Saving for College Education? Trusts, 529 Accounts or Both?

You have options, when it comes to saving for those tuition bills.

What is the best way for one generation to save for the next generation to be funded for a college education? There are a number of ways to accomplish it, according to Penta in the article “There’s A Better Way to Fund a College Education.”

In the article, the matriarch of a New England family decided to give up the tax benefits of 529 College Savings Accounts and go with a trust. However, the the best method depends on the family and the circumstances.

The reason the matriarch made the trust decision was to have more flexibility. The 529 account limits how much can be invested, where the money can be invested and how the assets must be used. A trust provides far more options.

However, these two options—the 529 and the trust—can be used in a combination that offers the best of both worlds. Let’s look at them both.

The 529 plan is great for tax-deferred asset growth. Funds can be taken out tax-free, as long as they are used for qualified educational expenses. As a result of changes to the law from the recent tax reform, you can use 529 funds for qualified educational expenses for elementary, middle, and high school tuition. For families sending their kids to private schools, this was a great change.

Investment options for 529 accounts are mutual funds or pre-designed portfolios that become more conservative, as the beneficiary gets closer to attending college. Investment caps are generally about $300,000 for the entire life of the plan, as opposed to annually.

If the funds are used for expenses that are not qualified, like buying a car for a student who will be living off campus and needs a car to get to and from school, there will be a 10% penalty on earnings and taxes to be paid.

A trust offers far more flexibility for all concerned. If the money is not completely used for education, the trustees might wish to give the child money for a down payment on a home, or to start up a business. The rules are set by the person creating the trust. You can even require the student to maintain a certain grade point average. The owner of the trust also determines who will pay taxes on the appreciated assets in the trust—the owner of the trust, the trust itself, or the beneficiaries.

Another tactic is to use the annual gift-tax exclusion to fund a 529 plan and put the balance of the money dedicated to a child’s college fund into a trust.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include funding a college education.

Reference: Penta (September 2018) “There’s A Better Way to Fund a College Education”

Banks Have New Weapon in Fight Against Elder Financial Abuse

Early signs of the loss of a customer’s mental agility may be recognized by banking personnel.

New federal legislation gives banks and financial institutions new tools to join in the efforts to halt the ever-growing problem of elder financial abuse, according to The Wall Street Journal in “Banks Monitor Older Customers for Cognitive Decline”?

Financial elder abuse is on the rise. The Securities and Exchange Commission released a report this spring that says as many as 6.6% of elderly Americans had undergone financial exploitation in the last year.

Banking personnel see some of the early signs of cognitive decline, such as when a customer begins missing payments, sending duplicate checks, bouncing checks because of confusion over balances, or sending money to unrelated people. Does the bank have a legal, ethical and/or moral obligation to alert family members?

Until recently, financial institutions operated on the assumption that there were privacy issues that precluded them from informing anyone about these kinds of suspicions. The only questionable transactions that were reported, concerned possible illegal activities. Should they contact the local Adult Protective Services agency, or another social service agency?

A new federal regulation was signed into law this past spring that protects financial institutions from litigation if they report concerns about elder financial abuse to government agencies, although there is no requirement that such reporting take place.

Some experts would like to see financial institutions go further and share their concerns with each other. This is commonly done when commercial fraud is suspected, through a department of the U.S. Treasury.

Reporting on a client’s behavior is a grey area, but some companies are enhancing their ability to identify problems. The use of Artificial Intelligence (AI) allows banks to monitor and analyze massive amounts of data that may reveal cognitive declines. In addition to relying on AI, institutions are training staff members to watch for behavior markers that may indicate decline or fraud. It helps if the banks have contact information for other family members, which can happen if the customers will permit family members to access their accounts.

Reference: The Wall Street Journal (Nov. 20, 2018) “Banks Monitor Older Customers for Cognitive Decline”

Hold Accounts Jointly with Your Child? Give It Careful Consideration

Joint accounts can sometimes be a problem for your estate.

