‘When’ play Major role in Retirement

April 19, 2023

When do you plan to retire? When will you take Social Security? When must you start withdrawing money from your retirement savings? “When” plays a major role in retirement, says Kiplinger’s recent article entitled, “In Retirement, Many Crucial Questions Start With the Word ‘When’.” That’s because so many financial decisions related to retirement are much more dependent on timing than on the long-term performance of an investment.

Too many people approaching retirement — or are already there — don’t adjust how they think about investing to account for timing’s critical role. “When” plays a major role in the new strategy. Let’s look at a few reasons why:

Required Minimum Distributions (RMDs). Many people use traditional IRAs or 401(k) accounts to save for retirement. These are tax-deferred accounts, meaning you don’t pay taxes on the income you put into the accounts each year. However, you’ll pay income tax when you begin withdrawing money in retirement. When you reach age 73, the federal government requires you to withdraw a certain percentage each year, whether you need the money or not. A way to avoid RMDs is to start converting your tax-deferred accounts to a Roth account way before you reach 73. You pay taxes when you make the conversion. However, your money then grows tax-free, and there is no requirement about how much you withdraw or when.

Using Different Types of Assets. In retirement, your focus needs to be on how to best use your assets, not just how they’re invested. For example, one option might be to save the Roth for last, so that it has more time to grow tax-free money for you. However, in determining what order you should tap your retirement funds, much of your decision depends on your situation.

Claiming Social Security. On average, Social Security makes up 30% of a retiree’s income. When you claim your Social Security affects how big those monthly checks are. You can start drawing money from Social Security as early as age 62. However, your rate is reduced for the rest of your life. If you delay until your full retirement age, there’s no limit to how much you can make. If you wait to claim your benefit past your full retirement age, your benefit will continue to grow until you hit 70.

Wealth Transfer. If you plan to leave something to your heirs and want to limit their taxes on that inheritance as much as possible, then “when” can come into play again. For instance, using the annual gift tax exclusion, you could give your beneficiaries some of their inheritance before you die. In 2023, you can give up to $17,000 to each individual without the gift being taxable. A married couple can give $17,000 each.

Take the time to discuss your retirement goals with your estate planning attorney. He or she will help you understand how the “when” in your planning plays a major role in retirement. If you would like to learn more about retirement planning, please visit our previous posts.

Reference: Kiplinger (March 15, 2023) “In Retirement, Many Crucial Questions Start With the Word ‘When’”

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Asset Protection Trusts can address Long Term Care

April 5, 2023

Asset protection trusts can address long term care costs. As the number of people aged 65 plus continues to increase, more seniors realize they must address the cost of long-term health care, which can quickly devour assets intended for retirement or inheritances. Those who can prepare in advance do well to consider asset protection trusts, says the article “Asset protection is major concern of aging population” from The News Enterprise.

Asset protection trusts are irrevocable trusts in which another person manages the trust property and the person who created the trust—the grantor—is not entitled to the principal within the trust. There are several different types of irrevocable trusts used to protect assets. Still, one of the more frequently used irrevocable trusts for the purpose of protecting the grantor’s assets is the Intentionally Defective Grantor Trust, called IDGT for short.

As a side note, Revocable Living Trusts are completely different from Irrevocable Trusts and do not provide asset protection to grantors. Grantors placing their property into Revocable Living Trusts maintain the full right to control the property and use it for their own benefit, meaning any assets in the trust are not protected during the grantor’s lifetime.

IDGTs are irrevocable, and grantors have no right to principal and may not serve as a trustee, further limiting the grantors’ access to the property in the trust. Grantors may, however, receive any income from trust-owned property, such as rental properties or investment accounts.

During the grantor’s lifetime, any trust income is taxed at the grantor’s tax bracket rather than at the much higher trust tax bracket. Upon the grantor’s death, beneficiaries receive appreciated property at a stepped-up tax basis, avoiding a hefty capital gains tax.

While the term “irrevocable” makes some people nervous, most IDGTs have built-in flexibility and protections for grantors. One provision commonly included is a Testamentary Power of Appointment, which allows the grantor to change beneficiary designations.

