Category Archives: Estate planning

Being There

Anyone who has been in a long-term committed relationship understands what “being there” means.

One of the benefits of a stable relationship is that you have someone you can rely in when you need help.  Couples support each other.  Even as traditional roles have evolved, most families still have a division of labor when it comes to certain chores and tasks.  The fact is that some people are good at one thing and not so good at others.  What’s great about compatible couples is that they complement each other and, as a result, they are stronger, smarter and wiser together.

This is why the loss of a companion is such a traumatic experience.

All of a sudden, the person you have relied on is no longer there.  There is a big void in your life.  You may find yourself wondering what you are going to do.

While we don’t promote ourselves as the substitute spouse, in a financial sense we quite often find ourselves in that role.

When a spouse or long-time companion dies, our surviving clients often call on us to provide financial guidance.  Having dealt with hundreds of these transitions, we know the ins and outs of the estate settlement process.  We know the common pitfalls and things that can go wrong and are there to provide advice and guidance to help lift the burden and take care of things correctly and efficiently.

We relieve people from having to do it themselves.

We’ve written a set of books on this issue to help people plan ahead before their time comes, called BEFORE I GO.  The book and workbook are a wonderful compliment to traditional estate planning documents and help to fill in the missing information that those documents tend to leave out.

For a copy of these guides, you can contact us or you can buy them on Amazon.com.  Click HERE for a link.

Let us know if you have any questions or if you or anyone you’re close to needs an experienced and helpful hand working through one of these situations.

 

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New Years Resolutions for 2017

As another year winds to a close, we wanted to present you with some New Years resolutions designed to improve your financial health in the coming year.

  • Update your estate plan. Has there been a change in your family over the last year?  A marriage, a new baby, a death in the family?  If so, you need to update your estate plan, your insurance policies and your beneficiary designations.
  • Update your internet passwords. Are you using the internet to pay bills, shop, or access your investment accounts?  You will want to update your passwords and make them harder to guess.
  • Review your investments. Have you reviewed your portfolio recently?  Is it still aligned with your needs and goals?  If not, make some changes.
  • Get a personal “Risk Number.” Do you know how much risk you can take?  Most people don’t really know.  Resolve to get your personal “Risk Number“this year.  If you don’t know yours, click here to figure it out.
  • Get your portfolio’s “Risk Number.” Do you know how risky your investments are?  Most people don’t know how much risk they are taking.  Get your portfolio’s “Risk Number” and compare it to yours.  If it’s not the same, you need to consult your financial advisor.
  • Update your financial plan. If you don’t know where you’re going you probably won’t get there.  What’s your financial plan?  If you answered: “I don’t have one” resolve to get one this year.
  • Set your financial goals. Do you know how much you need to save to retire?  Here are some guidelines:

A 30-year-old can open a retirement account and make regular monthly contributions.  By investing properly and aiming for a modest 6% per year rate of return:

  • Saving just $200/month, by age 67 his account will have grown to nearly $350,000.
  • By saving $500 per month the account will be worth over $850,000.
  • Saving $1,000 per month will make our 30-year-old a millionaire by age 59.

 

If you have problems with any of these resolutions, you should definitely consider working with a financial advisor; someone who will be like a health coach for your personal finances.  Resolve to find one this year.

Think of the Advisor as your Sherpa, as it were, whose job it is to guide you amid the extreme altitudes and treacherous passes in investing’s hazardous terrain. That is to say, an Advisor is not someone you hire to beat the market for you, but rather someone who can help you achieve your personal financial objectives as “a facilitator, mentor, and market strategist” for those who, on their own, struggle to achieve their goals.

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Retirement statistics

  • 65 – The age at which the average American expects to retire, up from 63 in 2002.
  • 26 – Percentage of baby boomers who expect to retire at age 70 or later.
  • $265,000 – the estimated amount a couple, both age 65, should expect to spend on health care.
  • 22 – Percentage of couples who factor health care costs into retirement.
  • 30 – Percentage of adults born in the 1940s and 1950s who have traditional pension plans.
  • 11 – Percentage of adults born in the 1980s who are expected to have a traditional pension plan.
  • 60 – Percentage of medical expenses that Medicare by itself covers.

If some of these statistics don’t scare you read them again.

For others, we may be able to help.

And read the first three chapters of Before I Go.

 

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Retirement Lessons from Gene Wilder

Gene Wilder

Gene Wilder

Unlike many movie stars, Gene Wilder did retirement right.

Gene Wilder’s glory years came too late for the Golden Age of Hollywood and too early for the modern era of $50 million superstars, but he did well enough to walk away after a couple of decades.

