Rowley Law

Why Estate Planning is So Important

“Without a plan in place, there could be a long-lasting impact on your loved ones, even if you don’t have a pricey home, large IRA or valuable art to pass on.”

The average person spends more time planning a vacation or deciding what car to buy, than they do deciding who will inherit their assets after they've passed away.

While estate planning isn’t as fun as a Caribbean cruise or a brand new sedan, without it, you’ll have little say in who gets all of your possessions.

Investopedia’s recent article, “4 Reasons Estate Planning Is So Important,” reminds us that estate planning isn't only for the rich. To show you that estate planning is necessary, look at these four reasons why you should have an estate plan to avoid potentially devastating consequences for your loved ones.

1. Keeps Your Wealth From Going To Unintended Beneficiaries. Estate planning helps middle-class families plan, in the event something happens to a family's breadwinner(s). If you don’t decide who receives your assets when you pass away, you won’t have any control as to who gets what. Without an estate plan, a probate court will decide who gets your assets, based on state intestacy law. This may not be what you would have wanted. A will can avoid this result.
   
   
2. Families with Young Children are Protected. If you're the parent of minor children, you need to name a guardian to be certain your children are taken care of the way you’d want. Without this fundamental provision in your will, the probate courts will make this decision.
   
   
3. No Huge Taxes for Your Heirs. Estate planning serves to protect your family from unnecessary estate and income taxes. You want to minimize or eliminate all of their federal and state estate taxes or state inheritance taxes, as well as the income tax that beneficiaries might have to pay. Without a plan, these taxes can be significant.
   
   
4. Avoids Headaches and Messes for Your Loved Ones After You're Gone. Family fighting after a loved one dies is not uncommon, and it's another reason why an estate plan is needed. An estate plan will let you say who controls your finances and assets, if you become mentally incapacitated or after you die. It will also go a long way towards settling or preventing any family conflict and ensuring that your assets are handled in the way you wanted them to be.

Protect your assets and your loved ones, when you no longer can do it. Create an estate plan. Contact an experienced estate planning attorney today.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

Add a Buy-Sell Agreement to Your Planning Process

“If you own a business, you have hopefully established a buy-sell agreement, in case you or a co-owner voluntarily or involuntarily leaves the company.”

The creation of a buy-sell agreement is just one component of a larger process. A buy-sell agreement shouldn’t be drafted and then tucked away for safekeeping—it should be a fluid document— that you need to review and even revise based on changing circumstances, says Ohio’s Country Journal in the article titled “Drafting and reviewing your buy-sell agreement.”

The idea behind a buy-sell agreement is to legally confer on the owners of a business or the business itself, the right or obligation to buy a departing owner’s interest. However, a professionally drafted agreement can also dictate that control of the business is restricted to specified individuals, like the current owners or a family member. In addition, a buy-sell agreement can set a price for the ownership interests. Finally, estate planning is also a top issue for many buy-sell agreements.

A buy-sell agreement can lie dormant for years, then a “triggering event,” like the retirement or death of an owner, brings the buy-sell agreement into play. However, other events like changes to marital status can also trigger the document. A buy-sell agreement can also address events like a criminal conviction, the loss of professional licensure or certification or involvement in a situation deemed to be inappropriate or illegal.

If you haven’t drafted a buy-sell agreement for your business with your lawyer, you can now see the importance of doing so. Here are the structures and options for agreements:

• Redemption—permits or requires the business as a whole to repurchase an owner’s interest;
• Cross-purchase—permits or requires the remaining owners to buy the interest (usually pro rata), and
• Hybrid—combines the two other structures. For example, it might require a departing owner to first make a sale offer to the company and, if it declines, sell to the remaining individual owners.

You should also consider the tax implications when you draft your buy-sell agreement and its initial structure, because taxes will differ based on whether your company is a flow-through entity or a C-corp.

Buy-sell agreements need a funding source so the remaining owners can buy their former co-owner’s shares, and life insurance is commonly used. There are alternatives. A cash-rich company that’s confident in its future, could rely on its reserves.  However, this could leave a business vulnerable to an unexpected cash shortfall. A “sinking fund” is another option. You set aside money for paying out the agreement over time.

A buy-sell agreement takes some effort, but it will pay off in time and costs, if a triggering event occurs.

Reference: Ohio’s Country Journal (June 14, 2017) “Drafting and reviewing your buy-sell agreement”

Use Life Insurance to Create Your Legacy

“Use life insurance to leave a legacy when you’re gone”

We all want to leave a legacy after we’re gone, but how do you go about accomplishing such a worthy task? An article in MarketWatch, “5 ways to make a great impression after you’re dead,” says you might be surprised to learn that there’s an easy answer: your life insurance policy.

The payout from a life insurance policy—known as a “death benefit”—can be used to create a legacy. It’s even more than that for someone who wants to leave a legacy to their spouse and children. A life insurance policy can have a direct impact on individual lives, after you’ve passed away.

