EHDH Estate Planning

Do Unmarried Couples Need Estate Planning?

A couple that has no intention of ever getting married should know that they won’t get the automatic rights and protections that legally wed spouses get, particularly when it comes to death. Therefore, unmarried couples must make a concerted effort to cover all the bases, says CNBC’s recent article entitled “Here’s what happens to your partner if you’re not married and you die.”

The number of unmarried couples who live together reached 18 million in 2016, a 29% increase from 14 million in 2007, according to the Pew Research Center. Among adults age 50 and older, the increase was 75% with roughly 4 million cohabiting in 2016, compared to 2.3 million in 2007.

These couples still face some key differences from their married counterparts. For example, there’s no filing federal taxes as a couple, and if an employer allows health insurance for a partner, the amount the company contributes is taxable to the employee, rather than being tax-free for a spouse.

End-of-life considerations also need attention. Unmarried couples can sign some legal documents that will dictate what happens, if one of them either becomes incapacitated or passes away, which is a type of estate plan.

If you die without a will or intestate, the state probate court will decide how your assets are distributed. A will by itself also won’t address everything. If you want to make sure your tax-advantaged retirement accounts — like your Roth IRA and 401(k) plans — go to your partner, make sure that individual is the designated beneficiary on those accounts. Even if your will says otherwise, whoever’s listed as the beneficiaries on those accounts will get the money. It’s the same for insurance policies and annuities.

If both partner’s names are on checking, savings or investment accounts, the account will pass directly to the surviving partner. However, for an account with only one partner’s name on it, ask the bank about the appropriate form to be completed, so the money is left directly to the surviving partner. This is what’s called a transfer-on-death or payable-on-death designation. Without this designation, the assets will end up in probate and distributed either in accordance with the will or intestacy state laws.

Regardless of how the mortgage is paid or whose name is on the loan, the person named on the deed is the owner. If the house in one partner’s name, it won’t automatically pass to the partner, as it would with a married couple (via joint tenancy with rights of survivorship). It would become part of the probate estate. To remedy this, you can retitle the home, so that both partners are listed as joint owners on the deed, “with rights of survivorship.” Each partner then equally owns the house and is entitled to assume full ownership upon the death of the other. Note that there could be other factors to consider before adding a partner’s name to an existing deed, such as expenses, tax implications and protection from potential creditors. Ask your estate planning or probate attorney before you make a change. A partner owning the house, could leave it to the surviving partner in the will. Remember, though, any asset passing via the will is subject to probate, which may lead to unforeseen issues.

In addition, a partner has no legal say in his or her partner’s medical treatment, if he or she is in a situation where they can’t make decisions for themselves. To give the partner that right, partners can grant each other a durable power of attorney over health care. This allows the partner to make important health-care decisions, if the one in the hospital is unable to do so. This is different from a living will, which states a person’s wishes if they are on life support or suffer from a terminal condition. This document helps guide the agent’s decision-making. If no one is named, medical personnel must follow the instructions in that document.

Likewise, partners may want to give each other durable power of attorney for finances. This would let them handle one another’s money, including accessing accounts as necessary, if the incapacitated partner could not do so.  If the partners have dependents, name a guardian for them in the will. Otherwise, that decision will be left to the courts.

Reference: CNBC (Dec. 16, 2019) “Here’s what happens to your partner if you’re not married and you die”

How Should I Prepare for My Child’s Future?

It’s been a common path for millennials and their predecessors to go to a four-year college and get a job. If they were short on funds, they’d take out some loans. However, there have been some signals that this norm is changing.

With worries about a student debt crisis and with the experience of recent graduates, new college-age students are increasingly turning to alternatives to the established route to create their own debt-free future.

Kiplinger’s recent article entitled “How to Stay Flexible in Saving for Your Child's Future” says that student debt is leading to obstacles, when it comes to achieving major milestones of financial freedom. Of the young millennials surveyed, nearly half (47%) said they delayed purchasing a home because of  their debt, 40% delayed saving for retirement and 31% waited to move out of their parents’ home. A total of 28% of parents said they delayed saving for their own retirement, to pay for their children’s education.

Saving for a child’s future now looks different than when these 18-year-olds were born.  It certainly will be the case, when they leave the nest. As a result, it’s critical for parents to try to give them help, by learning how to adapt to the changing times.

With the gig economy and digitally enabled side jobs, parents have more flexibility to maintain their financial goals, while preserving their personal lives.