In an industry where performers in their 80s and 90s outlive their savings and need to keep working into the grave to pay the bills, that’s an achievement.

While the details of his estate have not been made public, there are a number if things we do know.

Gene Wilder died somewhere between filthy rich and flat broke, spending down his cash while remaining comfortable to the end, which came last week from Alzheimer’s complications…

Wilder retired at 58 to do what he enjoyed, writing his memoirs while living in a relatively modest home in Connecticut with his wife.  While he was active in ovarian cancer charities, it’s unclear how much he gave to them other than lending his celebrity to the charities he favored.

After all, the spouse is the only estate planning goal retirees really need to consider. Everything else — from philanthropy to dynastic heirs — comes second.

The lessons here are simple, yet unusual in the entertainment business – whether we’re talking about movies or sports.  Too often highly paid entertainers adopt a lifestyle that absorbs all of their income.  That means that if their careers end after a few years they need to begin a new career.  The alternative is to end up broke.

Wilder put enough aside while he was working to allow him to live in the style he enjoyed for 25 years after retiring and leave his wife in comfort after he passed away.  It’s a lesson for all of us who are not movie stars.  Know what we want, save so that we can afford it, and retire when we’re ready to walk away and leave it all behind.

Buying insurance and annuities

Two kinds of insurance products are often sold as investments, and should not be:

  • Life insurance
  • Annuities

There may be a place for both of them in your financial plan.  But they are often bought for the wrong reason because they are often misrepresented by the agent or misunderstood by the buyer.

Insurance products are complex and difficult for a layman to understand.  Let’s first review the basic purpose of these products.

Life insurance – its primary purpose is to replace the income that is lost to a family because of the premature death of the primary earner.  A young family with one or more children should have a life insurance policy on the earners in the family.  Ideally the insurance is will allow the survivors to continue to live in their accustomed style and pay for children’s education.

This usually means that younger families need more insurance.  However, there will be a trade-off between what a young family needs and what they can afford.  To obtain the largest death benefit, I suggest using a “term” policy.   “Whole Life” policies which have some cash value generally do not provide nearly as much death benefit and are less than ideal as investment vehicles.  Whole life policies are often sold using illustrations showing the accumulation of cash value over time.  What most people don’t realize is that illustrations are based on assumptions that the insurance company is not committed to.  This is the point at which an advisor who’s not in the business of selling insurance can prevent people from making mistakes.

Life insurance can also be used for other purposes.  One popular reason was to pay for estate taxes.  However, changes in the estate tax exclusion amount have made this much less attractive except to the very wealthy.

Annuities – useful for providing an income stream that you cannot outlive.  Like life insurance, it comes in a dizzying array of options that the average layman has trouble understanding. It is also one of the most commonly misrepresented insurance products.

Some of the most heavily promoted annuities are sold as investments that allow you to get stock-market rates of return without risk.  That’s one of those “too good to be true” offers that some people simply can’t resist.  The problem is that few people either read, or understand the “small print.”  Insurance companies are really not in the business of giving you all the upside of the stock market and none of the downside.  If they did, they would quickly go out of business.

These products are popular with salespeople because they pay high commissions.  Unfortunately they also come with very high early redemption fees that often last from 7 years to as much as 16 years.

If you have been thinking about buying a life insurance policy or an annuity you should first get some unbiased advice on what to look for.  Most insurance agents are honest, but like most sales people they would like you to buy their product.  It would be wise to get advice from someone who is an expert, but who is not getting paid to sell you a product.  There are a number of financial advisors who will provide guidance.  At Korving & Company we are Certified Financial Planners™ (CFP®) and licensed insurance agents, but we do not sell insurance products.   Since we don’t get paid to sell insurance we can evaluate your situation, advise you, and if life insurance or an annuity is what you need we can refer you to a reputable agent who can get you what you need.

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Keeping the Family Together With a Private Foundation

A private foundation has many advantages for the high net worth (HNW) individual. Along with the tax benefits, the foundation also provides a way of keeping families together.

Private foundations sound like they are only appropriate for the ultra-rich; but that’s not the case.  There are over 90,000 private foundations in the U.S. and 98% are under $50 million.  In fact you can start a private foundation with as little as $250,000 according to Foundation Source.

Of course the immediate advantage of a private foundation is the tax benefit you get from funding it.  It sets you apart in the world of philanthropy and allows you to leave a legacy that can outlive you.  It also provides protection from unsolicited requests for donations; you can always tell people that it’s a wonderful cause but you’ll have to check with your board.

But one of the major benefits of a family foundation is that it can act in many ways like a family business.  It can create the glue to keeps a dispersed family together working toward a common purpose.  It creates a way of instilling family values and transmitting those to a younger generation.

