pays the premiums. You, in turn, make annual donations to the charity to cover the cost of the premiums it pays. The first method allows you to stay in control of the policy and change the beneficiary at a later date should you so choose, but you do not get to claim a tax deduction for the premiums you pay. The second method allows you to claim a tax deduction for the annual donations you make (that cover the cost of the premiums paid by the charity), but the charity has full control over the policy. Either method can provide a major benefit to a charitable organization that you favor while keeping the out-of-pocket cost of your donation relatively small and manageable. There are actually many variations on these two themes for using life insurance in making a charitable gift. For maximum tax advantage and effectiveness, we recommend establishing a charitable giving plan in conjunction with a comprehensive estate plan. We always advise people to visit with a financial planner, tax advisor or attorney when developing an estate plan, and the same advice holds when creating a charitable giving plan. A good advisor can help you develop an effective, coordinated approach to your financial planning that will encompass all your goals, including major gifts to the causes you care about. Mel Adams Chairman

2 Choosing Between a Traditional IRA and a Roth IRA by Todd Adams President of Adams Bank & Trust You probably already know that having an Individual Retirement Arrangement (commonly referred to as an IRA) and making annual contributions to it is a good financial move. An IRA provides significant tax advantages for setting aside money for retirement and the advantages are too great to ignore. Each year, when it comes time to make your contribution, however, there is always the choice between contributing to a traditional IRA or a Roth IRA. Even if you already have a traditional IRA established, you still have the option of establishing a Roth IRA (as long as your total contributions to all IRAs combined do not exceed the allowable annual limit). Our purpose with this article isn t to explain the IRA, but rather to highlight the primary differences between the two choices traditional IRA and Roth IRA so you can make an informed decision on your contribution. Background The contribution limits are the same for either type of IRA. The maximum amount that you can contribute for 2004 is the smaller of: $3,000 ($3,500 if 50 or older); or Your total taxable compensation for For the 2005 tax year, the above maximum increases to $4,000 ($4,500 if you are 50 or older.) Note: Most people can make contributions for the 2004 tax year up through the tax due date for that year, which is April 15 of Differences The main differences between a traditional IRA and a Roth IRA have to do with whether or not the account earnings (account value above and beyond the amount that you contribute to the plan) are taxable in the future, at the time of withdrawal. Basically, a traditional IRA is a tax-deferred plan, while a Roth IRA is a tax-free plan. But this explanation requires some qualification, so let s take a separate look at contributions (deposits) into the plan, earnings while the plan is in force and withdrawals from the plan. Contributions Traditional IRA: Contributions for most people are tax-deductible for the year the contribution was made. (There are exceptions that affect people with higher incomes but, for simplicity, we are not covering the exceptions in this article.) Essentially this means you are funding a traditional IRA with income you have not paid taxes on. If you are in the 15% tax bracket, for example, this deductibility feature means that a $3,000 IRA contribution for 2004 reduces your 2004 taxes by $450 because it reduces your taxable income by $3,000. Roth IRA: Contributions are not taxdeductible. You are funding a Roth IRA with after-tax dollars income you have already paid income tax on. Thus, with a traditional IRA, there is an immediate tax break when you make a contribution. With a Roth IRA, there is no immediate tax break. An important point to keep in mind here, however, is that the immediate tax break with the traditional IRA is only a tax-deferral, not a tax foregiveness. Earnings With either type, current taxes are not due on earnings or growth. As you will see below, with a traditional IRA the taxes on earnings are deferred until withdrawal. On a Roth IRA, by contrast, earnings are never subject to federal income tax, even at withdrawal. Withdrawals Traditional IRA: Withdrawals during retirement time are taxed as current income for the year the withdrawal was received. Withdrawals must be started by age 701/2 and there are minimum withdrawal amounts required each year. Roth IRA: Withdrawals are not subject to federal income tax and there are no requirements for annual withdrawals. Which to choose Deciding whether to contribute to a traditional tax-deferred IRA that offers an immediate tax benefit or a tax-free Roth IRA that has no immediate tax benefit can be complicated. And it involves a prediction of the future. If you are in a higher tax-bracket now and expect the tax percentage to be significantly lower during retirement, you may want to take advantage of the immediate tax break offered by the traditional IRA. However, if your tax bracket is relatively low now, so that the immediate tax break of a traditional IRA is not great, the advantage of taxfree growth (rather than tax-deferred growth) may make the Roth IRA more appealing. Please keep in mind that this is not a thorough discussion of the subject. There are many restrictions and exceptions these are IRS rules, after all that affect each individual situation. We strongly recommend that you consult a qualified financial advisor, attorney or accountant if you want to figure out the course of action that is best for your situation. Having said that, however, we can also say that as a general rule either a traditional IRA or a Roth IRA is better than having no IRA at all. 2

