Archive for the ‘Estate Planning’ Category

National Financial Literacy Month: Six Steps Toward Successful Estate Planning

Tuesday, April 1st, 2014

In support of National Financial Literacy Month (April) and National Estate Planning Awareness Week (3rd week in October), the following estate planning article contains a very important message:

Estate planning is a financial process that can protect you and your family and is a very important component of your overall financial planning. Now is the perfect time to put your estate planning house in order. If you don’t have an up-to-date estate plan and you happen to get hurt or sick and cannot manage your financial affairs, the courts will have to appoint someone to manage them for you. The person they appoint might not be the one you would want to perform those tasks.

Without an estate plan, when you pass away, your affairs will be settled by default through a complex legal system called “probate.” The handling of your financial affairs can turn into a costly and frustrating ordeal for your family and heirs.

The crafting of a good estate plan starts with planning, followed by the proper drafting and signing of appropriate legal documents such as wills, trusts, buy-sell agreements, durable powers of attorney for asset management, and an advanced health-care directive or health-care power of attorney. Having these documents in place saves you and your family a lot of money and time at a very difficult and emotional time.

Your estate planning should also address the coordination of the way you hold title to your various assets, your beneficiary selections, and the possible transfer of certain assets while you are alive.

Regardless of the extent of your net worth, estate planning is important for everyone. Complex strategies may be used by wealthy people to reduce death taxes and costs. Others may only require a simple will and/or trust to pass on property to their heirs and provide for minor children.

Even if a simple will is all you require, an estate plan is an essential part of your financial planning. Everybody will need it someday. The time to address or update your estate plan is now. See the checklist provided below to help update your estate plan:

CHECKLIST — SIX STEPS TOWARD SUCCESSFUL ESTATE PLANNING

1. DEFINE YOUR GOALS: What do you want to happen to your assets in the event of your death or disability? If your beneficiaries predecease you, who are your alternate selections? How will your assets be distributed, and when will these distributions take place?

  • Decisions on distribution of your estate assets should take into account the size of the estate, the ages and abilities of your children, and your personal desires. For example, a distribution to children over time might consist of 10 percent of the estate at age 18, 25 percent at age 21, 50 percent at age 24 or upon completion of college, and the balance at age 30.
  • Choose your appointees for important roles: Who will be your executor and, if applicable, trustee and/or guardians? It is advisable to list at least a first and second alternate for each appointment in case your first choice is unwilling or unable to serve.
  • If you have children who are minors, the appointment of a guardian is probably the most important decision you’ll make. With the court’s approval, this person, or persons, will raise your children. Consider appointing a family member and spouse, or another close couple who’ll care for your children the way you would want.
  • You may want to consider listing multiple executors, trustees and guardians to serve together in handling the details of your estate. This can provide a check-and-balance system for the appointees and help them avoid oversights or misappropriations. Consider appointing family members, friends, professionals, advisers and/or trust companies for this position.
  • There is some risk here: If these people disagree and have problems, they can each be represented in court by counsel paid for by your estate, so be very careful in making your selections.
  • Living trusts have become popular because less administration is required in comparison with a will. Be aware that having a living trust does not eliminate the need for a will and administration at either the first or second spouse’s death.
  • To get the benefits of the trust, certain details must be attended to, and this is the job of your appointees. For example, leaving a trust for the surviving spouse requires that the trust be funded properly and in a timely manner at the first death, or major tax benefits can be lost.
  • Is estate privacy an issue for you? Do you want your estate to be public record upon your death? Do you have any special gifts you want made to charity? Do you want an elderly parent or friend to be financially cared for? All of these circumstances should be noted in your plan.
  • GATHER & ORGANIZE YOUR DATA: There are three basic tasks to be accomplished:
  • Review and update your financial position.
  • Review how you hold title to your assets. Is it consistent with your estate plan?
  • Review your beneficiary selections. Are they aligned with your estate plans?
  • Did you know that how you hold title to assets has a higher legal priority than your will? For example, if you and your best friend held title to an investment club account as joint tenants and you died, the property would revert to your friend even though you had willed your interest to your spouse.

