Estate Exemption Expiration

Estate Exemption Expiration

Today, it’s hard to believe that in 1997 you could only exempt $600,000 from estate taxes. When a person died, heirs would pay tax on anything above $600,000 at the (then) maximum 55% tax rate. The estate situation is very different today. The Internal Revenue Service just announced that for anyone dying in 2021, the inflation-indexed exemption would be $11,700,000 per person. Any unused amount from the first spouse to die can be used later by the surviving spouse. Also, the maximum estate tax on amounts above that threshold has dropped to a 40% rate.

 

The Tax Policy Center estimates that only about 0.1% of the estimated 2.7 million people expected to die in the coming year will have to pay any estate taxes at all. There has never been a year when the government has reduced the estate tax exemption in the history of estate taxes.

 

 

Changes to the estate exemption

 

All of that could end in four years unless Congress passes an extension. The current exemption sunsets at the end of 2025, at which point the exemption would automatically drop back to what it was before 2018—back to $5 million indexed to inflation. We may not have to wait that long. President-elect Joe Biden’s tax plan calls for reducing the estate tax exemption amount to $3.5 million. The plan would also increase the top rate for the estate tax to 45%.

 

 

How the Biden plan would change the estate exemption

 

The Biden plan would dramatically reduce the exemption. This change would pull a lot more people into estate tax territory. It is uncertain the measure would pass in its current form, and it seems unlikely that it would affect the 2021 tax year. But the prospect of a change has set people talking to their financial advisors about gifting to heirs under today’s very generous exemption, under the (reasonable) assumption that there would be no walk-back for any actions taken under current tax law. Besides, families can put several relatively complicated estate tax strategies into place, which allow them to keep control of their assets if needed in retirement. At the same time, heirs receive increases in value tax-free. Tax experts are quietly telling their clients to plan now rather than later.

 

 

Planning for the estate exemption or possible changes

 

 

Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route.

 

Discover. Where are you and where do you want to be?

During our meeting, we discuss your goals and concerns before we start gathering data. The financial facts and figures are important, but it’s not the whole story. We learn about your values and dreams, as well as what keeps you up at night, so that we can serve you better.

 

Create. How can you get to where you want to be?

We develop a customized financial plan that shows where you are in relation to where you want to be. We present different scenarios that show the impact of your options so you can choose how to accomplish your goals in a way that is meaningful to you and how you want to live your life. We also stress test the scenarios to see how your plan will hold up to challenges like lower returns or higher inflation.

 

Execution. What are you willing to do to get there?

A plan has no value if it’s not implemented. You choose the scenarios and options that are right for you, and we act as your accountability partner to ensure the plan is implemented. We break the actions into manageable steps and help you prioritize so you’re not overwhelmed.  We also work with your attorneys, accountants, and other professionals as needed.

 

Monitor. What happens when life happens to your plan?

We stay engaged with you because life happens, both good and bad. Fluctuating markets, career changes, liquidity events, changes in the laws, and health concerns can impact your plans. Ongoing proactive planning can keep you on track toward your

 

If you’d like to see some financial plan scenarios for your retirement or estate planning, please give us a call at 619-255-9554.

We would love to explore your possibilities with you.

Long-Term Care: What You Need to Know

Long-Term Care: What You Need to Know

There are many misconceptions and misunderstandings about long-term care (LTC), including who needs it and how to pay for it. It’s essential to break down the main components of long-term care insurance to find what is right for you.

 

What does long-term care mean?

If you’re already on Medicare or researching it, you know that Part A covers in-patient hospitalizations and skilled nursing. You might be wondering why people buy policies to cover LTC if Medicare already pays for it.

But Medicare does not pay for LTC, which is not skilled nursing. It’s home help for someone who can’t perform several of the Activities of Daily Living (ADLs) for themselves: toileting, transferring (for example, from bed to chair), dressing, bathing, feeding, and walking or ambulating. You might also see these referred to as the Basic Activities of Daily Living or BADLs.

Patients can receive LTC in a facility such as a nursing home or their own homes.

 

Why should I consider setting aside funds to cover long-term care?

According to the US Department of Health and Human Services, if you’re approximately retirement age now, you have a 70% chance of needing some LTC. About 1 in 5 of those who will end up receiving long-term care will need it for more than five years.

