Business succession often fails because business owners failed to plan, not because of a failure of the plan itself. But once a succession plan is established, it requires periodic review because tax laws change, goals change, dreams change and outcomes change.

“Often I find a business, particularly when it’s closely held, is one of the biggest assets of a family. So you’ve got to treat it that way,” says Rick Applegate, President of First Commonwealth Financial Advisors. “People get so close to their business that they forget, or fail to, look at it objectively.”

Smart Business spoke with Applegate about what to consider with business succession.

Why do business transfers to another generation often fail?

Assuring continuity is vital, but it doesn’t always mean that a second generation can assure success. A business succession strategy needs to take into account the business owner, the buyer, key employees and, most importantly, the clients.

Many times, owners of a closely held family business want to be ‘fair’ to all their children. So, a sibling who hasn’t been involved gets an interest equal to that of the sibling who has worked in the company for many years. Fairness has nothing to do with a successful business succession. Work out some other way, such as taking out a life insurance policy on yourself to benefit the uninvolved son or daughter.

How does a defensible business valuation help?

Understand what you’re trying to do — are you selling to family members, on the open market or to internal employees? One of the first things a buyer wants to know is the cost, so you need a supportable valuation to put a price on the business.

Even if you’re not selling, a business valuation is helpful. If the company hasn’t been properly valued at your death, the IRS will value it as highly as possible to collect more tax when your estate executioners sell or transfer the business.

It’s important to bring in appropriate professionals like attorneys, tax accountants, financial planners, etc. People who are closely vested in their business almost always think it’s worth more than it is. Professionals can help guide you to a reasonable valuation, including picking the best methodology.

What else should you take into account?

You need to think about who would be interested in buying your business. It might be difficult to sell in the open market. Family members could be disinterested. So, employees may be an option. Employee stock ownership plans have tremendous tax benefits to the prospective seller. Today’s low interest rates also easily allow a stock transfer with a bank loan. Again, qualified professionals can help with sale contract language and other matters.

In addition, you might not have the option of active, thoughtful selling. Plans must weigh what happens if there’s financial hardship, injury, disability or even death. Business succession planning should go hand-in-hand with your estate planning.

When family members are under duress, you don’t want them scrambling with business operations or estate matters. Leaving the business to your uninvolved spouse may be a terrible position to put him or her in. And it can hurt the value if they end up having a liquidation sale.

Use the plan to put your successors in the best position. Ask who is key to the continued success of the business. Do you need to give key employees part ownership or incentives to stay?

How can the right financing help with the plan’s execution?

There are different ways to sell a business. Prospective owners often utilize life insurance purchased under an agreement of sale because it makes the outcome a known entity. This is particularly useful when the buyer is paying through installments. If the business owner dies in the transition period, the life insurance awards funds to pay for the remainder of the company.

There are a lot of details to wrap up with business succession. Even after a sale, the right parties must be notified so previous owners or survivors aren’t liable for the unemployment tax filings, tax returns, business credit cards, etc. With help from experienced professionals, your plan can anticipate and respond to ensure the business continues after you’re gone.

Rick Applegate, CFP®, AIFA®, ChFC®, CLU®, is the president of First Commonwealth Financial Advisors. Reach him at (724) 933-4529 or

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Published in Pittsburgh

Health savings accounts (HSAs) are a savings vehicle increasingly being used to offset health care costs and improve awareness when utilizing health care simply because there is additional skin in the game. Further, HSAs provide potential savings and accumulation of assets that work well with long-term financial planning.

“HSAs encourage us to be better consumers, plan ahead and consider the ramifications of health care, as it applies to your long-term financial plan,” says Michael Bartolini, President and CEO of First Commonwealth Insurance Agency.

“It might be a very good opportunity to save more tax-deferred and tax-free money, depending on your situation,” says Nancy Kunz, Lead Financial Planner at First Commonwealth Financial Advisors.

Smart Business spoke with Bartolini and Kunz about how health savings accounts operate and where they fit in with your financial planning.

How does an HSA work in conjunction with your health insurance?

Many people are going to a high-deductible health care plan that has premium savings as a result of the larger upfront deductible. The idea is to shift those premium savings to an HSA, which can be used to pay for unreimbursed medical expenses on a pre-tax basis. The list of applicable expenses is long and includes dental, vision, long-term care insurance premiums, home improvements for medically necessary conditions, etc.

An HSA does not have to be provided by an employer; it can be set up on an individual basis. You also are able to accumulate funds year after year, with the idea of using those dollars against future medical expenses.

The current annual contribution limits, which tend to increase, are $6,450 for a family or $3,250 for an individual. If you are over the age of 50, you are able to contribute an additional $1,000.

How does this differ from a flexible spending account?

Typically provided by employers, a flexible spending account (FSA) works on a pre-tax basis for many of the same unreimbursed medical expenses, but the money does not roll over to the following year. If the monies that are in the FSA are not spent by the end of the calendar year, they are lost. Unlike an HSA, all monies you plan to contribute to the FSA throughout the year are available as soon as you sign up, whereas only the actual contributions are available in an HSA.

