The Silver Tsunami Silver Lining, Pt 2: It\’s Never Too Late
Last week’s article described The Silver Tsunami and found Grandma Jen in a funky situation: she had become the guardian of 2 girls, Taylor, and Michelle, with insufficient resources left by their parents. This week’s article discusses Jen\’s alternatives. ONE. Jen needs to make sure that she has solid plans in place to provide for herself because if she’s not doing well Taylor and Michelle probably won’t either. These circumstances and Jen’s age, 52, require an estate plan that includes the requisite powers of attorney and a revocable living trust, naming a successor trustee who could step into her shoes were she to become incapacitated. That successor trustee, who should also be Jen\’s property power of attorney agent, should be working with a highly qualified financial planner and CPA, to ensure Jen’s financial needs are met. Under her trust, she should have at least 2 subtrusts, perhaps more, for the children, leaving Jen as Trustee and designating the financial advisor as a successor co-trustee and a trusted friend who would act as a successor co-trustee and successor guardian of the estates of the 2 children. The trust and powers of attorney would help considerably. Yet, additional questions she must consider are complex with serious implications: Who should determine how much of her income should be spent on her care – the trustee, the agent under her property power of attorney, or the agent under her healthcare power of attorney? What if there is not enough to fund Jen’s long-term care and college education for both girls? TWO. Let’s just say that Jen is a healthy, strong, and vibrant 52. She’s also at the younger end of the Boomer generation with at least 13 – 15 years of earning potential left. Thus she must make the best of it. Since estate and financial planning overlap and yours truly works with a number of financial and tax professionals, a financial professional would likely tell Jen to max out her retirement plan contributions, defer taking Social Security until the payout is 100%, and be mindful of the resources needed for Taylor and Michelle for at least 7-9 years after Jen’s retirement. This is also where retirement withdrawal strategies come into play. Let’s also say Jen stays healthy, retires comfortably, the girls graduate college but one flies back to the nest for an indeterminate period, an “Echo Birdie.” Now, in retirement, Jen has an extra adult to feed and shelter, which means she is again incurring additional daily expenses. What would happen if Taylor became seriously ill or injured? Has she done even nominal planning to safeguard her grandmother’s resources? Does Jen have insurance on Taylor? Thus while Jen and her late husband had an estate plan, Chris and Chaz didn’t, which isn’t surprising because 70% of all Americans, including Baby Boomers, haven’t planned or planned adequately for regular situations, not to mention the Silver Tsunami. This is just yet one more example of why estate planning is critical for the 99%rs. For recent information relevant to Baby Boomers, visit our Facebook page. The Silver Tsunami Silver Lining, Pt 1 | The Silver Tsunami Silver Lining, Pt 2
The Silver Tsunami Silver Lining, Pt 1: Minimizing the Wave
Recently, I shared a lovely dinner with a few friends and clients over a discussion about the “Silver Tsunami,” a phrase I’m sure you’ve heard bandied about over the last year of so. Still, just what is this “Silver Tsunami”? The “Silver” is related to the number of Baby Boomers, those of us born in 1946 through 1964, reaching retirement age daily. There’s a whopping 10,000 of us looking at 65 every day and that number isn’t decreasing for at least 10 years. The Silver Tsunami is the combined effect of factors caused by retiring Baby Boomers, the largest concentration of individuals reaching retirement age in U.S. history. The effects involve what happens when millions of people suddenly stop earning what they used to, are staring at potentially a longer lifespan than anyone anticipated, and because of the Great Recession or other factors may have or become non-spousal or partner dependents. But there is a silver lining to the Silver Tsunami and, given the current state of affairs of our government, this information is even more critical for Boomers and their children and parents. Most of us have dependents – minor children, grandchildren, very close nieces, nephews, or even very close minor children of dear friends. If we don’t, we probably have adult dependents. If we don’t have either, we just need to give it about 10 years or so. The point is the dependent wave is the precursor to the tsunami but this wave requires relatively simple preparation to ensure that it doesn’t morph into a tsunami. Chris and Charles’ story helps make the point: Chris and Charles decide to take a vacation without the children, Taylor and Michelle. Chris’s sister, Sarah, usually watches the kids but is working on a major project for her boss during their vacation, so Charles’s brother, James is watching them. The kids love James and he loves them, too, often lavishing them with Cheetohs, fruit punch, and snickers…for breakfast. Chris and Charles are driving along and POW! Pileup! Both sustain injuries that will require 6 months or more of surgeries and then therapy. So who’s going to care for the kids? Who will pay the mortgage? No one knows because Chris and Charles are both incapacitated and they failed to plan adequately. What could they have done to ensure the kids were cared for and the mortgage was paid while they were both unable to work? They could have had solid property powers of attorney, which would allow the right person – probably Sarah – to