IDGTs also include clauses providing for the grantors’ exclusive right to reside in the primary residence. However, if the grantor needs to change residences, the trustee may buy and sell property within the trust as needed.

IDGTs provide for two different types of beneficiaries: lifetime and after-death beneficiaries. Lifetime beneficiaries are those who will receive shares of the total estate upon the death of the grantor. Lifetime beneficiary provisions are important because they allow the grantor to make gifts from the trust principal. Hence, there is always at least one person who can receive the trust principal if need be.

Asset protection trusts are complicated and require the help of an experienced estate planning attorney. However, when used properly, asset protection trusts can address unanticipated creditors, long-term care costs and even unintended tax liabilities. If you would like to learn more about asset protection, please visit our previous posts.

Reference: The News Enterprise (March 4, 2023) “Asset protection is major concern of aging population”

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New changes to 529 Plans provide more Options

April 3, 2023

There are new changes to 529 plans that will provide more options to families. Forbes’ recent article titled “529 Plans Just Became More Flexible: Here’s Everything You Need To Know” explains that the Secure Act 2.0 changed 529 savings plans, which will make the funds easier to use when college expenses aren’t as high as planned. In addition, the law allows families to roll over up to $35,000 from a 529 plan to an IRA. However, the changes do not become permanent until 2024.

After 15 years in the plan, unused funds up to $35,000 can be rolled into a Roth IRA to save for retirement, subject to the annual IRA contribution limit. There’s also no penalty for using this money for IRA contributions instead of college expenses. Previously, a 10% penalty would have applied to the growth if funds were withdrawn for non-qualifying expenses.

There’s a 15-year waiting period, which might affect the benefit many people can get from this change. Therefore, you cannot open a 529 plan now, fund it and start moving money immediately. You have to wait at least 15 years.

The money transferred to an IRA goes to the account’s beneficiary or the student, not the account owner.

529 plan rules are created on the state level for each plan. Therefore, while federal law now allows529 plans to roll over to IRAs, your state may not conform to these rules. Currently, the 529 to IRA rollover is considered a “rollover” for tax purposes, and most states consider outbound rollovers taxable events. Therefore, states will need to update their state tax laws to conform with this new federal rule. Check your state’s law as well before you proceed with a rollover.

If you use up all the money for college, that’s super. However, if you don’t, you can transfer some money to your beneficiary’s IRA based on annual limits, until you reach the $35,000 cap. These new changes to 529 plans provide more options for families worried about saving too much money and like the idea of funneling that cash into their child’s retirement accounts instead. If you would like to learn more about college savings plans, please visit our previous posts.

Reference: Forbes (Feb. 20, 2023) “529 Plans Just Became More Flexible: Here’s Everything You Need To Know”

Trust can be Designed to be Millennial Friendly

March 22, 2023

If your named beneficiaries are Millennials—born between 1981-1996—you may want to consider three essential points about your trusts, as explained in the recent article “Trusts For Your Millennial Beneficiaries” from The Street. They’re different from their parents and grandparents, and disregarding these differences is a missed opportunity. Your trust can be designed to be Millennial friendly.

This generation’s distinguishing characteristics and traits include:

Valuing relations with superiors with a passion for learning and growth.
Desire to live a life with meaning and make a positive impact on the world and causes.
Creative and free thinking, looking for outside-the-box solutions and opportunities.

If your estate plan benefits Gen Y, some trust features recommended for Millennials may not be optimal for them. They’re different than their older Millennial counterparts.

Have your beneficiary serve as a co-trustee of their trust alongside an experienced advisor. Millennials appreciate the opportunity to ask for advice from a trusted advisor, secure positive reinforcement and get constructive feedback. Many heirs set to come into money are likely to work with an advisor once they inherit. For them, a co-trustee arrangement could be perfect. Consider naming a family member or friend with a background in finance as their co-trustee or naming a corporate trustee.

Consider giving your beneficiary a limited testamentary power of appointment to support their favorite charity. Millennials want to make a positive impact on the world, and there’s a trust feature you can build into a trust to support this goal: a limited testamentary power of appointment. In broad strokes, this gives the trust beneficiary the power to redirect where assets go upon their death. If the scope of power permits, they could redirect assets to charitable organizations of their choice.

