University Retirement Specialists, LLC

Will You Avoid These Estate Planning Mistakes?

Too many wealthy households commit these common blunders.

Many people plan their estates diligently, with input from legal, tax, and financial professionals. Others plan earnestly, but make mistakes that can potentially affect both the transfer and destiny of family wealth. Here are some common and not-so-common errors to avoid.

  

Doing it all yourself. While you could write your own will or create a will or trust from a template, it can be risky to do so. Sometimes simplicity has a price. Look at the example of Warren Burger. The former Chief Justice of the United States wrote his own will, and it was just 176 words long. It proved flawed – after he died in 1995, his heirs wound up paying over $450,000 in estate taxes and other fees, costs that likely could have been avoided with a lengthier and less informal will containing appropriate language.¹

 

Failing to update your will or trust after a life event. Relatively few estate plans are reviewed over time. Any life event should prompt you to review your will, trust, or other estate planning documents. So should a life event affecting one of your beneficiaries.  

Appointing a co-trustee. Trust administration is not for everyone. Some people lack the interest, the time, or the understanding it requires, and others balk at the responsibility and potential liability involved. A co-trustee also introduces the potential for conflict.

 

Being too vague with your heirs about your estate plan. While you may not want to explicitly reveal who will get what prior to your passing, your heirs should have an understanding of the purpose and intentions at the heart of your estate planning. If you want to distribute more of your wealth to one child than another, write a letter to be presented after your death that explains your reasoning. Make a list of which heirs will receive particular collectibles or heirlooms. If your family has some issues, this may go a long way toward reducing squabbles and the possibility of legal costs eating up some of this or that heir’s inheritance.

 

Failing to consider what will happen if you & your partner are unmarried. The “marriage penalty” affecting joint filers aside, married couples receive distinct federal tax breaks in this country – estate tax breaks among them. This year, the lifetime gift and estate tax exclusion amount is $5.45 million for an individual, but $10.9 million for a married couple.^1,2

 

If you live together and you are not married, it is worth considering how your unmarried status might affect your estate planning with regard to federal and state taxes. As Forbes mentioned last year, federal and state taxes claimed more than more than $15 million of the $35 million estate of Oscar-winning actor Phillip Seymour Hoffman. He left 100% of his estate to his longtime partner, and since they had never married, she could not qualify for the marriage exemption on inherited assets. While the individual lifetime gift and estate tax exclusion protected a relatively small portion of Hoffman’s estate from death taxes, the much larger remainder was taxed at rates of up to 40% rather than being passed tax-free. Hoffman also lived in New York, a state which levies a 16% estate tax for non-spouses once estates exceed $1 million.¹

 

Leaving a trust unfunded (or underfunded). Through a simple, one-sentence title change, a married couple can fund a revocable trust with their primary residence. As an example, if a couple retitles their home from “Heather and Michael Smith, Joint Tenants with Rights of Survivorship” to “Heather and Michael Smith, Trustees of the Smith Revocable Trust dated (month)(day), (year)”. They are free to retitle myriad other assets in the trust’s name.¹

Ignoring a caregiver with ulterior motives. Very few people consider this possibility when creating a will or trust, but it does happen. A caregiver harboring a hidden agenda may exploit a loved one to the point where he or she revises estate planning documents for the caregiver’s financial benefit.

     

The best estate plans are clear in their language, clear in their intentions, and updated as life events demand. They are overseen through the years with care and scrutiny, reflecting the magnitude of the transfer of significant wealth.  

         

Citations.

1 - raymondjames.com/pointofview/seven_estate_planning_mistakes_to_avoid [10/16/15]

2 - fool.com/retirement/general/2015/12/11/estate-planning-in-2016-heres-what-you-need-to-kno.aspx [12/11/15]

TOD vs. Living Trust?

A look at two basic methods for shielding assets from probate.

 

How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective.

One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed.¹

If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.²

This is not an either/or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should be transferred via a TOD arrangement versus a trust?

Many investment accounts can be made TOD accounts. Originally, that was not the case – for decades, only bank accounts and certain types of savings bonds could pass to beneficiaries through TOD arrangements. When the Uniform Transfer on Death Security Registration Act became law in the 1980s, the variety of assets that could be transferred through TOD language grew to include certificates of deposit and securities and brokerage accounts.²   

 

Many investment & retirement savings accounts are TOD to begin with. Take IRAs and workplace retirement plans, for example. In the case of those assets, the beneficiary form legally precedes any bequest made in a will.³

 

The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.