Making all of your accounts as Transfer on Death (TOD) or Payable on Death (POD) sounds like a simple solution in avoiding probate. However, sometimes it can become a complex problem, according to The Mercury in “Planning Ahead: Joint Accounts and Transfer on Death can torpedo an estate plan.”

In some states, probate is a complex and expensive problem. California is one of those states, having arguably the worst probate process in the country. Many people use TOD or POD designations to avoid probate, but don’t realize they’re creating additional problems, even though they’ve managed to skip probate.

Sometimes joint titling and payable on death does work, especially in families where there is only one child or one heir. This can be a good solution, if the POD or joint account owner is your spouse.

However, here is where things get dicey. Let’s say your spouse passes away, and you name one of your children as the joint or payable on death for all accounts. Let’s say you also do that on your real estate properties and other assets and accounts.

How your accounts are titled overrides anything that your will or trust says. If your will or trust directs that all your assets be distributed in equal shares to your children, but your one child has become the legal owner of your assets when you die, you have created the perfect estate litigation storm.

On your death, the adult child becomes the owner, and has no legal obligation to share any of those assets with his or her siblings.

To take the example further, if the child dies shortly after you, then the assets go to his or her spouse. If his or her spouse is not living, then all your assets go to the estate, and not to their siblings as you had intended.

This can also be a huge problem for blended families where there are step children involved. Leaving everything to your spouse might cause your children to be left out entirely from your estate.

Another issue that is not resolved through titling is the ability for the estate to pay expenses. If son John becomes the owner of all your assets, who is going to pay for any taxes, funeral expenses and other costs associated with settling an estate?

When it comes to real estate, things get even trickier. Imagine that you’ve added your son and daughter-in-law as joint tenants to your house, because you want to make sure the house doesn’t go through probate. Now, a few years later, your son and daughter-in-law are getting a divorce. She’s on the deed for your house, so all of a sudden your house becomes involved in their divorce proceeding!

A smarter move than taking a simple piece of advice and trying to apply it to a complex matter: make an appointment with an experienced estate planning attorney and create a plan for how you would like your assets to be distributed upon your death. Plan for expenses that occur, like funeral expenses and taxes. You can now rest easy, knowing that you’ve just spared your family the divisiveness and stress that can occur from well-intentioned but inappropriate advice.

Reference: The Mercury (Dec. 4, 2018) “Planning Ahead: Joint Accounts and Transfer on Death can torpedo an estate plan”

What Do You Really Know about Social Security Benefits?

It is your future and your money. Learn everything you can about the program.

Social Security is an entitlement and you have worked long and hard for it. It would be best to take the time to investigate what you will receive and when it would be best to take it, according to the AARP Bulletin in “12 Top Things to Know About Social Security.”

It’s not going bankrupt. The Social Security trust funds are near an all-time high, says AARP’s legislative policy director. However, it does have long-term financial challenges. For decades, the agency collected more than it paid out. The extra money was invested in Treasury securities. Today, the trust fund’s value is worth about $2.89 trillion. However, demographics come into play: boomers are retiring and the ratio of people retiring versus those in the workforce is changing. The program will continue, but benefits may decrease.

Congress is not likely to address reform soon. Partisan politics make it unlikely that there will be any efforts to engage the long-term funding issues facing Social Security. To make significant changes that will have a lasting effort, will require bipartisan support.

Some reform ideas are starting to form. There are a few proposals floating around, including one that proposes either raising or eliminating the wage cap on how much income is subject to the Social Security payroll tax. Another is to raise the age for full retirement benefits.

Washington cannot take funds from the trust fund for other uses. Any money remaining after benefits and expenses are paid is invested into U.S. Treasury securities. If money is used, it must be paid back with interest. Congress determines how much can be spent on administrative costs, and there have been much-needed increases recently.

Yes, it could be better administered. The Social Security Administration is a massive organization, with more than 60,000 employees and 1,200 offices nationwide. The rapidly escalating number of retirees has presented challenges for the agency, which has been underfunded for some time.