Depending on how long you need it, the expenses quickly add up. LTC’s costs range from $3,600 per month for someone who is mostly independent in a facility to about $7,700 in a nursing home. 

Home health care aides cost approximately $21 per hour on average. The average American who needs this help during the day would spend roughly $5,000 a month. Whether in a facility or at home, typically, women need care for a more extended period than men do.

It costs a little bit more than average here in California to receive LTC in a facility. The median cost for help with assisted living is about $4,500 and goes up to over $10,600 in a nursing home.

Some families are willing to self-insure or pay out of pocket should they ever need this kind of assistance. Family members can also provide care, which reduces the cost as well.

However, some people would prefer to be independent for as long as possible. They’d rather hire someone outside the family to help them go to the bathroom or get dressed.

Those who choose to hire for this type of care often want to set aside funds for this purpose. They don’t want to be a burden on their loved ones. 

 

Long-term care insurance (LTCI)

These policies pay a certain amount for a specified period if a doctor diagnoses the insured as unable to perform two or three ADLs, depending on the policy. 

Unlike life insurance, there is no medical exam for LTCI. However, the companies use questionnaires, and you may respond with answers that disqualify you. For example, they will typically reject people who are already showing symptoms of cognitive issues such as Alzheimer’s and dementia.

Although LTCI has been around here in the US since the 1970s, Americans started to purchase them in the 1980s. The insurers at that time made two significant errors in their pricing.

They didn’t know how fast the cost of health care would accelerate (faster than CPI inflation) and didn’t realize how much longer people would live. These factors led to substantial underpricing on the policies, and in some cases, the insurers even refused to pay for legitimate claims.

As a result, fewer insurance companies are in the market for LTCI today. However, policies still are being sold.

The contracts usually stipulate limits on lifetime benefits paid out, the monthly maximum, and potentially a deductible. They also offer inflation riders for additional fees. Most policies today don’t discriminate between facility or in-home care. 

 

Ways to purchase LTCI

The original policies were usually use-it-or-lose-it. If you paid for the policy and never required the care, you couldn’t get a refund. Though so much of the population is likely to need it these days, it might not be such an issue for potential buyers. 

Anecdotally the “sweet spot” for purchasing such a policy was around 55 years old. You wouldn’t have too many years of payments if it turned out you didn’t need it, and you were still young enough that some of the disqualifying medical conditions probably hadn’t appeared.

These contracts are still available, though their popularity has dropped sharply. Premiums can undergo rate hikes at any time in the future. 

The insurance company can’t increase the amount you pay just on your policy, but it can raise the premiums on the entire class of people who purchased the same insurance as you. They now have other premium payment options, so you don’t continue to pay for life. 

Rather than take a use-it-or-lose-it policy with the potential for future premium hikes, some LTCI users purchase a hybrid product. These can be life insurance or annuity products that also allow you to use the money for long-term care.

In the hybrid with life insurance contracts, typically, the cost of whatever care you use is deducted from the face amount that’s payable at death. Different companies offer different ways to structure the policy.

When you combine LTCI with an annuity, you usually need to purchase the annuity with a lump sum. There are no premiums for the LTCI, and what you’ll receive is based on how your insurer sets up your contract.

Although the hybrid products are often more expensive than a plain-vanilla life insurance or annuity policy, they can be a good alternative. Especially for someone who suspects they may need the care but is not interested in a stand-alone policy they might not use.

No matter what type of long-term care insurance you buy, make sure that you understand what triggers a claim and what the policy promises to pay. 

If you’re considering LTCI, make sure you check with your company, associations, and groups. Some offer group LTCI plans with relatively attractive premiums.

 

If you want help determining whether you need to buy some LTCI, give us a call at 619.255.9554 or email us to set up an appointment.

 

Maximize Your Charitable Giving Strategy

Maximize Your Charitable Giving Strategy

You might recall that the Tax Cuts and Jobs Act made it much harder for Americans to get tax breaks on their charitable giving by raising the standard deduction so that fewer people have the opportunity to itemize. Of course, you want to do some good for the community with your charity dollars! But receiving the tax break is nice too.

For National Philanthropy Day, we wanted to give you some ideas for making the most of your charitable gifting this year.

 

Choosing a charity

More significant dollars make a bigger impact. In other words, if you select just five charities and give them $1,000 each, you’ll make more of an effect than if you sent $100 to 50 charities.