Most people design trusts to last for the beneficiary’s lifetime and then structure the trust so assets remaining at their death will pass in trust to their children in equal shares. Trusts can also be created to change the distribution percentages between recipients. For instance, instead of a 50-50 split, the trust can redirect shares of 70-30 to better accomplish their personal objectives. You can also provide for new beneficiaries, like charities, if they weren’t part of the original trust.

Powers of appointment can be complicated and making them overly broad can have serious and adverse tax consequences. Therefore, speak with your estate planning attorney to make sure the scope of power is clear and properly designed.

Broadly define the standards for which distributions can be made to your beneficiary. Millennials think differently, so the commonly used trust distribution standards of health, education, maintenance and support (“HEMS”) may stop them from being able to tap into trust funds for philanthropic or entrepreneurial efforts. The HEMS standard only allows for distributions generally for purposes to align with the beneficiary’s current standard of living. If you want beneficiaries to be able to do more, they need to be given the ability to do so.

Another way to accomplish this is to allow a disinterested trustee (someone who is not a beneficiary) an expansive distribution authority. Having the ability to make a distribution of trust funds to your beneficiary for any purpose can be a little unsettling. However, naming a disinterested trustee you trust will ensure that funds are distributed responsibly.

Leaving assets in trust for beneficiaries can be part of an effective estate plan supporting planning goals and your loved one’s future. However, if the trust’s structure doesn’t meet their unique needs and talents, then their potential may be dimmed. Talk with your estate planning attorney about how a trust can designed to be Millennial friendly. If you would like to learn more about trusts and wills for younger adults, please visit our previous posts.

Reference: The Street (Feb. 24, 2023) “Trusts For Your Millennial Beneficiaries”

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How to Avoid Common IRA Errors

March 15, 2023

To help you sidestep some of the most common blunders and get the most out of your IRA investments, Kiplinger’s recent article entitled “Don’t Make These Common IRA Mistakes” points out how to avoid the most common IRA errors.

Not Planning for the “Second Half”. It’s really about two halves. You accumulate wealth in the first half and withdraw it in the second. Many people only play the first half of the game: they focus only on saving as much as possible in their IRA account. However, with retirement saving, it’s not how much you have. It’s how much you can keep after taxes.

Converting to a Roth All at Once. If you think your tax rate will be higher when you retire than it is right now, converting a traditional IRA to a Roth IRA this year might be smart. In the end, the total tax you owe on those funds may be lower by taking that step. However, a Roth conversion has a tax bill on your next return. The “mistake” those people sometimes make is thinking they have to convert the entire account at once. Instead, you can do partial conversions.

Exceeding Roth IRA Income Limits. There are annual contributions limits for both traditional IRAs and Roth IRAs. However, for Roth IRAs only, there are also income limits. If you’re single, the amount you can contribute to a Roth IRA account in 2022 is gradually reduced to zero, if your modified adjusted gross income is between $129,000 and $144,000 ($204,000 to $214,000 for joint filers).

Doing Indirect Rollovers. Many people have trouble when they attempt to move money from one retirement account to another. If you take money out of an IRA account and the check is in your name, you only have 60 days to roll that money over into another retirement account before the withdrawn funds are deemed taxable income. This is an indirect rollover. For IRA-to-IRA transfers, you can only do one indirect rollover per year.

Forgetting to Account for All RMDs. You must start taking required minimum distributions (RMDs) when you reach 72. Some people miss an RMD or don’t take it for all of their accounts subject to the RMD rules. Other people miscalculate and don’t withdraw enough money. These can be costly mistakes, because you could be hit with a stiff penalty for violating the RMD rules.

These are simply the most common IRA errors to avoid, but there can be additional issues that you need to be aware of. Take the time out to consult with your financial advisor and your estate planning attorney to make sure you are covered. If you would like to learn more about retirement accounts, please visit our previous posts.

Reference: Kiplinger (July 25, 2022) “Don’t Make These Common IRA Mistakes”

Consider Annuities in your Estate Planning

March 2, 2023

Many people have annuities tied to their retirement accounts. It might be wise to consider annuities in your estate planning. Annuities are contracts between you and an insurance company, which is unlike retirement investment accounts like 401(k)s or individual retirement accounts (IRAs).

