Taking Over Aging Parents’ Finances

Posted by dfederman on Feb 29, 2012 in Investor Education | Comments Off

As our parents age, there is an almost inevitable probability that they will require assistance with financial or health issues.

One or both parents may become ill or incapacitated and unable to keep up with their financial affairs as their mental and physical abilities decline. This can mean that bills don’t get paid or they get paid twice and checks bounce. Even worse, parents can become susceptible to scams and fraud. Children usually will have to step in and take over the management of their parents’ finances, often during a crisis, and often with little knowledge of their parents’ financial affairs. This can cause stress, not only to the parents who feel that their independence is suddenly being taken away, but also for the children who are now in the position of having to navigate through years of financial documents to ascertain exactly what the parents’ assets, liabilities, income, and expenses are. Taking over parents’ finances can be tricky business, both emotionally and financially for all involved.

The best way to avoid problems later on is to plan ahead. Planning ahead helps to ensure that parents’ wishes are carried out, and it can eliminate potential conflicts among siblings about how mom and dad’s finances will be managed and by whom. Children should have a frank discussion with parents about their assets, liabilities, income, and expenses around the time parents retire, if not earlier. The problem is that many people are private about their finances, so parents may be reluctant to discuss their finances with their children. While bringing up the subject of finances with parents can be awkward, it is an important and necessary conversation to have so children can better assist their parents later on. At the very least, parents should let their children know where the parents keep their important financial documents in case these documents are needed in an emergency. Ideally, parents should have an estate plan in place that includes powers of attorney or revocable living trusts that dictate who will manage their finances and under what circumstances. Additionally, parents should maintain updated lists of income and assets.

An article on Forbes.com offers a few practical suggestions for actions that children can assist their parents in taking now that will ease the burden and transition for children later, if and when the children need to step in and take over the management of their parents’ finances:

– Put regular transactions on autopilot. Have Social Security and other monthly checks deposited directly into bank accounts and have bills automatically debited.

– Simplify where possible. Consolidate bank and brokerage accounts and request that financial service companies send duplicate paper statements to parents and children.

– Have one child in charge. When children do take over, have only one child handle everyday finances and regularly inform the other siblings in writing of what is going on. Such communication can prevent tension and potential problems down the road.

– Locate insurance policies. Insurance policies can easily be overlooked. Ensure that copies of all policies are easily accessible.

In taking over the management of a parent’s finances, it is important that children respect their parents’ rights and wishes. Children should allow parents to maintain as much control as possible. Parents should be kept involved as much as possible and informed of all actions that their children are taking on their behalf. Children should always keep their parents’ money separate from their own. Starting the conversation about finances with a parent now will go a long way to help ease the transition of finances to a child later.

The attorneys at The Estate Planning & Elder Law Firm can assist clients with their estate, financial, insurance, long-term care, veterans’ benefits, and special needs planning issues.

To review your financial planning needs, call your Ariba financial adviser at 1-800-808-7488.

Tax Strategies for Retirees

Posted by dfederman on Feb 28, 2012 in Investor Education | Comments Off

Description

Managing taxes in retirement can be complex. Thoughtful planning may help reduce the tax burden for you and your heirs.

Synopsis:

Managing taxes for maximum benefit in retirement requires careful planning. You’ll need to consider the tax implications of different investments — such as municipal bonds and index funds — and maintain a portfolio that fully utilizes the range of tax efficient strategies available. You’ll also want to rethink how you allocate investments to — and make withdrawals from — taxable and tax-deferred accounts. Tax-deferred investments have greater earning potential than their taxable counterparts due to compounding, yet withdrawals from tax-deferred accounts are subject to higher taxes than investments held for a year or more in taxable accounts. In addition, some tax-deferred retirement accounts, such as IRAs, require that you begin taking an annual minimum distribution after you reach age 70½. Finally, work out a comprehensive estate and gifting plan with competent professionals so you can make the most of your money while you are alive and maximize what you pass on to heirs.

Key Points

• Less Taxing Investments
• The Tax-Exempt Advantage: When Less May Yield More
• Which Securities to Tap First?
• The Ins and Outs of RMDs
• Estate Planning and Gifting
• Points to Remember

Nothing in life is certain except death and taxes. – Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.

Less Taxing Investments

Consider pursuing tax efficiency with your investments by employing a number , such as limiting the number of times you trade investments or selling securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because in 2003, Congress reduced the maximum federal tax rate on some dividend-producing investments and long-term capital gains to 15%. In light of these changes, some financial advisers recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you’ll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 35%, while distributions — in the form of capital gains or dividends — from investments in taxable accounts are taxed at a maximum 15%. (Capital gains on investments held for less than a year are taxed at regular income tax rates.)