One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage but by account, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way, in fairness to one another? Perhaps, and perhaps not. 

 

Placing valuable property items into a living trust makes sense. Real estate, ownership shares, precious metals, pricy collectibles such as fine art, classic cars, antiques, and rare stamps and coins – these are all worthy candidates for inclusion in a living trust. If your net worth happens to run well into the millions, these assets may constitute the bulk of it, and a trust offers a degree of protection for such assets that TOD language cannot. A trust also allows you to name a successor trustee, which TOD language cannot do for you.²  

A “pour-over” will usually complements a revocable living trust. As your net worth will presumably keep growing after the trust is implemented, a “pour-over” will may be used to allow your executor to “pour over” assets not already in the trust at your death into the trust. That will mean added privacy for those assets in most states – but the downside is that these “poured-over” assets will be subject to probate.¹

Of course, you can add and subtract from the original contents of a revocable living trust as you wish during your lifetime – you can remove assets retitled into it when it was originally created and retitle them again in your name, you can “pour in” new assets, and you can sell or give away specific assets in the trust.⁴

Is it ever wise to name a trust as the beneficiary of a retirement account? Under three circumstances, it might be worth doing. If you worry about your heirs rapidly spending down your IRA assets, for example, naming a trust as the IRA beneficiary more or less forces them to abide by a stretch IRA strategy. Are there “predators and creditors” who want some of your net worth? That is another reason to consider this move. If you want to leave your retirement account assets to someone who is currently a minor, this idea may be worthwhile as well.⁴   

   

How complex should your estate planning be? A conversation with a trusted legal or financial professional may help you answer that question, and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.

         

Citations.

1 - individual.troweprice.com/public/Retail/Planning-&-Research/Estate-Planning/Considering-a-Trust/Revocable-Living-Trust [11/10/15]

2 - fdcpa.com/Tax/0807TaxNewsEstatePlanning.htm [11/10/15]

3 - forbes.com/sites/deborahljacobs/2014/01/03/how-to-leave-your-ira-to-those-you-love/ [1/3/14]

4 - nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter7-7.html [11/9/15]

Charitable Lead Trusts

How they work, how they may help you reduce taxes.

 

Are you concerned about the inheritance taxes your heirs may have to pay? Then you may want to consider creating a charitable lead trust.

A charitable lead trust is the inverse of a charitable remainder trust. While a CRT is structured to provide income to the trust beneficiaries and an eventual charitable donation, a CLT provides a charitable gift at its implementation plus the possibility of eventual income to your heirs.¹

A CLT may provide an estate tax solution for a highly appreciated asset. As a hypothetical example, a multi-millionaire named Scott owns $1 million of greatly appreciated blue-chip stock. He wants to reduce the value of his taxable estate; he does not want to burden his heirs with death taxes. He would also like to make a major gift to a local charity. So Scott collaborates with an estate planning attorney to draw up and implement a CLT.

By gifting the highly appreciated stock to the charity using a CLT with a term of 20 years, Scott creates an income stream for the charity with significant tax benefits as a byproduct. Income payments to the charity will be made in 20 yearly installments of $50,000 from the trust principal. After either 20 years or Scott’s death, his heirs will receive the interest off of the initial CLT principal (i.e., the appreciation on those shares across 20 years) while the actual shares will go to the charity.¹

In donating the stock through the CLT, Scott is eligible to take an upfront income tax deduction for the full value of the charitable donation. He receives a gift and estate tax break equivalent to what would happen if he simply wrote a $1 million check to the charity, while also offering a potential financial benefit to his heirs.²

 

All CLTs are irrevocable, and there are different varieties of them. Here is a brief breakdown of their variations, and their characteristics.²

*CLTs can be created either before one’s death or at one’s death. In an inter vivos CLT, the grantor (i.e., donor) relinquishes ownership of the asset(s) to the trust while alive. Asset(s) transfer into a testamentary CLT only upon the death of the grantor. An executor to a testamentary CLT can fund that CLT with assets equaling any inheritance taxes owed.^1,2

*Some CLTs are structured to allow further asset contributions during the trust term. Other CLTs are designed so that no further contributions to the trust are permitted once the trust is active.^1,2

  

*Most CLTs are non-grantor trusts. These CLTs are expressly designed to benefit a charity and the donor’s heirs. In a non-grantor CLT (such as the above example), the donor gives away the asset(s) to charity; heirs receive only the interest on the principal at the end of the trust term. You can see the potential downside: if the asset depreciates over the trust term, the heirs receive nothing. In a non-grantor CLT, the donor is able to take an annual income tax deduction on the value of the income that heads to the charity discounted at the federal funds rate.^3,4