step into their shoes and help ensure their financial stability. In this case as in many, a property power of attorney isn\’t about helping someone out until death; it\’s about protecting what they\’ve got until they can get back on their very much alive feet. What about the money, though? Neither one will be working for at least 3 months. Any financial advisor worth his or her salt will tell you that’s why you must save at least 6 months of emergency living expenses while you’re also socking away your retirement. But let’s just say the money is there. What we don’t want is someone running away with the money, which is why choosing a trustworthy power of attorney agent is critical. What if there were no siblings but only Chris’ parents left to care for the kids? Then the waves may come crashing down on the children and definitely on the parents’ retirement goals. A recent study indicates that approximately 2/3 of Baby Boomers are unsure about their retirement resources. If Chris and Charles were only survived by the girls and Chris’ parents – Rob and Jen, then Rob and Jen were, of course, going to care for Taylor and Michelle. However, that loving obligation could surely cause waves to crash against the retirement shores. Since estate planners love killing folks off to get our points across, for purposes of our story, let’s just say that Rob didn’t last long after Chris and Charles, so only Jen – age 52, Taylor age 6, and Michelle age 8 survive. Rob left Jen comfortable, but Chris and Charles, as mentioned earlier, had not planned adequately. They did what most young couples do, bought reciprocal life insurance policies with a death benefit of $50,000.00 each, naming Taylor and Michelle as contingent beneficiaries. At the time of their deaths, the projected cost of a college education for one child at Taylor’s age was $180,000.00 and the cost to raise one child to 18 years of age, $215,000.00. Accordingly Grandma Jen would need an additional $500,000.00 to see the girls through college. That\’s a tsunami headache. What can she do? The Silver Tsunami Silver Lining, Pt 1 | The Silver Tsunami Silver Lining, Pt 2
Wealth Preservation: When Your Pocket Shouldn’t Be the Payroll
People often confuse estate planning with wealth preservation, aka “asset protection.” The confusion is understandable for 2 reasons. First, estate planning and wealth preservation have overlapping areas and considerations. Second, and probably the most popular reason is that legalese is confusing when it refers to almost everything. Estate planning, while it involves planning for asset maintenance during your lifetime, that planning typically addresses emergencies. Accordingly, the documents needed are powers of attorney and medical release forms. Some trusts may also assist in asset maintenance, such as Qualified Personal Residence Trusts (QPRTs) and even revocable living trusts that provide income during the life of the beneficiary/trustee. However, estate plans generally address the transfer of assets to loved ones upon death. Wealth preservation, conversely, addresses the issue of keeping and enjoying the fruits of your labor during your lifetime and, most importantly, keeping it out of the reach of others. Many individuals think that the big other is Uncle Sam. The contrary is true. Most lawyers who prepare wealth preservation plans repel the idea of tax evasion; it’s against the law. Do we use the law to help minimize tax burdens? Yes. But the operative phrase is “use the law” not evade the law. Thus, we only work with clients who are willing to comply with tax laws and if potential clients don’t like the sound of that, those of us who want to keep our licenses, gently tell those potential clients to seek counsel elsewhere. The “others” we really want to keep away from your “fruits” are menacing, frivolous plaintiffs. These plaintiffs are individuals who believe that because you work in a particular profession, that they should be on payroll even though they don’t deserve a penny of your earnings. Usually, the clients who confront menacing plaintiffs are either business owner or those in “high risk professions” that attract unwarranted lawsuits – doctors, lawyers, architects, engineers, and hazardous chemical delivery. Occasionally the lawsuits are valid and settlements are reasonable and on other occasions, the lawsuits are unwarranted or the settlements are egregiously large, causing the defendant to lose everything. To prevent financial disasters such as this, clients seek the services of attorneys who provide wealth preservation services that include a number of strategies: Liability insurance in the millions of dollars. A Limited Liability Company (LLC) or a Family Limited Partnership (FLP) and if one is nearing retirement, we look to maximize retirement earnings being mindful however, that retirement vehicles are often emptied in large risk events such as a litigation settlement; A Domestic Asset Protection Trust (DAPT) in a state that allows DAPTs and to ensure that you have a substantial relationship to that state. FYI – Illinois is not a DAPT state; and An international trip to a jurisdiction that allow offshore trusts whereby the financial institution is the trustee and you are the beneficiary. Admittedly, many individuals don’t like the idea of living in one country while most of their assets are in another but when they learn of the thousands of frivolous lawsuits that are filed because a plaintiff thinks they should have a payday of which they are non-deserving, some change their mind. Hopefully, you found this helpful and have started planning for both your today and tomorrow, as well as the tomorrow of your loved ones, and the plan isn’t being an unwarranted payroll.