For this reason, it’s beneficial to hold securities in taxable accounts long enough to qualify for the 15% tax rate. And, when choosing between tapping capital gains versus dividends, long-term capital gains are more attractive from an estate planning perspective because you get a step-up in basis on appreciated assets at death.

It also makes sense to take a long view with regard to tapping tax-deferred accounts. Keep in mind, however, there is a deadline for taking annual required minimum distributions (RMDs).

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple – the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you’ll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.

Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.² In fact, you’re never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.² For this reason, you may wish to liquidate investments in a Roth IRA after you’ve exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your money accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases spousal beneficiaries are ideal, because they have several options that aren’t available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you’re close to the threshold for owing estate taxes. In 2012, the federal estate tax applies to all estate assets over $5.12 million, but this threshold is scheduled to revert to $1 million in 2013, unless Congress elects to extend it. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed – or gains tapped – at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild’s higher education expenses.

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

Points to Remember

1. Formulating a tax-efficient investment and distribution strategy may allow you to keep more assets for you and your heirs.
2. Consider tax-efficient investments, such as municipal bonds and index funds, to help reduce exposure to taxes.
3. Tax-deferred investments compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts. However, qualified withdrawals from tax-deferred investments are taxed at income tax rates up to 35%, whereas distributions from taxable investments held for more than 12 months are taxed at a maximum 15%.
4. You must begin taking an annual amount of money (known as a required minimum distribution) from some tax-deferred accounts after you reach age 70½.
5. Review how your assets fit into a comprehensive estate plan to make the most of your money while you’re alive and to maximize the amount you’ll pass along to your heirs.

Source/Disclaimer:

¹Capital gains from municipal bonds are taxable and may be subject to the alternative minimum tax.

²Withdrawals prior to age 59½ are subject to a 10% penalty.

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February 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2012 McGraw-Hill Financial Communications. All rights reserved.

Buying Life Insurance: What Kind and How Much?

Posted by dfederman on Feb 21, 2012 in Investor Education | Comments Off

Description

Finding the middle ground between being “insurance poor” and unprotected requires assessing real needs and choosing products that are affordable. This article introduces different types of insurance products and the role that they can play in a personal financial plan.

Synopsis:

Death is one of things that no one likes to talk about. Yet, protecting loved ones from the financial consequences of death is one step you can take to gain peace of mind for you and your loved ones. And this is where life insurance enters the picture.

If you have a family or spouse who depend on you for financial support, or if you work at home providing your family with such services as child care, cooking, and cleaning, then you need life insurance. Older couples also may need life insurance to protect a surviving spouse against the possibility of the couple’s retirement savings being depleted by unexpected medical expenses. And individuals with substantial assets may need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations.

Determining what type of insurance depends on your goals, while deciding on an appropriate amount of coverage requires an assessment of your needs. Some approaches use a formula based on your income, while others factor in future liabilities, such as mortgage debt, college expenses, and estate taxes. The bottom line is quite simple: Don’t go it alone. Enlist the services of a qualified life insurance professional to help you determine the type and scope of coverage that best suits your financial objectives.

Key Points

• Types of Insurance
• Key Terms and Definitions
• How Much Insurance Do I Need?
• Other Types of Life Insurance
• Conclusion
• Points to Remember

Conventional wisdom says that life insurance is sold, not purchased. In other words, some people are reluctant to discuss the importance of owning life insurance, and others are simply unaware of the need to have life insurance. Although many large companies provide life insurance as part of their benefits package, this coverage may be insufficient.

Who needs life insurance? If there are individuals who depend on you for financial support, or if you work at home providing your family with such services as child care, cooking, and cleaning, you need life insurance. Older couples also may need life insurance to protect a surviving spouse against the possibility of the couple’s retirement savings being depleted by unexpected medical expenses. And individuals with substantial assets may need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations.

Types of Insurance

Term insurance is the most basic, and generally least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. Also, the premiums increase at the end of each term and can become prohibitively expensive for older individuals. A level term policy locks in the annual premium for periods of up to 30 years.

Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is “pure” insurance without any investment options. Benefits are paid only if you die during the policy’s term. After the term ends, your coverage expires unless you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent insurance without a medical exam.

Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy’s cash value tax-free, although loans reduce the policy’s death benefit and cash value, and may trigger a taxable event if the policy lapses.

Universal Life is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also highly flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn. You may also have the option to change face values. Universal life policies typically offer a guaranteed return on cash value. You’ll receive an annual statement that details cash value, total protection, earnings, and fees.

Drawbacks to this type of insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.

Variable Life generally offers fixed premiums and control over your policy’s cash value. Your cash value is invested in your choice of stock, bond, or money market funding options.¹ Cash values and death benefits can rise and fall based on the performance of your investment choices. Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract.