*Other CLTs are grantor trusts. These CLTs are primarily designed to benefit a charity and the donor. The charity receives income off the trust principal for X years, but the donor will regain ownership of the appreciated asset(s) when the trust term expires. The donor gets to claim an upfront income tax deduction for the gift. In this variation, the donor pays taxes on the income the CLT generates, so it is wise to put tax-exempt investments into a grantor CLT.^3,4

An IRS formula figures the future value of the donor’s gift. The variables here include the annual income the charity will receive, the duration of the CLT and the projected ROI for the trust asset(s). The IRS determines the ROI using an interest rate (the “hurdle” rate) based on Treasury yields. Non-charitable beneficiaries of the CLT are projected to receive the value of the trust assets at the end of the trust term minus the value of the initial gift. This amount will be exposed to estate taxes, but in many cases it will be far less than the generous estate tax exemption.²

CLTs allow you to pursue three estate planning objectives. If you want to make a sizable charitable gift, help your heirs and reduce taxes, you may want to explore creating one.

    

Citations.

1 - finance.zacks.com/charitable-lead-trust-work-7556.html [10/8/15]

2 - nolo.com/legal-encyclopedia/charitable-lead-trusts.html [10/8/15]

3 - thinkadvisor.com/2015/09/25/now-is-the-time-for-charitable-lead-trusts [9/25/15]

4 - bbt.com/bbtdotcom/wealth/retirement-and-planning/trusts-and-estates/charitable-lead-trusts.page [10/9/15]

End-of-the-Year Money Moves 2015

Here are some things you might want to do before saying goodbye to 2015.  

                       

What has changed for you in 2015? Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2016 begins.

     

Even if your 2015 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth. 

   

Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.¹ 

   

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

   

Do you itemize deductions? If you do, great. Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction… there are so many deductions you can potentially claim, and now is the time to meet with your tax professional to strategize to claim as many as you can.

    

Could you ramp up 401(k) or 403(b) contributions? If you can do this in November and December, that will lower your taxable income for 2015. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so those Roth account contributions won’t lower your taxable income for 2015 (they will still help to build your retirement savings).²

   

Are you thinking of gifting? How about donating to a charity or some other kind of 501(c)(3) non-profit organization before 2015 ends? In most cases, these gifts are partly tax-deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.³

  

If you donate appreciated securities you have owned for at least a year, you can take a charitable deduction for their current value and forego the capital gains tax hit that would result from their sale. If you pour some money into an education savings plan on behalf of a child, you could claim a full or partial state income tax deduction (depending on the state).^4,5

   

Of course, you can also reduce the value of your taxable estate with a gift or two. The gift tax exclusion is $14,000 for both 2015. So as an individual, you can gift up to $14,000 to as many people as you wish this year. A married couple can gift up to $28,000 to as many people as desired in 2015. (Unfortunately, the IRS prohibits a current-year income tax deduction for the value of a non-charitable gift.)⁶

   

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.  

   

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday... and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.⁷

   

Can you take advantage of the American Opportunity Tax Credit? In place through 2017, the AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.⁸

   

What can you do before they sing “Auld Lang Syne?” Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

   

 

Citations.

1 - azcentral.com/story/money/business/consumers/2015/10/23/seasonal-planning-now-taxes-charities-more/74325400/ [10/23/15]

2 - fool.com/retirement/iras/2015/01/11/ira-contribution-limits-in-2014-and-2015-and-how-t.aspx [1/11/15]

3 - irs.gov/taxtopics/tc506.html [3/5/15]

4 - philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]

5 - finaid.org/savings/state529deductions.phtml [10/29/15]

6 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes [10/2/15]

7 - tinyurl.com/nmou7jc [10/2/15]

8 - irs.gov/uac/American-Opportunity-Tax-Credit [8/24/15]

 

Estate Planning After a Second Marriage

Special considerations for a complex situation.

 Marrying again makes estate planning more involved. How do you provide for everyone you love? Should you provide for everyone you love? How do you arrange to transfer wealth in a way that won’t hurt the feelings of certain heirs?

   If you have not planned your estate yet, take inventory. Spend a half-hour and jot down the assets you own, major and minor. Who should own these assets after you die? Your spouse should do this, too – and you should talk about your preferences. It may not turn out to be the easiest conversation, but agreement now may preclude family squabbles and legal challenges down the line. (If you have a prenuptial agreement in place, you may have already discussed some of these matters.) You should also consider two scenarios – what happens if you die first, and what happens if your spouse dies before you do.