Forbes’ recent article entitled “What Is An Annuity Beneficiary?” explains that, with an annuity, you make a lump sum payment or a series of payments over a set period to the insurance company. In exchange, the insurance company will pay out a stream of income in retirement or at a predetermined future date, depending on the type of annuity purchased.

There are a number of benefits to annuities, such as a predictable income in retirement, tax-deferred growth and a death benefit if you pass away. There are several different types of annuities, but they can be grouped into three main categories:

Fixed annuity. If you buy a fixed annuity, the insurance company will pay you a minimum rate of interest and a fixed amount of periodic payments. These are the safest type of annuity because you know the minimum you’ll earn.
Indexed annuity. This combines features of annuities and investment securities. The insurance company’s payments are based on the performance of a stock market index, such as the S&P 500. When the index performs well, the value of the indexed annuity increases. However, it can also decline along with the index’s performance.
Variable annuity. With this type of annuity, you can use your annuity payments for investment products, like mutual funds. Your payout is based on the performance of how much you invest and the rate of return on those securities. These annuities can be risky. However, they have the potential for higher returns.

Whoever signs an annuity contract is considered the owner, who selects the way the annuity will be funded, how payouts will be made and the recipient of the payouts. They also name beneficiaries, control withdrawals and have the power to cancel the contract. An “annuitant” is the person who gets income payments from an annuity contract.

Some annuities have death-benefit provisions, so you can name someone to inherit the remaining annuity payments if you die before it’s been fully paid. The designated recipient of that benefit is known as the annuity beneficiary.

The death benefit of an annuity is typically the remaining contract value or the amount of premiums, minus any withdrawals, upon the annuity holder’s death. Discuss with your estate planning attorney whether or not you should consider annuities as part of your estate planning strategy. If you would like to learn more about annuities and how they work, please visit our previous posts.

Reference: Forbes (Jan. 19, 2023) “What Is An Annuity Beneficiary?”

Naming a Secondary Beneficiary is critical

February 10, 2023

Naming a secondary beneficiary is critical to ensuring your assets go where you want them. A secondary beneficiary, sometimes called a contingent beneficiary, is a person or entity entitled to receive assets from an estate or trust after the estate owner’s death, if the primary beneficiary is unable or unwilling to accept the assets. Secondary beneficiaries can be relatives or other people, but they can also be trusts, charities or other organizations, as explained in the recent article titled “What You Need to Know About Secondary or Contingent Beneficiaries” from yahoo! life.

An estate planning lawyer can help you decide whether you need a secondary beneficiary for your estate plan or for any trusts you create. Chances are, you do.

Beneficiaries are commonly named in wills and trust documents. They are also used in life insurance policies and in retirement accounts. After the account owner dies, the assets are distributed to beneficiaries as described in the legal documents.

The primary beneficiary is a person or entity with the first claim to assets. However, there are times when the primary beneficiary does not accept the assets, can’t be located, or has predeceased the estate owner.

A secondary beneficiary will receive the assets in this situation. They are also referred to as the “remainderman.”

In many cases, more than one contingent beneficiary is named. Multiple secondary beneficiaries might be entitled to receive a certain percentage of the value of the entire estate. More than one secondary beneficiary may also be directed to receive a portion of an individual asset, such as a family home.

Estate planning attorneys may even name an additional set of beneficiaries, usually referred to as tertiary beneficiaries. They receive assets if the secondary beneficiaries are not available or unwilling to accept the assets. In some cases, estate planning attorneys name a remote contingent beneficiary who will only become involved if all of the primary, secondary and other beneficiaries can’t or won’t accept assets.

For example, a person may specify their spouse as the primary beneficiary and children as secondary beneficiaries. A more remote relative, like a cousin, might be named as a tertiary beneficiary, while a charity could be named as a remote contingent beneficiary.

Almost any asset can be bequeathed by naming beneficiaries. This includes assets like real estate (in some states), IRAs and other retirement accounts, life insurance proceeds, annuities, securities, cash and other assets. Secondary and other types of beneficiaries can also be designated to receive personal property including vehicles, jewelry and family heirlooms.

