When Should I Review My Estate Plan?

As life changes, you need to periodically review your estate-planning documents and discuss your situation with your estate planning attorney.

WMUR’s recent article, “Money Matters: Reviewing your estate plan,” says a common question is “When should I review my documents?”

Every few years is the quick answer, but a change in your life may also necessitate a review. Major life events can be related to a marriage, divorce, or death in the family; a substantial change in estate size; a move to another state and/or acquisition of property in another state; the death of an executor, trustee or guardian; the birth or adoption of children or grandchildren; retirement; and a significant change in health, to name just a handful.

When you conduct your review, consider these questions:

  • Does anyone in your family have special needs?
  • Do you have any children from a previous marriage?
  • Is your choice of executor, guardian, or trustee still okay?
  • Do you have a valid living will, durable power of attorney for health care, or a do-not-resuscitate to manage your health care, if you’re not able to do so?
  • Do you need to plan for Medicaid?
  • Are your beneficiary designations up to date on your retirement plans, annuities, payable-on-death bank accounts and life insurance?
  • Do you have charitable intentions and if so, are they mentioned in your documents?
  • Do you own sufficient life insurance?

In addition, review your digital presence and take the necessary efforts to protect your online information, after your death or if you’re no longer able to act.

It may take a little time, effort, and money to review your documents, but doing so helps ensure your intentions are properly executed. Your planning will help to protect your family during a difficult time.

Reference: WMUR (January 24, 2019) “Money Matters: Reviewing your estate plan”

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Why Is It A Bad Idea to Take a Loan from My 401(k)?

Generally, it’s a really bad idea to take a loan from your 401(k).

Wealth Advisor’s recent article, “Why You Shouldn’t Take A 401(k) Loan,” lists some of the reasons why.

Many people who borrow from their 401(k)s wind up lowering or completely stopping their contributions, while they’re paying back the loans. This can mean the loss of 401(k) matching contributions, when their contribution rates fall below the maximum matched percentage.

Most people thinking about changing jobs don’t know that their outstanding 401(k) loan balance becomes due, when they leave their employer. Whether a job change is voluntary or involuntary, who among us has the financial resources available to pay back a 401(k) loan right away, if we leave our employer? As a result, many individual default.

However, the new tax law gives a little cushion, and you have until your tax return due date the next year. Plan balances that leave 401(k) plans due to loan defaults are rarely ever made up. That makes it less likely that loan defaulters will build sufficient retirement savings.

When you take a loan, it becomes one of your investments in your 401(k) plan account. If you were to take a $10,000 loan for five years at a 6% interest rate, that portion of your 401(k) balance will earn a 6% return for five years.

However, if your loan balance had been invested in one of the other investment options in your plan, you may have earned a lot more. Instead, look into taking a home equity loan first, because interest on those loans is tax-deductible.

Easy availability of a 401(k) loan can frequently make a bad financial situation worse. It can push you into bankruptcy and/or resulting in the loss of your home.

It is clear that 401(k) loans can significantly reduce your chances of achieving retirement preparedness.  It is also one of the worst investments you can make in your 401(k) account.

Reference: Wealth Advisor (February 4, 2019) “Why You Shouldn’t Take A 401(k) Loan”

 

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Is Will Planning the Same as Estate Planning?

Will planning and estate planning are very different processes. Both provide family members with instructions on how assets should be distributed after death, but estate planning goes beyond that, to provide instructions on your health, finances and more while you are living, according to an article from Lexology titled “The Differences Between Will Planning & Estate Planning.”

An estate planning lawyer can help you determine exactly what kind of planning you need, help you create the documents that will support your needs and give you and your family guidance in more complex matters.

Will planning is a relatively simple process that involves creating a document known as a last will and testament. It conveys instructions for after you have died. That may include naming a guardian to rear your children or who should take over your business, who should be in charge of your estate, the executor and who will receive your assets.

Everyone needs a will. It avoids family disputes about property, saves money on legal expenses that occur when there is no will and makes many decisions about your estate much easier. It is a kindness to your loved ones, to have a will.

Estate planning is a little different. It is more detailed and involves tax planning and certain protections for you while you are living. A living will is used to convey your wishes about what kind of medical care you want, if you should become unable to speak on your own behalf. The living will includes end-of-life care, the use of extraordinary measures, like a respirator or feeding tube and more. This is also a kindness to your loved ones, since it spares them from having to guess what your wishes might be.

