King & Wood, P.A.

More Reasons for Estate Planning

“There are two types of powers of attorneys.”

Estate planning is critical for everyone. That goes double for seniors.

Basic estate planning means you’ve drafted and properly recorded legal documents, such as wills and powers of attorneys, and they’re all up-to-date. Wills written 20 years again after a child is born are now severely dated and possibly inaccurate.

There’s a fair chance that things have changed, and the will may be missing all of the grandchildren or still includes individuals whom you no longer want as primary beneficiaries.

The Herald-Standard explained, in its recent article, “Your Financial Future: Estate planning,” that powers of attorney come in two general flavors.

One power of attorney is for health care. This document designates an individual and gives him or her the authority to make health care decisions for you, if you are incapacitated. Capacity is the ability to understand your options and pick the best one. There are times when people may not have capacity temporarily, such as when they are in a coma. It can also be long term, when a person suffers from dementia.

The other type of power of attorney is for financial matters. This permits the appointed individual to make decisions concerning paying your bills and those that keep your family’s financial life functioning. Note that powers of attorney end upon your death.

Powers of attorney are granted under state laws. Because of this fact, federal government agencies don’t typically recognize them.  Since federal law supersedes state law, your power of attorney may not be recognized by agencies, like the Social Security Administration.

The Social Security Administration has its own form which appoints a personal representative. The agency requires that its own form be used to make decisions on behalf of another. If someone may need this, it’s prudent to prepare Social Security Administration paperwork in advance while the senior can still make sound decisions. This may be called for, if he or she moves into a nursing home, and their benefit checks are mailed to their old address. Yes, this is another good reason to receive your payments by direct deposit.

That individual may also want to set up a Social Security Administration account online at Social Security/myaccount. Changes can be made here at any time without the need to speak to a Social Security Administration employee.

Reference: Herald-Standard (November 23, 2017) “Your Financial Future: Estate planning”

What Can I Do With My Gifts to My Daughter, If I Don’t Trust My Future Son-in-Law?

“When there's a marriage you're not happy about, how to protect your estate plan.”

What if your daughter is getting married and you never have really liked the looks of her future husband? Perhaps you simply don't trust the guy. What if you regularly give her gifts of cash and don't want him to be able to get to that money?

nj.com notes, in its recent article, “Protecting inheritance from future son-in-law,” that the easiest option is for the daughter to create an account to which only she has access and into which she deposits any money from her parents. As long as her future husband's name isn’t on the account, and she hasn’t given him power of attorney over it, he can’t get to it.  However, if there’s a concern that the daughter may not be able to resist her future husband’s attempts to gain access to the funds, a parent will need to take additional steps.

Here are some examples:

Monthly bills: if the daughter uses the gift to pay monthly bills, the parent could pay the bills directly instead of giving her money.

Children: if she has children and is setting aside the money for their college education, the parents could set up a 529 savings account for their grandchildren. They could name themselves as the custodians.

Savings: if the daughter is simply saving the gift money, a trust may be a good solution. However, trusts are not as simple as the other options discussed above. The more restrictive the trust terms are to protect the assets from the son-in-law, the greater the possibility that gift and estate taxes will become an issue.

Prenuptial Agreement: another thing to consider is whether the parents have given their daughter significant amounts of money already and because of that, she’s entering into the marriage with more assets than her spouse. In that case, she should consult with an attorney about a prenuptial agreement. If the marriage then ends in divorce, she will not have to split any of the funds with her ex.

As a final reminder in this scenario, the parents should also speak with an estate planning attorney about updating their estate plan, so that anything they want to leave her when they die, is left to a trust for her benefit.

Reference: nj.com (November 23, 2017) “Protecting inheritance from future son-in-law”

What’s Your Plan for Your Pension Plan Payout?

“Before you take a lump sum or lock in monthly payments, carefully consider the consequences for you, your spouse and your heirs. Once you make a move, there's no turning back.”

