TAKE STEPS TO PROTECT CUSTOMER PRIVACY

Concerns about privacy are growing, and rightly so. Identity theft accounts for 43 percent of all fraud complaints, according to the Federal Trade Commission.

An additional concern is the newest trend in identity theft: thieves targeting groups of people by breaching workplace security and gaining access to personal information about an organization's customers.

With all the publicity about identity theft, consumers are relatively informed about steps to take to protect privacy. Now, businesses are being expected to take similar steps. Consumers are starting to ask companies why certain personal information is needed and how it will be used.

Privacy laws have contributed to this greater awareness, and companies in certain industries or those marketing to specific segments must adhere to new privacy standards.

Policies Needed

For these reasons, all organizations need to develop privacy policies and practices if they do not already have them, and evaluate and tighten them if they do. Businesses face numerous risks by failing to adequately protect customer information, including irreparable damage to their reputation and brand, potential legal liability, and regulatory sanctions.

Taking visible steps to protect privacy can not only reduce risks, it can also help companies win favor with customers. Almost half of consumers surveyed by Harris Interactive said they would buy more frequently and in greater volume from companies with reliable privacy practices.

Organizations wanting to solidity customer trust and protect themselves from the risks of failing to protect privacy would be wise to take the following steps, at a minimum:

Review current practices to understand how, where and why customer information is collected, used, disclosed and retained. Risk-minded companies will want to limit their exposure to extraneous or outdated personal information about customers that could be misappropriated.

Identify specific areas of privacy risk. A thorough review of your practices will probably highlight ways in which you may be putting customer information at risk. These findings can help focus improvement efforts.

For instance, are you collecting unnecessary personal data? Are you adequately restricting access to sensitive information? Are you safely storing essential information and properly disposing of other data by shredding or other acceptable means?

Compare your practices against best practices.
Depending on your industry and how you operate - for instance, whether you engage in electronic commerce or electronic data interchange with customers - you'll want to first ensure compliance with all applicable laws and regulations. Any practices that are not fully compliant should be immediately targeted for improvement.

Beyond what is necessary for compliance, learn more about leading privacy practices and adopt them as reasonable. Specific practices to consider include:

• Creating a written privacy policy for internal use and a shortened version to distribute to customers.
• Adopting consent procedures for information sharing.
• Upgrading information systems to address vulnerabilities.
• Naming a chief privacy officer, or assigning someone responsibility for overseeing privacy matters.
• Seeking independent verification of privacy practices to ensure compliance with stated policies and procedures.

If your company has not yet addressed privacy safeguards, consider performing an internal review of your practices now, or seek assistance from an external business advisor, such as your certified public accountant. Privacy expectations are rising, and no company will want to open itself up to the very real and significant risks associated with ignoring privacy issues.

Low Interest Rates Make GRATS Attractive

Now is an ideal time for those with large estates to consider a Grantor Retained Annuity Trust (GRAT). This estate planning technique allows for potentially tax-free asset transfers to designated beneficiaries.

The current low interest rates make GRATs extremely attractive. In addition, a December 2000 Tax Court case, known as the Walton decision, paved the way for these trust to be created without paying a gift tax upon transfer of assets to the GRAT.

A GRAT is an irrevocable trust that pays the person establishing the trust ("the grantor") an annuity for a preset term. During that term, the grantor pays income tax on all of the GRAT's income. Whatever is left in the trust when the term ends passes tax-free to designated beneficiaries, typically the grantor's children or to trusts for their benefit.

Avoiding Gift Tax
The Walton decision enabled GRATs to be structured so that no gift tax is paid when the trust is established. The amount that would be subject to a gift tax can now be "zeroed out" by setting the annuity payment high enough that the present value of the payouts equals the value of assets contributed.

At first glance, this would appear to leave no assets in the trust, but to calculate the present value of the annuity payments, the Internal Revenue Service (IRS) makes an assumption about the rate at which trust assets will appreciate. Known as the Section 7520 rate, this rate is published monthly and tied to current interest rates.

If the rate of return on the trust assets exceeds the Section 7520 rate (3.6% for June), the beneficiaries receive the excess value of the trust tax-free. Therefore, the greater the spread between the Section 7520 rate and the actual return, the greater the tax-free gift you can pass on. In the current interest rate environment, the odds favor the likelihood that the return on assets will outpace the IRS rate.

Pros and Cons
Another advantage of GRATs is that they provide a cash flow to the grantor, unlike if an outright gift were made. The primary disadvantage of a GRAT occurs if the grantor dies before the term of the trust expires.

