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Retirement

The Complex Web of Estate Planning – Probate, Wills, Trusts, and Directives.

by TheProAdvisor on July 20, 2010

Many hold the widespread misconception that estate planning is a subject of interest only to the wealthy.  The reality is that estate planning is a larger process consisting of the use of legal tools like wills, trusts, and directives to determine what happens to you, who gets your assets, and how they get them during your life in the event you’re unable to decide for yourself and after your death.

In fact, an estate plan provides a legal mechanism for disposing of property upon death and with proper planning it will recognize your wishes and the needs of your survivors.  It can and should also include planning for the handling of affairs in case of disability, and the deeply personal medical choices that may need to be made as life nears its end.

You might be asking yourself, “What happens if I don’t do any estate planning?”  The simple answer is that an estate plan has already been put in place for you by the government.  The governments plan consists of a legal mechanism called “probate” – let’s take a look at the government system and a few alternatives that you may find more agreeable.

Probate

For those who haven’t done any type of estate planning, your heirs still have a legal method for distributing your assets at your death.  Called Probate, it is the state’s method for determining how your assets should be dispersed and who they should be dispersed to in the event that you don’t leave any specific legal instructions.  In the event you die without a will or trust in place, your estate is said to be “intestate.”

So what’s included in someone’s probate estate?  All solely owned property, plus any and all other property interests that do not pass to somebody else by “operation of state law “– that means anything and everything that doesn’t have a specific beneficiary or joint owner at the time of death.


What Is a Probate? — powered by eHow.com

For example, if a house is held jointly with right of survivorship, your spouse under the rights of survivorship gets 100% ownership at the very moment of your death. The house would not be included in any probate proceedings because of the predetermined legal ownership change.

In instances where there aren’t any predetermined beneficiary or ownership privileges – most common with stocks, bonds, and other investments, including property, cars, and business interests held solely by the deceased are included in and subject to probate.

It is important to note that most states will charge a fee (basically a tax) to help your heirs determine where your assets should go.

Wills

A “Will” or “testament” is a legal declaration by which a person, the testator, names one or more persons to manage his estate and provides for the transfer of his property at death. In the strictest sense, a “Will” has historically been limited to real property, while “testament” applies only to dispositions of personal property, though this distinction is seldom observed today.

Wills come in many different styles, but they all provide a legal method of informing your heirs and your states probate systems of your wishes regarding the distribution of your assets.  With a Will, distribution of your property is normally ordered under the terms of your Will and the probate process is significantly streamlined.

Even with a Will it is important to remember that your state will most likely charge you a fee (tax) to finalize the distribution of your assets.

Trust

Think of a trust as a holding facility, a place where you put your assets before they are released to the people or organizations that you designate to eventually receive them. Trusts work because they are considered a separate legal entity just like you. Because you and the trust are separate legal entities, anything you transfer from you to the trust becomes property of the trust – this key difference is what allows trust held assets to bypass probate.

A trust and the property that it holds are governed by the terms of the trust document, which is usually written and occasionally set out in deed form.  Normally, the trust then holds the property for your benefit, or for the benefit of those whom you designate – this means that you or your designated beneficiaries can use the trust assets and benefit from them under the terms of the trust document.

There are two main types of trusts – Revocable and Irrevocable.  Revocable trusts can be changed or revoked by the grantor (you) after they are established.  Irrevocable trusts cannot be changed after they are created.

Trusts also go by many different names, depending on the characteristics or the purpose of the trust.  Trusts often have multiple purposes, allowing a single trust might accurately be described in several ways. For example, a living trust is often an express trust, which is also a revocable trust, and might include an incentive trust, and so forth.

It is important to note that trusts can be set up while you are alive or they can be established upon your death by your Will. One final note – trusts may subject to and governed by local, state, and federal laws.

Directives

More commonly referred to as “Advance” or “Medical” Directives, the term refers to treatment preferences and the designation of a surrogate decision- maker in the event that a person should become unable to make medical decisions on her or his own behalf.

Advance directives generally fall into three categories: living will, power of attorney, and health care proxy.

  1. Living Will: This is a written document that specifies what types of medical treatment are desired should the individual become incapacitated. A living will can be general or very specific. The most common statement in a living will is to the effect that:

If I suffer an incurable, irreversible illness, disease, or condition and my attending physician determines that my condition is terminal, I direct that life-sustaining measures that would serve only to prolong my dying be withheld or discontinued.