3. ANALYZE YOUR SITUATION: Start by determining your current net worth, assuming your death occurred today. This can be done by totaling your current assets and liabilities, and adding the value of any life insurance.

  • Try sketching a picture or flow chart of your existing estate plan. Review your appointees:
  • Executor
  • Guardian of the Person/of the Property
  • Trustee
  • Power of Attorney – Property Management
  • Advance Health-Care Directive or Health-Care Power of Attorney

4. DEVELOP YOUR STRATEGIES: With the assistance of your estate planning advisor(s), identify the legal documents that need drafting or make any necessary adjustments to existing documents. Determine any other actions that must be taken for your wishes to be carried out.

5. IMPLEMENT YOUR PLAN: Do what needs to be done — i.e., create new wills, trusts and powers of attorney, adjust title to your properties, change alternate beneficiaries of retirement plans and life insurance policies to trusts.

6. TRACK & MONITOR YOUR PROGRESS: Check your estate plan annually or any time there are changes in your family situation or net worth. Use your financial planning calendar to schedule your next review.

 

Learn more about National Financial Literacy Month by clicking here. For more information on estate and financial planning content contact v.sabuco@TheFinancialAwarenessFoundation.org.

 

 

 

Age-Related Financial and Planning Milestones that People Will Encounter in their Sixties

Friday, March 28th, 2014

As one nears retirement age, a number of important financial planning milestones begin to approach. It can be difficult to keep them all straight. Here is a timeline of what happens when:

  • At age 59 1/2, people can begin to make withdrawals from 401(k)s, traditional IRAs and similar retirement savings accounts, without an additional tax penalty of 10 percent. (Withdrawals are still taxed as income in any case.) Of course, just because one can begin to make withdrawals at this age does not mean one necessarily should.
  • At age 60, if one’s spouse has died, then one can begin to collect a Social Security survivor benefit. This is also true if an ex-spouse has died, if the marriage lasted at least 10 years and the survivor did not remarry.
  • Upon reaching age 62, people can take the option of early Social Security retirement benefits. Keep in mind that starting one’s benefits early results in lower payments, and it is usually better to wait a few years to receive a larger benefit. If one is eligible for a pension, these benefits also often kick in at this age.
  • At age 65, one becomes eligible for Medicare. There is a seven-month window around one’s 65th birthday to sign up for Medicare benefits and avoid a surcharge.
  •  Age 66, for most baby boomers, is full retirement age for the purposes of Social Security retirement benefits. Additionally, at this age, someone who chose early benefits can now suspend benefits in order to build up delayed retirement credits.
  •  Upon reaching age 70, there is no further advantage to delaying taking Social Security retirement benefits. People who wait until this age to begin receiving benefits maximize their monthly payments.
  • At age 70 1/2, required minimum distributions begin for 401(k)s and IRAs. A certain amount must be withdrawn from these accounts each year, based on the total value of all such accounts.

By paying close attention to these milestones, one can complete a more precise budget, an important part of retirement planning.

 

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How Divorce and Remarriage Affect Social Security Retirement Benefits

Tuesday, March 11th, 2014

People considering divorce as their 10-year wedding anniversary approaches should know that delaying the split until after the decade mark can result in higher Social Security retirement benefits for a spouse with a lower earning record.

Taking the example of a divorced couple where the ex-husband had a higher earnings record, if the couple was married for 10 years or more, then the ex-wife can receive higher benefits based on his record, provided she is age 62 or older and has not remarried.

Even if the ex-husband has not applied for retirement benefits, the ex-wife may receive benefits based on his record, provided they have been divorced for more than two years. If the woman remarries, then she would no longer be able to collect the benefits unless the later marriage ends.lawyer-or-notary-with-cl

Recent years have seen a rise in both marriages and divorces later in life, and statistics suggest that divorcing couples may take retirement benefits into account, as there is a measurable increase in divorce after the 10-year mark. As might be expected, the effect is most pronounced for couples nearing retirement age. A recent study found that for people 55 and older, there is an 11.7 percent increase in the likelihood of divorce at about the decade mark. For couples age 35 to 55, that drops to a 6 percent increase in likelihood of divorce at 10 years, and for people under age 35, there is almost no effect.