If this happens, the trust assets are pulled back into the grantor's estate and become subject to estate taxes. The grantor is also out the costs of establishing and administering the GRAT.

Advisors sometimes suggest "tiering" GRATs, or staggering their terms, to lessen the risk that all assets contributed will be pulled back into a grantor's estate.

Although it is always a gamble whether a GRAT will perform as intended, the interest rate climate bodes well for an investor's odds. If you want to explore or improve your estate-planning options, you owe it to yourself and your heirs to consider the potentially significant tax-saving benefits of GRATs.

PERFORMANCE MEASURES DRIVE IMPROVEMENTS

At one time or another, most companies struggle with underperformance. Often, this stems from an inability to maximize employee potential.

It's essential to get the most from your people because they're the driving force behind the business. But in a tough economic environment, where many companies are asking employees to do more with less, it may be necessary to boost performance by refocusing on key goals.

Specific and Measurable
Performance measures can provide a framework for improvement by clearly defining goals and helping employees understand how they contribute to them.

To be effective, performance measures must be specific and measurable. For instance, rather than simply saying you want to improve customer service, develop measures to monitor the underlying activities that support this goal. In this case, it might be a decrease in product defects or faster product or service delivery.

Companies will want to be selective in developing measures. A good rule of thumb is four to six meaningful metrics for each business process or activity. Having too many measures can obscure focus and frustrate employees.

It's also a good idea to track incremental progress - for example, monitor performance on a weekly basis, in addition to quarterly and annually. This helps identify problems early on so that adjustments can be made and trends reversed.

Coaching Techniques
It's not enough, however, to simply articulate desired changes and establish performance measures. Coaching is key to reaching individual and organizational goals. The most effective techniques involve pulling employees toward goals, rather than pushing them.

Often coaching is done internally, but some companies benefit from having an outside coach or advisor lead change initiatives. Regardless of who performs the coaching
function, here are some tips for achieving success:

Make improvement a two-way street. Employees are more supportive of change when they're involved in establishing performance goals and finding ways to achieve them.

Offer specific feedback. Avoid platitudes in favor of useful feedback. Instead of saying, "We're almost there, " explain clearly what still needs to be done to reach a target.

Function as a coach not a manager. Forging a cooperative, team-driven approach to change is more effective in fostering improvement than using a supervisory approach.

Keep in mind that achieving lasting change is neither fast nor easy, but it is more likely to occur when companies establish clear goals, design meaningful performance measures, and coach employees on how to make improvements.

Terminate Split-Dollar Policies Before Deadline to Avoid Taxes

Individuals involved in split-dollar life insurance arrangements should be aware of the need to terminate these policies or face adverse tax consequences beginning in 2004.

Rules ending the favorable tax treatment to these policies are imminent, but in Notice 2002-8, the Internal Revenue Service (IRS) outlined the coming changes and offered a grace period of sorts for participants in these arrangements to avoid tax consequences if they end them before 2004.

A split-dollar life insurance arrangement involves two parties agreeing to split the premiums or benefits, or both, of a life insurance policy. In the past, employers have often entered into these policies with key executives as a means of providing a fringe benefit or extra compensation with little or no taxation attached.

Two Sets of Rules
The forthcoming regulations will require split-dollar life insurance arrangements to be taxed under one of two sets of rules, depending on whether the employer or employee is the policy owner.

If an employee is the policy owner (also known as equity split-dollar or collateral assignment arrangements), premium payments by the employer will be treated as loans to the employee. Consequently, unless the employee is required to pay the employer market-rate interest on the loan, the employee will be taxed on the difference between the market-rate interest and the actual interest.

If the employer is the policy owner (also called the endorsement method), the employer will be considered to be providing an economic benefit to the employee in the form of life insurance protection that will be taxed as ordinary income.

For split-dollar arrangements in effect before Jan. 28, 2002, however, the IRS will not assert that there has been a taxable transfer of property if:

• the arrangement ends before Jan. 1, 2004, or
• for all periods beginning on or after Jan. 1, 2004, all payments from inception of the arrangement are treated as loans.

Those involved in these arrangements will want to consult a tax advisor as soon as possible to assess the impact of the new rules on their situation and evaluate the best course of action. Considering many split-dollar policies have sizable values, it's important to act now to avoid potentially staggering tax consequences that could occur if these arrangements are allowed to continue beyond year-end.