You’ll also want to have a financial Power of Attorney created to instruct a named person regarding how to handle your money, your business and your investments, if you are unable to function. This person can do anything you could do, from transacting business to moving money into accounts, etc.

A living trust can be used to outline your wishes regarding your property and finances. An estate planning attorney will be able to review your assets and determine whether you need a living trust or if there are other trusts that may be more appropriate for your situation.

Beneficiaries are the individuals named on various accounts. They will receive assets directly from the institution that holds the assets, like insurance policies, retirement accounts, investment accounts and the like. It’s very important to understand that when there is a beneficiary named in a document, that beneficiary will get the assets, regardless of what your will says. These should be updated on a regular basis and if possible, you should always have a primary beneficiary and a secondary beneficiary.

An estate planning attorney will review your situation and talk with you about your goals for your family and your assets after your death. They will create a comprehensive plan with the necessary documents.

Reference: Lexology (January 28, 2019) “The Differences Between Will Planning & Estate Planning”

 

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Does Anyone Really Need a Trust?

The simplest definition of a trust is a three-party fiduciary relationship between the person who created the trust and the fiduciary for the benefit of a third party. The person who created the trust is known as the “Settlor” or “Trustor.” The fiduciary, known as the “Trustee,” is the person or organization with the authority to handle the asset(s). The trustee owes the duty of good faith and trust to the third party, known as the “Beneficiary.”

That is accurately described by the Pittsburgh Post-Gazette in the article titled “Do I need a trust?”

Trusts are created by the preparation of a trust document by an estate planning attorney. The trust can be made to take effect while the Trustor is alive — referred to as inter vivos or after the person’s death — testamentary.

The document can be irrevocable, meaning it can never be changed, or revocable, which means it can change from one type of trust to another, under certain circumstances.

Whether you even need a trust, has nothing to do with your level of assets. People work with estate planning attorneys to create trusts for many different reasons. Here are a few:

  • Consolidating assets during lifetime and for ease of management upon disability or death.
  • Avoiding probate so assets can be transferred with privacy.
  • Protecting a beneficiary with cognitive or physical disabilities.
  • Setting forth the rules of use for a jointly shared asset, like a family vacation home.
  • Tax planning reasons, especially when IRAs valued at more than $250,000 are being transferred to the next generation.
  • Planning for death, disability, divorce or bankruptcy.

There is considerable misinformation about trusts and how they are used. Let’s debunk a few myths:

An irrevocable trust means I can’t ever change anything. Ever. Even with an irrevocable trust, the settlor typically reserves options to control trust assets. It depends upon how the trust is prepared. That may include, depending upon the state, the right to receive distributions of principal and income, the right to distribute money from the trust to third parties at any time and the right to buy and sell real estate owned by the trust, among others. Depending upon where you live, you may be able to “decant” a trust into another trust. Ask your estate planning attorney, if this is an option.

I don’t have enough assets to need a trust. This is not necessarily so. Many of today’s retirees have six figure retirement accounts, while their parents and grandparents didn’t usually have that much saved. They had pensions, which were controlled by their employers. Today’s worker owns more assets with complex tax issues.

You don’t have to be a descendent of an ancient Roman family to need a trust. You must just have enough factors that makes it worthwhile doing. Talk with your estate planning attorney to find out if you need a trust. While you’re at it, make sure your estate plan is up to date. If you don’t have an estate plan, there’s no time like the present to tackle this necessary personal responsibility.

Reference: Pittsburgh Post-Gazette (Jan. 28, 2019) “Do I need a trust?”

 

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A Roadmap for Making Your Money Last Through Retirement

Many Americans worry about whether they will outlive their money in retirement. This concern is understandable. Just the thought of going broke after decades of working hard, and not being able to fix the problem, because very few companies will hire a person of advanced age is enough to cause sleepless nights. To help you avoid this situation, here is a roadmap for making your money last through retirement.

Since people ask them about this problem frequently, financial experts have come up with key strategies for making your money outlast you. The four components are:

Add Up the Income You Can Count On

Start with Social Security and add to that all of your guaranteed income. This category can include things like a pension, annuity, or net rent (after all expenses) from reliable rental property. If you do not yet receive Social Security retirement benefits, you can call the Social Security Administration (SSA) or set up an online account for yourself (a My Social Security account) at the SSA’s website, (ssa.gov) to estimate your Social Security retirement benefits.