The Unintended Beneficiary You Should Guard Against
Because approximately 70% of Americans die intestate, that is without a will or some form of legal instrument transferring their estate assets, the probate courts are busy, at least in Illinois. Also busy are folks who want a piece of the pie but are not legally entitled to the smallest crumb of crust. Yet, courts are busy because these folks have misrepresented themselves and rightful heirs must prove their relationships. Worse are situations where heirs don’t have the means to claim their inheritances through the court system and, thus, must relinquish assets that might have been helpful to them or their families. This is the thorny bush that members of blended families and other non-traditional families often experience. So, below are a few primary estate planning documents and ways to prevent assets from falling into the no-good-son-in-law’s or dastardly step-daughter\’s hands. Power of attorney for property Problem: The designated agent can empty your bank accounts before you die. Answer: Name an intended beneficiary under your will as agent and provide explicit instructions in the power of attorney narrowing the agent\’s authority to access the accounts strictly for your benefit, e.g., pay your bills and daily living expenses. Furthermore, provide that the agent can only deplete all resources if it is absolutely necessary for your health or well-being. Use clear, explicit, unambiguous, plain language. If you must name someone who is not an intended beneficiary under your will or trust, make sure that an intended beneficiary has a copy of the power of attorney and narrow the authority more, providing that the agent cannot withdraw more than a particular percentage unless your health and well-being will be jeopardized and that the withdrawal information is shared with intended beneficiaries of your will. Will this stop someone from taking your account to zero if he or she really wants to? No, but it will give intended beneficiaries evidence for court. Power of attorney for healthcare Problem: With the right amount of authority, the designated agent can kill you. Answer: Enough said. Will Problem: The wrong person might inherit your estate. Answer: Explicitly state who will inherit what. Having a trust prepared is even better because then you don’t have to state your intentions explicitly in your will. However, make sure that powers of appointment, i.e., the authority to bequest your gifts to others, are limited in the manner you intend your gifts to be distributed. For example, if you die, leaving a great deal of wealth to your loving step-daughter whose husband is a sloth unworthy of an earwig’s toenail, you probably want language in your will or trust to prevent the sloth from inheriting your assets through your step-daughter in case she dies before they divorce. Revocable Living Trust Problem: The wrong person might inherit your estate and cause probate anyway. Answer: The primary reason for preparing a trust is to prevent your heirs from having to probate your estate. However, if you don’t want to cause your intended beneficiaries to lose some or all of their inheritance in litigation proving their relationship and proving the disinherited was, in fact, soundly and legally disinherited, see the above, \”Will,\” have an in terrorem provision, and, while you\’re lucid, write a letter to the disinherited spendthrift stating your reasons for disinheriting him or her. Upon your death, leave instructions for the trustee to deliver the letter with a copy of the in terrorem provision. You might want to have co-trustees in this case: one who’s a family member and one who is a disinterested party. Probate courts and lawyers are often unintended third party beneficiaries to wills or trusts, but they don’t have to be if estate planning documents are prepared with cautious forethought and care.