 

If you and/or your spouse have children from prior marriages, there may be some dilemmas for each of you. If you die, there is a real possibility that your current husband or wife will not elect to provide for your children from past marriages. So what might you do to prepare for that possibility? You might make a child the primary beneficiary of a life insurance policy, or set up a trust for your kid(s), or place certain real property under joint ownership with a child.

   

If you have already written a will, it will probably need revisions. They could be considerable. You want to be extremely specific about which heir gets what; you need to state bequests convincingly, because the more convincing your bequest, the less ambiguity.  

 

How up-to-date are your beneficiary designations? Out-of-date beneficiary decisions are an Achilles heel of estate planning. Be sure to review them; you may want to revise beneficiary forms for retirement plans, investment accounts, and insurance policies.

   

As you consider these revisions, pay particular attention if you have been divorced. Divorce may actually preclude you from changing beneficiaries in certain cases. Turn to a lawyer and show the lawyer a copy of your divorcee decree; ask if revising your beneficiary designations will violate it. Should you be unable to make beneficiary changes to your life insurance policy, you may want to buy another one in consideration of your new spouse.¹

   

Take a look at irrevocable trusts.They can be used to provide for your spouse as well as your kids. Some people establish a separate property trust to provide for their spouse after their death while directing most or all of their real property to their children.^2,3

 

Alternately, parents create irrevocable trusts to direct assets to particular children. They are attractive estate planning vehicles for a number of reasons. A trust agreement is a private mechanism for wealth transfer, while a will is a public document (and some parents who have remarried would rather their wills not be made public). Assets within irrevocable trusts are shielded from creditors, and also from inheritance claims of spouses of the adult children named as heirs. An irrevocable trust represents a “finalized” estate planning decision, one that ensures that particular assets transfer to a parent’s biological children. Irrevocable trusts are also rarely undone. It typically takes permission from beneficiaries (and a judge) to reverse them.⁴

 

Those aforementioned pre-nups can play an estate planning role as well. They allow you to designate personal assets (such as assets within a college savings account) for existing rather than future children. Post-nuptial agreements (similar to pre-nups, but drafted after a marriage) can also accomplish this. Some states do not view pre-nup and post-nup agreements as legally valid, however – and sometimes carrying out the terms and conditions of these agreements is up to a judge.

 

Be sure to consult legal & financial professionals. When estates become this complex, collaboration with professionals having a thorough understanding of estate planning and tax issues is essential.

   

     

Citations.

1 - elderlawanswers.com/redo-your-estate-plan-when-you-remarry-5477 [12/29/14]

2 - nolo.com/legal-encyclopedia/estate-planning-blended-family-29665.html [8/7/15]

3 - tinyurl.com/ohqsvro [8/14/15]

4 - blogs.wsj.com/totalreturn/2015/03/18/for-blended-families-consider-prenups-and-trusts/ [3/18/15]

Retirement Blindspots

Some life & financial factors that can be overlooked.

 We all have a “blue sky” vision of the way retirement should be, yet it helps to plan for retirement with a little pragmatism. Fate may alter the course of our retirement in ways we do not currently anticipate. So as we plan for the next act of life, we may want to think about (and plan for) some life and financial factors that are often overlooked.

 

We may retire earlier than we think we will. Some of us envision leaving the workforce at “full” retirement age (66 or 67) so that we can receive “full” monthly Social Security benefits rather than slightly reduced monthly payments. Will that happen? It might not, according to data released this spring by the respected Employee Benefit Research Institute.

 

In EBRI’s most recent Retirement Confidence Survey, 21% of the respondents thought they would retire at age 65. Another 26% expected to retire at age 70 or later.¹

     

These expectations may not correspond with reality. In surveying current retirees, EBRI found that only 6% had worked into their seventies. Only 9% had retired at age 65. Sixty-five percent of the respondents had left work before age 65, up from 61% in EBRI’s 2010 survey.¹

 

We may see retirement as an extension of the present rather than the future. This is only natural, as we live in the present – but the present will not go on forever. Things change, and the costs we have to shoulder five or ten years from now may be greater than the expenses we face at the start of retirement. As many of us will likely be retired for 20 or 30 years, it becomes essential to take a long-term view of the retirement experience – which is why retirees may want to consider growth investing and long term care coverage.