Naming a secondary beneficiary is critical to ensuring that your wishes as expressed in your will are going to be carried out even if the primary beneficiary cannot or does not wish to accept the inheritance. Lacking a secondary beneficiary, the estate assets will have to go through the probate process. Depending on the state’s laws, having a secondary beneficiary avoids having the estate distribution governed by intestate succession. Assets could go to someone who you don’t want to inherit them!

Talk with your estate planning attorney about naming secondary, tertiary and remote beneficiaries. If you would like to learn more about beneficiaries, please visit our previous posts.

Reference: yahoo! life (Jan. 4, 2023) “What You Need to Know About Secondary or Contingent Beneficiaries”

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Ideas to improve Business Succession Planning

February 9, 2023

Winter is a slower season for farmers and ranchers. It offers family business leaders time to plan for the future. A recent article from Progressive Farmer, “Family Business Matters: Eight Practical Succession Ideas,” lists ideas to improve business succession and estate planning efforts.

Update balance sheets. Families who own land passed through generations don’t always like to show the land at its current fair market value. Even if you intend to never sell the land, creating an estate plan requires an accurate valuation of all assets to minimize the consequences of estate and income taxes.

Chart ownership for the future. Family members often have no understanding of how they will achieve ownership of the business and its assets. Will it be a gift? Will there be taxes to pay? Or will it be a sale? Will they need to buy out non-farming family members? Without clear answers to these and related questions, people may find themselves operating on assumptions, which almost always leads to conflict or family fractures.

Start handing off management tasks sooner, not later. Plan for the transition by starting with discrete business functions. This could be as straightforward as making decisions about equipment, purchasing crop insurance, or enrolling in a Farm Service Agency. This gives the senior generation the ability to delegate and observe, while empowering and more fully engaging the next generation.

Refresh estate planning documents. People often neglect to update estate documents. Review wills, trusts, trustees, beneficiary designations, advance medical directives and power of attorney documents. Are the people named in various roles still appropriate? Does your estate still work, in light of changing tax laws? This should happen at least every three to five years.

Assess tax consequences of exiting the business. Part of retirement funding is the tax liability of leaving the family business. Deferred income, prepaid expenses and fully depreciated equipment can lead to significant tax exposure. Three to five years ahead of your departure, start mapping out a plan with your accountant, estate planning attorney and financial advisor.

Create a relationship between family members and landowners. If you rent property from an absentee landowner, those relationships will be vital to continuing the business. You may not be able to influence the landowner at the time of transition to the next generation. However, establishing relationships with family members who will take over for you can reduce friction.

Communicate the benefits family members will get from working together to maintain the business. Passing land from one generation to the next often means siblings or cousins become business partners, with undivided interests in the land or as shareholders or members of some legal entity. Family members who may not get along will benefit from having a “buy-sell agreement” in place. This spells out how partners can buy out each other’s interest if one or more family members want to sell. Talk with your estate planning attorney to establish an agreement in advance of anyone leaving the business to reduce the potential of family conflict.

These are just a few ideas to improve business succession planning. Discuss your goals with your family and your estate planning attorney so a solid plan is in place. If you are interested in reading more about succession planning, please visit our previous posts.

Reference: Progressive Farmer (Jan. 1, 2023) “Family Business Matters: Eight Practical Succession Ideas”

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Prevent some Common Beneficiary Errors

January 19, 2023

Planning for one’s eventual death can be a somber task. However, consider what would occur if you failed to plan: loved ones trying to figure out your intentions, a long and expensive legal battle with unintended heirs and instead of grieving your loss, wondering why you didn’t take care of business while you were living. Planning suddenly becomes far more appealing, doesn’t it? There are ways to prevent some common beneficiary errors.

A recent article from yahoo! finance, “5 Retirement Plan Beneficiary Mistakes to Avoid,” explains how to avoid some of the issues regarding beneficiaries.

You haven’t named a beneficiary for your retirement accounts. This is a common estate planning mistake, even though it seems so obvious. A beneficiary can be a person, a charity, a trust, or your estate. Your estate planning attorney will be able to help you identify likely beneficiaries and ensure they are eligible.

