Include Tax Strategy in Retirement Income Planning

When you’re busy working, saving and investing for retirement, taxes during retirement aren’t usually on the top of your list, explains The News Tribune in “Implement an efficient tax strategy to make sure your retirement income keeps you financially secure.” Taxes during your working life are not as complex, as they are during retirement.

For most retired people, the biggest assets are their retirement accounts, whether 401(k)s or IRAs. There are also Social Security benefits, any pensions or annuities and Medicare premiums. These all present tax-related decisions that need to be considered.

Tax deferred retirement savings accounts were introduced in 1974 and 401(k) accounts debuted in 1978. For members of the Baby Boom generation, this was the standard for retirement savings. There are now 10,000 Boomers retiring every day, and almost all of them have a retirement account. However, every withdrawal of an IRA account requires a tax payment (unless it’s a Roth IRA, where taxes are paid when contributions are made).

If you were a disciplined saver and amassed a significant amount of money in your retirement savings but not a lot in non-taxable accounts, you may find yourself in a financially sticky and non-tax savvy situation. This is especially true after age 70 1/2, when Required Minimum Distributions must start from those accounts. Your income will go up and might put you into a higher tax bracket than you expected.

When your retirement account income is combined with Social Security, it can cause the amount of Social Security income subject to taxation to rise. If the total of one-half of Social Security benefits plus other taxable income is more than $34,000 (or $44,000 if you are married filing jointly), you’ll have to pay ordinary income tax on as much as 85% of the Social Security income, instead of 50%. That’s not a fun surprise.

On the other hand, you’ll be making payments on Medicare premiums, which for most people are netted out of their Social Security payments. Higher income earners pay more for Medicare. Think of it as a stealth tax. Therefore, you’ll need to manage your income around the Medicare premium thresholds. You don’t want to see your premiums double from one year to the next.

Unless you run the numbers very closely with an experienced advisor, you may find yourself with a higher tax burden than you expected during retirement. All this planning needs to be done in concert with a professional advisor, who can help you manage your tax liability, maximize your Social Security benefits and make sure that you have enough money to enjoy your retirement. That may include trips around the world or leaving a substantial legacy to your children. Speak with an estate planning attorney about minimizing taxes in concert with your estate plan.

Reference: The News Tribune (Jan. 4, 2019) “Implement an efficient tax strategy to make sure your retirement income keeps you financially secure”

Suggested Key Terms: Taxes, Retirement Income, Social Security, 401(k)s, IRAs, Medicare, Estate Planning

How Can I Protect an Elder Loved One From Abuse?

The (Lorain OH) Morning Journal’s recent article, “How to protect elder loved ones from abuse,” reports that the National Center on Elder Abuse says the 2010 census showed the largest number and proportion of people are 65 years old and older in the U.S. population with 40.3 million people, or about 13% of the population. By 2050, that number is expected to more than double to 83.7 million.

A 2010 national study found that financial abuse is the most commonly reported form of abuse followed by potential neglect, emotional mistreatment, physical mistreatment and sexual mistreatment. With financial abuse and neglect, the courts often must get involved to limit the damage and try to get the elderly person the help they need.

When looking for elder abuse in family or friends, look for changes in their circumstances. A neighbor may become more isolated or is making decisions that are potentially harmful to themselves. There’s also self-neglect, where a senior isn’t taking good care of themselves. “New people” in their lives may also be a risk. They may want to assume control over the senior’s person’s life and exclude other people who have had longstanding relationships with the person.

Financial exploitation can take many different forms. Isolation is a critical component of financial exploitation. If a senior is isolated from the people who’ve helped them make financial decisions in the past, and then a new person comes along, that individual may try to make financial decisions for their own gain.

If you think a loved one or neighbor is suffering from elder abuse, start by just talking to them. Talk to them about some of the changes you’ve seen.

There are people who are required by law to report elder abuse, and that list has recently expanded to include chiropractors, dentists, ambulance drivers, coroners and member of the clergy, among many others.