More specific living wills may include information regarding an individual’s desire for such services such as analgesia (pain relief), antibiotics, hydration, feeding, CPR (cardiopulmonary resuscitation) and the use of life-support equipment including ventilators.

  1. Health Care Proxy: This is a legal document in which an individual designates another person to make health care decisions if he or she is rendered incapable of making their wishes known. The health care proxy has, in essence, the same rights to request or refuse treatment that the individual would have if capable of making and communicating decisions.
  1. Durable Power of Attorney: Through this type of advance directive, an individual executes legal documents which provide the power of attorney to others in the case of an incapacitating medical condition. The durable power of attorney allows an individual to make bank transactions, sign Social Security checks, apply for disability, or simply write checks to pay the utility bill while an individual is medically incapacitated.

Obviously this is only a broad overview of some of the different options available.  With a clear idea of what you want to happen with you assets and a little assistance from a “Financial Professional,” in this case a qualified attorney – you can make sure that your family and personal wishes are protected.

Remember, estate planning is not just for rich people – it is for everyone.  And as always – Don’t delay; there is never a good reason to wait on improving your financial future.

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Tax Savings Tips – What you need to know before filing!

by TheProAdvisor on March 23, 2010

As tax day 2010 approaches, here are a few tips that will help you file saving as much as you can, with as little effort as possible and on time.  For those of you new to this blog – I hate taxes.  Income Tax, Estate Tax, Sales Tax, Gas Tax, You-name-it Tax – I loathe them all equally.

With that, your best strategy for minimizing tax liability and bolstering your financial position is to stay current on tax law. However, in a time of sweeping change, new legislation and regulations, continuing economic uncertainties, doing so can be a challenge.

In 2009, tax law changes ranged from tax credits for employees and undergraduate students to tax breaks for first-time homebuyers and unemployment assistance for workers involuntarily terminated. Yet, what remains constant is the need for in-depth knowledge when preparing your taxes. Tax Saving Tips for 2009 provides an overview of key tax law changes that may affect your return and the latest information and practical strategies for minimizing your tax bill.

Should you have any questions or concerns, a CPA tax professional can review your overall financial picture to help you identify winning tax strategies.

Filing Basics

Filing Status Taxpayers can file as single, married filing jointly, married filing separately, head of household or qualifying widow(er). If you are married and filing jointly, you can take advantage of tax credits and benefits not available to couples filing separately. Unmarried taxpayers may file as single or, if they qualify, as head of household. If more than one filing status applies to you, you may want to choose the one that result in the lowest tax obligation.

Exemptions

You may claim a personal exemption for yourself, your spouse and each of your dependents. A dependent child includes children born to your family, stepchildren, foster children and adopted children. Each exemption reduces taxable income by $3,650 in 2009. However, the exemption benefit is lost if your adjusted gross income (AGI) is above the amounts indicated below:

Deductions

The basic standard deduction for 2009 is $5,700 if single or married filing separately, $11,400 for married filing jointly or qualifying widow(er) and $8,350 for head of household. Taxpayers age 65 and older and/or blind receive an additional standard deduction of $1,100, and $1,400 if the individual is also unmarried and does not have a surviving spouse. In addition to above-the-line deductions, you can claim the standard deduction or choose to itemize your deductions. Itemized deductions include specific state and local taxes, mortgage interest, and charitable contributions.

Even if you do not itemize, some deductions are still available, including traditional IRA, SEP and qualified plan contributions and contributions to Health Savings Accounts. In general, you should itemize if your total allowable itemized deductions are more than the standard deduction, although there are exceptions. Keep in mind that the value of some of your itemized deductions will be reduced if your AGI is above $166,800 ($83,400 if married filing separately). This reduction will be eliminated in 2010.