Other researchers are skeptical that many people take retirement benefits into account in their divorce decisions, pointing to studies that show that only 13 percent of people are very knowledgeable about how Social Security benefits are calculated.

Whether divorcing couples currently consider retirement benefits in timing their divorce, many advisers agree that they should. Divorcing just short of the 10-year mark could result in thousands of dollars in lost benefits, so it may be worthwhile for some to delay the process.

Financial considerations are often part of making decisions about divorce, so it is important to be aware of how Social Security benefits can be affected.

 

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Students Loans Affecting Retirees

Monday, February 24th, 2014

Unmanageable student loan debt is a common problem, with nearly one in 10 borrowers defaulting within two years, according to the U.S. Department of Education. Now student loan debt is increasingly interfering with the retirement plans of older adults as well.

According to the New York Times, people age 60 and older now comprise the fastest growing age group for student loan debt. More older adults are borrowing, and a larger percentage of the borrowers are defaulting.

Some older Americans took out loans to pay for their children’s college expenses, and some are in debt from their own education costs. The ratio is unknown because there is no government system to track that information.

A particular concern for retirees is that the federal government will take up to 15 percent of Social Security payments and apply it to unpaid loans, although this does not affect recipients who collect less than $750 per month.

The total outstanding student loan debt in the United States has reached a remarkable $1 trillion, and with unemployment still high, many people of all ages have been unable to pay back their loans. Even people who are able to pay back loans may find that their retirement is affected, because high payments make it more difficult to save for retirement.

One legislative reform that has been proposed is to allow private student loans (but not government-sponsored loans) to be dischargeable in bankruptcy.

 

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Leaving Unequal Inheritances to Children Can Cause Problems

Wednesday, January 22nd, 2014

Many people creating or updating an estate plan are blessed with children and grandchildren, and enough assets to leave them a significant inheritance. However, deciding how to provide for future generations can lead to conflict, and much of that conflict stems from unequal treatment of children, whether it is intended or not. Here are a few pitfalls to avoid.

In some families, especially in previous generations, it was common to treat sons and daughters differently in regards to inheritances. A family business might be left to sons, while another asset such as a trust may have been created to provide for daughters. Needless to say, this can cause resentment and disputes. In modern times, such gender distinctions are less common. However, parents creating an estate plan often still choose to treat some children differently.

Parents sometimes consider providing for their adult children differently based on each child’s family income and assets. While this may seem like fairness, it is likely to cause resentment. It is, of course, one’s right to distribute one’s assets according to one’s wishes. However, parents may want to consider simply dividing their assets equally among their children. This simple solution can head off arguments and hurt feelings.

Distribution of assets to one’s children and grandchildren during one’s lifetime may be unequal for valid reasons. Paying for college may entail a greater cost for one child than for another. Helping to provide for grandchildren may mean that one’s adult children with more children of their own receive more help. These matters are best approached with openness and an attempt at fairness, keeping in mind individual circumstances.

When it comes to planning one’s estate, there may be a temptation to either mirror those inequalities by leaving more to adult children with more children of their own, or to make up for them by leaving something additional to one’s other children. However, the best approach may be the simplest: dividing one’s estate equally among one’s adult children, and providing that in the case of an adult child who has passed away, that any grandchildren receive that child’s share of the estate.

Passing on a family business may seem like a special case, but it need not be. If one or more adult child has had a special role in a family business, then that role will likely continue. Ownership of a family business may still be passed on to all adult children equally, with a child who has worked in the business continuing to be compensated for his or her work. Alternatively, a child who works in the business can receive ownership shares during the parents’ lifetime, so that the remaining family shares are distributed equally upon the parents’ death.