Immediate family first. The greatest legacy that you have is your family. Life insurance can assist with financial protection for them. If you have family who rely on your income for their day-to-day lives, think of them when deciding on life insurance and the amount of coverage you need. Your legacy can live on through a death benefit that can pay off the family home mortgage, contribute towards college tuition or help start a business. It can ultimately provide income that helps your loved ones continue to meet their financial needs, if you’re no longer around.

Be the “cool” aunt or uncle. Your nieces and nephews may not need a life insurance policy from you to cover their day-to-day financial needs. However, naming your nephew as a beneficiary of your life insurance policy is a gesture that would cement you as the best aunt or uncle ever. There are numerous uses for life insurance that could help your extended family. Be sure to talk to your siblings to make them aware, set expectations and allow them to factor the money into their family’s overall financial plans. A big influx of cash could have an impact on student aid, so it’s an important conversation to have.

Remember a legacy to your favorite charity. Maybe your legacy should be giving back to your favorite charity, like one dedicated to finding a cure for a disease or animal rescue. Life insurance offers the way to help charities after you pass. You can still continue giving back and advocating for what you believe in, after you are gone. Alternatively, you can name a trust as the beneficiary of your life insurance policy and provide the trust with specific instructions to give a certain amount of your estate to the charity when you die. You could also use your life insurance to establish a scholarship at your alma mater. Contact your school’s development or advancement office for assistance.

You can leave an impact on your loved ones and your community that will carry on, long after you’re gone. If you’re interested learning how to use life insurance to create a legacy, speak with an experienced estate planning attorney for help in making the best choices for your situation.

 

Reference: MarketWatch (May 8, 2017) “5 ways to make a great impression after you’re dead”

Don’t Stop Planning Once You Reach Retirement

“You're now responsible for generating your own retirement paycheck by drawing on Social Security, a pension (if you're fortunate enough to still have one) and your savings and investments.”

Although it’s critical to plan in the years leading up to retirement, it doesn't mean you’re through planning once you retire. Financial planning becomes even more important, because there won’t be a steady paycheck on which to rely.

With that in mind, The Brainerd (MN) Dispatch offers a few ideas to consider early in retirement, in its article, “3 Moves you should make in the first 3 years of retirement.”

Understand that retirement can be a long time. Compared to 60 years ago, we're seeing seniors who are retired for nearly 40 years! That means today's retirees must be prepared for a significantly longer retirement than their parents. Nothing is a certainty, but you should plan for a retirement that could last several decades. A percentage of your portfolio should be allocated in stocks and other growth-oriented investments that have historically provided the returns needed to preserve your portfolio for extended periods of time.

Roth Conversions. Diversification means having diversified tax treatments of your savings. If you have most of your savings in a 401(k), nearly every dollar you withdraw in retirement will be taxed. If your savings are only tax-deferred, you'll be hit with required minimum distributions (RMDs) when you reach age 70½. RMDs are a required percentage of your tax-deferred savings that you must withdraw each year—regardless of whether you need the money or not, resulting in a potential jump in your taxable income later in retirement. The solution is to proactively make Roth conversions, so the money will potentially grow tax-free, and you won't have to pay taxes on qualified distributions. You're also decreasing the amount of your savings that’ll be subject to RMDs in the future.  However, you will pay taxes on the amount you convert, so consider the tax ramifications before doing a conversion.

Estate Planning. Think of estate planning as your "legacy planning." When you die, where do you want your assets going? Have a legal will in place and if it suits your situation, a trust. Talk to an estate planning attorney about whether a trust is appropriate for you.  You should also ask your attorney about a power of attorney and a living will to protect you, in the event that you become incapacitated.

Fix your financial and estate plan on a course that's primed for long-term success. Actions that allow your retirement to succeed for both the next three years and the next 30 years, can help you feel more secure about your future.

Reference: Brainerd (MN) Dispatch (June 16, 2017) “3 Moves you should make in the first 3 years of retirement”

The Benefits of Gifting Assets to Heirs Now

“Before death, here's how you can gift assets to your heirs.”

There are accidents leading to injuries that can leave a loved one on life support for an extended period. There may come a day when removing life support is discussed. Aside from having a living will and healthcare directive in place, family members may need to know about any large settlement from the accident or substantial assets in a checking account and the tax implications for the estate and the heirs.

There are actions that families can take while a person is incapacitated but still living, if the right planning has been done, which can minimize taxes after an individual dies, says NJ.com in the recent article, “Lowering an estate's value before death.”

This is a heart-breaking situation that no one wants to think about.  However, it does provide the opportunity to engage in "death bed" planning that could help minimize estate taxes.

Estates larger than $5.49 million are subject to federal estate taxes of 40% in 2017. However, gifting can be used to lower the value of the estate. Individuals can make annual gifts of $14,000 per person, and a couple can make $28,000 to any person. If assets exceed $5.49 million, the estate can be reduced by making $14,000 gifts to as many family members as possible, prior to death. Gifts can be made in excess of $14,000, but that will be applied against and reduce the $5.49 million exemption amount.

Some states, like New Jersey, have taxes on estates more than $2 million. (The New Jersey estate tax is scheduled to be eliminated in 2018.) Check with a qualified estate planning attorney for state-specific rules. In New Jersey, there’s no limitation on annual gifts. Therefore, an individual can transfer an unlimited amount of assets immediately before death to reduce the estate tax.