A large proportion of family foundations have two or more generations on the board.  Most are set up as family affairs with membership limited to immediate members of the family.

Contact us for more information.

 

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Passing $10 million to your heirs tax free

The new estate tax law includes a provision called “portability.”  It’s officially known as the “Deceased Spouse Unused Exclusion Amount.”

Portability allows married couples to capture two estate tax exemptions without having to rely on the A/B Trust plan discussed in previous essays.

An attorney should be consulted shortly after the death of a spouse to make sure that the deceased spouse’s exemption does not expire.

It’s convenient, and does not require separate accounts for A and B trusts.

It simplifies the tax life of the surviving spouse.

And it preserves the step-up in cost basis when the second spouse dies.

For more information, contact your estate planning attorney.

We welcome your inquiries.

Changes in tax law create problems for trusts – what to do now.

In our previous discussion of this issue we reviewed why so many estate plans included an A/B (or “spousal” and “family”) trust as a key provision of the plan.  It was a way of avoiding high estate taxes on modest sized estates.  However, when the tax laws were changed to increase the amount exempt from estate tax to $5.45 million per person (the current amount) it exposed some problems with these plans for people whose estates are under the exemption amount.

These are:

  • Inconvenience
  • Administrative costs
  • Capital gains taxes

Inconvenience:

Setting up two trusts requires establishing separate banking and investment accounts to hold the assets of each trust.

The surviving spouse may be allowed to use the income and assets in the “family” trust for health, education, maintenance and support but has to be careful that the heirs to the trust do not dispute the manner in which these assets are managed or dispersed. In the case of a blended family, this could cause problems.

Administrative costs:

Determining which assets go into the “family” and the “spousal” trust often requires the assistance of an attorney, a CPA or a financial advisor.

The income in the “family” trust requires a separate tax return and the tax rates on the two trusts are different.

This means that the surviving spouse may need expensive professional help for the rest of his or her life.

Capital gains taxes:

This can be the biggest issue of all.  When someone dies, the assets owned by the decedent have a step-up in cost basis.  This means is that if someone bought stock ABC many years ago for $1 per share and dies when the stock is worth $100, the new tax cost basis on ABC is $100.  If the heirs sell it for $100 there is no capital gains tax.   If it’s left to the spouse the spouse receives the stepped-up cost basis.  At the death of the spouse, the heirs receive a second stepped up cost basis.

Only assets left to the surviving spouse or to a “spousal” trust receive a stepped up cost basis at the survivor’s death.  Because the assets in the “family” trust never become the assets of the surviving spouse for tax purposes there is no second step-up in cost basis when the survivor dies.

For example, if ABC is put in the “family” trust with a stepped up cost basis of $100 and the stock is worth $200 per share when the surviving spouse dies, the heirs have to pay a capital gains tax of $100 ($200 – $100 = $100) when they sell.  If it had been left to the surviving spouse, the capital gain tax would have been avoided.

If the estate plan documents were prepared when the exemption was much lower, the result could be an actual increase in cost and increase in taxes rather than a tax saving.  It may be time to meet with your attorney and bring your estate plan up to date.

In our next essay we will briefly look at ways to increase the amount that can be left estate tax free to over $10 million.

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Changes in tax law create problems for trusts

The Federal Estate Tax was created in 1916 to help pay for World War 1.  The tax is levied on everything you own or have interests in at your death.  At first, it did not apply to many people but inflation and prosperity began taking its toll.  From 1987 to 1997 the government tax on estates over $600,000 was 55%.

By then, many people who owned a nice home and had savings and investments became worried that a lot of their money want going to go to the government rather than their heirs.  Each person has his or her own exemption.  A married couple has two exemptions.  However, if one died, leaving everything to the spouse, the surviving spouse only had one exemption left.

The legal profession came up with an answer: the A/B Trust otherwise known as the “spousal” and the”family” trust.  Under current law, you can leave an unlimited amount of money to your spouse free of tax.  But you can leave up to $600,000 to a trust that your spouse can use for his or her benefit but is not legally their property.  This is known as the “family trust.”  The rest goes directly to the spouse or to a “spousal trust.”

Then when the surviving spouse dies, the heirs inherit both the “family trust” assets ($600,000) and the surviving spouse (or “spousal trust”) assets up to the $600,000 limit – for a total of $1,200,000 free of federal estate tax.

At a tax rate of 55%, that saves the heirs a whopping $330,000 in taxes.  Everyone thought that was a great idea.  Many estate plans and trust documents were prepared with these issues in mind.  There were some drawbacks with these plans but the estate tax savings overwhelmed all other considerations.