7 Deadly Estate Planning Don\’ts
Experience and observation often has me shaking my head as I assist families in correcting mishaps by well-intended loved ones. This article is about some of what those families have learned. Don’t designate minors as primary beneficiaries on anything. Imagine being a divorcee with Peter Pan as an ex-spouse and play-date dad. The unthinkable happens but you’ve left a life insurance policy naming your 12 year-old son as primary beneficiary. Guess who may control the proceeds of that policy? Don’t designate adult children who cannot manage personal finances well (aka “spendthrifts”) as primary beneficiaries on anything either. Imagine leaving $250,000.00 to your daughter who blows it in one year on my favorites – Ralph Lauren, Rancho Mirage, Peach Champagne, Anne Fontaine, Jimmy Choo, and Paris. Note: I’m working my way up to Anne Fontaine. Don’t assume a will does the trick if you’re cohabiting. The potential of inheriting even modest sums of money does strange things to the affinity family members have for each other, let alone what family members may have felt for non-blood-related members. Family members will try to kick a cohabiting partner to the curb so fast, the engraving on the headstone won’t be finished yet. Don’t depend on a will if you and your spouse or partner have children from previous relationships. What do you think will happen if the step-children who you adored and treated so generously during the 15 years of your marriage to their father realize that you’re leaving everything to your children? More importantly, what do you think your kids will do if they realize that you’ve left a substantial portion to the step-kids? Ahhh…the privacy of trusts. Don’t ignore documents with beneficiary designations if you’re recently divorced. Imagine winning a handsome settlement because Peter Pan was also Mr. Gigolo and then, the unthinkable happens, and you didn’t change the designations on your will and life insurance? Antacids don’t work for the dearly departed. Don’t ignore planning if you’re recently married, especially if a prenuptial agreement is involved. And for goodness sake, ensure that your attorney takes care to explicitly define certain items, such as the marital residence, but is not so explicit as in providing the exact address. What if years later, you divorce and the prenupt states you get the house on Rosemary Lane no matter what but your spouse convinced you to sell the house on Rosemary Lane but your will states that in the event of a divorce, the terms of the prenupt govern the property that shall be considered your estate? Don’t ignore planning if you’ve more than one intended beneficiary. Beneficiaries will fight over pennies, over tattered recliners, over cats, over who gets to be administrator. Maybe you’ll enjoy the bickering in the karmic impish sense, but do you really want your estate to pay lawyers’ fees to straighten this out because that’s who will pay, if at all possible, not the beneficiaries, but you and you’ll be dead!
Logging Out of Your Digital Estate Plan
By now, you’ve undoubtedly heard about the wisdom of incorporating a “digital asset plan” in your estate plan. If you haven’t, feel free to visit my introductory article on the topic. However, if you are familiar with the concept, then this article will shed more light on the subject. Below you’ll find what can happen to a loved one’s digital account (email, Facebook, Twitter, etc.) when he or she passes away. Facebook Facebook has a “family-and-friend-friendly” policy. Surviving loved ones have 2 choices: memorialize the account or have it deleted. If a Facebook account is memorialized, which can be requested by anyone, then the account is somewhat frozen. Confirmed friends can post to the account and view it on their news feeds, but no one can access or change the account. Proven immediate family members or the executor are the only persons who can request the account’s deletion and must provide proof of the relationship through certified vital records or court documents. LinkedIn Ironically, LinkedIn, a professional social media network, has a somewhat more relaxed approach than Facebook. If LinkedIn is notified that a person has died, LinkedIn will close the account and remove the profile. Notification must provide, the member’s name, company where the member worked at most recently, the relationship between the person notifying LinkedIn and the member, a link to the member’s profile, and the member’s email address. Odd is the fact that LinkedIn doesn’t require proof of a relationship or death certificate. It seems that an unresponsive email is sufficient evidence. But to the poor individual who is only on vacation and friends decided to pull a prank, it might not be so sufficient. Hmmm…. Twitter Despite its brevity and awesomeness, Twitter is even more strict than Facebook. The only request observed is one to delete the account. If a loved one’s account is to be deleted, Twitter requires the following information from an immediate family member or executor: username and of the deceased user’s Twitter account, copy of the deceased’s death certificate, copy of the family member or executor’s government-issued identification, AND a signed statement providing the requester’s first and last name, email address, current contact information, relationship to the deceased or their estate, action requested, and brief description detailing how this account belongs to the deceased. Twitter denies access to everyone, regardless of relationship or fiduciary capacity; there is no tweeting after death. Instagram It looks like Instagram does