Gifts can be executed by a power of attorney or guardian, if the loved one is unable to make the gifts him or herself. That power of attorney document must specifically authorize the agent to make gifts, and court approval is required to authorize a guardian to make gifts.

There are states that also impose an inheritance tax. This tax is not based on the size of the estate, but on who receives the estate. In New Jersey, there’s no inheritance tax imposed on transfers to a parent, grandparent, spouse, domestic partner, child or step-child (Class "A" beneficiaries).

Work through all of this with an experienced estate planning attorney.

Reference: NJ.com (June 23, 2017) “Lowering an estate's value before death”

Let’s Review Revocable Trusts and How They Can Help You

“What's a revocable trust, and how does it work?”

A revocable trust or living trust can be a wonderful way to create an estate plan for you and your family. These trusts are flexible legal documents that can be modified during your lifetime. When they become irrevocable, they will protect your assets for your family.

Motley Fool’s recent article, “Revocable Trusts: What You Need to Know,” explains that a revocable trust is a trust you create to hold whatever property you want to be subject to its provisions. What makes a trust “revocable”, is that even after you create it, you can change it or cancel it and distribute its assets back to yourself. When you create a revocable trust, you act as its trustee during your lifetime.

A revocable trust is worthwhile, if you become ill or an injury incapacitates you to such a degree you can’t handle your financial matters. Successor trustee provisions of your revocable trust let the individual you name take care of those matters on your behalf. The successor trustee becomes responsible for paying your regular bills and handling ordinary financial needs that arise. When you're able to manage your own affairs again, you can take back the trustee role.

The revocable trust includes your wishes for what should happen to trust assets after your death. For example, a revocable trust can be useful for those with minor children. You can provide for the trust to continue and for trust distributions for the benefit of those children to be made by the successor trustee, until they’re old enough to handle their own financial affairs.

Another benefit of revocable trusts is that your family can usually avoid probate. Revocable trusts are private documents that typically aren't subject to probate proceedings. A successor trustee can manage your affairs without court intervention or public scrutiny.

Remember: in order to implement the revocable trust, you'll need to formally transfer the title of your property from your name to the name of the trust. If you forget, the trust’s provisions won't apply, and your heirs might have to go to court after your death to address those assets.

Speak with an experienced trust attorney to learn how a revocable trust may fit with your estate planning.

 

Reference: Motley Fool (June 23, 2017) “Revocable Trusts: What You Need to Know”

Tighten Your Belt Now to Gain More for Your Retirement

 “If you kick in a measly $20 a week to your retirement account, you'll end up with an extra $173,000 forty years later, if your investments grow an average 6% a year compounded quarterly.”

A little extra belt-tightening on your part doesn’t necessitate any miracles from the market. Research shows that large-cap stocks averaged a 10.09% gain from 1926 through May 31 of this year, and small-cap stocks averaged better than 12% a year. These gains weathered through catastrophes like the Great Depression, World War II, the Crash of '87, the Tech Bubble and the Great Recession.

But investors.com says, in its recent article, “How To Turn A Glass Of Wine Into A $173,000 Bump In Your IRA,” that the hard part for most of us is taking action and putting the money to work. Some say it’s impossible to save even a modest sum like $20 a week. Here are some practical examples of straightforward ways to cut spending and save $20 or much more per week, which lets you put that savings into your investments, like an IRA, where the earnings grow tax-deferred.

Supermarket membership or discount card. These are free from many grocery chains, the exception being club stores like Costco, which charges approximately $60 each year. The weekly discount can look like about $30 on a $100 weekly bill or a yearly saving of $1,560.

Personal care from a local training school. A local cosmetology school that teaches beauticians always needs customers. This means sizable discounts, or even free haircuts, manicures or massages. For example, a $44 service charge may be cut to $12 on average, saving you $32. If you need that service quarterly, the annual savings would be $128.

DIY dry cleaning. The cost of an alternative product like Dryel is about $2.00 for eight garments, which would save you nearly $30.00 on what would otherwise be a $32 dry cleaning bill. That’s about $330 a year in savings. How does it work? Clothes go with a Dryel cloth into a special bag that comes with it into your clothes dryer.  The heat releases a cleaning solution from the cloth.

Uber or Lyft and not a taxi. These cab alternatives can cost 40% less than traditional taxis. See a traditional taxi vs. Uber/Lyft forecast of your fare at whatsthefare.com. If you save 40% of a $50 fare with a traditional taxi once a week, your cost would be only $20. Your yearly savings would be $1,560.

Takeout dinner. We all love our favorite dinner from our favorite restaurant.  However, one way to slash that dinner check is to order the entrees to go. If a couple normally has two glasses of wine  each at a cost of $10.50 per glass, they can normally buy the same bottle on wine.com for $12.99 and save $29.01 on their Friday night dinner.

Reference: investors.com (June 15, 2017) “How To Turn A Glass Of Wine Into A $173,000 Bump In Your IRA”

Posted by Rowley Law on 07/11/2017 at 07:42 AM | Permalink