You forgot to review your beneficiary designations for many years. Most people have changes in relationships as they move through the stages of life. The same person who was your best friend in your twenties might not even be in your life in your sixties. However, if you don’t check on beneficiary designations on a regular basis, you may be leaving your retirement accounts to people who haven’t heard from you in decades and disinheriting loved ones. Every time you update your estate plan, which should be every three to five years, check your beneficiary designations.

You didn’t name your spouse as a primary beneficiary for a retirement account. When Congress passed the 2019 SECURE Act, the bill removed a provision allowing non-spousal beneficiaries to stretch out disbursements from IRAs over their lifetimes, also known as the “Stretch IRA.” A non-spouse beneficiary must empty any inherited IRA within ten years from the death of the account holder. If a minor child is the beneficiary, once they reach the age of legal majority, they are required to follow the rules of a Required Minimum Distribution. Having a spouse named as beneficiary allows them to move the inherited IRA funds into their own IRA and take out assets as they wish.

You named an estate as a beneficiary. You can name your estate as a beneficiary. However, it creates a significant tangle for the family who has to set things right. For instance, if you have any debt, your estate could be attached by creditors. Your estate may also go through probate court, a court-supervised process to validate your will, have your final assets identified and have debts paid before any remaining assets are distributed to heirs.

You didn’t create a retirement plan until late in your career. Retirement seems very far away during your twenties, thirties and even forties. However, the years pass and suddenly you’re looking at retirement without enough money set aside. Creating an estate plan early in your working life shifts your focus, so you understand how important it is to have a retirement plan.

An experienced estate planning attorney can help you prevent some common beneficiary errors as part of your overall estate plan. The best time to start? How about today? If you would like to learn more about beneficiary designations, please visit our previous posts.

Reference: yahoo! finance (Dec. 19, 2022) “5 Retirement Plan Beneficiary Mistakes to Avoid”

SECURE 2.0 Act has New Features

January 18, 2023

SECURE 2.0 Act of 2022 is an extension of the original SECURE Act, which was enacted in 2019, reports Forbes’ recent article, entitled “SECURE 2.0 Passes—Here’s What It Means To Your Retirement.” An American Retirement Association press release notes the Secure 2.0 Act has new features including:

A Starter 401(k)—that could provide more than 19 million new American workers with access to the workplace-based retirement system through a brand new super simple, safe harbor 401(k) plan
A 100% tax credit for new plans to incentivize the creation of new workplace retirement programs by small businesses; and
A Saver’s Match Program that would incentivize retirement savings by giving a 50% match on up to $2,000 in retirement savings annually for lower- and middle-income Americans.

About 108 million Americans would be eligible for the Saver’s Match that would be directly deposited into their retirement account—upping the savings of moderate-income earners.

“We are grateful to the many members of Congress and staff who worked tirelessly to get SECURE 2.0 included in the omnibus legislation enacted this week,” noted Brian Graff, CEO of the American Retirement Association in Washington, DC.

“This important legislation will enhance the retirement security of tens of millions of American workers—and for many of them, give them the opportunity for the first time to begin saving.”

The Pension Protection Act of 2006 first introduced the concept of automatic 401(k) enrollment. This shifted the then-current 401(k) practice of requiring workers to opt-in before being allowed to participate in their company’s 401(k) plan to requiring them to opt-out only if they did not want to participate.

The new legislation now has a number of provisions meant to encourage companies to create retirement savings plans for their workers.

For older workers who find themselves behind in their savings, SECURE 2.0 grants them higher “catch-up” provisions. The new features in the Secure 2.0 Act may be a benefit to you or your loved ones. If you would like to learn more about the SECURE Act, please visit our previous posts.

Reference: Forbes (Dec. 23, 2022) “SECURE 2.0 Passes—Here’s What It Means To Your Retirement”

Category: Retirement Planning

Asset Protection Trusts can address Long Term Care

New changes to 529 Plans provide more Options

Trust can be Designed to be Millennial Friendly

How to Avoid Common IRA Errors

Consider Annuities in your Estate Planning

Naming a Secondary Beneficiary is critical

Ideas to improve Business Succession Planning

Prevent some Common Beneficiary Errors

SECURE 2.0 Act has New Features

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