 

We may face an insurance coverage shortfall. Some of us rely onemployer-sponsored health insurance. If we have to retire before age 65, how do we insure ourselves until we become eligible for Medicare?

 

Beyond that basic question, we need to think about insurance from a couple of other angles. Will we need long term care coverage? It seems to get more expensive each year, but as medicine and health care continue to advance and evolve, the possibility of a gradual rather than sudden death may increase. The wealthy may have the assets to contend with long term care costs, but the middle class rarely does. In Genworth’s 2015 Cost of Care Survey, the median annual cost for a semi-private room in a nursing home is $80,300. In California, it is $89,396; in Florida, $87,600.²

 

Additionally, few pre-retirees have disability insurance. Some employers do provide it, but many do not. A small percentage of us will likely become disabled in our fifties or sixties, or become ill to a point where we cannot work for an extended period of time. If we don’t have disability insurance, how do we make ends meet? We may be tempted to draw down retirement savings.

 

Disability insurance and long term care coverage may prove more essential to retirement planning than many of us realize.

  

Age may catch up to us sooner rather than later. Generationally speaking,are we healthier than our parents and grandparents were? Anecdotally, it would seem so: we see people running 10Ks in their eighties, climbing mountains in their seventies, and so forth. Then again, we have diabetes and obesity plaguing American health.

 

Will we be able to manage our finances at age eighty? At age ninety? How long will we remain able-bodied? Many of us will live long and healthy retirements, but this is not a given. That means we need to find people we can trust to manage our finances and help us in our daily lives if we become mentally or physically infirm. Our estate planning should not dismiss such concerns.

  

We may be alone sooner than we assume. Many couples retire with a reasonable assumption that they will be together for some time – but something may happen to leave one spouse alone. As anyone who has ever lived alone realizes, a single person does not simply live on 50% of the income of a couple. Keeping up a house – or even a condo – could be arduous for an eighty-year-old man or woman. Driving is a concern. All this means that we may need someone or some group of people to care for us when our spouse is gone. Is that kind of support currently available? Could it be available twenty years from now? If not, what will take its place?

     

These are some of the blindspots that can surprise us in retirement. They may quickly affect our money and our quality of life. If we age with an awareness of them and recognize them in our retirement and estate planning, then we may be betterprepared when or if they emerge.

     

 

Citations.

1 - finance.yahoo.com/news/when-americans-think-they-will-retire-ebri-162344633.html [4/21/15]

2 - genworth.com/corporate/about-genworth/industry-expertise/cost-of-care.html [8/18/15]

Life Insurance with Long Term Care Riders

As conventional LTC policies grow costlier, alternatives have emerged.

 The price of long term care insurance is really going up. If you are a baby boomer and you have kept your eye on it for a few years, chances are you have noticed much costlier premiums for LTC coverage today compared to several years ago. For example, in 2015 the American Association for Long-Term Care Insurance found that married 60-year-olds would pay $2,170 annually to get a total of $328,000 of coverage.¹

 

As CNBC notes, about three-quarters of the insurers that sold LTC policies ten years ago have stopped doing so. Demand for LTC coverage will only grow as more baby boomers retire – and in light of that, insurance providers have introduced new options for those who want to LTC coverage.¹

   

Hybrid LTC products have emerged. Some insurers are structuring “cash rich” whole life insurance policies so you can tap part of the death benefit while living to pay for long term care. You can use up to $330 a day of the death benefit under such policies, with no reduction to the cash value. Other insurance products are being marketed featuring similar potential benefits.²

 

This option often costs a few hundred dollars more per year – not bad given that level annual premiums on a whole life policy with a half-million or million-dollar payout often come to several thousand dollars. The policyholder becomes eligible for the LTC coverage when he or she is judged to require assistance with two or more of six daily living activities (dressing, bathing, eating, etc.) or is diagnosed with Alzheimer’s disease or some other kind of cognitive deficiency.²

   

This way, you can get what you want from one insurance policy rather than having to pay for two. Contrast that with a situation in which you buy a discrete LTC policy but die without requiring any long term care, with the premiums on that policy paid for nothing.  