You’re probably aware that few companies today offer pensions to new employees. For current workers, businesses froze the plans they had in place, so no new benefits could accrue. Finally, many companies are offering their remaining plan participants the option of taking a lump sum payment in place of the monthly checks they were to receive in retirement. Kiplinger says, in its recent article, “6 Things to Think About When You Get a Pension Payout Offer,” that it’s a more complex decision than most people realize. There are several factors to think about, including the following:

1. The Health of Your Company. Do you feel fairly confident that your employer will be around to make those pension payments throughout your retirement? Pension obligations are governed by federal regulations, so your employer can’t just refuse to pay you, even if the company is sold. However, if the company goes bankrupt and defaults on the plan, the government’s Pension Benefit Guaranty Corporation (PBGC) will become the trustee responsible for paying your benefits. You should be aware that it may pay less than 100%. For example, the 2017 maximum annual guarantee for a 65-year-old retiree is about $64,400 per year.
2. Your Beneficiaries. Based on your pension’s survivor benefit options, the payments could cease or decrease when you die, and they’ll stop completely when your spouse dies. Your children will receive none of your pension survivor benefits. If you live a long time, that may not be a factor. However, if you die prematurely, you’ll lose money that could have gone to your family. Therefore, you should consider your gift and estate planning goals.
3. Your portfolio. How does that look? If the pension lump sum added to your other savings is enough, it might let you delay claiming Social Security benefits until you turn 70. That’s a substantial boost to your guaranteed income.
4. Your Expected Rate of Return. You can calculate the rate of return your employer is targeting to generate your lifetime pension payments. This calculation compares the lump sum amount to the monthly pension payments to determine the rate of return based on your average life expectancy. If the employer’s rate of return is high, it may be better to hang on to the pension. If it’s lower, it’s probably a good idea to take the lump sum. A lump sum that’s invested in a well-structured portfolio could generate higher income payments than the pension, or you can grow the lump sum as a legacy to leave to your kids.

Don’t wait too long to seek help. Once you receive the offer letter from your employer, you probably won’t have much time to think about it. The decision you make is final.

Reference: Kiplinger (November 22, 2017) “6 Things to Think About When You Get a Pension Payout Offer”

Start Thinking About an Estate Plan

“If you think an estate plan is just for the rich and famous, think again.”

If you have assets, such as a 401(k), savings or brokerage account, or a home, you need to consider how those possessions will be distributed when you are gone. In its recent article, “How to start thinking about an estate plan,” CNBC provides some tips to nip in the bud any fight by your kids and to limit your heirs’ tax responsibility.

Even if your plan is to leave your assets directly to your children, you should consider that not everyone is good with money and there are certain steps you can take to make sure they don't waste it. To help decrease the odds of your kids squandering your money, take a look at these tips for how and when your assets are passed down.

One wise way to distribute your wealth is to leave it to your children via a trust, which can be designed in several different ways. You can set it up so it specifies precisely when assets pass to your beneficiaries (like when they reach age 18, 21, 35, or whenever you choose) and how the money is to be used (like only for education expenses).

A trust can also help your estate avoid probate court and reduce your estate taxes. Another benefit of a trust is that your heirs will be able to access the money, but it will be exempt from creditors. The trust assets are also considered separate from marital property, so if one of your children were to divorce, that money will not end up with an ex-spouse.

There’s also a strategy that allows the money in a 401(k) or IRA to be transferred into an IRA trust. Just like a traditional trust, these assets are protected from bankruptcy, and withdrawals are managed by a trustee. This will keep an heir from treating an inherited IRA like a blank check, when the account owner dies.

Another option when it comes to creating a trust is to have it created under your will.

One important reminder is that the beneficiaries named on financial accounts, such as IRAs, retirement accounts, insurance policies, and brokerage accounts, take precedence over what is in your will. Thus, it’s critical to keep beneficiary designations current.

Speak with a qualified estate planning attorney to help you determine the best ways to keep your kids from fighting—or overspending—and limit the amount of taxes your heirs have to pay.

Reference: CNBC (November 21, 2017) “How to start thinking about an estate plan”

Will My Retirement be a Really Long, Really Great Vacation?

“When we're young, we tend to think about retirement as though it's just a really long, really great vacation.”

You may envision a house on the beach or playing a round of golf whenever you please. Take off for Vegas or stay in your pajamas all day. Whatever you want.