When considering flexibility, especially when saving for a child’s education, it’s actually one of the big benefits of a 529 plan. Although you’re responsible if you make a withdrawal that isn’t for a qualified education expense, the penalties aren’t too steep. Federal income tax is imposed on the plan’s growth, plus a 10% penalty on the growth. Therefore, depending on the amount withdrawn, the penalty may be very little.

Nonetheless, the tax penalties may worry parents enough that even when their goal is to save for their child’s education, they want to spread their savings into multiple accounts. This has some clear advantages, when the child decides not to go to college after high school. The good news is that there are plenty of options to account for both possibilities.

• Other investment accounts: You could also create a brokerage account with money earmarked for a child. This gives parents complete flexibility in how the money is used. The money can be used for expenses other than education, but the downside is not having the tax benefits of the 529 plan (tax deferral and potential tax-free growth).
• Trusts: a trust allows parents to keep complete control over the funds and lets parents provide instructions to the trustee, on how the trust can be used.
• Custodial accounts: These accounts are managed by a guardian (or custodian), until the child is an adult. These accounts are pretty easy to set up but don’t have the restrictions that can be placed on trust funds.

The digital world has changed everything, including how we plan for our children and their future. Be flexible and make your plans accordingly.

Reference: Kiplinger (Dec. 27, 2019) “How to Stay Flexible in Saving for Your Child's Future”

What’s the Best Time to Take Social Security Benefits?

With the near disappearance of traditional pensions and longer life expectancies, Social Security benefits have become more important than ever to retirees. For many, Social Security benefits are the biggest asset they have. Strategically planning how and when you take these benefits, can have a big impact on your overall retirement finances. That includes coordinating benefit claims with a spouse, if you have one, knowing your full retirement age and making a conscious decision about when to take these benefits.

Kiplinger’s recent article, “Time Claims to Maximize Social Security Benefits,” says that with more baby boomers becoming eligible for Social Security benefits, some strategies for how to claim the benefits are going away. Full retirement age is also going up, and there’s the threat of curbs to future benefits.

However, the rules for claiming retirement benefits have become a little simpler. Under a law passed in 2015, those born on or after January 2, 1954 are presumed to be applying for the highest benefit for which they qualify—regardless of whether it’s their own benefit or a spousal benefit—no matter what their age is when they claim. The law also phases out the restriction on an application for spousal benefits, which could boost a couple’s total payout by tens of thousands of dollars. However, a small group of boomers still may be eligible to use it.

These important moves can help you maximize your lifetime benefits—and help your nest egg go much further. Full retirement age (FRA)—calculated by your birth year—is on a gradual slope upward from age 66 to age 67. Social Security benefits increase monthly by a small percentage from age 62 to your full retirement age. As a result, if you err and claim at age 66 when your full retirement age is really 66½, the loss won’t be significant, but it could be permanent, decreasing your benefits for a lifetime.

The rising full retirement age for Social Security means that those who claim early will see a larger benefit reduction. For those with a full retirement age of 66, claiming at 62 permanently reduces their benefits by 25%. However, for those with a full retirement age of 67, the reduction is 30%. A higher full retirement age also decreases the bonus for people who wait to claim until age 70. Those with a full retirement age of 66 can earn up to 32% extra—or 8% a year in delayed retirement credits up to age 70. People with a full retirement age of 67 can earn up to 24% extra.

Know your exact full retirement age to understand how your benefit will be affected by claiming at different ages. All the cost-of-living adjustments are also calculated on that higher amount, so you receive the benefit of compounding.

Your FRA is also important, if you’re still working when you claim. Retiring and taking Social Security benefits are two separate decisions. You can do one without doing the other. However, if you apply for benefits before your FRA while still working, your benefits will be subject to the earnings test. Early claimers will temporarily lose $1 of benefits for every $2 of earnings above $17,640 in 2019. In the year you hit FRA, the threshold is higher—in 2019, you’d temporarily forfeit $1 of benefits for every $3 of earnings above $46,920.

Here's a piece of good news: the month you reach your full retirement age, that earnings test goes away. If your plan for retirement includes continuing to work in any fashion, wait until at least after your full retirement age, or later if you can, to claim benefits.

Reference: Kiplinger (July 29, 2019) “Time Claims to Maximize Social Security Benefits”

How an Experienced Estate Planning Attorney Helps People

People turn to estate planning attorneys, when they are ready to create a set of instructions for what they would like to happen to their assets when they die, explains Vents Magazine’s recent article, “Understanding What an Estate Planning Attorney Does.” The estate planning attorney creates a will, also known as a last will and testament to accomplish this, but that’s just part of what they do.

