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
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…
Fact v. Fiction about Echo-Birdies
As couples mature and children grow less dependent, we start considering life without “the little birdies.” Often, at this stage, if a couple hasn’t created an estate plan or revisited it in years, they decide to continue postponing the initial visit or revisit. Especially if the children are in their late teens, near or in college, a couple or parent postpones this work thinking that planning with the children in mind is nearly over. However, articles and commercials abound about the return of the little birdies…indefinitely. What’s worse is that upon the return, the little birdies sometimes don’t contribute financially to the household maintenance but instead use resources without replenishing them. So I caution people who say to themselves, “Ahhh, she’s in grad school now; we can relax,” to think again, long and hard. Once the children are relatively independent, i.e., still maturing financially and emotionally, parents should revisit the following questions: What are our goals in 10 years and are we on track? What do we want to protect? How should we protect it? Revisiting the Goals If you own a home, you probably want to protect it. Yes, you may consider downsizing or changing geographic locales, but you’re still likely to want to protect ownership of your primary residence. Also, if your child has been accepted or is in the college application process, you’ll probably to want to protect the college education. You’ve saved and worked smartly with a CFP and CPA, and you don’t want to blow your child’s opportunity. Still, what if your child is brilliant or extremely talented and ears a full scholarship? Finally, how’s that retirement planning going? If you, your spouse, partner, or child experience a long-term illness, would you be able to manage financially without sacrificing retirement income? The Fiction v. Fact about Protecting Those Goals Place your home in trust. Fiction: It protects homes from creditors. Fact: Not necessarily. If a homeowner is Trustee of the house placed in trust, that homeowner’s creditors can place a lien on that trust. Even land trusts are permeable. Place education savings in a 529 account. Fiction: 529s are the only way to pay for your child’s education other than traditional savings. Fact: 529s are beneficial under certain circumstances. Other considerations are balancing the funding of this college savings account with saving for retirement. Again, what is your primary financial goal? Place retirement proceeds in a trust. Fiction: Naming a trust as beneficiary for retirement proceeds will reduce or eliminate tax burdens. Fact: Naming a trust as beneficiary for retirement proceeds may actually create undesired tax burdens depending on the retirement account requirements and the trust involved. It may also create problems when required distributions must be made. So putting off a visit or a revisit to an estate plan because the birdies have flown or are about to fly the coop, could be detrimental to future life stages for you and the birdies. Furthermore, if they come back, well, consider learning about landlord and tenant rights. That’s what my grandmother did!
Debunking Estate Planning Myths & Developing Wealth, Pt 2
As mentioned in Part 1 of this series, powers of attorney last until death, so they protect you and your loved ones now. The other tool that can protect your loved ones immediately upon death is life insurance. From a very basic perspective, life insurance is used to replace the income of a loved one. If you’re a single parent, I need not tell you how absolutely critical it is to have life insurance, because for single parents, life insurance can provide a lot more, which involves the intermediate techniques I will discuss in Part 3. However, before I continue, another myth needs debunking: Life insurance IS considered part of your estate for estate tax purposes. Most people think it is not but that is because typically life insurance proceeds aren’t considered taxable for income tax purposes. However, income taxes and estate taxes are two separate issues. So what does this mean? If you currently have or are close to having a taxable estate when considering the value of your home, retirement accounts, investment accounts, and other assets, then if you include a sizable life insurance policy with those assets, you will likely pass the taxable estate threshold. Right now, few individuals come close to having a taxable estate because the federal tax exemption is high right now – $5.12M, and the marginal tax rate is relatively low – 35%.* Additionally, Illinois, which is not linked (or “coupled”) with the federal tax system is also relatively high – $3.5M and our marginal tax rate is 16%.* Now, I’m going to save the bulk of what this means in terms of planning for the next blog entry, but know that if Congress doesn’t do anything by December 31 of this year, the federal exemption is going to be reduced to $1M and the tax rate increased to 55%. That means that if someone dies in 2013 with $1.8M or more in assets, their beneficiaries may likely face a federal tax bill on the $800,000 excess! Let’s look at this example: Single Parent Sheila owns a 6 flat that’s worth about $700,000, has about $250,000 in retirement benefits, and then has $500,000 worth of life insurance and, unfortunately dies next year, those life insurance proceeds and part of those retirement benefits will be needed to pay taxes if Congress or Sheila doesn’t do anything. Lesson: Parents should be careful when purchasing life insurance because life insurance is necessary but it is not always ignored by Uncle Sam. * 2013 update: The federal estate tax exemption is $5.25M indexed for inflation with a marginal rate of 40%; and the Illinois estate tax exemption is $4M. Part 1 | 2 | 3 | 4 | 5
Life Insurance and 90210 Accessories