A judge can freeze a bank account and suspend powers of attorney. She can also order evaluations and require that Medi-Cal and Medicare applications be made for the adult. A judge can continue her orders up to six months and appoint guardians.

An emergency elder abuse restraining order can also be sought against the abuser.

The best way to keep loved ones safe from this kind of elder abuse, is to make certain that important legal documents like a will, trust and powers of attorney are done while the person is still competent, and that people they trust are named to carry out those documents.

Reference: The (Lorain OH) Morning Journal (December 26, 2018) “How to protect elder loved ones from abuse”

Suggested Key Terms: Elder Law Attorney, Elder Abuse, Financial Abuse, Elder Care, Will, Power of Attorney

Self Employed People Get to Retire Too–If they Plan Well

People who work for companies have access to perks like 401(k) plans, with automatic deductions that let them put retirement savings on autopilot. However, when you work for yourself, it’s all up to you, says Zing! in the aptly-titled article “Saving for Retirement When You’re Self-Employed? It Takes Planning and Commitment.” If you have the discipline and self-motivation to run a business, you should be able to apply those skills to your retirement.

Here are some tips for self-employed people who are concerned with building their retirement savings.

Embrace a budget. One of the biggest challenges is income that fluctuates. It’s hard to save when one month has you earning $10,000 and $3,000 the next month. You’ll need to create a budget and stick with it, including budgeting a percentage of your income for retirement. While you’re creating a budget, set goals for short- and long-term objectives to keep your budgeting focused.

A budget should include necessary expenses for each month, including mortgage or rent, car loans and credit card payments. Include groceries, transportation, and health care costs. Some self-employed people pay for some items like transportation or entertainment out of their business accounts. If you do that, just work with one budget, so you can measure spending. There is no need to split things out for yourself. You should then look at discretionary items like vacations, entertainment, gym memberships, clothing and things that are not basic necessities.

Now see what’s left at the end of the month. If there’s no regular stream of money going into retirement savings because there’s not enough after spending, you may need to make some changes.

Create an item in your expense budget for retirement savings. Make it automatic. Set a fixed amount of your income, by dollar amount or percentage of monthly income, and put it away every month for your retirement. This takes discipline at first and then becomes a habit. Once you see how the account grows, you’ll be more inclined to continue.

Talk with your accountant about the best savings vehicle for you. Some self-employed individuals use a “solo” 401(k) account, known as a SEP or Self-Employed 401(k). Designed for employers who have no employees other than themselves (or their spouses), it offers the same benefits as traditional 401(k)s. In 2019, you can contribute up to $19,000 when contributing as an employee, or up to $24,500 if you are 50 and older. As an employer, you can contribute up to 25% of your compensation – not counting catch-up contributions for those 50 and older, you can go as high as $55,000 in 2019.

Another factor if you are self-employed is your estate plan. Entrepreneurs are often so busy working on their business, that they forget about the legal side of their personal lives. You need a will, power of attorney, health care power of attorney and, depending on your business and life situation, a succession plan.

Reference: Zing! (Jan. 7, 2019) “Saving for Retirement When You’re Self-Employed? It Takes Planning and Commitment”

Suggested Key Terms: Retirement Planning, Budgeting, Self-Employed, 401(k), SEP, Estate Planning

Who Will Cover My Debt When I Die?

Did you know that we’re dying in this country with an average of $62,000 in debt? What happens to that debt?

Fox Business recently published an article that asks “What Happens to Your Debt When You Die?” As the article explains, the answer depends on a few different factors, including the type of debt, whether there was a cosigner and the value of the deceased person’s estate. Let’s look at some possible outcomes:

In many cases, any debt you owe during your lifetime will have to be paid by your estate when you pass away. Creditors can make claims against your estate during the probate process. If you died with a will and named an executor, he or she will usually use the assets you left behind to pay off your debt. If you don’t have enough assets, creditors are typically without recourse, if you had unsecured debt without a cosigner. However, if you had a secured loan, like a mortgage or a car loan, the debt would need to be paid for your family to keep the asset. For instance, if you leave your home to your family, they’d have to pay your mortgage to keep the house.