Beginning in 1988 the amount of the exemption that could be passed on to non-spousal heirs was gradually increased.  In 2000 it went to $1,000,000 and for one year – 2010 – there was no estate tax at all.  In 2012 the law was changed and the limit was raised to $5 million and indexed for inflation.  In 2016 the estate tax exemption is $5.45 million and the estate tax rate is 40%.

This means that a lot fewer people will be subject to the estate tax and now are faced with the negative aspects of this approach to estate planning. These include

  • Inconvenience
  • Administrative costs
  • Capital gains taxes

We will address these issues in our next essay.

Questions?  Call us.

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How Advisors Can Help Surviving Spouses

Investopedia published an article we authored.

When the subject of death comes up, a term that’s often used to describe the feelings of those left behind is “loss.” But there is more to that loss than the loss of companionship. There’s also the loss of information, especially if the person who died also handled the family finances.

In my 30 years of experience advising families I have often had to help and council widows who depended on their husbands to manage the family finances. It’s fairly common for families to have several investment relationships. It’s quite rare to find that the spouse who managed the money actually did a good job keeping records and keeping his spouse “in the loop” when it comes to money management. And when her spouse dies, the widow has to deal with a host of organizations whose primary focus is on making sure that they don’t distribute money to anyone who is not entitled to it. The liability is too great. So we typically have a widow dealing with the death of a loved one, plus the Social Security Administration, the husband’s pension plan, and two, three or more brokerage firms who handled the couple’s investments. (For more, see: Estate Planning: 16 Things to Do Before You Die.)

Who Handles the Finances?

One of my earliest experiences was with a widow whose husband took care of all the family finances. He made the investment decisions, paid the bills and balanced the checkbook. He died suddenly and his wife did not know what to do. Childless and with no near relatives, she needed help. (For more, see: Estate Planning for a Surviving Spouse.)

While her husband’s will was up to date, during our first meeting she revealed that she knew nothing about her financial condition. She did not know how much she was worth, what her income sources were or what it cost her to live. It took a while to learn where all the investments were, what her income sources were and how much she needed to maintain her lifestyle. (For related reading, see: Advanced Estate Planning: Information for Caregivers and Survivors.)

Over the years I found that this situation was not uncommon. Balancing a checkbook, paying bills and making investment decisions does not appeal to a lot of people. They are happy to allow their partner to do that for them. The problem with this division of labor does not appear until the individual in charge of the finances disappears either through death or incapacitation.

Helping Manage the Transition

This is the point at which a trusted financial advisor can ride to the rescue. A good one is willing to go through records to see what it takes to run the household. He will be able to determine the survivor’s income. He will know how to identify the family’s investment and bank accounts even if the records are incomplete. Just as important, a financial advisor should be willing to provide more than simply financial advice to the surviving spouse. This is the point where questions arise about selling the extra car, upgrades around the home, moving to be nearer the children – or moving into a senior living facility. These may well be the questions a trusted advisor is able to answer. (For more, see: 6 Estate Planning Must-Haves.)

Advisors who are simply money managers will, at this point, probably find themselves replaced. According to PriceWaterhouseCoopers’ Global Private Banking/Wealth Management Survey, 2011, more than half (55%) of the survivors will fire their financial advisor following the death of a spouse. A lot of that will be due to the changing level of service that a surviving spouse needs. (For related reading, see: Why Do Widows Leave Their Advisors?)

But there is actually a better answer to the financial confusion that often follows a death. The best time to gather comprehensive information about family finances is when the couple is still alive.

Why a Will Might Not Be Enough

With due respect to the legal profession, will and trust documents are written to specify how assets are to be distributed at death. With few exceptions, they rarely get down to the kind of detail that allows the surviving spouse to take up where the deceased has left off.

What is needed is a specific book of instructions itemizing financial assets, their location and their ownership. Income will be vitally important to the surviving spouse. Realizing that income will change once one’s spouse dies, it’s important to know what the survivor’s income sources will be. Finally, the cost of maintaining the surviving spouse can be determined while both are still alive much more easily than after one has passed away. And since so many transactions now take place via password protected Internet portals, the survivor needs a list of those portals and passwords. (For further reading, see: The Importance of Estate and Contingency Planning.)

When someone dies, the surviving spouse will always have a period of grieving. But if a little though is given to preparing for the inevitable, grief does not have to be accompanied by fear of an unknown financial future.

To make it easy for couple who want to plan, purchase a copy of our book: BEFORE I GO and the BEFORE I GO WORKBOOK.  Contact us:

 

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