That may mean that you take more time to figure out where you truly want your charitable funds to go and to ensure that the organization is one that you are willing to support. Although many of our clients have a wide variety of philanthropic interests, we encourage you to choose your top two or three and plan to make a difference through them.

Many of the charity rating websites can provide you with a list of the top charities according to the issues that are most important to you.

For tax deduction purposes, your dollars need to go to an organization recognized as a charity. A 501c3 entity can show you their IRS letter granting them charitable tax exemption. You can also find them on the IRS’s lookup tool.

 

Research the charity to make sure it’s worthwhile

Verify your choices with online sites that provide ratings and information about them. Make sure that your money is going to an entity that values the same things you do.

You can ask the organizations some questions directly as well. What is their mission, and how have they made progress toward it and their goals? Do they have transparency about financials and IRS forms that are readily available on the website?

Watch for costs, primarily operating or administrative. Although not the number one consideration for choosing a charity, costs can help guide your decision. Some charities require a lot more internal support than others, and the organization must staff up to carry out the mission. 

Although the vast majority of charities that you’ll come across are healthy and dedicated to their vision, some scam artists operate in this space. 

If you get an email from an organization you’ve never heard of before, be skeptical. Most of the time, a true charity only emails you when you provided your address to them. And if they’re asking you to send money to a foreign bank or institution – forget it!

Legitimate charities usually don’t send attachments with their emails. They may have pictures that link back to the site, but clicking on an attachment can unleash a virus or other cyber issue into your computer. Delete them. If you’re concerned, you can always look up the phone number on their website and double-check.

You’ll probably see a lot of information come through your social media feeds, too. Remember those scam artists and others, including Russian intelligence, plant bots, and fake profiles. Do your homework first if you see something through social media you want to investigate.

If someone claims to be a victim through email or social media, that’s also likely a scam. You can always search for the charity’s website, look it up on an online rating site, and determine if it’s legitimate.

 

Don’t forget QCDs

The TCJA also increased the age required to take minimum distributions (sometimes called RMDs or MDRs) from your Traditional or pre-tax retirement accounts. If you’re 72, you need to begin these withdrawals.

However, you can deposit up to $100,000 of the funds at the (legitimate) charity of your choice. This option is known as the Qualified Charitable Distribution or QCD. The distribution must go directly to the charity without making a pit stop at your bank account along the way to avoid disqualification.

As you know, typically, you have to pay taxes on your RMDs. That’s the whole point of having mandated withdrawal requirements. But if you do a QCD directly to the charity instead, you won’t pay taxes on the withdrawal.

 

Bundle potential deductions

The standard deduction for married couples for the 2020 tax year is $24,800 ($12,400 for singles and married filing separately.) Since the TCJA limited the deductions you can take on items such as mortgage interest and state and local taxes, many taxpayers no longer itemize. Which means they can’t take the itemized deduction for charitable gifts.

However, if you have some unusual deductions this year that could push you over the standard deduction, you might want to accelerate them into 2020 and do some charitable giving while you’re at it. 

For example, the floor to deduct medical costs is 7.5% of your adjusted gross income. If you happen to reach it this year because you’ve had some medical issues, you might exceed the standard deduction. 

Another avenue to consider is bundling your charitable donations into one tax year to help you exceed the deduction threshold, rather than giving smaller amounts annually. If you decide to use a donor-advised fund, you could bundle several years’ worth of giving into one tax year and then portion out the money to your charities over time.

This strategy provides an excellent opportunity to make some substantial gifts and receive your tax break.

 

Contribution limits

Ordinarily, you would only be able to deduct up to 60% of your adjusted gross income for a cash donation to a qualified organization. However, those limits have been suspended for 2020. The ceiling is still in place for non-cash donations, such as stocks.

Thinking about how best to make your charitable gifts this year? We can help. Just give us a call at 619.255.9554 or email us to set up an appointment.

 

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Your Finances: What You Need To Do First When Your Spouse Dies

Your Finances: What You Need To Do First When Your Spouse Dies

 

It’s common for the surviving spouse to feel a bit lost upon the death of their partner. You may not have immediate access to all the household assets or know what information you need to put together for the estate.

This time can be very confusing, so it’s essential to feel that you can enlist your financial team. Your financial advisor, CPA, and attorney should work together to help you manage the transition.