How does an HSA help you better manage health care expenses?

When something hits your pocket or you have a new cost, it causes you to be more responsible and a better consumer. If you have to pay $2,000 first with the high-deductible health plan, you’re going to be more mindful of where you go for health care expenses, including which hospital or provider you choose for a procedure.

The economics of health care don’t follow traditional economics where you choose wisely based on price points and/or quality. What one provider may charge for an MRI versus what another provider charges could be very different, but you’re not likely to care if it’s a $10 or $15 copay. We don’t have the mindset that even if insurance companies are paying, so are we — one way or another.

HSAs and high-deductible health plans with their greater level of upfront deductible  pushes consumers to exert more energy to pick up the phone and find out what a procedure costs. In addition, many health insurance carrier websites are starting to populate this kind of transparent data to show provider price points.

How does an HSA fit into your overall financial plan?

An HSA can act as another retirement vehicle, especially if you start young enough to accumulate funds without having to — or choosing not to — use those dollars against medical expenses. Once you’ve reached age 65, HSA funds can be used without penalty for any purpose. An HSA also will follow you wherever you go; it’s not tied to an employer.

Many people have reached their maximum on 401(k) or IRA contributions, so depending on your age and health needs, this may be an option to look at seriously for tax benefits and long-range financial planning.

Michael Bartolini is president and CEO at First Commonwealth Insurance Agency. Reach him at (724) 349-6028 or

Nancy Kunz, CFP®, ChFC®, CLU®, is lead financial planner at First Commonwealth Financial Advisors. Reach her at (412) 562-3232 or

Insights Wealth Management  is brought to you by First Commonwealth Bank



Published in National

When Congress passed the American Taxpayer Relief Act, it came with just enough time to give a clearer picture of expectations for the year ahead.

“There was a lot of anxiety and uncertainty in the last quarter of the past year as the deadline got closer and people had no idea what to do about their tax planning,” says Rick Applegate, president and CEO of First Commonwealth Financial Advisors.

Smart Business spoke with Applegate about the changes and how they impact your tax and financial planning.

What are some of the tax law changes? 

The act avoided higher ordinary income tax rates for most Americans, but higher-income earners — $400,000 per year for single filers or $450,000 per year if married and filing jointly — will have their tax rate revert back to 39.6 percent, the highest ordinary income tax rate in this country before the tax reductions instituted by President George W. Bush. This impacts approximately 1 to 1.5 percent of Americans.

The biggest overall impact is the 2 percent increase in the payroll tax back to 6.2 percent, which might slow the economy’s growth rate in the first six months of 2013. In the year ahead, the Social Security tax tops out at incomes of $113,700 — therefore, an individual could pay up to an additional $2,274 and a working couple even more. It’s estimated that the 2 percent increased payroll tax will generate about $125 billion for the Social Security system, but that’s money that reduces discretionary consumer spending, which has otherwise helped to drive a U.S. economic recovery.

Another notable change is the 5 percent increase in capital gains and dividend rates for higher-income earners to 20 percent. This increase was not as bad as it could have been — capital gains rates on dividends were scheduled to go to ordinary income tax rates, which could have been as high as that top income tax bracket of 39.6 percent.

Investment income also gets the new Medicare surtax of 3.8 percent tacked on for anyone making more than $200,000, or $250,000 if married and filing jointly. It’s not a killer, but people at these income levels who rely on investment income will pay.

Some other changes are:

  • Estate tax exemptions and rates. Congress extended the $5 million exemption and adjusted it for future inflation, and upped the top estate tax rate to 40 percent.

  • Permanently indexing the Alternative Minimum Tax to inflation. This fixed the problem where more and more middle-class Americans were paying a tax originally meant to catch high-income earners who used deductions and loopholes to avoid paying any taxes.

  • Reinstituting phase-outs of certain deductions for those with higher incomes.

If anyone was a winner in the tax bill, at large, it was people with educational loans and families trying to pay for college. The act extended certain credits and deductions for qualified taxpayers.

How do investment advice and tax considerations go hand-in-hand?

You don’t want your investments to be ruled by tax decisions — you want investments to be made based on the projected economics of the deal and its potential returns.

That’s why it’s an adviser’s job to get people past their fears and emotions, and focus on making money. If investors can’t get past it themselves, they should sit down with a trained adviser who has a perspective on why there are always opportunities out there.

What are some strategies that can add value in the year ahead?

The average investor shouldn’t be too intimidated by these adjustments because, by and large, they mostly impact those in very high-income brackets. High-income earners may benefit from tax-exempt income from municipal bonds, tax deferrals like low-cost annuities, and/or decreasing their ordinary income by deferring more taxable income today into a retirement plan.

Until Congress permanently deals with the debt ceiling, headline volatility will likely be a fact of life. However, we still think that 2013 will be a fairly good year for the stock market. We would advise taking advantage of market declines that are likely to occur and to buy into opportunities such as the emerging markets. Investors shouldn’t let headlines make decisions; smart investors take advantage of market dips because, long-term, the stock market offers good value.

