When Considering Life Insurance

Life insurance is a simple concept. A person takes out a policy in order to provide funds to his or her loved ones upon his or her death. However, life insurance can get complicated by the various products that life insurance companies offer. A recent article attempts to assist insurance customers in understanding how to make good decisions concerning their life insurance.

The article first suggests that people consider life insurance as financial plan insurance. The term itself is rather misleading, considering that life insurance cannot bring you back once you have passed on. Rather, life insurance provides for the financial future of your loved ones.

Here is one rule of thumb: when purchasing life insurance, first calculate how much money you believe your family would need to live comfortably without you. Factor in any mortgage or car payments, college tuition for children, and supplemental income. When you have factored in all of these assets, consider how long your family will have these specific needs. Often, a level term policy that expires at the same time that your working career would be over is the best option.

Life insurance replaces your income, so consider how long of a working career you believe you will have. For example, if you plan on retiring at age 65, calculate your income until that date. After which, there is no anticipated income to protect.

529 Plans Benefit Grandparents and Grandchildren

As a recent article explains, a majority of wealthier investors prefer to transfer money to their grandchildren through 529 college savings plans. In part, 529 college savings plans are popular because they allow the grandparents to reduce the value of their taxable estate, while also maintaining control of the funds removed from the estate.

A person can open a 529 College Savings Plan for each of his or her grandchildren. The grandparents can then transfer up to the current annual gift tax exemption amount to each account, tax-free. Not only will the 529 account grow tax-free, but any withdrawals made by the grandchildren will be tax-free, as well.

English: A grandfather teaching his little gra...
(Photo credit: Wikipedia)

Importantly, the donors to the account are the ones who determine how the assets will be distributed. For example, if a grandparent unexpectedly has a stay in an emergency room and requires the money, he or she can take the assets back. If this happens, however, any investment gains would be taxed to the grandparents when the assets are withdrawn. This penalty tax, however, is only ten percent. Many donors attempt to “frontload” the 529 account so that they can make a lump sum gift of $65,000, tax free.

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Thanks Gramps! Planning Gifts to Grandchildren

Often, grandparents who have extra money wish to assist their grandchildren financially. A recent article discusses three ways through which grandparents can give to their grandchildren.

Grandparents with a child
Grandparents with a child (Photo credit: Nestlé)

Write a Check

Many grandparents simply write checks to their grandchildren without thinking twice about it. Under current tax rules, a person can give as much as $14,000 per recipient per year, without tax consequences. If you would like to give an individual grandchild more than $14,000, consider using another vehicle to avoid tax consequences. Finally, remember that this type of gift is often calculated into a giver’s estate for the calculation of whether a person is eligible for means-tested government programs such as Medicaid.

Invest in a College Savings Plan

If you want to assist your children with paying for a college education, consider a 529 account rather than simply writing a check. With a 529, you can be certain that the money is spent exactly how you would like it to be spent. Additionally, 529 accounts offer important tax benefits that will not have any impact on your grandchild’s ability to apply for means-tested financial aid.

Use a Gift Trust

Finally, you can transfer money to your grandchild through a gift trust. A gift trust is an account that you set up where you or a named individual serves as the trustee. The trustee can direct the timing and use of any distributions made from the trust.

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What is an Irrevocable Funeral Trust?

One tool for those looking to spend down their assets in order to apply for Medicaid benefits is the Irrevocable Funeral Trust (“IFT”). Through an IFT, a person can set aside funds to pay for his or her funeral and burial expenses. Importantly, funds in an IFT are not considered to be part of a person’s estate for purposes of Medicaid qualification. A recent article discusses the basics of the IFT.

Importantly, an IFT should not be used by just anyone. High net-worth individuals who will not require Medicaid assistance, for example, would not use an IFT because they likely have sufficient funds or insurance policies that will cover medical expenses.

However, those who are worried about how to pay for their long-term care costs and do not have money earmarked for their funeral should consider an IFT. A person taking out an IFT will be required to pay completely in advance, and will not be permitted to take out an IFT for an amount that exceeds 125 percent of the average funeral cost.

Importantly, no medical underwriting is necessary for an IFT. Beyond the one-time payment to the insurance company, the insured party faces no expense from the trust.