Passing on an inheritance to one’s children should be a cause for celebration rather than disputes. Making distributions as equal as possible is one way to keep it that way.

 

 

Sharing Caregiving Responsibilities Among Siblings

Thursday, November 14th, 2013

Caring for an elderly parent in declining health is a big responsibility, and one that can have a significant effect on the caregiver’s financial and emotional well-being. Having a sibling to share in that responsibility can make things easier, but it can also lead to conflict and resentment. It is important to understand the issues that may arise when two or more adult siblings are caring for an elderly parent, and the best ways to resolve problems.

One question that usually comes up at the outset is who will be the primary caregiver. If only one sibling lives close to the parent who needs care, that is often the deciding factor. When two or more siblings live close by, then the decision often depends on work schedules. If none of the siblings live close to the parent or have time available, then the question becomes how to divide the expense of hiring an in-home health aide or perhaps an assisted living facility, depending on the circumstances.

Good communication is probably the most important factor in making these decisions. Ideally, responsibilities will be divided in whatever way feels fair to everyone involved, and arriving at the best outcome depends on communication. Siblings should be encouraged to share exactly what they feel they should contribute and why. Factors such as an individual’s family income or work schedule are legitimate concerns that may play into decision-making. Feelings about this should be stated plainly so that later resentments can be avoided. Siblings should try their best not to let old sibling rivalries get in the way. Adult siblings caring for an elderly parent are taking on new roles, and they are best served by not replaying old ones.

In addition to family income and work schedules, siblings should consider each other’s particular skills. If one sibling is a more frugal money manager, it may make sense for him or her to hold the power of attorney for the parent. Someone with experience as a caregiver may do the best job handling day-to-day care. One fact that should not be forgotten is that caregiving is valuable and important work. Siblings who are not involved with day-to-day care may not be aware of just how much work is involved. The caregiving sibling should not be afraid to speak up and share with the others how much time goes into giving care for their parent. It can be easy for a sibling that is contributing more time or contributing more money to feel that his or her contribution is unfair or is going unrecognized. Full and frank discussion is the best solution.

Finally, as with most things, careful planning will save a lot of headaches. Just as mom or dad’s schedule of doctor’s appointments and daily medications needs to be kept track of, so should the finances be kept in careful order. An estate planning attorney or financial adviser can be invaluable in preparing a budget that accounts for the cost of different types of care that may be needed.

Wives and Stepchildren Are Often in Conflict Over Caregiving

Thursday, November 7th, 2013

Being a caregiver for an older loved one can be stressful, not least because the work often seems to fall to one person, with other family members seemingly unaware of how much work goes into caregiving. When a woman is caring for her husband and needs help from his adult children from a previous marriage, conflicts can arise.

This issue was examined in a study published in The Journal of Marriage and Family. The study looked at late-life wives whose husbands had Alzheimer’s or other dementia and what sources of support they had. Many of the women in the study felt that their husband’s relatives – particularly his adult children – had a negative impact on their caregiving. The women often felt that their husband’s adult children made a minimal contribution to caregiving, or created conflict.

Researchers – and caregivers – were already aware that being a caregiver can be demanding and isolating. The new study shows that it is especially challenging for remarried caregivers.

Researchers interviewed 61 women for the study and found cases where adult children refused to believe a diagnosis of dementia or refused to participate in decision-making about caregiving. Some women had had lawsuits filed against them by their husband’s adult children, claiming money was being misspent.

For caregivers experiencing these issues, the solution is often to find positive emotional and practical support elsewhere: from friends, professionals, and their own loved ones.

 

Extending Your Retirement Savings

Tuesday, October 29th, 2013

In 1935, when the Social Security system was created, average life expectancy was 62 years. In 2013, it has increased to about 80 years. A longer life expectancy means people have a chance to enjoy their retirement years, but it is also something to keep in mind during financial planning for retirement. What if you outlive your money?