A recent Nasdaq article, “6 Mistakes to Avoid When Planning Your Retirement,” says that as we grow older and retirement gets closer, enthusiasm and positive feelings frequently turn to angst. We need to figure out how we're going to pay for the lifestyle we want when the paychecks end. This can be a challenge, even for the savviest of savers. Here are several mistakes to avoid when planning your dream retirement:

1. No plan. Your goal in retirement should be to understand the amount of money you’ll have coming in each month from all of your income streams and how you'll make that money last. Your written retirement plan should encompass five main areas:

• Income (how you’ll pay yourself);
• Investments (how you’ll keep growing your money while keeping it safe);
• Taxes (how you’ll hold on to more of the money you worked so hard to save);
• Health care (how you’ll address short- and long-term care expenses that could significantly reduce your nest egg as you get older); and
• Estate (how your family and favorite charities will be cared for when you die).

That plan is your guide to and through a successful retirement.

2. No portfolio stress-testing. Ask yourself how much money you're willing to lose, if there's a market downturn. Try to find an amount that you can handle, both financially and psychologically.
3. No tax plan. Many people underestimate the amount they’ll need to pay in income taxes after they retire. For example, up to 85% of their Social Security benefits can be taxed, and there are taxes on a 401(k) or IRA (if it’s not a Roth) when they take out their money. Many think that they'll be able to live on far less income during retirement. Some can live on less, but many cannot. Work with an estate planning attorney who understands retirement tax planning.
4. Unrealistic income plan. Many peoples’ income plans have a high rate of return that may be incredibly optimistic. This type of plan typically uses minimum inflation protection rates and low tax rates, with no assets assigned to health care costs. A plan like that could leave you vulnerable.
5. No estate plan or an out-of-date plan. If you don't have an estate plan, the state may decide who gets your assets. This may not be close to what you wanted for your family. Work with an estate planning attorney to draft a will, a living will and a power of attorney. You also may need or want to draw up a trust. If your legacy is an important part of your retirement dream, your wishes should be included in your comprehensive plan.

If you're near retirement or already there, creating a written plan should be a top priority.

Reference: Nasdaq (November 20, 2017) “6 Mistakes to Avoid When Planning Your Retirement”

The Good and the Bad of Working Part-Time in Retirement

“Keeping a hand in the workforce after retirement can be richly rewarding (in a couple of key ways). However, it can also complicate your finances.”

Kiplinger’s article, “Working Part-Time in Retirement Can Be Tricky,” notes that some folks’ retirement dreams entail having the time to do what they want without work pressures. However, for others, working part-time—either by choice or out of necessity—is a critical part of their retirement picture. Part-time employment in retirement can supplement cash flow, keep employee benefits and help keep one mentally and physically challenged.

The good thing about working part-time is that it’s very healthy from a financial-planning standpoint. Every year you work improves your earnings history, increasing the amount of Social Security you get. It can also let you to delay taking Social Security benefits, which increase by 8% every year past your full retirement age, up to age 70. Your pay from a part-time job may also mean you can wait to spend from your retirement accounts, giving them more time to grow. Finally, part-time work may let you keep employer benefits, like health insurance and contributions to tax-efficient employer sponsored plans such as 401(k)s.

As an added bonus, any funds in your current employer’s plan will avoid required minimum distributions (RMDs) at age 70½ and later—provided you stay actively employed. While funds in an inactive 401(k) from a former employer would be subject to RMDs, this can be avoided if the inactive accounts are consolidated with your current employer's 401(k) account and if your employer accepts rollovers.

Now the bad news. Working part-time in retirement can complicate your finances. If you're already taking Social Security, your benefits are taxable based on other income sources like your pay, dividends, capital gains, retirement account distributions, and 50% of your Social Security benefits. Your part-time job means more income, but it may adversely affect your Social Security benefit.

Your part-time income may also put you in a higher tax bracket for income taxes, as well as for capital gains taxes. If your part-time income puts you at or above the 25% income tax bracket, you may be subject to a 15% or 20% capital gains tax rate.