its own investigation into a decedent\’s death. The platform simply asks requesters to email its staff about deceased users and then the folks at Instagram will let the requester know if any further information is available. Does anyone besides me thinks this is a little creepy? Gmail This is Google, so while access may be granted, a process will be required. First, the requester must provide Google with his or her full name, physical mailing address, email address, photocopy of a government-issued ID, the Gmail address of the deceased, and the death certificate of the deceased. Now, going through step 1 doesn’t guarantee access to the deceased’s email. Google may require the requester to take a second step 2: providing a court order or other materials. Hotmail Hotmail considers you dead if your account is inactive for 12 months. It will delete contents after 9 months of inactivity and delete the account after 12 months of inactivity. Plus, it’s unlikely that if you’re alive and want your contents back, that you’ll be able to retrieve them. Hotmail is a Microsoft platform, so it follows Microsoft’s “next of kin” process. To prove that you are the legal next of kin and that the account holder is deceased – or incapacitated – Microsoft requires: an official death certificate of the user; if the user is incapacitated, a certified document signed by a medical professional in charge of caring for the user (oops! HIPAA violation warning for doctors) or a signed court document providing that the requester is an agent with power of attorney or a conservator. Documents for decedents from a court must show that the requester is a trustee or an executor. And still further proof is needed to prove kinship: marriage certificate showing requester is surviving spouse (Query: What if spouse divorced and hates surviving family members?); signed power of attorney documents; copy of a will or trust (read privacy issues); a birth certificate for the user showing parentage of the requester; or guardianship documents; and a photocopy of the requester’s government-issued identification. Once all information is provided, the requester still does not gain access to the account but will instead receive a DVD of all the account\’s contents, including emails, attachments, address book, and Messenger contact list. The requester can ask for the account then to be closed. Lesson: Logging on to the digital world may be easy but permanently logging out isn’t. Hat tip: My intern, Lesley Gwam.
Charitable Trustees Beware
Cycling to the office this morning, I passed a woman jogging while pushing a 3-wheeler stroller jogger with twins in it. My mind meandered as to how challenging it must be to care for twins and let’s not even talk about triplets! But I couldn’t help it… Hope and Bill had triplets: Gray, Jay, and Faye. Bill couldn’t handle the stress of 3 terrible twosies, 3 tumbling toddlers, 3 precocious pre-teeners, and 3 hormonally tangled teenagers, so he divorced Hope when the triplets were 15 and went on a permanent excursion to chant in the Himalayas. Hope, not one to be deterred, called on her siblings, Charity and Joy. All was going well until Hope suddenly became ill and, at the young age of 44, passed away, leaving 3 teenagers with no parent. Bill had never been heard from since he left with snowshoes in hand. However, Hope left a will and a trust, naming Charity as trustee and Joy as guardian. When Hope passed on, though she didn’t have a taxable estate at $4 million, she left a considerable amount to her children and her sisters: $1 million to each child and $500,000 to each sister. After the trauma of losing their sole parent had waned to a manageable, moving forward, level, May, Faye, and Jay continued planning for college. Faye was especially excited because she had been accepted at her first choice for engineering. Well, 3 years into her engineering program, Faye and a few other classmates decided to start a small technology company. Each classmate pledged $100,000.00 as seed money and each had the means to fulfill the pledge. So Faye phoned Charity, who was vacationing in the Cayman’s, told Charity about the new venture and asked for her pledge money. She knew that her mom had left enough for her in the trust at this stage – Hope had staggered mentoring provisions in each child’s trust – to more than meet the pledge and that Charity was to invest for the purpose of conservation and then growth. What Faye didn’t know, however, was that Charity was very charitable to herself, using not only Faye’s trust, but May’s and Jay’s as a source of charitable giving. Charity told Faye that it would be a little difficult to come up with the $100,000.00 straight from Faye’s trust, but that she would borrow from May and Jay and help Faye meet the pledge. Faye, the oldest by 10 seconds, didn’t like what she heard and a heated argument ensued. It ended with Aunt Charity telling Faye to calm down or else she wouldn’t get anything because she had discretion over the distribution and there was nothing Faye could do. In fact, Charity decided to make the Cayman’s her home and wasn’t sure when she’d be returning to the states to give Faye the distribution. But Charity was wrong; Faye had the law on her side and Charity was eventually extradited to the U.S., where she faced counts of fraud and breach of fiduciary duty. Faye and her classmates’ business boomed; she eventually coupled with a partner and had a child aptly named, Prudence. The Prudent Investor Rule: A trustee administering a trust has a duty to invest and manage the trust as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust.