 

The basics of securing LTC coverage applies to these policies. As with a standard LTC policy, the earlier you start paying premiums for one of these hybrid insurance products, the lower the premiums will likely be. You must pass medical underwriting to qualify for coverage. The encouraging news here is that some people who are not healthy enough to qualify for a standalone LTC insurance policy may qualify for a hybrid policy.³

 

These hybrid LTC products usually require lump sum funding. An initial premium payment of $50,000 is common. Sometimes installment payments can be arranged in smaller lump sums over the course of a few years or a decade. For a high net worth individual or couple, this is no major hurdle, especially since appreciated assets from other life insurance products can be transferred into a hybrid product through a 1035 exchange.^1,3

     

Are these hybrid policies just mediocre compromises?They have detractors as well as fans, and the detractors cite the fact that a standalone LTC policy generally offers greater LTC coverage per premium dollar paid than a hybrid policy. They also cite their two sets of fees, per their two forms of insurance coverage. While it is possible to deduct the cost of premiums paid on a conventional LTC policy, hybrid policies allow no such opportunity.³

 

Paying a lump sum premium at the inauguration of the policy has both an upside and a downside. You will not contend with potential premium increases over time, as owners of stock LTC policies often do; on the other hand, the return on the insurance product may be locked into today’s (minimal) interest rates.

 

Another reality is that many middle-class seniors have little or no need to go out and buy a life insurance policy. Their heirs will not face inheritance taxes, because their estates aren’t large enough to exceed the federal estate tax exemption. Moreover, their children may be adults and financially stable themselves; a large death benefit for these heirs is nice, but the opportunity cost of paying the life insurance premiums may be significant.⁴

 

Cash value life insurance can be a crucial element in estate planning for those with large or complex estates, however – and if some of its death benefit can be directed toward long term care for the policyholder, it may prove even more useful than commonly assumed.

  

    

Citations.

1 - cnbc.com/2015/08/07/fer-more-products-that-cover-long-term-care-costs.html [8/7/15]

2 - consumerreports.org/cro/news/2015/04/get-long-term-care-from-whole-life-insurance/index.htm [4/16/15]

3 - tinyurl.com/o3ty2j3 [5/4/14]

4 - marketwatch.com/story/hedging-your-bets-on-long-term-care-2013-11-06 [11/6/13]

 

Teaching Your Heirs to Value Your Wealth

Values can help determine goals & a clear purpose.

                                                                                                                             

Some millionaires are reluctant to talk to their kids about family wealth. Perhaps they are afraid what their heirs may do with it.

 

In a 2015 CNBC Millionaire Survey, 44% of families having at least $1 million in investable assets said that they had not yet told their children about their future inheritance. Another 27% said they had refrained from mentioning it until their children were 30 or older.¹

   

It can be awkward to talk about such matters, but these parents likely postponed discussing this topic for another reason: they wanted their kids to grow up with a strong work ethic instead of a “wealth ethic.”

    

If a child comes from money and grows up knowing he or she can expect a sizable inheritance, that child may look at family wealth like water from a free-flowing spigot with no drought in sight. It may be relied upon if nothing works out; it may be tapped to further whims born of boredom. The perception that family wealth is a fallback rather than a responsibility can contribute to the erosion of family assets. Factor in a parental reluctance to say “no” often enough, throw in an addiction or a penchant for racking up debt, and the stage is set for wealth to dissipate.

 

How might a family plan to prevent this? It starts with values. From those values, goals, and purpose may be defined.

 

Create a family mission statement. To truly share in the commitment to sustaining family wealth, you and your heirs can create a family mission statement, preferably with the input or guidance of a financial services professional or estate planning attorney. Introducing the idea of a mission statement to the next generation may seem pretentious, but it is actually a good way to encourage heirs to think about the value of the wealth their family has amassed, and their role in its destiny. 

 

This mission statement can be as brief or as extensive as you wish. It should articulate certain shared viewpoints. What values matter most to your family? What is the purpose of your family’s wealth? How do you and your heirs envision the next decade or the next generation of the family business? What would you and your heirs like to accomplish, either together or individually? How do you want to be remembered? These questions (and others) may seem philosophical rather than financial, but they can actually drive the decisions made to sustain and enhance family wealth.

 

Feel no shame in exerting some control. A significant percentage of families seek to define a purpose for transferred wealth. In CNBC’s survey, 32% of parents aged 55 or younger said they were going to specify what their heirs could use their inheritances for, and that was also true for 15% of parents aged 55-69 and 9% of parents aged 70 or older.¹

 

You may want to distribute inherited wealth in phases. A trust provides a great mechanism to do so; a certain percentage of trust principal can be conveyed at age X and then the rest of it Y years later, as carefully stated in the trust language.