Creditor claims take precedence over your instructions as to what happens to your assets. If you stated in your will that your bank account is to pass to your children, but you owed money to a creditor, the money in the bank would first be used to pay the creditor, before your children could inherit.

If your estate doesn’t have enough assets to satisfy your debts, creditors may seek the payment from any cosigners on the loans. Cosigners share legal responsibility for debt and will be held 100% responsible for paying the remaining balance.

One potential exception to this general rule, is for certain types of student loans. For example, a Parent PLUS loan can be dischargeable due to a student’s death, and some private student loans offer a death discharge. However, it is rare. If the primary borrower on student loan debt dies, the surviving cosigner should read the loan terms to determine if he’ll still be held responsible for paying it. Federal student loan debt is typically forgiven, when the borrower dies.

Creditors can also attempt to collect from co-borrowers, if you had a joint account. Therefore, if you and your spouse had a mortgage together or shared a credit card, your spouse would be expected to continue paying the bills after your death.

However, if there’s no cosigner and not enough assets in the estate to pay the bills, creditors will charge off the debt because there’s no way to collect. Beware that creditors may attempt to guilt family members into paying after their deceased loved one’s death. However, generally there’s no requirement that you pay debt that belonged to a loved one. An exception is in states with community property laws that require spouses to pay off debt belonging to a deceased spouse using community property.

If your loved one has already passed away and you’re worried about what will happen to their debts, speak to an experienced estate planning attorney.

Reference: Fox Business (December 27, 2018) “What Happens to Your Debt When You Die?”

Suggested Key Terms: Estate Planning Lawyer, Wills, Community Property, Probate Court, Financial Planning, Probate Attorney, Intestacy

What Documents Do I Need When Someone Dies?

This is not a short list, and frankly, it isn’t riveting reading. However, if you have had a family member pass away, this is the information you and your estate planning attorney need to help settle the decedent’s final affairs. An even smarter approach would be to gather these materials before someone dies, but that doesn’t always happen. This useful article from The Balance, “Important Papers to Locate After Someone Dies,” will help, regardless of your family’s situation.

Asset Information:

  • Account statements, including bank accounts, investments, and retirement accounts.
  • Life insurance policies. You may be required to show the original documents.
  • Beneficiary designations. This could include payable on death accounts and transfer on death accounts.
  • Real estate deeds
  • Titles for cars and boats
  • Stock and bond certificates–if held in certificate forms.

Business Documents:

  • Corporate, LLC or partnership documents
  • Account statements
  • Contracts
  • Business licenses
  • Income tax returns

Contracts:

  • Pre- or post-nuptial agreements and amendments, if any
  • Loans
  • Leases

Bills:

  • Utilities, cell phone, credit card, storage unit bills
  • Property tax and mortgage bills
  • Lines of credit or any outstanding loans
  • Medical bills
  • Funeral bills

Estate Planning Documents:

  • Last will and testament, plus codicil(s), if any
  • Revocable living trust and amendment(s), if any
  • Legacy letter, if there is one

Tax Returns

  • Income tax returns – federal and state for the last three years
  • Gift tax returns -federal and state

Death Certificates

  • You’ll need to order several from the funeral home

In addition to these documents, locate the decedent’s Social Security card and Medicare or Medicaid information.

It is a lot of information to gather, especially during a time of grief. Some people find this process cathartic, as they work through years of documents. Others may require help from another family member or a professional from their estate planning attorney’s office.