Your Safe Number to Withdraw from Savings

With interest rates fluctuating and the stock market going all over the place, it can be exasperating to try to calculate how much money you can withdraw safely from your retirement savings, without running out of money down the road. You can stop banging your head against the wall. Financial planners have a formula.

Get the total value of all of your liquid assets – things that are cash or that you can easily convert into cash. These assets include checking and savings accounts, money market accounts and investments like mutual funds, stocks and bonds. You should include your retirement accounts and other savings and investments.

Once you have that total, deduct a ”buffer” amount for several months’ worth of living expenses. That year, you can withdraw four percent of the amount that remains.

Here is how it works: If your total liquid assets minus the cash cushion equal $200,000, you can spend four percent ($8,000) that first year. The second year, you can withdraw a little more if there is inflation, but make sure that you do not confuse the formula on how to adjust for inflation.

Let’s say inflation is two percent. In year two, you can withdraw and spend four percent of your total liquid assets plus two percent for inflation. That does not mean you should spend six percent of your total liquid assets. It means you can spend $8,000 plus $160, which is two percent of $8,000.

Add Your Guaranteed Income and Your Spendable Amount

You can calculate your total income, by combining your Social Security and other guaranteed income with your “safe” four percent to withdraw. If you get $24,000 from Social Security and your four percent to withdraw from savings is $8,000, your total income is $32,000 a year.

Budget Accordingly

Set your budget around this amount. If you can keep your annual spending at or under your total income, you should have enough money to last you for your lifetime.

Be aware that some economic fluctuations might require you to withdraw less money from your savings in some years, and things like a medical crisis can increase your expenses.

Every state has different laws, so be sure to talk with an elder law attorney near you to find out how your state’s regulations might vary from the general law of this article.

References:

AARP. “4 Steps to Make Your Money Last a Lifetime.” (accessed January 25, 2019) https://www.aarp.org/retirement/retirement-savings/info-2018/make-money-last-lifetime.html

 

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Planning for Three Financial Phases of Retirement: Spending Down, Final Spending and Legacy

In pre-retirement earning years, all our attention is focused on accumulating assets. However, the information you need during the accumulation years is different than for the remaining years, according to a useful article from Financial Advisor titled “A Successful And Secure Retirement—Spend-Down Strategies: Part 1.”

The biggest difference in the strategies during the accumulation and withdrawal strategies, is that there’s a greater emphasis on long-term tax planning. Taxes are often the single biggest expense for investors. To make sure that you meet your goals, which includes having the IRS take the smallest piece of your assets, a plan must be created to focus on paying the least amount in taxes, while you are alive and even after you have passed.

The first phase of decumulation, which occurs at different times for different people (and for some people, never occurs) usually comes with a low tax rate. It often starts with retirement, when the paychecks are not coming in and, ideally, you are not yet drawing Social Security or pension benefits. This would allow your Social Security benefits to continue to grow and keep you in a low tax bracket.

The spend-down phase begins, when you start taking withdrawals from tax deferred retirement accounts. This typically starts the year you turn 70½ and start taking RMDs (Required Minimum Distributions). This is the time to be careful, since your tax rate will likely jump up from the amount it was when you were not yet taking RMDs or getting Social Security or pension benefits. The goal is to manage your retirement income, in order to minimize taxes.

The final-spending phase begins all too soon, especially when medical costs and long-term care costs increase dramatically. Given their tax deductibility, as things currently stand, this may provide another period with very low tax rates.

The legacy phase begins upon your death, or on the death of the surviving spouse. The goal is the tax efficient transfer of remaining wealth to heirs and charities and preparing heirs for the assets they will inherit. An estate plan should be in place long before this phase is reached, so that your assets are passed seamlessly to family members and charities.

As a person moves through these stages of post-retirement spending, there are many strategies that can be used to minimize tax liability and maximize the growth of assets. A balance must be found between spending, managing tax burdens and preparing for a legacy.

Speak with your estate planning attorney, who can help you navigate tax planning.

Reference: Financial Advisor (Jan. 21, 2019) “A Successful And Secure Retirement—Spend-Down Strategies: Part 1”

 

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What is an Irrevocable Life Insurance Trust?

The threshold for each state’s estate tax needs to be considered, when the family is doing estate tax planning. This is because many are not as high as the current federal estate tax exemption. As part of an overall estate planning strategy, says JD Supra in the article “Estate Planning: The Irrevocable Life Insurance Trust,” an Irrevocable Life Insurance Trust, or ILIT, can be used to take the life insurance proceeds out of a donor’s taxable estate. One catch: the donor (the owner of the policy) must live for three years after the policy is transferred to the trust, in order for the proceeds to be excluded from the estate for any estate taxes.