Consider how working part-time in retirement would impact your ability to achieve an ideal retirement lifestyle. Work with a competent financial planner to explore your options.

Reference: Kiplinger (August 2017) “Working Part-Time in Retirement Can Be Tricky”

What If I Don’t Want to Retire?

You’ll have more money to spend on fun stuff—but don’t go overboard.”

Some folks are counting the days until retirement, and there’s no shame in that.  However, others have decided to keep working due to financial necessity or because they’re content in their current situation for the foreseeable future. The reasoning: why should you look for another way to enjoy a fulfilled and meaningful life, when you already have one?

According to MarketWatch’s recent article, “How to plan for retirement if you don’t plan to retire,” the population that’s continuing to work is on the rise.

The same financial planning rules don’t apply, since retirement will start only when frailty sets in. This will mean a much shorter time. Consider how this changes your retirement planning, if you keep working.

You may be able to avoid required minimum distributions (RMDs). The IRS lets some people who are still working to delay RMDs until they retire. If you are still working for the company where you have a plan, you don’t own more than 5% of the company, and your plan allows it, you can delay distributions until the April 1 after you finally retire. The “still working” exception may let you to keep your tax bill down by just living on your salary and not forcing “required” retirement income by the IRS. But the “still at work” exception doesn’t apply to money you have in your IRAs (or prior plans), even if you are still employed. The 5% ownership requirement starts with your personal holdings but also may include ownership by family members.

If you have your money in a Roth IRA, there are no RMDs while you’re still alive, regardless of whether you are working. You may also be able to keep making Roth IRA contributions. The longer you hold the Roth, usually the better off you are.

You may be able to make retirement contributions or receive retirement contributions made on your behalf. If you’re still working, you may be able to keep making tax deductible contributions to your 401(k) plan and, when applicable, still get the employer match. Your regular contributions should continue from your employer, regardless of your age, if you’re still employed and meet the minimum hours required to be a plan participant. An exception to this is if you have a defined-benefit plan that caps the years of service that you count to determine your benefit.

In addition, you may be able take Social Security without losing benefits. The earnings test stops at full retirement age for anyone collecting Social Security.

Recalculate the amount you will need to save for retirement, since you will be spending less time in retirement. It may mean you can dramatically decrease the amount of money you’ll need to save during your career. You may also want to review estate plan and lifetime gifting opportunities, since you’ll probably have more assets available at death.

Reference: MarketWatch (November 10, 2017) “How to plan for retirement if you don’t plan to retire”

Elder Financial Exploitation Comes in Many Forms

“One in five Americans age 65 and older has been impacted by fraud, according to a survey by the financial education organization Investor Protection Trust. Holiday time, in particular, is high season for these illegal actions.”

It is estimated that seniors who’ve been scammed have lost an average of $430. The national overall total is more than $9.5 billion. Law enforcement and eldercare agencies say financial scams targeting the elderly have become so common, they’re now “the crime of the 21st century.”

The Dayton Daily News reports in its recent article, “Phone scams of elderly ramp up for holidays,” that the ways elder consumers can fall victim to financial exploitation may come in many forms.

Some research indicates that seniors make twice as many purchases over the phone than the national average. As a result, it’s a very common practice to target the elderly in telemarketing fraud.

New widows or widowers who have recently assumed the role of managing their finances, may be more susceptible to being targeted by a scamming telemarketer.

Maggie Flowers from the National Council on Aging says, “Scam artists know that many older adults have fixed incomes, which may make them more susceptible to fraud, because there may be an openness to learn about ways to make money and pay their bills.”

Financially secure elders are also at risk for fraud, because criminals may presume that years of saving could mean a healthy checking account. Older adults who are socially isolated or who are unaware of a decline in cognition may also be at increased risk for financial exploitation. Older adults who get multiple daily telemarketing calls are likely to experience three times as much financial loss, as a person who receives an occasional telemarketing call.

The FBI says elder victims of scams often don’t report telemarketing fraud because these victims feel shame for being scammed. An elder may also not care to talk about a fraudulent act because they think their family may act aggressively and make the elder feel that their independence may be threatened.