An estate planning attorney also helps to plan for incapacity, when a person cannot speak for themselves because of an injury or an illness. She also helps you understand estate taxes.

An estate planning attorney will also help to make certain that all of your savings and property are safe and distributed through the proper legal processes.

Estate planning attorneys assist with the power of attorney and health care directives. These documents allow you to designate an individual to decide issues on your behalf, in the event that you become mentally incapable of making decisions for yourself. They can also help you with a guardian who will look after your estate.

It’s important that you select the right estate planning attorney to execute the legal process, as you’ve instructed in your estate plan. You should only retain an attorney with experience in this field of law because other legal counsel won’t be able to help you with these issues—or at least, they may say they can, only to find out later that they’re not experienced in this area.

You also want to feel comfortable with your estate planning attorney because you must disclose all your life details, plans, and estate issues, so she can create an estate plan that’s customized to your circumstances.

By selecting an experienced estate planning attorney, you save your family from unnecessary stress and costs. If there is no will, the entire estate is handled by the courts, which also takes a considerably longer time than if a will was properly prepared. If no estate plan exists, there may also be additional taxes.

Reference: Vents Magazine (December 12, 2019) “Understanding What an Estate Planning Attorney Does”

How Does a “Senior Freeze” Work?

In some families, a decision is made to transfer the parent’s home to their children through the use of a life estate. It’s used to help parents become eligible for certain government benefits, among other estate planning purposes. However, this could cause parents to lose their ability to receive the Senior Freeze, which reimburses eligible seniors and disabled people for increases to property tax or mobile home park site fees.

As far as property with a life estate, nj.com’s recent article, “Will I get the Senior Freeze if I have a life estate for my home?” explains that it’s important to determine who remains the owner of the property. The article says that the Senior Freeze program is a bit of a misnomer, because the benefit doesn’t actually “freeze” property taxes. The program actually reimburses eligible individuals for any property tax increases incurred, once an individual qualifies for the benefit.

An eligible person gets the difference between the property tax amount in the first year of eligibility—the “base year”—and the current year’s property tax amount, presuming it is higher. For example, in New Jersey, a person has to have two consecutive years of eligibility before applying and satisfy the following requirements:

• The applicant or his/her spouse are at least 65 or receiving Social Security disability benefits;
• The applicant lived in the state continuously since Dec. 31, 2007, or earlier, as a homeowner or renter;
• The applicant owned and lived in his/her home since Dec. 14, 2014 or earlier (and still owns and lives in the home);
• He or she has paid the full amount of the property taxes due; and
• The applicant meets the income limit (currently $89,013 in NJ).

The program typically doesn’t apply to vacation homes, second homes, rental properties, or properties that have more than four units.

It’s not uncommon for seniors to transfer a home to a trust for a variety of purposes, including government benefit planning. However, conveying your home entirely may disqualify you from the Senior Freeze program. An applicant is considered the owner of the property, if she retains a life estate in the property, which must be evidenced in the deed or other legal document showing the applicant’s right to occupy the property.

Before transferring any real estate or making any large gifts, talk with an estate planning elder law attorney. While the retention of a life estate may let an applicant qualify for the Senior Freeze if other qualifications are met, it may have a bigger impact on other benefits.

Reference: nj.com (December 11, 2019) “Will I get the Senior Freeze if I have a life estate for my home?”

How Can You Get Ready to Retire?

Enjoying these so-called “golden years” is a lot easier with a lot of gold in your nest egg. That’s not so easy for everyone to accomplish.

According to the Federal Reserve, 26% of non-retirees say they have nothing saved for retirement. Zero.

CNBC’s recent article, “Make these 6 moves now to be financially prepared for retirement,” provides the steps you should take right away to start building your retirement savings.