Social Security retirement benefits provide a small income for retirees, but most people want to be able to maintain a lifestyle similar to what they had when they were working, and that takes planning.Of course, one of the most important factors in successful retirement planning is to start saving early, and young people who take advantage of 401(k)s and other retirement accounts are doing their future selves a great favor. If, on the other hand, you are nearing retirement and realizing that you need to increase your savings, there are things you can do.

It is important to take advantage of Roth accounts and other retirement accounts as much as possible. Roth accounts are particularly helpful for retirement because of the tax break on withdrawals. High-income earners would be well-advised to make the maximum contributions and convert traditional accounts to Roth accounts during high earning years, when the income tax will be less of a burden.

Another useful strategy to consider is investing in tax-deferred annuities or life insurance policies such as whole life, which have a cash value component that grows tax-deferred. These investments also have death benefits that can help provide an income to survivors.

 

 

 

Estate Planners Find More Clients Are Raising Grandchildren

Monday, October 7th, 2013

Financial advisors and estate planning experts are reporting that they are seeing an increase in the number of grandparents who are helping to raise their grandchildren. For many, that added financial responsibility means that plans for retirement must be put on hold.

More than 2.6 million grandparents were raising grandchildren below the age of 18 as of 2011, according to the U.S. Census. Many households are disrupted due to underemployment, divorce, mental health or substance abuse issues or chronic illness. When adult children are not able to fully parent their own children, other family members often step in, and many times, custody of the children falls to the grandparents. That addition to the household means that more funds are needed for food and clothing; add in school supplies, sports and leisure activities and even basic entertainment, and a comfortable budget for two retirees can quickly be stretched to the breaking point, not to mention the emotional toll.

Merrill Lynch ran a survey of retirees in early 2013. Thirty-five percent of responding grandparents stated that they expect they will have to provide financial support for their grandchildren: 43 percent of those respondents stated that they will be providing financial support; 38 percent believe they will be paying for housing; 30 percent will be paying for education; and 25 percent are planning to pay for health care.

Even when grandparents are not shouldering the entire burden, many grandparents report that they are helping to “bridge the financial gap,” paying for some items or providing ongoing monthly funds to help make ends meet. And when some families are more financially secure than others, issues of resentment can build. That and the tax implications of gifts and estate tax is why so many estate planning attorneys strongly suggest that families look into setting up trusts with specific guidelines.

In addition to looking at financial estate plan issues, any grandparents who are parenting or co-parenting grandchildren should speak with an attorney to make sure guardianship issues are formalized. A guardianship that must be declared through the courts during an emergency is unpleasant for everyone involved.

 

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Procrastination & Debt Have Serious Effects on Estate Planning

Thursday, September 19th, 2013

Proper retirement and estate planning is the key to having the resources to enjoy one’s golden years and leave a legacy to one’s heirs. Two of the biggest obstacles to avoid on the way to these goals are procrastinating about saving for retirement, and accumulating unmanageable debt.

It may be understandable that retirement is the last thing on young people’s minds, but it is also regrettable, because the earlier one begins to save for retirement, the easier it is to build a comfortable nest egg. Someone who saves $100 per month beginning at age 25 will have saved over $300,000 by age 67, assuming a rate of return on investment of 7 percent. Saving the same amount of money per month but not starting to save until age 40 would result in savings of less than $100,000.

The Social Security system is more stable than some critics would lead one to believe, but Social Security retirement benefits provide only a safety net, not enough to retire in comfort. Employer pensions are very nearly a thing of the past. Much of the responsibility of providing for one’s retirement is up to the individual. A 401(k) plan, especially with an employer contribution, can be a tremendous help, and can motivate even young workers to save. The key is to avoid procrastination in saving for retirement.

Debt is the other major issue that can adversely impact retirement planning and estate planning. With too much debt, many older Americans find they cannot afford to retire, much less leave a substantial estate to their heirs. To get control of debt, it is important to focus on paying down high-interest debt first, such as credit cards.

Debt – even a healthy, manageable amount – can affect estate planning in less obvious ways as well. For instance, if you are planning to provide for some heirs through a trust and others through a will, you should be aware that debts must be paid from your estate and consider how that will affect your bequests.

 

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