Tax Breaks for Homeowners

First-Time Homebuyer Credit

The First-Time Homebuyer Credit increased to $8,000 in 2009 and is generally available for purchases made between January 1, 2009, and May 1, 2010, provided the home is occupied as the buyer’s principal residence within 24 months of the purchase. (Note: A first-time homebuyer is defined as someone who has not owned a principal residence in the three years before the purchase.) For purchases made after November 6, 2009, no credit is allowed if the purchase price exceeds $800,000. The credit only needs to be repaid if the home is sold within 36 months of the purchase date. For purchases made on or before November 6, 2009, the credit phases out for taxpayers with modified AGIs in excess of $75,000 ($150,000 for joint returns). The credit is refundable and recaptured if the home is sold within 36 months of the purchase date. For purchases made after November 6, 2009, the phase out starts at modified AGI of $225,000 for married taxpayers and $125,000 for all other taxpayers. The credit is completely phased out at modified AGI of $245,000 for married taxpayers and $145,000 for all other taxpayers.

Interest and Property Taxes

Home mortgage interest on up to $1 million ($500,000 if married filing separately) of home acquisition loans secured by your principal residence and/or second home is fully deductible. You also may deduct mortgage interest on a home equity loan or line of credit up to $100,000 ($50,000 if married filing separately). Therefore, you can deduct interest on total home debt up to $1.1 million ($550,000 if married filing separately).

Mortgage Debt Forgiveness

If you still have mortgage liability after foreclosure, any amount forgiven by the lender is generally ordinary income. However, for debt discharged on or after January 1, 2007, and before January 1, 2013, the debt forgiveness is treated as tax free if the property is your primary residence. The limit on qualifying debt is $2 million ($1 million for a married person filing separately).

Tax Exclusion of the Sale of a Principal Residence

When you sell your principal residence, you can exclude from income up to $250,000 in gains ($500,000 if married and filing jointly or a surviving spouse if the sale is within two years of the other spouse’s death). To qualify, you must have owned and used your home as a principal residence for at least two years during the five-year period ending on the date of sale.

Retirement Strategies

Retirement Savings Tax Breaks

Tax-advantaged retirement plans can help you lower your current tax bill and achieve a secure retirement. Recent legislation makes permanent higher IRA and 401(k) contribution limits.

Individual Retirement Account (IRA )

You may contribute up to $5,000 to fund a traditional or Roth IRA in 2009. Individuals age 50 or older by the end of 2009 can make an additional catch-up contribution of $1,000. If your spouse does not work for compensation, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your own earnings, with the same dollar limits applying. However, the maximum aggregate that can be contributed to a Roth IRA is reduced by contributions made to other IRAs.

Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Roth IRA contributions are not deductible, but the earnings accumulate tax deferred and may be withdrawn tax free if you meet the qualified distribution requirements.

For 2009, eligibility to contribute to a Roth IRA is phased out as modified AGI rises from $105,000 to $120,000 if single, head of household or married filing separately and not living with spouse at any time in 2009; and $166,000 to $176,000 if married filing jointly or qualifying widow(er). Married taxpayers who file separately and lived with a spouse at any time in 2009 cannot contribute to a Roth IRA if their income is $10,000 or more. Qualified dividend income from a domestic or qualified foreign company is taxed at a top rate of 15% (zero for taxpayers in the 10% or 15% tax brackets in 2009).

Offset Capital Gains with Losses

Net capital losses are fully deductible against capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 in net capital losses against ordinary income ($1,500 if married filing separately) or your total net loss as shown in 1040 Schedule D, Capital Gains and Losses, whichever is less. Any remaining capital losses may be carried over to future years.

Other Recent Tax Law Changes

The Making Work Pay Credit

The Making Work Pay Credit provides employees, including the self employed, with up to a $400 tax credit ($800 for married people filing jointly). The credit is 6.2% of earned income and phases out at modified AGI of $75,000 to $95,000 for singles or $150,000 to $190,000 for married people filing jointly. In 2009, taxpayers will receive the credit through a reduction in employee withholding and self-employed required estimated tax payments.

Economic Recovery Payments

People receiving social security, SSI, railroad retirement and veteran’s disability compensation benefits also receive a one-time $250 payment, offset by any Making Work Pay Credit.

COBRA Premium Assistance

The federal government is subsidizing 65% of COBRA premiums for employees who are involuntarily terminated between September 1, 2008, and February 28, 2010. The premium subsidy is in effect for any premium for a period of coverage beginning on or after February 17, 2009, for 15 months. The tax-free element of this subsidy is reduced for singles with modified AGI between $125,000 and $145,000, and joint filers with modified AGI between $250,000 and $290,000. For singles with modified AGI above $145,000 and joint filers with modified AGI above $290,000, the subsidy is treated as gross income. If you are laid off, your employer should notify you about this rule.