Dealing with Early-Stage Alzheimer’s

Currently, the sixth leading cause of death in the United States is Alzheimer’s disease. Between 2000 and 2010, the number of deaths caused by Alzheimer’s disease increased by 68 percent. By 2050, the number of Americans with Alzheimer’s disease is set to increase to 13.8 million. As a recent article explains, Alzheimer’s could quite possibly become an epidemic, if it is not one already.

English: PET scan of a human brain with Alzhei...
English: PET scan of a human brain with Alzheimer’s disease (Photo credit: Wikipedia)

If a loved one in your family begins to display the signs of Alzheimer’s disease, the first thing a family should do (beyond medical attention) is be sure that the family member has executed a will, durable financial power of attorney, and health care power of attorney. These documents allow the person to direct how his or her assets will be distributed upon his or her death, and also to direct who should make medical and financial decisions for him or her when he or she is no longer capable.

Importantly, a person diagnosed with early-stage Alzheimer’s may still be able to sign these legal documents. When a loved one is suffering from short-term memory or vocabulary loss, but still has a grasp on reality, he or she can often show the necessary mental capacity to create legal documents.  Although it is best if these documents are created prior to the early-stage dementia, if that is not possible, have a geriatric psychologist evaluate the person immediately prior to signing.

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Calling an Audible: Avoiding Taxes Caused by a Bypass Trust

Since estate-planning maneuvers can cause unintended consequences, it’s important to plan with flexibility. A recent article discusses how one man dealt with the unintended consequences of a bypass trust he inherited from his wife before it was too late.

Bypass trusts are a very common estate-planning tool used to pass wealth to several generations. Angie Stephenson, partner at ParenteBeard Wealth Management LLC, explains that “these [bypass] trusts were common years ago when the estate-tax exemption was much lower, so you see them in many wills.”

When this particular man’s wife passed away, he received a bypass trust worth $730,000. In creating the trust, his wife’s intentions were that the trust provide him with income for the remainder of his life, and then distribute the remaining assets to their children. The problem was that when the children receive the remaining assets, they would also receive a large bill for capital gains taxes.

Through planning, the man was able to work out a way to include the trust assets into his estate, thereby eliminating the capital gains tax liability for his children. In order to accomplish this transfer, the man was granted the power of appointment over all assets held by the trust. Importantly, this maneuver gave him control over the assets which would then be considered as part of his estate upon his death. Such a result illustrates the benefit of planning with flexibility.

Back to the Basics: Estate Planning for a “Typical” Family

Contrary to popular belief, estate planning is still important for the vast majority of Americans who are not wealthy. After all, after a person has worked his or her entire life to amass all of his or her assets, he or she should seize the opportunity to direct what happens to the assets after his or her death. A recent article discusses five important estate planning maneuvers for the “typical” family (although we are pretty sure there is no such thing as a “typical” family).

Day 73: Kerns family self portrait {about me}
(Photo credit: lorenkerns)
  1. Sign an Advance Health Care Directive: This document allows you to put your wishes in a document to be followed by your doctors, concerning the end-of-life medical care you’d like to receive.
  2. Complete a Durable Power of Attorney, which will allow you to select the person who you would like to take control of your financial affairs, should you become unable to do so.
  3. Execute a Last Will and Testament: This is an important document because it directs the distribution of your assets. Through your will, you designate the guardian for your minor children.
  4. Complete and review your beneficiary designations: These are the designations on policies, such as life insurance, that pass straight to your intended heirs upon your death.
  5. Be sure to consider the impact of property held via joint ownership. Such property is inherited immediately by the joint owner upon your death.
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‘Spending Down’ for Medicaid Coverage: A Cautionary Tale

Medicaid is a need-based public benefit program that assists citizens in paying for medical care. Therefore, a person can only receive benefits if he or she meets certain income criteria. In order to meet the criteria, many people attempt to spend down their assets. However, if not done properly, a ‘Medicaid spend-down’ could have disastrous consequences. A recent article tells the story of Eugene Shipman, who ran into trouble after attempting to spend down his assets to qualify for Medicaid.

Centers for Medicare and Medicaid Services (Me...
Centers for Medicare and Medicaid Services (Medicaid administrator) logo (Photo credit: Wikipedia)

Shipman and his wife, Arline, began the spend down process in April of 2008, so that Arline would qualify for Medicaid coverage for her anticipated and impending care needs. As part of this spend-down, Eugene disinherited her in his will executed in March of 2009. Following the drafting of the will, Arline’s son, David – who exercised her power of attorney – disclaimed any inheritance from Eugene on her behalf.