Here are the steps you should take to make the process easier for you as you navigate your new phase of life. You can delegate some of these to a trusted relative or friend to give yourself more time to grieve.

1. Death Certificate: Request multiple copies

For many of these steps, you’ll need a death certificate. Make sure you request multiple copies. Some companies may require an actual certificate and not a copy, so ask what they want when contacting them.

These are not necessarily in the exact order you’ll end up taking them, but the more urgent suggestions are listed first.  

 

2. Locate the will

Hopefully, you and your spouse have both made wills and know where they’re located. If you’re not sure, check where your spouse kept important papers. It could be in a file cabinet or a safe deposit box.

If you’re having difficulty, your estate planning attorney will likely be able to help you since they should have a copy on file.

3. Talk to your estate planning attorney

Every state has different probate requirements, so your lawyer can guide you through the process. “Proving” the will is often the first step taken by the probate court. They’ll also be able to help you with reading the will and settling the estate.

It may take some time for the estate to finally be distributed, depending on how the attorney has set up the estate planning documents. At some point, you may want to revisit your own will, but that doesn’t need to be taken care of right away unless you have an urgent reason for doing so.

If you don’t already have an estate planning attorney, consider asking your financial advisor for a recommendation.

 

4. Talk to your financial advisor

It would be best if you alerted your advisor about the death as soon as possible. They’ll be able to get the paperwork ready to make the necessary changes. You can discuss with them if they have any recommendations for you regarding your budget, financial plan, or investments. 

They most likely have experience in dealing with widows and widowers, so they can help guide you through some of your decisions.

 

5. Call the Social Security Administration

 

You will need to call or visit your local office in person. You may qualify for survivor’s benefits, whether or not your spouse had already begun collecting Social Security retirement payments.

Most likely, you’ll need your spouse’s Social Security number for this, so have it handy when you call or visit.

 

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is just one part of your journey to the retirement of your dreams. A Certified Financial PlannerTM can help you navigate the complexities of financial planning. Talk to a Financial Planner>

6. Call the Veterans Administration if your spouse served in the US armed forces

Similarly, you may be able to claim benefits from the VA, depending on the length of service. There may be some funding that you were not previously aware of, so it’s always a good idea to check with them when you have a military spouse.

 

7. Collect documents

 

You’ll find it’s much easier to gather all the necessary items before you begin contacting people. In addition to the will and Social Security information, you’ll want birth, marriage, divorce (if applicable), and death certificates. In addition, find tax returns, banking, credit card, investment account, retirement account, pension plan, and loan statements (including mortgage) as applicable.

It will also help have your house deed, car titles, insurance statements, and bills in one spot.

 

8. Let employers know

There may be benefits that you can receive as the spouse of a deceased employee. Often you can start your search with the Human Resources department. They’ll be able to advise you if there’s a different number you should call. 

There are several employers you should call, not just the current or most recent company.

Your spouse’s current/most recent employer if retired

Find out what benefits may be available to beneficiaries, as well as the details of the retirement plan or pension. If your family is covered through your spouse’s health insurance, contact them as well to make sure you can continue coverage.

Your employer

Frequently, a spouse’s death is considered a “life event” that may allow you to claim some benefits. Check with your HR to determine whether you are eligible for any additional aid.

Your spouse’s previous employers

You may have access to a pension, retirement account, insurance payout, or other benefit you or your spouse may not have been aware of.

 

10. Notify insurance companies

It does take some time for life insurance and health insurance companies to process death claims, so you want to do this sooner rather than later. They will likely send you paperwork to fill out. Ask for instructions because the forms aren’t always clear.

For your property and casualty insurance, you’ll need to remove your spouse’s name to put everything in your name. Check policies for auto, homeowners, umbrella, etc.

11. Change titles and beneficiaries on jointly-held property

You’ll need to change everything into your name only, whether it’s the house, banking accounts, credit card accounts, or investment accounts. Your financial advisor can prepare and expedite the paperwork for the accounts that they manage for you.

For accounts in your name, such as pensions and retirement accounts, you may want to change beneficiaries if your spouse is the sole beneficiary with no contingent beneficiaries listed. If you already have contingent beneficiaries designated, this is not an immediate need.