Unemployment Compensation

Usually, state unemployment benefits paid to laid-off employees are taxed in full. However, in 2009, the first $2,400 of unemployment compensation you received is excluded from your gross income and not subject to tax.

Alternative Minimum Tax (AM T) Patch

Among the provisions included in the Emergency Economic Stabilization Act of 2008 is the AMT patch, which protects most middle-income taxpayers by increasing the AMT exemption amounts. The 2009 exempt amounts are: $46,700 for single filers and heads of household, $70,950 for married taxpayers filing jointly or qualifying widow(er)s and $35,475 for married taxpayers filing separately.

Employer-Sponsored 401(k)

Pre-tax contributions to employer-sponsored retirement plans reduce your taxable wages. Matching contributions and income earned within your plan also are tax deferred. The employee contribution limit for 2009 is $16,500. Employees age 50 or older by the end of 2009 may make an additional catch-up contribution of $5,500 for 2009. Also, there is no minimum distribution required in 2009 from your 401(k).

Child and Education-Related Tax Credits

Child Tax Credit

For 2009, the Child Tax Credit is worth $1,000 for each qualifying child who is under age 17 at the end of the calendar year and who qualifies as a dependent. The Child Tax Credit is in addition to the child’s dependency exemption. The credit begins to phase out when modified AGI exceeds $110,000 for married couples filing jointly; $55,000 for married taxpayers filing separately; and $75,000 for single filers, heads of households and qualified widow(er)s.

Dependent Care Credit

Parents who must pay for the care of a dependent under age 13, who they also claim as a dependent, while they work or look for work may be eligible for a tax credit of between 20% and 35% of qualifying expenses (up to $2,100). You must have earned income to receive the credit. For 2009, the maximum amount of expenses on which the credit can be claimed is $3,000 for the care of one dependent or $6,000 for two or more. This credit is not restricted to child-related care costs.

If you pay someone to look after an incapacitated dependent of any age, such as a parent or disabled family member, you may be eligible for this tax break.

The American Opportunity Tax Credit

This credit replaces the Hope Scholarship Credit. It is available for the first four years of college or other post-secondary school that leads to a degree (the Hope credit was only for the first two years of undergraduate school). The maximum credit is $2,500 per student for each year and 40% of the credit is refundable – that is, it can reduce the taxpayer’s liability below zero. It phases out at modified AGI levels between $160,000 and $180,000 (married filing jointly), and $80,000 and $90,000 (other filers). This credit is allowed against the Alternative Minimum Tax (discussed later).

Tax Considerations for Investors

Long-Term Capital Gains and Dividends

The maximum tax rate on net long-term capital gains remains at 15% for 2009. For taxpayers in the 10% or 15% tax brackets, the tax rate on long-term capital gains is zero. Capital gains on investments held for one year or less are taxed at regular income tax rates.

Health Coverage Tax Credit

As of May 1, 2009, the Health Coverage Tax Credit increased from 65% to 80% of the person’s premiums for the qualified health insurance of specific family members. This credit expires in 2011.

Some important numbers and items for 2010:

2009 Exemption

Phaseout Begins at:

  • Single – $166,800 up to $289,300
  • Married filing jointly/Qualifying widow(er) – $250,200 up to $372,700
  • Married filing separately – $125,100 up to $186,350
  • Head of household – $208,500 up to $331,000
  • For 2009, even with an AGI in excess of the phaseout maximum, you still may take a $2,433 personal exemption. The personal exemption reduction is being phased out and will be fully repealed by 2010.