Reference: The Balance (Jan. 1, 2019) “Important Papers to Locate After Someone Dies”

Suggested Key Terms: Account Statements, Last Will and Testament, Trusts, Life Insurance Policies, Beneficiary Designations. Deeds, Assets, Partnership Documents, Business Licenses, Real Estate Titles, Income Tax Returns, Death Certificate, Tax Returns, Gift Tax Returns

Thinking about Giving It All Away? Here’s What You Need to Know

There are some individuals who just aren’t interested in handing down their assets to the next generation when they die. Perhaps their children are so successful, they don’t need an inheritance. Or, according to the article “Giving your money away when you die: 10 questions to ask” from MarketWatch, they may be more interested in the kind of impact they can have on the lives of others.

If you haven’t thought about charitable giving or estate planning, these 10 questions should prompt some thought and discussion with family members:

Should you give money away now? Don’t give away money or assets you’ll need to pay your living expenses, unless you have what you need for retirement and any bumps that may come up along the way. There are no limits to the gifts you can make to a charity.

Do you have the right beneficiaries listed on retirement accounts and life insurance policies? If you want these assets to go to the right person or place, make sure the beneficiary names are correct. Note that there are rules, usually from the financial institution, about who can be a beneficiary—some require it be a person and do not permit the beneficiary to be an organization.

Who do you want making end-of-life decisions, and how much intervention do you want to prolong your life? A health care power of attorney and living will are used to express these wishes. Without these documents, your family may not know what you want. Healthcare providers won’t know and will have to make decisions based on law, and not your wishes.

Do you have a will or trust? Many Americans do not, and it creates stress, adds costs and creates real problems for their family members. Make an appointment with an estate planning attorney to put your wishes into a will.

Are you worried about federal estate taxes? Unless you are in the 1%, your chances of having to pay federal taxes are slim to none. However, if your will was created to address federal estate taxes from back in the days when it was a problem, you may have a strategy that no longer works. This is another reason to meet with your estate planning attorney.

Does your state have estate or inheritance taxes? This is more likely to be where your heirs need to come up with the money to pay taxes on your estate. A local estate planning attorney will be able to help you make a plan, so that your heirs will have the resources to pay these costs.

Should you keep your Roth IRA for an heir? Leaving a Roth IRA for an heir, could be a generous bequest. You may also want to encourage your heirs to start and fund Roth IRAs of their own, if they have earned income. Even small sums, over time, can grow to significant wealth.

Are you giving money to reputable charities? Make sure the organizations you are supporting, while you are alive or through your will, are using resources correctly. Good online sources include GuideStar.org or CharityNavigator.org.

Could you save more on taxes? Donating appreciated assets might help lower your taxes. Donating part or all your annual Required Minimum Distributions (RMDs) can do the same, as long as you are over 70½ years old.

Does your family know what your wishes are? To avoid any turmoil when you pass, talk with family members about what you want to happen when you are gone. Make sure they know where your estate planning documents are and what you want in the way of end-of-life care. Having a conversation about your legacy and what your hopes and dreams are for family members, can be eye-opening for the younger members of the family and give you some deep satisfaction.

Reference: MarketWatch (Oct. 30, 2018) “Giving your money away when you die: 10 questions to ask”

Suggested Key Terms: Estate Planning, Will, Charities, Heirs, Legacy, End of Life Wishes, Taxes, Charitable Giving

What Exactly is Long-Term Care Insurance?

Some people confuse Long-Term Care (LTC) with Long-Term Disability Insurance. The disability insurance coverage is designed to replace earned income in the event of a disability. Others think that LTC is a type of medical insurance.

nj.com’s recent article entitled “The benefits of long-term care insurance” explains that long-term care insurance isn’t meant to be disability income replacement, and it isn’t medical insurance. LTC insurance covers the varied personal needs of persons who are ill and (even temporarily) incapacitated. This includes feeding, clothing, bathing, and driving to appointments and doing the extra washing.

Some people consider LTC insurance as what was once called “Nursing Home Insurance.” This evolved to include either care at home or care in a rehab or nursing home facility.