Then, in 2010, Eugene unexpectedly passed away. Arline’s attorney scrambled to file a petition to claim an elective share of Eugene’s estate on her behalf. When the trial court denied the petition, Medicaid got involved and asked the court to reconsider. Luckily, the appellate court revoked the disclaimer and granting Arline the elective share.

Had the court determined that the disclaimer should not be revoked, not only would she have lost her Medicaid eligibility, but she would have also missed out on half of Eugene’s estate. The story of Eugene and Arline should remind individuals that they must seek competent counsel and take caution when involved in a Medicaid spend down.

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Income Tax Planning While Planning Your Estate

Now that the American Taxpayer Relief Act of 2012 has bumped the federal estate tax exemption up to $5.25 million, a recent article explains that many individuals are now turning their energy to estate planning maneuvers that will reduce their income tax bills.

Most income tax planning strategies are aimed at individuals who have a high net worth, yet do not anticipate their estate to be valued at or above $5.25 million upon their death. One popular strategy is making a loan to a family member or friend in a lower tax bracket at a low interest rate. The borrower can invest the money and take out the dividends, interest, and capital gains. Eventually the borrower will pay the loan back and the lender will have his or her money back so he or she can pay for retirement or medical expenses.

Like the maneuver described above, income tax planning often involves the shifting of assets in order to reduce the income tax liability on those assets. Incorporating a trust into the strategy may also fortify the plan to protect against creditors and State Estate taxes.

Minding Mom & Pop’s Shop: Five Steps to the Succession of Your Family Business

Succession planning for a family business is often no easy task. Recently, an article in Forbes outlined the five necessary steps for a viable succession plan. The five steps include:

English: Demise of a family business? Coulson ...
(Photo credit: Wikipedia)
  1. Planning for the general transition of the business: The article notes that only one third of family businesses successfully make this transition.
  2. Creating a plan that aligns the family interests: This is important because the succession of a business must serve many family goals. Not only must it pass the business on to the next generation, but it must also provide a retirement income for the current owners.
  3. Creating a buyout agreement that balances financial returns: Often it is difficult to value a family business. While the retiring owner may look to the balance sheets for the value, the real value of the business is often based on a model of earnings capitalization.
  4. Creating a succession plan that quells any potential interfamily disputes: Often, interfamily disputes can spell the end of a family business. These disputes are most typical where the interests of all family members are not aligned. Pay particular attention when there is a divorce or death that leaves a non-involved family member stock.
  5. Avoid potential estate and inheritance issues, such as tax and probate delays that may hold up the succession of the business.  

What Goes in the Bucket? (i.e. What Can I Use to Fund My Trust?)

Aside from an individual’s Last Will and Testament, a trust is probably the most popular estate planning tool. Trusts, which come in various forms, are often used as a vehicle for tax avoidance. Assets in certain Irrevocable Trusts often avoid taxation because, by putting them in such a trust, the owner relinquishes ownership of the assets to a trustee.

When considering whether an estate plan should incorporate a trust, it is important to consider what type of assets within the estate may be transferred to the trust. A recent article discusses certain types of trusts, and the assets that they hold. This is NOT an exhaustive list, but rather a ‘sampler’ of sorts.

  1. Property and Land Trusts: These trusts can hold any sort of property or real estate, such as your residential home or an investment property.
  2. Financial Asset Trust: This type of trust can hold a multitude of financial assets, such as stocks, bonds, and shares.
  3. Life Insurance Trust: This type of trust holds a life insurance policy that is ‘written into trust.’ A life insurance policy that is ‘written into trust’ will be paid out to the trust, rather than an individual.

Many other assets, such as Business Interests (even S Corporations), Hotel Investments and Personal Property, can be written into appropriate trusts as well.

Safeguard Your Wealth for Retirement

It is never too early to start planning for a long and comfortable retirement. A major part of retirement planning is safeguarding assets from the uncertainty that life often brings. A recent article shares some tips for protecting retirement savings from potential liabilities such as lawsuits, while also ensuring that there is money available to you when you need it.  Here are some important takeaways:

retirement (Photo credit: 401(K) 2013)

Schedule Your Assets Based on Your Financial Timeline
People often protect their wealth by putting it in investments or policies that they will not be able to access for a number of years. While this is typically a great way to keep assets from creditors, it may become problematic if a person needs access to the money. Therefore, it is wise to schedule your investments and policies so that they become due at various, critical times in your life, such as when your children go to college or when you plan to retire.