Universal Variable Life insurance is the most aggressive type of policy. Like variable life, you can choose from a variety of investment options. However, there are no guarantees on universal variable policies beyond the original face value death benefit. These policies are probably best suited to affluent buyers who can afford the risks involved.

How Much Insurance Do I Need?

A popular approach to buying insurance is based on income replacement. In this approach, a formula of between five and ten times your annual salary is often used to calculate how much coverage you need. Another approach is to purchase insurance based on your individual needs and preferences. The first step is to determine your unique income replacement needs.

Currently, a large portion of your income goes to taxes (insurance benefits are generally income tax free) and to support your own lifestyle. Start off by determining your net earnings after taxes. Then add up all your personal expenses such as housing, health care, food, clothing, transportation expenses, etc. This represents the amount that your insurance will need to replace. You’ll want a death benefit amount which, when invested, will provide income annually to cover this amount. Then, you should add to that the amounts needed to fund one-time expenses such as college tuition for your children or paying down mortgage or debt.

Income replacement for nonworking spouses is an important and often overlooked insurance need. Coverage should provide for your costs for day care, housekeeping, or nursing care. Add to this any net earnings from part-time employment.

Finally, estimate your own “final expenses” such as estate taxes, uninsured medical costs, and funeral costs.

Other Types of Life Insurance

Survivorship life insurance (also referred to as last-to-die or second-to-die) is a unique type of contract that insures the lives of two people. It pays a death benefit upon the death of the second insured. Therefore, it is typically less expensive than two individual policies. Survivorship life is often used for estate planning, where it may be possible to potentially leverage today’s dollars — via insurance premiums — into a potentially significant death benefit that can be used to fund estate taxes, create wealth for future generations, or benefit a charity. These policies may be available if one insured is medically “uninsurable.”

First-to-die life insurance insures the life of at least two people and pays a benefit upon the death of the first insured. This policy is useful for covering a mortgage or other large debt obligation where there is more than one debtor. In addition, it can be an ideal tool for funding a buy-sell agreement within a closely held business.

Conclusion

Life insurance is an important component of a sound financial plan. Buying insurance involves asking a variety of personal lifestyle and financial questions. If you are not already working with an insurance professional, you may want to consider the advice of a fee-for-service financial planner who can offer you an objective review of your insurance options. When you decide on what you want, there are many insurance companies to choose from. Consult your library or an independent insurance professional for companies with the highest ratings from the four ratings agencies: AM Best, Duff Phelps, Standard & Poor’s, and Moody’s.

Points to Remember

1. Term insurance is basic, inexpensive coverage that does not accumulate cash value. Policies with very long terms offer stable premiums, but policies that require periodic renewal feature premiums that may increase over time to maintain coverage.
2. Consider a term policy that is renewable and convertible to whole life should your needs change.
3. Whole life provides level coverage with level premiums. A portion of those premiums goes into tax-deferred savings.
4. Variable life offers control over your investments.
5. Premiums on variable policies are fixed, but face value and the value of your investments can fluctuate.
6. Universal life is highly flexible, but is sensitive to interest rate changes. Universal variable life offers more investment options but fewer guarantees.
7. Insurance needs are based on income replacement and personal preferences.

Source/Disclaimer:

¹An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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February 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2012 McGraw-Hill Financial Communications. All rights reserved.

Spendthrifts: Preserving Your Estate for Your Children

Posted by dfederman on Feb 21, 2012 in Investor Education | Comments Off

Protecting and preserving your estate for your children after your death has become much more challenging in the face of the current economic climate.

With the financial collapse of 2008 and subsequent recession, the perilous nature of the European market, our country’s debt crisis, and the fears of another recession, many people are concerned about the long-term stability of the assets left to their children. Very often, however, market conditions are not the biggest threat to the inheritance you leave to your children; rather, the unpreparedness of your own children to manage their inheritance may pose the biggest threat. According to a recent poll, 75% of heirs felt either completely unprepared or only somewhat prepared to handle the management of their inheritance.

Fortunately, there are several solutions to protect against the diminution of such assets, either through mismanagement or creditor issues. One of the most common solutions to preserving your assets for your children is the creation of a spendthrift trust. A spendthrift trust is a trust that restrains the voluntary and involuntary transfer of a beneficiary’s interest in the trust. Such a trust is often established when the beneficiary cannot effectively manage the beneficiary’s own financial affairs, or, similarly, as an asset protection tool to protect the trust’s assets from the beneficiary’s debt and creditors.

The following are several considerations when using a spendthrift trust:

Trust terms—Most spendthrift trusts are irrevocable, provide discretionary as well as mandatory payout provisions, and may even direct partial or full payments of the trust assets to the beneficiary upon reaching certain age requirements.