1. Put on your thinking cap. Picture as accurately as you can what your ideal retirement will look like—and what it will cost. Use an online retirement savings calculator to help you see if you’re on the right spending and savings path.
2. Get a checkup. Get educated about Medicare and weigh the alternatives for long-term care, such as long-term care insurance.
3. Be sure your estate plan is up to date. See your attorney and be sure that all your estate documents work with the laws of the state where you’re retiring. Look at any possible concerns about estate taxes. Keep beneficiary designations up to date because, regardless of what’s said in your will, beneficiaries listed on specific accounts, such as IRAs, will inherit those funds.
4. Think of charities now. With more time on your hands, consider selecting a cause or two. You can lend a hand or make a donation.
5. Review your portfolio. You may have your money primarily deposited in a target-date fund that keeps your investment mix of stocks, bonds, cash, and other assets appropriate for your retirement time horizon. However, it’s a good idea to make certain that your asset allocation is where you want it. Remember that portfolio growth and market shifts can change your allocation at any time, and the closer you get to actual retirement—or if you’re already there—the more conservative an allocation you’ll want to have. You should also monitor the account fees you’re paying in funds and consider lower-cost alternatives.
6. Build a team of professionals. There are three people who you need to have on your side: an estate planning attorney, a CPA and a financial advisor.

Reference: CNBC (November 11, 2019) “Make these 6 moves now to be financially prepared for retirement”

What’s the Tax Liability for Heirs Who Inherit Retirement Accounts?

A person who is updating their estate plan is wondering what will happen when his robust retirement accounts pass to his children. Retirement accounts like 401(k)s, 403(b)s, traditional and Roth IRAs and others are considered part of a taxable estate, Motley Fool’s recent article, which asks “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?”

For 2019, this is $11,400,000, and in 2020, the exclusion will be raised to $11,580,000. If you total all of your assets’ value, only the amount in excess of the exclusion will be taxable. Therefore, if you have a $12 million estate and die in 2020, only $420,000 of your assets would be subject to estate taxes.

Let’s look at another example: if your assets, including your retirement savings, total up to $5 million, your heirs won't be required to pay any estate tax whatsoever.

However, while they may not have to pay estate taxes, remember that withdrawals from most retirement accounts (except Roth IRA accounts) will be deemed to be taxable income. Thus, estate tax or no estate tax, if your heirs are in a pretty high tax bracket, inheriting your retirement savings may increase their tax liability.

Don’t neglect to check with an estate planning attorney about your state’s estate and inheritance taxes. There are a handful of states that have their own estate taxes, and their thresholds may be lower than the IRS’s.

There are now six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Another reason to update your estate plan is that each state has its own laws about inheritance taxes exemption and rates. If those laws change, your estate plan needs to change with them. Good tax planning is part of a complete estate plan, and your estate planning attorney will have some good ideas for you to protect your heirs.

Reference: Motley Fool (November 8, 2019) “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?”

How Super Savers are More Ready for Retirement Than You

People who save 90-100% of the 402(g) IRA max contributions or had a deferral percentage of 15% or higher in 2018 have been dubbed named “super savers” by Principal, a financial company. They did a survey to find out how they did it, which was reported on in the article “19 things you’ll need to sacrifice for a healthy retirement” from The Las Vegas Review-Journal. It may not be surprising to find that they own modest homes (41%), they drive older vehicles (43%) and they don’t travel as much as they’d like to (41%). Those savings add up. Here’s how they do it.

That daily expensive coffee. You should be willing to give up having an expensive coffee at the coffee shop rather than at home. It’s a little thing, but a dollar saved today will grow to $7.60 in 30 years at a 7% return rate. For every dollar you waste today, you are costing yourself nearly $8 in retirement. Look at it this way: if these extra goodies cost you $100 a week, that’s over $5,000 a year. If invested, that money could grow to more than $38,000.

Cars. Roughly 43% of the survey’s super savers said they’ve driven older vehicles to save for retirement. It’s the most common sacrifice that super savers have made to save. Did you know that after the first year of ownership, you can lose more than 20% of the car’s value due to depreciation? If you buy a two-year-old car with an extended warranty, you save 30% to 40%, and over a lifetime that can add up to having substantially more in retirement assets at age 65. If your family has two cars, consider dumping one to cut auto expenses in half. While this sacrifice might take some getting used to, the long-term benefit could be worth it.

Keeping a larger home than you really need. After driving an older car, owning a smaller home was the most common sacrifice super savers made to save for retirement, the Principal survey found. The easiest way to lower your expenses and save more for retirement is to buy a cheaper house. A big house with a big mortgage will eat up most of your income.

International travel. You don’t need to give up all splurges, but it is important to cut back on these expenses when you can. Try a vacation within the U.S., where you’ll save on airfare. If you save $200 a month on travel, you’d save $2,400 per year. That would add up to $60,000 over a 25-year period—before interest. Among super savers, “not traveling as much as I prefer” was tied with owning a modest home as the second-most common sacrifice they made to save for retirement.

Saving more during your working years is good training for living on a fixed income during retirement. It’s also a good way to accumulate more assets for a fulfilling retirement.