12. Send a letter to the three credit bureaus

You’ll want to get the credit reports for your spouse so that you’re aware of all the credit liabilities. You should advise the bureaus to add the notification that your spouse is deceased so no one can attempt to take credit out in their name. This helps protect you from fraud.

13. Let your tax advisor know

They’ll need to file taxes for your spouse for the year in which s/he died and have the taxes paid. Depending on your situation, this can get tricky, so let them advise you. Because the taxes aren’t due right away, this isn’t an immediate need, but it still should be done in a timely fashion, so they’re not late in filing.

14. Call the financial aid office if you have a student in college

Your child may be eligible for more financial aid or other assistance, so let them know.

 

15. Cancel your spouse’s subscriptions and memberships

 

Any gym or club memberships in your spouse’s name should be canceled, so you don’t continue to pay those bills. If you have a joint membership, at some point, you’ll want to investigate what other options are available to you.

 

16. If your spouse had business interests, let their business attorney know

 

The lawyer can take charge of any processes that your spouse put in place for this contingency.

Do you need help dealing with the financial issues surrounding the death of your spouse? Please give us a call at 619.255.9554 or email us to set up an appointment.

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

The Secrets of 401(k)s

The Secrets of 401(k)s

 

The 401K, a widely used retirement vehicle offered by employers, is well known. But there are a few facts that you might not already be aware of.

History and a brief overview of 401(k) plans

Now the prime retirement account vehicle for full-time employed workers whose companies offer the benefit, the 401(k) was not originally designed to be the retirement account for the masses.

It was created as a way for executives and others to avoid taxes on their deferred compensation. Later, a benefits consultant wanted to find a way for employees to save while receiving an employer match, and in 1981 the IRS allowed employers to fund these accounts through payroll deductions. That kicked off the account’s popularity.

A 401K eligible employee can set aside up to $19,500 in 2020 into the plan. If over 50, they can also add a “catch-up” up to $6,500. Some firms provide a matching contribution up to a certain percentage or dollar amount, free money to the employee, and tax-deductible to the employer.

The match is always pre-tax, but if the option exists in the plan, the employee can choose whether their contribution is pre-tax, known as Traditional, or after-tax as a Roth. Typically, the plan sponsor (usually an investment services company) provides a menu of conservative to aggressive options so each employee can invest according to their particular strategy.

Because they are employer plans, 401(k)s are strictly regulated. A third-party administrator or TPA usually oversees the plans, so the employer has no influence over an employee’s account and can’t monitor it. Requests for withdrawals and rollovers are generally sent to the TPA to take care of. 

 

401(k) Overall defined contribution plan limit

Many people tend to think of the $19,500 (or $26,000 for those 50 or older) to be the limit. You can add to that the employer’s matching contribution for the total investment for the year.

Investors can also set aside $6,000 in an IRA, plus $1,000 catch-up for the 50+ crowd. (This money may or may not be tax-deductible, depending on the investor’s income, but it can tax-deferred even if you can’t take a deduction for it.)

That’s $25,600 or $33,000 to be set aside tax-deferred, depending on your age. But is that the maximum allowable? Not necessarily.

As they used to say on the informercials: But wait, there’s more!

The IRS caps the total amount of defined contribution plan limits at $57,000. The missing component, after the employee’s 401(k) contribution and the employer’s match, if any, is an after-tax contribution to the plan. Not all plans allow for this, but some do. This is the limit for solo 401(k)s and SEP IRAs as well.

Imagine that you’ve contributed $19,500 to your plan. Your employer match has kicked in $6,000, bringing the total to $25,500. For the $57,000 plan limit, the catch-up contributions don’t count.

Therefore, you can add to that $31,500 after-tax to reach the upper limit of $57,000. Why would you add in additional funds that are not tax-deductible? You may not get the current year tax deduction, but it will grow tax-deferred until it’s time to take the money out.

 

401(k) fees and retirement withdrawals

It’s essential to consider the fees in your plan and the options. If your plan sponsor is an insurance company, you may be paying an additional “separate account” charge that may go by the name Variable Account Charge or Mortality & Expense (M&E).

Plan sponsors, whether insurance companies or not, may charge the employer additional fees as well, which may or may not be passed down to you. They may offer other services such as “advice” for an additional cost, but you can most likely find similar advice more cheaply by asking your financial advisor.

When choosing your funds, look at the expense ratios and the share class (if you’re investing in mutual funds.) Those with high expense ratios and share classes that are not labeled “institutional” or “load-waived” aren’t good for your bottom line.