To help minimize the risk for fraud, remember the adage that if it sounds too good to be true, it probably is. Don’t share information that could be used to access to financial information over the phone, and speak with an elder law attorney to learn about the most effective practices for protection from potential scams.

Reference: Dayton Daily News (November 27, 2017) “Phone scams of elderly ramp up for holidays”

How to Tackle RMDs in Your IRA

“Required minimum distributions can be the bane of many IRA owners' existence.  However, there are a few creative ways to reduce your income tax burden, or that of your heirs.”

RMD season is in full swing, with the Dec. 31 deadline approaching for those who are 70½ and have IRA money that they have to withdraw or else face the 50% IRS penalty.

Kiplinger’s recent article, “3 Tax-Planning Ideas to Help Take the Bite Out of RMDs,” says that before making that withdrawal, review these three tax-planning possibilities:

1. Gifting the RMDs to a qualified charity. If you’re over age 70½, a RMD isn’t counted as taxable income for federal income tax purposes, if it’s paid directly to a qualified charity. That’s referred to as a qualified charitable distribution (QCD). Currently, the limit is $100,000 per taxpayer annually.

This may be a big help to those who want to keep their adjusted gross incomes (AGIs) lower, because the withdrawal is not counted toward their AGI. That’s important because AGI impacts your ability to take itemized deductions, eligibility for Roth IRA contributions and taxes on Social Security, as well as Medicare premiums and more. IRA owners with pretax contributions receive the QCD treatment, but the non-deductible contributions aren’t eligible for the QCD. Optimally, the charity should receive the cash by Dec. 31.

2. Qualified Longevity Annuity Contracts. Buying a QLAC in an IRA means that money used to purchase the annuity is excluded from the RMD calculation until age 85. Therefore, if an IRA owner has total assets of $500,000 and buys a QLAC for the maximum $125,000, that QLAC is excluded from the RMD calculation.

In that example, the RMD calculation is based on $375,000, not on the full value of the IRA at $500K. Using the Uniform Lifetime Table, the RMD for a 70 ½-year-old with a $500,000 IRA is $18,248, vs. $13,686 for the IRA with the QLAC. That’s an RMD savings of about $5K.

Thus, with this strategy you’re putting off paying income tax on a portion of your IRA money. Though the return rates on QLACs are low right now, this strategy may make sense as part of a diversified portfolio.

3. Use IRA RMDs to buy life insurance. If you don’t have a current need for an IRA RMD, rather than reinvesting the withdrawal, you may think about expanding the distribution for your heirs by buying a life insurance policy.

These three ideas can help reduce the burden of required minimum distributions.

Reference: Kiplinger (November 2017) “3 Tax-Planning Ideas to Help Take the Bite Out of RMDs”

What Do You Do with a Loved One’s Digital Footprint When They Die?

“In this digital age, it is the rare person who does not have some form of digital footprint. Facebook, Twitter, LinkedIn and others are part of everyday life for most people.”

What do you do with the digital footprint that a loved one has left behind when they die?

The Catholic Register’s recent article, “An executor must deal with digital footprint,” says it seems like it’d be a relatively easy issue, but folks are seeing that this is far from a simple process.

Think about what’s on your digital footprint: your Facebook account has many details of your daily life and personal history. Your email account(s) have your personal and business communications. You also probably do your banking online.

After you’re gone, do you want your heirs looking at virtual territory that you would rather keep private? How will your digital accounts be wrapped up? It's important that you name a digital executor.

In many instances, the person who is handling your estate may not be the person who has the technical aptitude to take care of your digital assets.

Remember that the executor named in your Will has to settle all issues relating to your life. Clearing out your digital footprint is one more task. Be specific with your instructions and keep a list of all the websites and login credentials, so the executor can take action as appropriate.

Speak to someone you trust about your online legacy and tell them “Just so you know, I put my passwords here, this is where I store them, and these are my accounts. Make sure you take care of those.”

Some accounts like Facebook, are easier to delete than others. It’s much easier with a death certificate. Facebook allows you to set up a memorialized account to remember the deceased. The timeline is kept, and friends and families can post comments and photos.

Reference: Catholic Register (November 6, 2017) “An executor must deal with digital footprint”