3 We d Like You To Meet: Corinne Pascale Item Process Supervisor Ogallala 3 Smart things to do now to make your financial life easier or more rewarding If you are interested in leaving a sizeable gift to a charity, visit with a financial advisor about the best way to make the gift. Start, or continue, contributing to an Individual Retirement Arrangement. If you have ever put a stop payment on a check, did you wonder who it is that makes sure the payment gets stopped? A glimpse into the back room operations of Adams Bank & Trust reveals that Corinne Pascale, Item Process Supervisor, and her team of four are the people responsible for making stop payment orders happen. They also process checks that were returned from other banks due to insufficient funds and just about any other banking item that requires special handling. As supervisor of the item processing team, Corinne is also responsible for the balancing of all teller work and the end-of-the-day bank balance. In addition, she supervises the statement rendering process, does some billing for the bank and helps answer questions and solve problems for all departments and branch offices. All told, Corinne and her team are vital to the smooth inner workings of the entire bank. Corinne, 34, was raised on a ranch near Maywood, Nebraska. A 1989 graduate of Maywood High School, she attended Chadron State College, graduating in 1993 with a major in business management and minor in organizational psychology. (Organizational psychol- Continued on back page. Make sure your beneficiary designations on your retirement accounts fully fit your estate plan and your wishes. Services Available at Adams Bank & Trust Transaction Accounts Basic Checking Regular Checking Bonus Checking SuperNOW Checking Student Checking Club 50 and Club 50 Gold Premier Checking Transaction Services Direct Deposit Wire Transfer of Funds Visa Check Card Bank-by-Mail Loan Services Overdraft Protection Business/Agricultural Loans Consumer Loans (home, auto, etc.) Student Loans Home Improvement Loans Mortgage Loans Second Mortgages Construction Loans Trusts and more Complete Trust Services Safe Deposit Boxes U.S. Savings Bonds Notary/Signature Guarantee Leasing Foreign Exchange Insurance (all types) Insured Savings & CDs Regular Savings Money-Market Savings Certificates of Deposit for any term from 1 60 months Tax-Deferred Retirement Plans, including IRA and Roth IRA (Individual Retirement Accounts), SEP (Simplified Employee Pension) Information and Convenience Services Automatic teller machines Internet Banking Internet Web Site Telebanc 24-hour banking 3

4 Corinne Pascale Continued from page 3. ogy, for the curious, is the study of how humans function within organizational structures; what motivates us, how we process information, how we cooperate to get thing done, etc.). Before joining Adams Bank & Trust in 1996, Corinne worked as a floor supervisor at Pamida in Chadron. Her first job at Adams Bank was as a drive-up teller. She later moved to data processing and was named supervisor of item processing in Corinne enjoys working behind the scenes in the bank. It s always interesting, she says, because our duties keep us involved with many different areas of the bank. We get to see how it all fits together and we help make it all work. Like many of us who balance our checkbooks on a regular basis, Corinne enjoys the satisfaction of the balancing process, especially when it works on the first try. In her home life, which includes a husband, Casey, and 4-year-old daughter, Jade, Corinne enjoys reading especially suspense novels and playing on a women s volleyball team. She and Casey enjoy hiking together, especially in the Colorado mountains. Corinne comes from close-knit a family of five children so spending time with extended family is a priority. All the siblings and their families live in either Nebraska or Colorado so they manage at least one complete and several smaller get-togethers every year. Corinne and her family are members of the Church of God in Denver. Inside 3 Life insurance as a charitable gift 3 Traditional IRA versus Roth IRA Adams Bank & Trust Balance Sheet as of December 31, 2004 Cash On Hand And Due From Banks $12,834,535 Money on hand in our bank and money to our credit in other banks. Government and Agency Bonds 48,459,389 Marketable investments in bonds and other securities of the U.S. Government and its agencies. Federal Funds Sold 0 Excess funds loaned to other banks on a day-to-day basis. Loans 285,454,027 The total of all customer loans, including farm, business, auto, home, student, consumer, and personal loans, etc. Buildings, Furniture and Fixtures 9,965,651 The current book value, after depreciation, of our buildings, computers, equipment, etc. Other Assets 7,485,811 Includes interest on loans that has been earned but not yet collected, expenses that have been prepaid, etc. Total Assets $364,199,413 Deposits $260,975,659 Includes all customer funds held on deposit. Other Liabilities 68,021,403 Includes borrowings by the bank, interest on deposits and other expenses accrued but not yet paid, deferred taxes, etc. Capital 3,000,000 The amount paid by initial stockholders for bank stock. Surplus 12,863,288 Additional money contributed by stockholders for added strength. Undivided Profits and Reserves 19,339,063 provide added strength to meet possible future loan losses and to replace buildings and equipment as they wear out. Total Capital Accounts 35,202,351 The total capital available for the safe operation of Adams Bank & Trust. Total Liabilities & Capital Accounts $364,199,413 PRSRT STD U.S. Postage P A I D Lincoln, NE Permit No. 592 Return Service Requested P.O. Box 720 Ogallala, NE Member FDIC ADAMS BANK & TRUST EQUAL HOUSING LENDER World Wide Web: info@abtbank.com Adams Bank & Trust Internet addresses:

5 Member NASD/SIPC 1 st Quarter 2005 FINANCIAL SERVICES, INC. INC. M e m b e r N A S D / S I P C IRA Distribution Rules Permit Non-Spouse Beneficiaries to Stretch Out Tax-Deferral Raymond James Investment Executives By Jim Prange and Chad Adams The discussion in this article focuses on the traditional IRA, as opposed to the Roth IRA. (For a basic discussion of the differences between a Roth IRA and a traditional IRA, please see page 2 of the accompanying More for Your Money newsletter.) Further, for simplicity, this discussion assumes that all contributions to the traditional IRA were taxdeductible though a mixture of deductible and nondeductible contributions is possible. Because a traditional IRA (Individual Retirement Arrangement) is a tax-deferred not tax-free retirement plan, you are not allowed to keep funds in a traditional IRA indefinitely. Eventually, the funds must be distributed (i.e., withdrawn from the IRA account), and they are subject to federal income tax in the year they are distributed. When distributions must begin Though you may take distributions earlier, IRS rules state that you must take a minimum dis- tribution every year beginning with the year in which you turn 701/2. Normally, the distribution for each year must be taken by December 31st of that year, but there is a 3-month grace period allowed for the first year. Example: If your birthday is March 2, and you turn age 701/2 on September 2 of 2006, your distribution for the year 2006 must be taken by April 1, 2007, and the distribution for 2007 must be taken by December 31, Required minimum distribution The required minimum distribution amount is recalculated each year. If you are over age 701/2, your required distribution for the current year is equal to the total balance in your IRA divided by the number of years of your remaining life expectancy as determined from an IRS table. Example: If you turn age 77 in 2005, your life expectancy is 21.2 years (determined from the IRS table). Assuming your IRA had a balance of $87, on December 31, 2004, your required minimum distribution for 2005 is $4, ($87, ). This is the minimum amount that you must withdraw from your IRA by December 31, Now, let s assume that your IRA grew in value by $6, during 2005 and had a total value at the end of 2005 of $89, ($87, Continued overleaf. Securities offered exclusively through Raymond James Financial Services, Inc. (an independent broker/dealer, member NASD/SIPC), are NOT FDIC Insured NOT GUARANTEED by Adams Bank & Trust Subject to risk and may lose value.

6 IRA Distribution Rules Continued plus $6, minus the required distribution of $4, taken at the end of 2005). Your required minimum distribution for 2006 would be $4, ($89, at the end of years of life expectancy for someone age 78). What if you are married? Since the purpose of an IRA is to provide funds during your retirement, it seems only reasonable that the required minimum distribution should be allowed to stretch out so it covers the life expectancy of your spouse, too. And it does, in a somewhat complicated way. If a spouse (who is named as the sole beneficiary of the IRA) is not more than 10 years younger than the owner of the IRA, the spouse can simply continue the same minimum distribution calculation after the owner s death. The only difference is that the spouse s age is now used to determine the remaining life expectancy. If a spouse (who, again, is named as the sole beneficiary of the IRA) is more than 10 years younger than the owner of the IRA, a combined life expectancy table is used to calculate the minimum required distribution. Example: Using the same situation as above an owner who is currently 77 years of age but with a spouse who is 60 years old, the minimum required distribution for 2005 would be $$3, This lower figure accounts for the fact that life expectancy of the last survivor of a couple those ages is 26.2 years, compared to a life expectancy of 21.2 years for a single individual or a couple that is much closer in age. The lower required minimum distribution amount means that the full value of the IRA will not be depleted as quickly and the IRA will have the benefit of a longer period of tax-deferred growth. A child as beneficiary Now, at last, we are getting to one of the main points of this article. If your named beneficiary is a younger person who is not your spouse, that person also has the ability to stretch out the IRA after your death and receive the benefits of tax-deferral for a longer period of time. Example: Again, let s use the example of an IRA owner who turns 77 in If the owner dies in 2005, and the beneficiary was the owner s 53-year-old daughter, the daughter has a life-expectancy of 31.4 years. That means the distribution of the remaining funds in the IRA can be stretched out over another 31 years. The stretch out advantage The whole purpose of an IRA is to defer taxes so the IRA funds have an opportunity to compound more advantageously. The longer the funds are left to compound, the more advantageous the IRA. Eventually the IRA must be fully distributed, but stretching the distributions out for an additional 20 or 30 years provides the potential for extra tax-deferred growth. Two cautions Caution #1: The IRS rules for IRA distributions are complicated and can be confusing. If you are approaching 70 years of age, we recommend that you seek the assistance of a qualified financial advisor, attorney or accountant to make sure you get the maximum benefit out of your IRA. Caution #2: Not all IRA plans allow for the stretch-out option to be selected by non-spousal beneficiaries. Ask your financial advisor to make sure that your existing plan allows for all the flexibility and pay-out options that you desire. Stretch IRAs are designed for investors who will not need IRA assets for their own retirement needs. The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources we consider to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Chad Adams and Jim Prange and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results. For assistance in reviewing your investment plan (or in creating one), please call any Adams Bank & Trust office for an appointment with one of these Raymond James Investment Representatives: Jan Acker, Chad Adams, Brandy Barrett, Jim Prange or Steve Zamborelli located at Adams Bank & Trust, 315 N. Spruce, Ogallala, NE or (toll-free).