Rick Applegate is the President and CEO of First Commonwealth Financial Advisors. Reach him at (724) 933-4529 or

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Published in National

Your responsibilities as the sponsor of a retirement plan are more significant than you may realize. It’s not enough anymore to simply hire a service provider to manage the plan and offer it to your employees. As a plan sponsor, there is a tremendous amount of fiduciary responsibility, and decision-makers are held to an expert standard in the eyes of the Department of Labor (DOL).

If they don’t have the skills to meet such stringent standards, plan sponsors need to retain outside experts to guide them through the decisions that must be made on a recurring basis, or risk running afoul of the law.

“Many plan sponsors rely on their providers to do everything for them,” says Andrew Gracan, retirement plan advisor at First Commonwealth Financial Advisors. “Because of this, not only is there a misunderstanding of their fiduciary obligations but the tendency is to run the plan on auto-pilot unless there is a major operational issue to be addressed. However, due to ramped-up enforcement and litigation surrounding retirement plans, it’s important for plan sponsors to understand their obligations and have processes in place to ensure their plans are compliant,” Gracan says.

Smart Business spoke with Gracan about key issues plan sponsors must address.

Why are plan sponsors most at risk right now?

Retirement plans and the activities of their fiduciaries are being placed under a microscope. No longer do participants have multiple plans to rely upon in retirement. The 401(k) plan is the primary retirement vehicle for the majority of today’s workforce, and the burden of savings rests on the employee. With personal savings rates and Social Security in a questionable state, a retirement epidemic is waiting in the wings.

Second, the financial crisis has exacerbated this potential epidemic and taken a toll on participant account balances, drastically changing retirement expectations and causing HR issues for companies in their workforce succession planning function. Finally, 401(k) participants bear the majority of the costs and risk associated with their plan, a dramatic change from the traditional defined benefit plan.

As a result, the government has enacted sweeping legislation through the Plan Sponsor and Participant Fee Disclosure regulations. The first wave of required fee disclosures goes into effect July 1, 2012, and with participant level fee disclosures going into effect Aug. 31, plan sponsors are assessing how their plans and their participants will be affected.

Plan sponsors also face the burden in a major increase of DOL investigations. For the past few years, the DOL has provided plan sponsors a comprehensive educational campaign focusing on helping them understand their fiduciary responsibilities. However, the time for enforcement has begun. In 2011, the EBSA closed 3,472 civil litigations, with 2,301 resulting in monetary settlements of $1.39 billion.

Why is now a critical time for business owners acting as plan sponsors?

Due to the increased government focus, litigation and negative publicity associated with retirement plans, it is important to understand the fiduciary obligations that go hand in hand with sponsoring a retirement plan. Plan sponsors are realizing it is important to be familiar with the fiduciary requirements that are placed upon them and the service providers they hire, as they are personally liable for these decisions. In addition, enforcement and legislative actions are forcing plan sponsors to take a proactive role in understanding the reasonableness of fees being charged to their plans and determining whether conflicts exist with the service providers.

What is the biggest mistake plan sponsors make with retirement plans?

The biggest mistake is not realizing that ignorance is not a viable defense. If plan sponsors don’t fully understand their fiduciary responsibilities or processes, it is their responsibility to hire a ‘prudent expert’ who does. Oftentimes sponsors view retirement plans as a product rather than a process and assume the service provider (or nonfiduciary broker or financial consultant) is giving them the necessary fiduciary guidance to mitigate risk. However, this is a major misconception, especially if the service providers are giving fiduciary advice but not taking written liability for it.

Completely understanding your fiduciary obligations, whether or not service providers are taking written fiduciary responsibility for their actions, and whether or not there are inherent conflicts of interest that exist with the service provider, are paramount to the process of being a prudent fiduciary.

How will the requirement of detailed fee disclosures affect plan sponsors?

The most imminent task will come from the plan sponsors disclosures scheduled to be delivered on July 1. The new regulations are designed to provide plan sponsors with a full disclosure of fees charged to the plan, and sponsors must ask if their fees are reasonable, how to determine whether fees are reasonable, and whether they should hire an expert to determine reasonableness.

How can plan sponsors mitigate risk?

Plan sponsors must fully understand their fiduciary responsibilities and the role their service providers play in their retirement plans. While most believe their responsibilities fall within remitting timely employee contributions, overseeing the record-keeper and monitoring investment options in the plan, these are only part of their core responsibilities. The key is for plan sponsors to be prepared to defend all of the decisions made concerning their retirement plan and to show that they have defined processes that can be measured and repeated. If you, as a fiduciary, do not understand your obligations, or don’t have the information or knowledge to run the plan for the exclusive benefit of participants, it is your responsibility to hire an expert who does.

Andrew Gracan is a retirement plan advisor at First Commonwealth Financial Advisors. Reach him at or (412) 690-4592.

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in Pittsburgh