4 Key Concerns on Estate Planning for Disabled Children
A number of articles in The Shark Free Zone address the bad idea of designating a minor as a primary beneficiary. Single parents especially struggle with this issue, which is why “it takes a village,” is more than political rhetoric. Another issue parents and family members struggle with is the unfortunate circumstance of managing the car of a disabled child or loved one. Yet, it is even more critical to plan for unfortunate events when you are the caregiver of a disabled person. As usual, examples often help distinguish bad planning from poor planning but this time we’ll just look at a scenario and the resulting considerations. Twenty years ago, Kelly and Sean’s daughter, Carrie was born mentally and physically disabled. As a result, Kelly and Sean decided that Kelly would remain at home to care for Carrie and the family would depend on Sean’s paycheck and Carrie’s Social Security Disability Income (“SSDI”). About a month ago, Kelly and Carrie were involved in a car accident and ended up with a settlement award of $50,000 after medical expenses were paid. Fortunately, neither Kelly nor Carrie was severely injured but the incident shook Kelly considerably. So she and Sean finally had the “what if” discussion about the possibility of something tragic happening to one or both of them. If one or both of them died, who would care for Carrie and what would that look like? Well, Kelly and Sean have several issues to consider, including: Guardianship v. Powers of Attorney. Carrie is an adult and, in Illinois, obtaining guardianship for a disabled adult is a lengthy and costly process. To avoid that process, powers of attorney for Carrie might be useful. The question of usefulness hinges on the severity of Carrie’s mental disability with respect to legal capacity needed to grant authority provided in powers of attorney. Adverse Implications of Government Assistance. Irrespective of who dies, if sufficient means are not available to ensure Carrie’s basic needs – food, shelter, clothing, and medical care – are met during the remainder of her life, she may need additional government assistance, such as Medicaid. However, when someone on Medicaid receives an inheritance, they may become temporarily ineligible for Medicaid. So particular testamentary planning, such as “special needs trusts,” may be needed. Sufficient Life Insurance. If Sean passes away, the question is then, how much of a death benefit is needed. Also, if Kelly predeceased Sean, who would be the contingent beneficiary able to act on Carrie’s behalf. Appropriate Fiduciaries. If both Kelly and Sean die, the question again is who will be able to financially and compassionately manage Carrie’s estate and how would that estate be structured? Caring for a child with mental or physical challenges has at least one commonality with caring for a child with no challenges: the need for a careful, caring, and protective plan in the event the parent is no longer able to provide needed care because the ability or inability of our loved ones doesn\’t change the fact that they are our loved ones.