Your Social Security benefits may be taxed. If you have retirement income in addition to Social Security, you may need to pay federal taxes. Thirteen states also tax Social Security benefits. For many people, that is a critical part of their retirement income planning.

Social Security was never meant to be a national retirement fund for everyone. The program was designed to protect the elderly and the ill from dire poverty. It will only replace about 40% of your pre-retirement income.

Its purchasing power is shrinking. Cost of Living Adjustments (COLAs) are based on a formula that does not account for the increasing medical costs faced by seniors. These costs are rising faster than others, and the COLA just doesn’t keep up.

Working and collecting benefits—yes, you can. If you are younger than your full retirement age and your paycheck exceeds a certain limit, a portion of your benefit may be withheld. However, you’ll eventually receive this money, when you hit full retirement age. If you wait until full retirement age to start drawing Social Security, you can work as much as you want, and benefits will not be reduced.

Social Security is keeping up with the times. Payments are made electronically, there’s an online portal and people are encouraged to use the website to set up their accounts. This precludes checks being stolen in the mail, or seniors being targeted by thieves, when they cash their checks.

It’s not just about retirement. Social Security includes four benefits: disability, retirement, dependent and survivors. However, don’t count on receiving more than one type of benefit at a time. You should, however, ask about other programs for which you may be eligible. If the family breadwinner dies, you may be eligible for survivor or dependent benefits.

Here’s a nice surprise. Studies have shown that most people receive more in benefits than they pay into the program. Married couples are more likely to get more than they contributed than single people, and low- and high-income people generally receive more dollars from the program over their lifetime than the amount they contributed.

Reference: AARP Bulletin (Nov. 2018) “12 Top Things to Know About Social Security”

New Year Is a Good Time to Consider Estate Planning

An estate planning resolution can be beneficial to everyone.

There are many possible New Year’s resolutions. However, a good one to consider may well be creating an estate plan or taking a fresh look at your current plan, according to the Grand Rapids Business Journal in “Incorporate estate planning into New Year’s resolutions,”

Resolving to address your estate plan and wealth administration in the coming year, will be a big help to you and your family. It’s easy to become overwhelmed—how many accounts do I have? Who is the named beneficiary? Who will administer my estate? To make it easier, use this checklist:

Revisit your estate plan. Have you looked at your estate plan in light of the 2018 tax law changes? Have you updated your beneficiary names on any accounts? Do you have contingent beneficiaries named?

Develop or update your will or trust and don’t forget to sign it. If you pass without a will or trust, the laws of your state will determine how your property is distributed, and the court will assign a guardian to your minor children. Better—have your will and trust created or update it. Not having a will and/or trust may increase your family’s tax liabilities, not to mention the legal disputes or challenges that result when there is no estate plan in place. Don’t forget to finalize the document with your signature. Yes, that really does happen, and it leads to unnecessary problems.

Revise your charitable giving. Instead of annual charitable giving that may no longer be deductible under the new tax laws, consider donating a larger sum to a donor-advised fund. This lets you receive an immediate charitable deduction and distribute funds to carefully vetted charities over time. This also lets your money grow tax-free before it is donated.

Check on your insurance coverage: Just as your life changes and your estate plan changes, your insurance needs change also. Make sure there are no gaps in your coverage and that there’s enough liquidity to pay taxes, satisfy any buy/sell agreements and provide enough money to support any survivors. If you have young children, have you included their college educations in your insurance portfolio?

Business succession plan review. Business owners who pour their heart and soul into their businesses hate to think about succession planning, and as a result many do nothing, leaving partners, family members, and clients in a bad position. What would happen to the business, if something unexpected occurred to you? Does your retirement plan center on the sale of your business? It usually takes a long time to create a business plan, and then it needs to be reviewed on a regular basis to ensure that it still works for all involved.

Make an appointment with your estate planning attorney. An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances or take a fresh look at an old plan.

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