The donor should also not be the trustee and may not retain any economic benefits from the policy, including the ability to change beneficiaries, to cancel or surrender the policy or to assign the policy.

If the donor is married, the surviving spouse may be a trustee, but should not be the sole trustee for most situations. A family member, or even a professional trustee, may serve as a co-trustee with the spouse.

The terms of the ILIT provide for the funds to be distributed to beneficiaries, or they also may be linked to another trust. That might be a Special Needs Trust or a Revocable Trust.

An ILIT also offers a level of asset protection to beneficiaries from creditors.

The ILIT pays policy premiums through gifts made to the trust. These gifts, it should be noted, do not qualify for the current $15,000 annual gift tax exclusion, unless the beneficiaries of the trust are given some very specific powers that will allow them to withdraw the gift to the trust for a period of time. These powers are known as “Crummey” powers. The trustee in this case must send “Crummey” notices to all the beneficiaries telling them about their withdrawal rights, when there is a contribution to the trust. An estate planning attorney will be needed to create and manage this.

An ILIT can be funded with term or permanent insurance that is in effect for the owner’s lifetime. To pass the proceeds outside of the donor’s estate, the donor may not borrow against or access the cash value of the insurance policy, once the life insurance policy has been transferred into the ILIT. However, the donor could indirectly benefit from the cash value through his or her spouse, who is a beneficiary of the ILIT.

Another way to use an ILIT is to establish it by a married couple and fund it with a second-to-die life insurance policy. The second-to-die policy pays out to the surviving spouse’s death and is often used as cash to pay estate taxes on illiquid assets or to fund a special needs trust.

Reference: JD Supra (Jan. 21, 2019) “Estate Planning: The Irrevocable Life Insurance Trust”

 

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Social Security Benefits ‘Restricted Application’

Don’t confuse “Restricted Application” with the “Claim and Suspend” strategy. Many people confuse the two, according to an article appearing in Forbes titled “Put Thousands In Your Pocket By Taking Advantage Of the Social Security ‘Restricted Application’.” One thing these tactics do have in common: you’ll need to be at your Full Retirement Age, or FRA, to use them.

The use of the ‘Claim and Suspend” strategy, ended on April 30, 2016. You would have needed to have been born before May 1, 1950. This let a person have Spouse #1 claim their benefit and then immediately suspend that benefit, allowing it to grow by 32% using delayed retirement credits. That allowed Spouse #2 to apply for and receive Spousal Benefits. In this case, Spouse #1 was not receiving a monthly benefit and Spouse #2 was.

However, that’s history. Let’s examine what you might be able to do: the ‘Restricted Application.’

To use this strategy, you need to have been born before Jan. 2, 1954 and have reached FRA. The restricted application is similar to claim and suspend, with one big difference: Spouse #1 needs to be receiving their Social Security benefit, in order for Spouse #2 to collect a spousal benefit. As of this writing, for one spouse to receive a spousal benefit, the other spouse must be receiving their benefit. Both spouses cannot receive spousal benefits at the same time.

Here’s what the Social Security Program Operations Manual says:

When a claimant is eligible for more than one benefit at the time of filing, he or she may, for any reason, choose to limit or restrict the scope of the application to exclude a class of benefits unless there is an exception. The reason may be to receive higher current benefits or to maximize the amount of benefits over a period-of-time, including the effect of delayed retirement credits (DRC). For additional information on DRCs, see RS 00615.690.

Using the restricted application works best, if the lower earning spouse claims their Social Security benefits, when the higher earning spouse reaches their FRA.

Here’s an example:

The husband’s primary benefit is $2,650 and his birthday is June 15, 1953.

The wife’s primary benefit is $1,000 and her birthday is June 15, 1955.

Because he was born before January 2, 1954, he can use the restricted application, when he reaches full retirement age. She can never use the restricted application because she was born after that date.

She begins taking her own benefits based on her earnings record at age 64, when he reaches his FRA. She only gets $855, because she is filing before her FRA.

He then files a restricted application for spousal benefits only in the amount of $500 in June 2019, when he is at his FRA of 66 years of age. He gets one half of her FRA benefit.