Be Risky, Within Reason
Risky maneuvers, such as putting money into the stock market, can often pay off where financial planning is concerned. However, too much risk can lead to disaster as well. In order to safeguard the bulk of your retirement savings, you may consider secured-return investments such as a fixed indexed annuity. Place a much smaller portion into vulnerable investments and securities.

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Planning With a Baby on Board

The birth or adoption of a new child is a frenzied and joyous time in the parents’ lives. Understandably, estate planning is often the last thing on the minds of expectant parents. However, as a recent article explains, certain parts of estate planning are essential for a growing family. Expectant parents should consider at least the following two questions, and plan accordingly before it is too late.

Children, Baby new born
Children, Baby new born (Photo credit: Wikipedia)

Who Would You Trust to Care For Your Children?

Should the unthinkable happen and neither you nor your partner are able to care for your children, it is important that you have a plan in place. If you do not designate a guardian for your children, or the guardian you have designated declines to serve, the court will select the person who will care for your children. This may or may not be the person that you would have chosen.

Do You Have Life Insurance?

Life insurance is an important part of the estate of many parents. Life insurance provides a guaranteed sum of money that can finance the care of your spouse and children. For extra protection, you can designate that if you and your spouse pass on before your children reach the age of majority, the money will be kept in trust and distributed only by a designated trustee. You can further designate that, should you die after your children reach the age of majority, they can simply receive the sum outright or in installments at various ages such as 21, 25, and 30.  Yet another popular option is to allow the money to stay in trust forever to maximize asset protection, while ensuring financial needs are met.

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ALERT: New Rules for Reverse Mortgages

As the costs of long-term care continue to rise, more and more elderly Americans are turning to reverse mortgages in order to fund these costs. A reverse mortgage allows a homeowner aged 62 or older to convert his or her home equity into cash while also remaining in the home. The homeowner can choose to accept this cash through a line of credit, monthly payment, or lump sum. As a recent article explains, the rules surrounding reverse mortgages are about to change.

Logo of the Federal Housing Administration.
Logo of the Federal Housing Administration. (Photo credit: Wikipedia)

The Federal Housing Administration (“FHA”), which insures and regulates reverse mortgages, recently announced that it will modify the reverse mortgage program in order to reduce the incidence of default. Two major changes include lower caps on borrowing limits and new rules that will make it even harder to obtain a reverse mortgage.

The FHA plans to change the borrowing limits in order to reduce the cap on the amount that a borrower can receive in the first year of a reverse mortgage. After the new rules are implemented, a borrower will only be able to take up to 60 percent of the appraisal value of the home. This amount is reduced from the previous cap of 75 percent.

The FHA will also implement various rules that will make it harder to obtain a reverse mortgage. These rules will also likely reduce the size of the loan that borrowers will be able to receive. The new rules are scheduled to take effect on October 1.

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Wait, I Did What?!?! Are You Second-Guessing Your ILIT?

Many Americans let out a sigh of relief when the American Taxpayer Relief Act of 2012 was finally signed into law. The signing of the act put an end to much of the uncertainty that previously surrounded estate planning where taxes are concerned. As a recent article explains, one consequence of this newfound certainty is that individuals who planned meticulously in order to avoid death taxes are now attempting to back-pedal .

One product that many individuals are now second-guessing is the Irrevocable Life Insurance Trust (“ILIT”). As the term “irrevocable” implies, ILITs are relatively inflexible. However, there are certain ways through which estate-planning attorneys can soften the terms of an ILIT.

Options such as adding a spousal access clause, adding a special trustee clause, or increasing the discretionary power of the trustee allow the trust creator to exercise more control over the trust. Some state governments have also attempted to make ILITs flexible by enacting “decanting” statutes that provide for the transfer of assets from an old ILIT to a new, less restrictive one.

If you would like to modify or revoke your ILIT, it is important to examine the originating documents carefully. Be sure to consider the legal, tax, financial, and insurance components of any planned adjustment. Importantly, any changes to your trust should comply with its terms and make financial sense.