Reference: Las Vegas Review-Journal (November 6, 2019) “19 things you’ll need to sacrifice for a healthy retirement”

What Should I Do with My Unexpected Windfall?

Would you know what to do, if a few million dollars was deposited in your bank account, without any notice? It sounds thrilling but knowing how to manage wealth is not something people learn overnight.

The greater the amount you receive, the greater your stress.

Investopedia’s recent article, “Tips For Handling Sudden Wealth” reports that there’s even a stress-related disorder called "Sudden Wealth Syndrome."

This stress results in the recipients doing things that will threaten their good fortune and may leave them worse off than before they got the money.

Let’s look at few ideas to help you hang onto that new wealth:

1. Tally your money. Take the time to carefully review all the documentation associated with the windfall. Note the areas you don't understand and talk with your attorney.
2. Create a comprehensive financial and life plan. Don’t settle for a cookie-cutter solution. Look for customization that takes into account your circumstances, your goals and your desired legacy.
3. Be wary of friends and family. A downside of sudden new wealth is that new friends and estranged family members may come out of the woodwork. One idea is to pay yourself a salary, which can put some distance between you and these people.
4. Don't buy big ticket items until you’re comfortable with the advice and understand your new financial position. You should address your taxes on the gain, pay down debts or take a small vacation. However, don't make too many changes all at once. Talk to your advisors.

We’ve all read the story of lottery winners who end up with less money in their bank accounts after their big win. Be cautious and take your time deciding what to do with your new wealth. Speak with an estate planning attorney, who will be able to help you plan and protect your windfall.

Reference: Investopedia (June 25, 2019) “Tips For Handling Sudden Wealth”

Should I Keep My Life Insurance Policies in Place After A Divorce?

Life insurance is not the first thing that people think of when negotiating a divorce, but it’s something they should keep in mind. Insurance News Net’s article “5 Ways Life Insurance Eases Post-Divorce Estate Planning” explains how life insurance continues to be a useful tool to serve the family, whatever its marital status.

Have money for divorce-related expenses. If the divorce is contested or includes child custody issues, the proceedings be quite long, maybe months or years. As a result, your attorney’s fees could be hefty. Those with an established permanent life insurance policy can take withdrawals or loans from the policy’s cash value to help pay expenses. If the policy is designed effectively, you won’t have to liquidate other assets or take money from your estate designated for beneficiaries.

Protect your income post-divorce. Your income can change significantly after a divorce, especially if one spouse was a stay-at-home parent. They may get alimony payments to help make up the difference, but if the payor unexpectedly dies, the lost income can create a lot of stress and financial hardship for those left behind. Permanent life insurance on the paying spouse can help provide coverage and replace income lost, if they pass away.

Preserve your estate post-divorce. Life insurance can also provide funds to pay off existing debt held by the deceased spouse. This also can eliminate the need to liquidate other assets from the estate that would have gone to the surviving spouse or other heirs. Take withdrawals or loans from the policy–tax-free, if the policy is set up correctly–and you can effectively plan your legacy, even if your ex-spouse hasn’t been financially responsible.

Ensure that children get a fair inheritance. If you have children from a previous marriage, it may make sense to provide for them through life insurance, rather than passing their assets to a new spouse first. In the alternative, you can provide for your new spouse through life insurance and leave the estate to the children outright or in a trust. With either option, dividing how you leave assets to biological children and a new spouse in a blended family, can eliminate stress and bad feelings, especially if the new spouse has children of their own.

Help fund college or other expenses for your child’s children. Protecting the lives of both parents with permanent life insurance allows you to make certain that the expenses for the children are addressed. Therefore, if the former spouse is responsible for paying medical expenses, college expenses, or other costs for the children, life insurance can provide needed funds, if that spouse passes. Permanent life insurance with cash value can also provide funds during the insured spouse’s lifetime (if cash isn’t readily available) to pay college tuition or help adult children repay student loan debt.

Consider permanent or whole life insurance, as well as term insurance. Yes, term insurance is less costly, but it will not accumulate any cash value. With permanent cash and a long-term care rider, the policy owner can accelerate the policy’s benefits to pay for long-term care. For divorced people who can only rely on themselves for care, if and when they can’t care for themselves, this can be invaluable.

Remember that life insurance is used to protect the policyowner, their income and their estate throughout life, regardless of marital status.

Reference: Insurance News Net (November 5, 2019) “5 Ways Life Insurance Eases Post-Divorce Estate Planning”