He then switches to his own benefit based on his earnings record in the amount of $3,498 in June 2023 at age 70. His benefit is 32% higher, because of earning delayed retirement credits.

She adds $325 in spousal benefits to her own benefit of $855, for a total of $1,180 in June 2023, when she is 68.

Now that he has filed for his own worker benefit, she can file for her spousal benefit. When he dies in June 2038, she switches to survivor benefits for $3,498, which is the amount he was receiving when he passed away. Her benefit of $1,180 goes away.

This strategy does three things:

  • Maximizes the higher earner’s benefit,
  • Coordinates benefits between the spouses, and
  • Maximizes the survivor benefits.

It takes advance planning and attention to detail, but this strategy could have a big difference in the total benefits that the couple receives. Is it worth doing the math? Definitely!

Reference: Forbes (Jan. 21, 2019) “Put Thousands In Your Pocket By Taking Advantage Of the Social Security ‘Restricted Application’”

 

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Should Older Millennials Buy Life Insurance?

We’re all going to die someday. That’s one of the only certainties in life, along with taxes. However, a recent study by Budget Insurance found that 82% of millennials don’t know the purpose of life insurance—despite the fact they’re aging, starting families and dealing with more complex financial situations.

Forbes’ article, “Why Older Millennials Need To Start Taking Life Insurance Seriously,” notes that, although most millennials may not have given life insurance much thought before, it’s now time to begin taking life insurance and other estate planning more seriously. To help with this, more companies are starting to take millennials seriously, when it comes to financial matters. The result? It’s getting easier than ever before to get life insurance.

Life insurance is used to protect your family financially, in case of your death. That is important for millennials who are starting families that depend on them financially.

According to Pew Research, 60% of families depend on dual incomes and just 31% of families rely on a single income.  A total of 91% of families in the U.S. require the income of at least one spouse to survive. However, what happens if one (or both) die? That’s where life insurance comes into play.

Because millennials are still relatively young, getting life insurance is very cost effective. In addition, for the vast majority of millennials, a simple term life insurance policy will do the job.

Term life policies are very inexpensive and can be a financial relief, if they’re ever actually needed.

It’s possible to get a $1,000,000 term life insurance policy for about $40 per month, depending on your age and health. That is quite a bit of insurance for little expense.

With the increase in millennials who require life insurance, many insurance companies are making buying life insurance very easy.

These companies have online or app-based solutions that focus on speed and ease of use. These companies leverage technology and keep human interaction to a level that most millennials like.

Reference: Forbes (January 26, 2019) “Why Older Millennials Need To Start Taking Life Insurance Seriously”

 

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Why Do I Need Estate Planning If I’m Not Rich?

Many people spend more time planning a vacation than they do thinking about who will inherit their assets after they pass away. Although estate planning isn’t an enjoyable activity, without it, you don’t get to direct who gets everything for which you’ve worked so hard.

Investopedia asks you to consider these four reasons why you should have an estate plan to avoid potentially devastating results for your heirs in its article “4 Reasons Estate Planning Is So Important.”

Wealth Won’t Go to Unintended Beneficiaries. Estate planning may have been once considered something only rich people needed, but that’s changed. Everyone now needs to plan for when something happens to a family’s breadwinner(s). The primary part of estate planning is naming heirs for your assets. Without an estate plan, the courts will decide who will receive your property.

Protection for Families With Young Children. If you are the parent of small children, you need to have a will to ensure that your children are taken care of. You can designate their guardians, if both parents die before the children turn 18. Without a will and guardianship clause, a judge will decide this important issue.

Avoid Taxes. Estate planning is also about protecting your loved ones from the IRS. Estate planning is transferring assets to your family, with an attempt to create the smallest tax burden for them as possible. A little estate planning can reduce much or even all of their federal and state estate taxes or state inheritance taxes. There are also ways to reduce the income tax beneficiaries might have to pay. However, without an estate plan, the amount your heirs will owe the government could be substantial.

No Family Fighting (or Very Little). One sibling may believe she deserves more than another. This type of fighting can turn ugly and end up in court, pitting family members against each other. However, an estate plan enables you to choose who controls your finances and assets, if you become mentally incapacitated or after you die. It also will go a long way towards settling any family conflict and ensuring that your assets are handled in the way you wanted.

To protect your assets and your loved ones when you no longer can do it, you’ll need an estate plan. Without one, your family could see large tax burdens, and the courts could say how your assets are divided, or even who will care for your children.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

 

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