 

This is a way to avoid a classic mistake: giving your heirs too much money at once. In fact, a 2015 Merrill Lynch Private Banking & Investment Group report notes that 46% of high net worth parents share that very concern.²

   

Just how much is too much? Answers vary per family, of course. In the aforementioned Merrill Lynch survey, 46% of families said that they wanted to avoid handing down the kind of money that would dissuade their heirs from realizing their full potential in their lives and careers.²

 

By involving your kids in the discussion of where the family wealth will go when you are gone, you encourage their intellectual and emotional investment in its future. Pair values, defined goals, and clear purpose with financial literacy and input from a financial or legal professional, and you will take a confident step toward making family wealth last longer.

     

     

Citations.

1 - cnbc.com/2015/07/22/wealthy-parents-fret-over-inheritance-talk-with-kids.html [7/22/15]

2 - bankrate.com/finance/estate-planning/critical-questions-before-leaving-an-inheritance-1.aspx [8/6/15]

 

The Fine Art of Flexible Estate Planning

Specialized trusts & private loans can help address some “what ifs.”

Estate planning professionals often contend with ambiguities. A plan may need to be modified in the future when some development in family life occurs – and there are some estate planning tools that may help to provide that kind of flexibility.

  Standby trusts. These are unfunded revocable living truststhat go into effect when and if families need them. (Sometimes they are referred to as contingent trusts.)¹

 

In a common scenario, a family has a history of hereditary illnesses, and mom or dad worry about one day being mentally or physically disabled to the point where they cannot make financial decisions. So a standby trust is declared through a living trust document – or alternately, a will may contain a provision authorizing one when necessary.² 

   

A standby trust goes into effect upon a triggering event. It could be the death of the grantor; it could be a diagnosis of a terminal illness or a form of dementia for that individual. At that point, the revocable standby trust can become an irrevocable trust with assets transferred into it via a durable power of attorney.³

     

Should the grantor recover from a prolonged disability or illness, the standby trust can remain revocable and the grantor can regain control over the assets.⁴

  

From a life insurance standpoint, the mechanics work as follows. One spouse buys either a survivorship life insurance policy or a single life policy insuring the other spouse, naming the standby trust as the contingent owner of the policy. The policy owner has control plus access to the cash value of the policy. If the policy owner dies first, the policy is transferred to the trust and the trustee names the trust as the policy beneficiary. Only the fair market value of the policy is added to the estate of the decedent; the trust pays the policy premiums until the surviving spouse dies, at which point the trust receives the policy death benefit tax-free.⁵

   

Spousal lifetime access trusts. If it seems that one spouse might live decades longer than the other, a spousal lifetime access trust (SLAT) may offer a helpful estate planning option. A SLAT essentially gives a longer-living spouse access to a trust established by a spouse who passed away.⁶

 

A SLAT is actually a form of irrevocable life insurance trust (ILIT) that one spouse creates for the benefit of the other. One spouse is the grantor, and the spouse expected to live longer may be named the trustee (or another party can be named as such).⁵

  

Premiums on the life insurance policy are paid by the trust. These payments are funded by gifts of property from the grantor. A SLAT is funded with separate property of the grantor spouse rather than community property.⁵

     

Basically, this is an irrevocable life insurance trust (ILIT) with one key difference: the spouse is a beneficiary as well as the children/grandchildren. The surviving spouse (trustee) may distribute assets out of the trust for his/her own benefit as well as the benefit of the heirs. As a SLAT is also an ILIT, heirs receive a tax-free life insurance benefit when the longer-living spouse passes away.⁵ 

    

What if the spouse dies before the grantor dies? If that happens, the trust assets (including the life insurance policy) are usually inaccessible to the grantor as this is an irrevocable trust.⁵

    

Private demand loans. Similar to a SLAT, these are also arranged with the help of either a survivorship life insurance policy or a single life policy. In this instance, an ILIT is created but the grantor loans funds to the ILIT instead of gifting them. The trustee uses these loaned funds to pay premiums on a single life policy on the grantor or a survivorship policy on the grantor and the other spouse. (The annual gift to the ILIT may vary depending on required interest rates stipulated by the IRS.) The loan is payable on demand if the grantor needs the money; the trustee can do so using the cash value of the policy. So the couple retains indirect control over the policy while they live (with access to its cash value) while also establishing an irrevocable trust.⁵

     

Could these ideas work for you? They may be worth exploring. These flexible estate planning techniques all use life insurance creatively, offering couples access to cash value while aiming to keep the death benefit of the policy out of the taxable estate of the spouse.

         

    

Citations.