Married couples are especially susceptible, when one spouse becomes ill or injured because the extra costs of long-term care can eat up all their savings and bankrupt the caregiver spouse. For that reason, those in their 50’s should start to look at LTC insurance for several reasons:

  1. Annual premiums are lower when acquired at younger ages; and
  2. Aging may bring health issues in the future, which may prohibit the opportunity to buy LTC insurance coverage altogether.

There are many ways to tailor LTC coverage to make it affordable. The most critical components of an LTC insurance policy include the following:

  • The average period of need for most is three years.
  • The daily amount of coverage varies by geographical area.
  • Home care should be the same as that for care in a facility.
  • The waiting period, which determines when the coverage actually starts after the date the incapacity began.
  • Married individuals can get a combined policy with a discount.
  • An inflation rider: The daily cost of coverage will naturally increase over time with inflation, selecting a rate of inflation will ensure keeping up with rising costs in the future.

Every family should have an open discussion about potential illness or incapacity of family members, and LTC should be a part of that.

Reference: nj.com (January 6, 2019) “The benefits of long-term care insurance”

Suggested Key Terms: Elder Law Attorney, Long-Term Care (LTC), Elder Care

How Do I Include Retirement Accounts in Estate Planning?

You probably made beneficiary designations for your retirement accounts when you opened them. Remember: who you designated can affect your overall estate planning objectives. Because of this, when including your retirement assets in your estate, ask yourself if anything has changed in your life since then that would affect their status as your beneficiaries, as well as how they’d receive the retirement assets.

Investopedia’s recent article, “Include Your Retirement Accounts in Your Estate,” gives us some things to consider in the New Year.

Beneficiary Designations. Review your beneficiary designations after major life changes. If you fail to make these designations, the funds will most likely go into your estate—a horrible outcome from a tax and planning perspective. If your estate is named a beneficiary, your heirs must wait until probate is finished to access your retirement accounts. It is usually better to name an individual or a trust as your beneficiary.

Protecting Retirement Funds With a Trust. Another option is to include a trust in your estate planning, instead of giving your retirement funds directly to named individuals. This allows you more control over the distribution, while protecting your heirs from additional paperwork and taxes. Trust distributions keep a beneficiary from accessing and spending their inheritance all at once. It’s also a good idea if your beneficiaries include minor children who shouldn’t have direct access to the money until they are adults. Be sure to consult with an estate planning attorney, because there are tax and other complexities associated with designating a trust as beneficiary.

Required Minimum Distributions (RMDs). Your retirement plans have rules about when you are required to start taking distributions. For 401(k) accounts, you are required to start taking RMDs at age 70½. However, if you die and leave retirement plans and accounts to your heirs, these rules apply to them instead. A spousal beneficiary can roll over your retirement funds tax-free into their retirement plan and make their own distribution choices. However, other beneficiaries don’t have the same option. Tax treatment and distribution options vary, depending on who is receiving your retirement assets.

Tax Considerations. The biggest worry you need to address when designating retirement accounts as part of your estate plan, is how they’ll be taxed. Consider how to withdraw from these accounts while you’re alive and how to minimize tax consequences after you’ve passed.

Work with an estate planning attorney who has a strong understanding of retirement accounts and the tax and legal requirements of estate planning. That way you can be certain your retirement assets are distributed to the proper beneficiaries with the least tax liability.

Reference: Investopedia (August 27, 2018) “Include Your Retirement Accounts in Your Estate”

Suggested Key Terms: Estate Planning, Trust, Required Minimum Distributions, Tax Planning, Financial Planning

To-do List for 2019 Should Include These Documents

Don’t wait until you are under pressure, to create these safeguards.

If you don’t have documents that protect you, your family and your assets, you should consider doing yourself a favor and putting them on your list to accomplish in 2019, according to Fox Business in “3 financial documents everyone needs”

A Will. The essential function of a will is to ensure that your wishes are carried out, when you are no longer alive. It’s not just for rich people. Everyone should have a will. It can include everything from your financial assets to life insurance, family heirlooms, artwork and any real estate property.