Most of us know that life insurance is the most basic and essential of estate planning tools. It serves 2 fundamental purposes we face with end of life issues: (1) not leaving our loved ones with hefty funeral or memorial service bills and (2) replacing income if we were the primary wage earner or part of an even wage-earning team. So, most individuals who are employed have some type of life insurance. As discussed in a former blog post, it is further understood that life insurance can not only afford relatives a certain solace during their grieving period, but it also affords benefits before the end of life, i.e., during retirement. However, when using life insurance for its additional benefits, individuals should be careful not to overdo it or you might end up losing money instead of earning a return on your investment. Let’s visit the Petry’s, a small family of 3. Robbie is in her mid-30s and works as a middle manager for a high end office furniture sales company. Jerri is in her early 30s and works at a lucrative nail salon. Robbie and Jerri have one son, Ritchie, who is in his terrible twos. Robbie and Jerri each bought life insurance policies providing $500,000 of death benefits in the event one dies. That would provide about 7 years of replacement income. They also bought another $500,000 as retirement income, which will begin to earn value in about 10 years. Ritchie is so cute they thought he might one day be in movies, perhaps another McCaulay Culkin. So Robbie and Jerri also took out a $200,000 policy on Ritchie. Other investments include their home, which was left to Jerri by Aunt Sally, and is now paid for and valued at $200,000; and about $400,000 in other retirement planning instruments. By now you have probably identified a number of issues involving Robbie and Jerri’s insurance decisions but I’ll point out a few basic points: If your family can move to 90210 or 60043 after you’ve departed, when before they lived in an area that didn\’t consider dogs as purse accessories, that’s not a good sign. If you’re empty nesters, plan to stay that way. If the kid hasn’t been discovered by e-Trade yet, don’t put your money on it. Millions of really cute kids never make it to either screen – the big one or the little one. BUT what you need to do is talk to your team – your estate planner, your financial planner, and your CPA. Talking shouldn’t cost, initially, and this discussion should give you a good idea of how much insurance you need to purchase in the event of premature loss. You’ll also know how much will be needed to keep the nest strong, sans the birdies in the event your retirement years are lengthy. Money saver tip: Bundle your insurance like your family cell phone plans.
Team Estrogen Needs to Plan Now for Now … and Then
For my male readers, I’m shouting one out for the estrogen team, today. You\’re more than welcomed to stay and share this post with the hub of your life, but I’ll return to the neutral zone with the next post. Recently, I shared a number of articles via Twitter and LinkedIn about the supposed trepidation women have when it comes to estate planning, particularly managing their financial affairs. As a female lawyer in a practice area traditionally held by men, I must admit those articles ruffled my feathers. I contend that women are not afraid of talking about money or estate planning matters, we often just don’t think we have the time. The role of the female is still that of the family hub– mother, daughter, spouse, partner, sister. Being the family hub requires a great deal of time and effort. Add to that our occupational responsibilities and community obligations and it’s perfectly understandable why we focus on the “now” and not the “then.” Yes, we are fully aware of the fact that if we take some time now, we could make “then” better. However, as a single parent when: a presentation to a major client is due on Monday, the kids have to be taken to gymnastics and birthday parties and Sunday school, Mom needs help with her new ottoman, Sis wants a review of the web site of your annual “sisterhood vacation” hotel, as chair of the silent auction committee you have to complete the donations list by Friday night, and you still have to exercise, cook, and pick up the cleaning (housekeeper not in the budget), “converting my 401(k) into …” doesn’t really make it to the top of the list. Next, is the fact that we know we’re the hub and the emotional gravity accompanying that realization. I don’t know too many women who readily give thought to when they won’t be around to see their grandchildren, nieces’ weddings, or best friend’s daughter’s college graduation. It is a very painful and counterintuitive thought for women. Fear has little to do with it. We simply love our families and friends and cannot fathom not being there for them. Nevertheless, Ladies, as painful, counterintuitive, and time consuming as it may be, we owe it to our families and ourselves to sacrifice a manicure, to miss a committee meeting, to reschedule a conference call, to say a prayer and let Sis choose the hotel, so we can take care of “now” and “then” now. The list of reasons for doing this is not exhaustive and are compelling: Your retirement savings may be dwindling unnecessarily; Your widowed father living a few states away may have a new BFF with less than charitable thoughts about Dad’s annuity; An in-state college may not afford your son the best educational opportunity for his mechanical engineering career; You might be able to withdraw income now from grandma’s IRA (progressive grandma!); Your current income may be beneficial for a retirement vehicle that may not be as readily available when your income rises past a certain point; You may want to go on sabbatical but, who’s going to mind the store, literally; Instead of a place where Mom will be bored silly playing checkers, you may want to send her cruising 6 months a year; and You want your partner to be able to visit you immediately after major surgery. Minding our retirement and estate matters now actually makes us, the family hub, stronger. If you want, I’ll take notes at your next committee meeting, so you can meet with a reputable CFP.