Infants, Stairwells & Burning a Million Dollars
Wealth preservation aka “asset protection” is slowly rising to the top of the mainstream American lexicon, much like estate planning did a couple of decades ago. However, though related, the 2 activities are quite different. A solid estate plan’s end goal is to ensure that your intended beneficiaries obtain what you intend for them in the most efficient and least adverse manner possible. Retirement and tax planning are a substantial part of the estate planning process but the primary beneficiary at the end of the game is someone else, not you. Conversely, a solid wealth preservation plan will ensure that you don’t go broke before, during, or after retirement and fulfill your intentions toward your beneficiaries, tying it into estate planning. But the primary beneficiary of wealth preservation is not someone else; the primary beneficiary is you. Estate planning and wealth preservation are technically linked because the core documents and the fiduciary roles are primarily the same. Both include trusts and, consequently, trustees. Both might even include a LLC. The fundamental distinction is jurisdictional, i.e., what law governs the trust. Typically the laws in states that have asset protection statutes and are referred to as Domestic Asset Protection Trusts (DAPTs) govern wealth preservation instruments whose jurisdiction is in the U.S. Instruments whose jurisdiction is outside the U.S. are governed by the laws, or lack thereof, in those particular countries and are known as “offshore” trusts. Now before you start getting all antsy with thoughts of tax evasion, let me squash that thought like a bug. The only way to ensure that one doesn’t incur Uncle Sam’s penalties is by being completely compliant with the U.S. tax code. Now before going too far into the different schools of thought surrounding DAPTs and offshore trusts, you may be thinking, “I don’t have a gazillion dollars, so this doesn’t apply to me.” But before I lose you to Facebook or an incoming text message – wait. If you live in America, you live in one of the most lawsuit crazed countries in the world. So while you may not have a gazillion dollars, consider the following stats: 99% of doctors in high risk specialties will be sued; 75% of doctors in low-risk practice areas will be sued; Every 6 minutes a child under the age of 5 is treated for an injury sustained on a residential stairwell; In 2012, a woman was awarded about $833,000 for an injury sustained on her landlord\’s property ; Over a 10-year period, 15-21 lawsuits were filed per 100 architect firms; I won’t mention lawyers, it’s a given, people hate us, think we have deep pockets, so they sue us. So if you know your liability insurance won’t cover a potential lawsuit or the cost of litigation in successfully defending an unscrupulous claimant, how comfortable are you holding a “fire sale”? If you’re not thrilled about selling your home and liquidating all of your assets, including your retirement portfolio, to settle a claim, then wealth preservation may be needed sooner rather than later. Then again, maybe you have a million dollars to burn…
3 Lessons about Grapes and Taxes
As Baby Boomers start retiring, thoughts of mortality and legacy planning begin to dance in their heads. While most boomers don’t have taxable estates…for now…the future is still a question mark for many. While enjoying retirement – golf course, cruises, mountain climbing, museum walks, wine tasting, and theatre galas – plans should be made for a time when the retirement funds must be transferred to someone else. It is critical to know how to transfer retirement proceeds properly so the distributions won\’t be literally and figuratively taxing: Claire and Cliff are in their mid 60’s. They’ve a modest estate – home valued at about $250K with most of its equity remaining, life insurance, and retirement benefits at about $2 million. Half of the retirement proceeds is in a 401(k), 25% is in an IRA, and 25% is in an annuity. They also have 2 kids: Lenny and Lisa. Lisa’s a starving artist, who is barely in the 15% tax bracket but who also has a vivacious and smart teenager. Lenny is 10 years older than Lisa and a savvy professional about to move into the highest tax bracket and has no intention of marrying or ever having children. Claire and Cliff want to distribute their estate to Lisa and Lenny equally and have been told to give the retirement proceeds to Lenny and Lisa outright. Before doing that, however, I would ask them to consider the following in a simultaneous death situation, where Claire and Cliff went down with the Titanic III: An outright gift from a 401(k) or a traditional IRA will be taxed and if the beneficiary is over 59 ½, the 10% penalty may also apply. For Lenny, who’s Mr. Money Bags, that doesn’t present too much of a problem, though no one wants to pay taxes. For Lisa, that would be a boon indeed. But an outright distribution to Lisa would yield less than what she would receive were the proceeds titled to a trust because of income tax consequences. Pick the fruit too young and the wine will be bitter; too old and you may taste too much oak. Claire and Cliff could have the proceeds placed in a trust for Lenny and Lisa. Here, part of Lisa’s benefit would be driven by Lenny’s life expectancy because he is the oldest, which would provide her with fewer years of income. Additionally, Lenny and Lisa must be sure to withdraw at least as much as the minimum required distribution annually or face a hefty penalty. Different varietals require different soils. In a qualified (retirement) annuity, the entire amount of the contract must be withdrawn over the 5-year period following Claire and Cliff’s death. Again, okay for Lenny, but not so okay for Lisa. Tax consequences also apply to this issue. Cabernets are as good as zinfandels; it\’s the consumer\’s tolerance that is key. Just like no 2 families are alike, no 2 children are alike. So make sure that your children know how to make decisions about the different types of distributions they can choose, after you enjoy your fruits. That way, the remaining fruit will, in fact, go to your children and not the community jelly jar.