A will can also be used to protect your business, provide for charities and ensure lifelong care for your pets.

If you have children, a will is especially important. Your will is used to name a guardian for your minor children. Otherwise, the state will decide who should rear your children.

Your will is also used to name your executor. That is the person who has the legal responsibility for making sure your financial obligations are honored. Without an executor, the state will appoint a person to handle those tasks.

A Trust. This one isn’t mentioned by Fox Business, but if you live here in California and own your home (even if there is still a mortgage on it), you need a revocable living trust. This is because in California, our probate process, which is the court administration of the estate of someone who doesn’t have a trust, is very lengthy, time-consuming, and expensive.

An Advanced Medical Directive. What would happen if you became ill or injured and could not make medical decisions for yourself? An advanced medical directive and health care proxy are the documents you need to assign the people you want to make decisions on your behalf. The advanced medical directive, also called a living will, explains your wishes for care. The healthcare proxy appoints a person to make healthcare decisions for you. As long as you have legal capacity, these documents aren’t used, but once they are needed, you and your family will be glad they are in place.

A Durable Power of Attorney. This document is used to name someone who will make financial decisions, if you are not able to do so. Be careful to name a person you trust implicitly to make good decisions on your behalf. That may be a family member, an adult child or an attorney.

Once you’ve had these documents prepared as part of your estate plan, you’re not done. These documents need to be reviewed and updated every now and then. Life changes, laws change, and what was a great tax strategy at one point may not be effective, if there’s a change to the law. Your estate planning attorney will help create and update your estate plan.

Reference: Fox Business (Dec. 19, 2018) “3 financial documents everyone needs”

Seconds to Leave Your Home? What Do You Take?

A “go-bag” can protect your family, until you can head home again.

With the recent wildfires affecting Ventura County, you never know when an emergency will arise that causes the evacuation of your home. If that should happen, do you have a “go-bag” that will protect your family until life returns to normal. If not, then you should have, according to The Union in “The most important ‘go bag’ item for emergencies is only 2 inches long.”

A “go-bag” protects your family with credit cards, cash, flashlights, flares, batteries, warm clothes, prescriptions and other necessities, is just one part of being prepared. That’s your “financial go bag.” It won’t feed you or keep you warm, but it will save you countless hours and headaches, when life returns to normal.

Here’s what you need to know:

  1. Gather all your important documents. That means your driver’s license, passport, birth certificate, social security card and Medicare card. If you own your home, you should include deeds to property and titles to cars, as well as insurance policy summaries for home, auto, medical, long term care, life, or umbrella policies. Include statements for checking, savings, investments, debt accounts with account numbers and federal and state tax returns from the last three years. Add estate planning documents (if you’re a client of ours, simply grab the USB drive we provide with instead of the physical documents themselves – much easier!). If you have a pet, include their license information, chip ID and vaccine records. If there is an 800 number for a service that can track your pet, make sure to include that.
  2. Create a physical list of important phone numbers and addresses for family members, professionals including your estate planning attorney, CPA, financial advisor, dentist, doctors and emergency contacts. Print it out and put it in your go bag. If you don’t have any power, your list on the phone will not be accessible.
  3. Create a video inventory of your home, including the contents of dressers, drawers, cupboards, collections. Don’t forget the garage and outdoor landscaping.
  4. Scan all this information and store it on two thumb drives (also known as memory sticks). Protect the information by using an encryption method to secure it in case it gets lost.
  5. Put one of these thumb drives into your safe deposit box and another in your go bag. Even a fireproof safe won’t survive a massive wildfire, so don’t put it in a safe in or under your house. Put the go bag somewhere near an exit point, where it blends in and is secure.
  6. Tell your family and closest friends that you have a financial go bag and where it can be found.

Reference: The Union (Dec. 23, 2018) “The most important ‘go bag’ item for emergencies is only 2 inches long”

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