Also, read your plan documents to see what kinds of withdrawals are allowed once you’ve reached age 59 ½ and can withdraw without penalty. Some plans don’t allow you to withdraw monthly, and may restrict you to annual or quarterly withdrawals.

 

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is just one part of your journey to the retirement of your dreams. A Certified Financial PlannerTM can help you navigate the complexities of financial planning. Talk to a Financial Planner>

401(k) Rollovers

In some of our previous articles, we’ve mentioned that you should consolidate your like-kind retirement accounts, i.e. Traditional with Traditional and Roth with Roth, rather than having a number of accounts from previous employers sitting in old 401(k)s.

Some 401(k) plans allow for rollovers into the plan itself. This might not be a bad idea if you’ve investigated the plan in detail and know that the fees are low. And that you can withdraw funds whenever you want after you’ve reached 59 1/2.

Another option is to roll all your 401(k) plans into an IRA once you leave the companies that sponsor them. Typically IRAs have lower fees, fewer restrictions, and a bigger menu of investment options than employer 401(k)s.

Either way, you’ll probably have some paperwork to fill out. The best way to roll funds into or out of a plan is to perform a direct rollover, where the funds go directly from one service provider to another. Many can do this transfer electronically, which is safer than having checks mailed out. Sometimes, the check will be mailed to your address but made out to the new financial company, FBO (for the benefit of) your name.

In an indirect rollover, the funds come to you instead. You have 60 days to deposit all the money back into a retirement account. If you don’t, it will be considered a withdrawal, and you’ll owe taxes and perhaps a penalty if you’re under 59 ½. If you only invest a portion of the money back in, the remainder is also considered a withdrawal and taxed and potentially penalized.

 

Stay in the game

You likely already know that staying invested is the name of the game, so we can’t call this one a secret.

However, it can be difficult when the market is volatile. And even when the market is relatively calm!

The key to staying invested is to have a diversified portfolio with enough aggressive funds (stocks) to reap the gains when the market is rising. And enough conservative or noncorrelated money (bonds) so that you can sleep at night when the market is dropping.
Since no one has a crystal ball, it’s important to diversify at an investment level: international and US, small, large and medium-sized companies, government and corporate bonds.

Do you need some assistance with your 401(k)? Or are you thinking about opening one up for your own business, whether you’re self-employed or have some staff? Give us a call at 619.255.9554 or email us to set up an appointment.

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Is Your Estate Planning Up-to-Date?

Is Your Estate Planning Up-to-Date?

It’s no secret that many Americans put off creating a will — even those who need it most. But one milestone event often triggers a shift in mindset: the arrival of a child or grandchild. Usually, it hits people right before they get on a plane for the first time following the child’s birth: “If the plane crashes, what happens to our children, and how do we make sure they’re taken care of after we’re gone?”

If you have not put your estate plan into place, the answer to that question is that state law dictates who gets your assets, and a court decides who will act as guardian of your minor children. Picture in-laws fighting over custody of your children, assets being misappropriated and mismanaged, and a spendthrift child 18 years in the future, riding off into the sunset in a shiny, new Lamborghini.

A thoughtful and well-constructed estate plan can make all of these worries obsolete. If you put an estate plan in place years ago, it may be time to revisit the documents and revise where needed. If your estate plan was created before the significant tax law changes of 2018, it should be reviewed by an attorney. Here are four essential questions you should be able to answer about your estate plan.

Are estate-planning documents in place and up to date?

For most people, “basic” estate-planning documents include the following:

Will, Revocable Living Trust, Financial Power of Attorney, Health care directives and a living will.

 

Will

This primary estate-planning document dictates how a your property will be distributed at death. A will also names the individual in charge of managing the property’s distribution — the executor — and includes a nomination of a guardian for any minor children.

 

Revocable living trust

In many cases, it’s important to have a revocable living trust in addition to a will. For example, in states where probate is unusually expensive or burdensome, a properly funded living trust avoids the expense and delay of a probate proceeding. The living trust becomes the primary estate-planning document, dictating how an individual or couple’s property is distributed upon death and who manages the process (in this case, a trustee).