1 - info.legalzoom.com/contingent-trust-trustee-22534.html [3/16/15]

2 - avvo.com/legal-guides/ugc/california-revocable-living-trusts [3/16/15]

3 - tyelaw.com/practice-areas/trust/ [3/16/15]

4 - californiaestatecorp.com/RevocableLivingTrust.aspx [3/16/15]

5 - internal.nfp.com/webfiles/public/2012/emails/brk/qrtly-sales-ideas/links/3FlexibEstateLiquidityIdeas.pdf [9/11]

6 - tinyurl.com/mmfoqnz [1/18/13]

 

Getting It All Together for Retirement

Where is everything? Time to organize and centralize your documents.

 Before retirement begins, gather what you need. Put as much documentation as you can in one place, for you and those you love. It could be a password-protected online vault; it could be a file cabinet; it could be a file folder. Regardless of what it is, by centralizing the location of important papers you are saving yourself from disorganization and headaches in the future.

 

What should go in the vault, cabinet or folder(s)? Crucial financial information and more. You will want to include...

 

Those quarterly/annual statements. Recentperformance paperwork forIRAs, 401(k)s, funds, brokerage accounts and so forth. Include the statements from the latest quarter and the statements from the end of the previous calendar year (that is, the last Q4 statement you received). You no longer get paper statements? Print out the equivalent, or if you really want to minimize clutter, just print out the links to the online statements. (Someone is going to need your passwords, of course.) These documents can also become handy in figuring out a retirement income distribution strategy.

 

Healthcare benefit info. Are you enrolled in Medicare or a Medicare Advantage plan? Are you in a group health plan? Do you pay for your own health coverage? Own a long term care policy? Gather the policies together in your new retirement command center, and include related literature so you can study their benefit summaries, coverage options, and rules and regulations. Contact info for insurers, HMOs, your doctor(s) and the insurance agent who sold you a particular policy should also go in here.

 

Life insurance info. Do you have a straight term insurance policy, no potential for cash value whatsoever? Keep a record of when the level premiums end. If you have a whole life policy, you need paperwork communicating the death benefit, the present cash value in the policy and the required monthly premiums.

 

Beneficiary designation forms. Few pre-retirees realize that beneficiary designations often take priority over requests made in a will when it comes to 401(k)s, 403(b)s and IRAs. Hopefully, you have retained copies of these forms. If not, you can request them from the account custodians and review the choices you have made. Are they choices you would still make today? By reviewing them in the company of a retirement planner or an attorney, you can gauge the tax efficiency of the eventual transfer of assets.¹

 

Social Security basics. If you have not claimed benefits yet, put your Social Security card, your W-2 form from last year, certified copies of your birth certificate, marriage license or divorce papers in one place, and military discharge paperwork and a copy of your W-2 form for last year (or Schedule SE and Schedule C plus 1040 form, if you work for yourself), and military discharge papers or proof of citizenship, if applicable. Take a look at your Social Security statement that tracks your accrued benefits (online or hard copy) and make a screengrab of it or print it out.²

 

Pension matters. Will you receive a bona fide pension in retirement? If so, you want to collect any special letters or bulletins from your employer. You want your Individual Benefit Statement telling you about the benefits you have earned and for which you may become eligible; you also want the Summary Plan Description and contact info for someone at the employee benefits department where you worked.

 

Real estate documents. Gather up your deed, mortgage docs, property tax statements and homeowner insurance policy. Also, make a list of the contents of your home and their estimated value – you may be away from your home more in retirement, so those items may be more vulnerable as a consequence.

 

Estate planning paperwork. Put copies of your estate plan and any trust paperwork within the collection, and of course a will. In case of a crisis of mind or body, your loved ones may need to find a durable power of attorney or health care directive, so include those documents if you have them and let them know where to find them.

 

Tax returns. Should you only keep your 1040 and state return from the previous year? How about those for the past 7 years? Have you kept every one since 1982 or 1974? At the very least, you should have a copy of returns from the prior year in this collection.

 

A list of your digital assets. We all have them now, and they are far from trivial – the contents of a cloud, a photo library, or a Facebook page may be vital to your image or your business. Passwords must be compiled too, of course. 

     

This will take a little work, but you will be glad you did it someday. Consider this a Saturday morning or weekend project. It may lead to some discoveries and possibly prompt some alterations to your financial picture as you prepare for retirement.

   

Citations.

1 - fpanet.org/ToolsResources/ArticlesBooksChecklists/Articles/Retirement/10EssentialDocumentsforRetirement/ [9/12/11]

2 - cbsnews.com/8301-505146_162-57573910/planning-for-retirement-take-inventory/ [3/18/13]