Common Deductions

Above the Line Deductions

  • Teacher classroom expenses
  • Student loan interest
  • Alimony expenses
  • One-half of self-employment tax
  • IRA contributions and one-half of contributions to SEP, SIMPLE and qualified plans
  • Health savings account contributions
  • Moving expenses
  • Penalties on early withdrawals from savings accounts
  • Tuition and fees deductions

Itemized Deductions

  • Mortgage interest including interest on equity loans up to $100,000
  • Points paid for mortgage or refinancing
  • State and local income taxes and personal property taxes
  • Sales taxes in states with no income tax
  • Health insurance costs and medical expenses in excess of 7.5% of adjusted gross income (AGI)
    • Prescription eyeglasses, contacts and hearing aids§
    • Crutches, canes and orthopedic shoes§
    • Medical transportation §
    • Cost of alcohol or drug abuse treatment§
  • Charitable contributions – cash, property, donated clothing or household items and appreciated long-term assets
  • Mileage and expenses associated with volunteer work
  • Unreimbursed casualty and theft losses
  • Income-tax preparation software and fees*
  • Job-search expenses*
  • Investment expenses*
  • Unreimbursed employee business expenses*
  • Professional investment advisory fees*

§ Deductible to the extent the total of all medical and dental expenses exceeds 7.5% of AGI

* Deductible as miscellaneous itemized deductions to the extent the total exceeds 2% of AGI

Obtain Professional Advice

This information is current as of January 1, 2010 – however, I always recommend that you work with a “Financial Professional”, in this case a CPA or tax professional.  Specifically a CPA or tax professional that understands the business of taxes and finances and can provide trusted advice and services during the tax season and throughout the year to come.

Finally, don’t feel bad about trying to save money on your taxes – don’t cheat, but definitely do everything legally in your power to avoid them.  As a little motivation, a quote from Judge Learned Hand in the case of Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935):

“A transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Good Luck!

TheProAdvisor

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Veterans Day Salute.

November 11, 2009

I have actually spent the better part of the last week thinking about and reflecting on both the Marine Corps Birthday (Nov. 10th, 1775) and Veterans Day (Nov. 11th).  I found it very difficult to not only express my feelings on these two days, but to actually find something that paid even the slightest degree [...]

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Happy 234th Birthday United States Marine Corps!

November 10, 2009

To all my fellow US Marines, their families, and loved ones – Happy 234th Birthday! From our humble beginning in Tun Tavern, to the Halls of Montezuma, the Shores of Tripoli, the sands of the South Pacific, the frozen landscape of the Korean Peninsula, the steamy jungles of Vietnam, scorching deserts of Iraq, and the [...]

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Planning for Retirement – What You Really Need To Know.

October 22, 2009

Planning for retirement requires different strategies before and during retirement.  Unfortunately, this simple fact is not understood by many financial advisors.  That is why it is important for you to work with a “Financial Professional” who understands retirement planning if you are retired or nearing retirement. Shifting Concerns in Retirement Prior to retirement, your main [...]

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New IRS Ruling May Affect Your Retirement!

October 2, 2009

Annuity owners and those with cash value life insurance definitely need to pay attention to this one.  The Internal Revenue Service (IRS) recently issued a revenue ruling that affects the tax-exempt status of some 1035 exchanges.  It specifically relates to how the IRS will categorize partial 1035 exchanges that result in cash being removed from [...]

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Fixed, Variable, or Indexed – Which Is Right For You?

August 4, 2009

In today’s complex world of insurance, annuity, and investment products – three terms are thrown about without much explanation: Fixed, Variable and Indexed.  These terms define how interest is credited or earned on the investment. Unfortunately, many advisors routinely fail to present all three as valid investment choices for their clients because they are unable [...]

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Financial Strength – The Truth Behind the Ratings.

July 16, 2009

I had a rather lengthy discussion today about the merits of financial ratings as they relate to insurance, annuity, and financial services companies.  The contention was that you should never deal with a company that doesn’t have the highest financial rating.  Granted, the financial advisor I was talking to works for one of the highest [...]

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Should You Be Using Life Insurance In Your Retirement Planning?

July 6, 2009

So when did life insurance become a retirement account?  With the recent decline of the stock and real estate markets, many are rethinking insurance as an asset class.  Products like whole life, universal life, and indexed universal life have maintained their values when other assets like, stocks, mutual funds, variable annuities, and real estate haven’t. [...]

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Qualified Retirement Plans – Good Idea or Ticking Time-bomb?

June 10, 2009

Qualified retirement accounts like IRA’s, 401k’s, and 403b’s have been gaining in popularity over the last 30 years.  They have almost entirely replaced corporate pension and defined benefit plans, with the few exceptions being government employers and union workers.  While all of the plans are technically different, they do have several major similarities. First, qualified [...]

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