 

Financial power of attorney

In a financial power of attorney, an individual names an agent to act on her behalf with respect to her financial matters. The powers granted under a financial power of attorney range from very narrow (i.e., granting the agent power to act on behalf of the individual with respect to a specific transaction) to very broad (i.e., giving the agent the authority to take virtually any action with respect to the individual’s financial matters).

 

Health care directive and living will

In this document, which has many different names and comes in many different forms, the individual appoints an agent to make health care decisions if she is unable to do so and makes known her end-of-life wishes.

Who should be trustee? Executor? Guardian? Do your clients understand the roles and the differences between them?

 

These terms can be confusing, but here’s a simple distinction: the trustee/executor is in charge of the “stuff,” and the guardian is in charge of the children. There will be many intersections of the two roles, but each requires a different skillset, meaning different individuals may be needed:

Gaurdian

Charged with raising the children if you are unable to do so, caring for the children daily.

 

Trustee/executor

In charge of overseeing the gathering of your assets, the payment of taxes and any other final expenses, and then the distribution of the assets to the clients’ beneficiaries. If your estate-planning documents provide for continuing trusts for the children, the trustee will handle the ongoing management and investment of the assets.They will also oversee the distribution of the assets to the children and their guardians.

Some common questions you may have about the two roles are:

Should the trustee/executor and guardian be the same person?

 

It depends on the client’s situation. The roles require two very different skill sets, but if you have a go-to person you trust to serve in both roles, it may make sense to name the same person. The checks and balances and diversity of perspectives afforded by two different individuals serving in the roles can be beneficial. If you decide to name two different individuals, they’ll need to work together.

Should the trustee/executor and guardian be a family member?

 

Again, this depends on your situation and relationships. Some things you should keep in mind are the age of the individual you’re considering, as well as where the individual lives (i.e., does the individual live in the same city where the clients are raising their children, or across the country), the individual’s own family composition (i.e., is the individual married, does the individual have his or her own children) and the individual’s personal financial situation.

Is the guardian appointed in the will guaranteed to be the children’s guardian?

 

No, it is merely a suggestion. The supervising court must officially appoint the guardian but is usually deferential to the parents’ wishes, unless there are extenuating circumstances.

In any case, whether trustee, executor or guardian, it is important to get permission from the person being appointed prior to naming them in the plan.

What if my children can’t handle money?

If the children are minors, an outright disposition of your assets is not appropriate. This means that after your death, continuing trusts will likely be put in place for the children’s benefit, and you need to decide what these trusts will look like. Although estate-planning attorneys will likely have helpful recommendations on how to structure the ongoing trusts for children, some factors you must consider include:

  • The standard of distribution (How does the trustee determine if a distribution is appropriate?)
  • The term of the trusts (Are there mandatory distributions at certain ages, or do the trusts continue for the children’s lifetimes?)
  • The identity of the trustee

 

Do you have sufficient life insurance?

If the children are minors, an outright disposition of your assets is not appropriate. This means that after your death, continuing trusts will likely be put in place for the children’s benefit, and you need to decide what these trusts will look like. Although estate-planning attorneys will likely have helpful recommendations on how to structure the ongoing trusts for children, some factors you must consider include:

Because of the high cost of raising children today, new parents need to consider purchasing life insurance. There are two basic types:

  • Term insurance – provides coverage for a term of years and pays out a death benefit if the insured dies during the term.

  • Permanent insurance – includes an investment component and is usually structured to pay a death benefit no matter when the insured dies.

One of the primary benefits of insurance is that beneficiaries receive the proceeds free of income tax. Further, if you have substantial net worth and purchase an insurance policy with a significant death benefit, it may make sense to hold the policy in an irrevocable life insurance trust. If structured properly, an irrevocable life insurance trust ensures that any insurance proceeds received by the trust are sheltered from the estate tax.

If you are young and healthy, term insurance is a relatively cheap and effective way to provide an income-tax-free pool of money to provide for surviving children in the case of your premature death.

 

Start the conversation

A new child or grandchild is a beautiful joy. The new addition to the family usually means an adjustment to estate planning. By working through the four questions above, you’ll take an important step in thinking about your estate plan — and you may rest easier knowing everything is in place.

Are you on track for retirement?

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is just one part of your journey to the retirement of your dreams. A Certified Financial PlannerTM can help you navigate the complexities of financial planning. Talk to a Financial Planner>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Login

[ultimatemember form_id=”1899″]

×