The terms of the trust should also explicitly provide spendthrift provisions. For example, the trust should be a spendthrift trust to the maximum extent permitted by law, providing that no interest in the trust shall be subject to a beneficiary’s liabilities or creditor claims, assignment, or anticipation.

The spendthrift trust should also provide protections against the beneficiary’s creditors. For example, if the trustee determines that a beneficiary would not benefit as greatly from any outright distribution of trust income or principal because of the availability of the distribution to the beneficiary’s creditors, the trustee shall instead expend those amounts for the benefit of the beneficiary (i.e., the trustee can directly pay the beneficiary’s bills ? such as rent and medical costs ? instead of giving money to the beneficiary outright which may then be reached by creditors). This direction is intended to enable the trustee to give the beneficiary the maximum possible benefit and enjoyment of all the trust income and principal to which the beneficiary is entitled.

Finally, the spendthrift trust can prevent marital claims against the trust assets in case of the beneficiary’s divorce. This is done by providing that all benefits granted to a beneficiary of the trust shall be the separate property of such beneficiary (as distinguished from marital property, community property, quasi-community property or any other form of property to which such beneficiary’s spouse might have a claim or interest arising out of the marital relationship).

Trustee—One of the most important decisions you must make is who to appoint as trustee of the trust. Often, another family member is asked to serve as the trustee. There are many reasons, however, to consider appointing a corporate trustee (or co-trustee). The corporate trustee—such as a bank or trust company—has experience managing money and can provide valuable guidance. It is also much easier for a corporate trustee to make unbiased decisions, especially when various family dynamics are in play.

Trust Protectors—A growing trend is to also appoint one or more trust protectors, defined as a person or persons who are authorized to direct the action of the trustee. The use of a trust protector can be a valuable tool when you have appointed a corporate trustee of the trust. The addition of a trust protector allows you to appoint a familiar, trustworthy person to oversee the trustee. Depending on your desires, and the applicable state laws, the trust protector may be given the power to (i) modify distribution or administrative provisions; (ii) remove and replace the trustee; (iii) consent to or veto exercises of trustee discretionary powers, such as investments and distributions; (iv) resolve disputes between beneficiaries and the trustee; and (v) terminate the trust.

The attorneys at The Estate Planning & Elder Law Firm can assist clients with their estate, financial, insurance, long-term care, veterans’ benefits, and special needs planning issues.

For a comprehensive review of your financial situation, including estate planning, investments, insurance, taxes, and retirement planning, contact an adviser at Ariba Asset Management 1-800-808-7488.

Should You Contribute to a Non-Deductible IRA?

Posted by dfederman on Feb 17, 2012 in Investor Education | Comments Off

When deciding which type of Individual Retirement Arrangement (IRA) to fund for your retirement savings, the answer may not be as simple as you would like.  As a refresher, the Traditional IRA allows an upfront tax deduction along with tax deferred growth. When you eventually take money out of a Traditional IRA, the distribution is taxed as ordinary income. By contrast, the Roth IRA allows you to place after-tax money into an IRA, and all future growth and withdrawals are tax-free.

If your tax bracket is higher than 15% it makes sense to take advantage of the tax deduction of a Traditional IRA. If your tax bracket is below 15% then a Roth IRA makes sense. However, if your income exceeds certain IRS limits, you may be excluded from contributing to both the Roth IRA and the Traditional IRA.

If you are excluded from these two options, should you contribute to a non-deductible IRA, which is funded on an after-tax basis? In most cases, the answer is no.  The problem with non-deductible IRAs is they give you the “worst of both worlds.” For example, it does not give you a tax deduction like the Traditional IRA, and the earnings cannot be withdrawn tax-free like the Roth IRA.  Furthermore, it is cumbersome from an administrative perspective. To designate contributions as nondeductible, each year you add to or make a withdrawal from the IRA, you must file Form 8606, Nondeductible IRAs with the IRS, and you must hold on to these records until you eventually make withdrawals, which could be 30-40 years. Last but not least, if you fail to file there is a $50 penalty!

So when does it make sense to contribute to a non-deductible IRA? There are two exceptions. If you’re older than 59 1/2 and able to avoid the 10% early withdrawal penalty, then you don’t have to worry about losing access to your money if you need it. As long as you choose investments that will maximize the value of tax deferral, you can use a nondeductible IRA to manage your tax burden. The other exception is if you plan to do a “backdoor roth IRA,” which allows you to contribute to a non-deductible IRA then convert to a Roth IRA. Talk to your tax adviser before attempting this because if you also have a Traditional IRA, you must also convert those assets, creating a taxable event.

Talk to your financial or tax adviser to learn about your options for maximizing retirement savings.

For a review of your investment portfolio and financial plan, talk with your Ariba adviser at 1-800-808-7488.