Category Archives: Suddenly Single

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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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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Getting Cookies

Cookies are not really on my diet, but she brings them anyway.  “She” is a very sweet, lovely lady of a certain age who drops by regularly to chat and bring us cookies.

We got to know her when her husband died and a friend referred her to us.   She was a homemaker and her husband handled the finances.  When he died, he left a collection of stocks, bonds and mutual funds scattered among several investment firms.  She was not quite sure where everything was.  There was a funeral to arrange.  Then there were life insurance forms, social security forms, pension forms, and every day bills that needed to be paid.  There was so much paperwork involved in getting it all together that it was overwhelming to her.

That’s where we came in.  This was something we had done many times before.  In fact, we had written a book on preparing for this day: BEFORE I GO.  So we helped her make sense of it all.  And then we offered to help her manage it.

That’s when she started to bring us cookies and stopped to chat, even if there was nothing pressing we had to discuss.  They were nice, friendly visits that allowed us to keep up with her children and friends.  She would tell us about the trips she took and the people she met.  And despite the fact that we shouldn’t be eating them, we loved her cookies.

She stopped driving recently and we don’t see her coming in the door any more.  So today I’m going to the store, buy some cookies and stop at her house.  It’s her turn to get cookies.

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It’s National Estate Planning Awareness Week

We are reminded by an attorney friend of ours that October 19-25 is National Estate Planning Awareness Week. We are told that most Americans don’t have an estate plan. That means that there will be both confusion and probably squabbling when one of these people dies. Even worse, the whole thing can end up in court.

Contrary to popular belief, estate planning is not just for the wealthy. It’s for everyone who has someone they care about. Over the decades we have frequently helped people cope with the death of a spouse, a parent or just a good friend. Even with a up-to-date will or trust there is inevitably a great many loose ends that need attention.

Even those who have the proper documents in place often overlook the fact that they usually don’t get into the kind of detail that the people who are left behind really need. That’s why we have published a set of books specifically designed to cover the subject of estate planning and more. You can get a copy of BEFORE I GO and BEFORE I GO WORKBOOK from Korving & Company or order it from Amazon.com.

To read the first three chapters free, go HERE. And if your estate plan is non-existent or out of date, this is a wake-up call.

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How to connect with your spouse about finances

Too many spouses don’t share enough information about family finances. It’s not unusual for one spouse to take care of investments and pay the bills. The other spouse may not be interested or may be too busy. It’s a fact that not everyone is interested in investing, budgeting or banking.

But this can lead to a bad outcome in case of death, divorce or separation. In fact, money is one of the top 10 reasons for marriage breakdown.

Money or anything related to finances can be a possible cause of disagreement between many people – including couples. Married couples, whether they are happy or not, may have disagreements over little financial issues to much bigger shared financial responsibilities or unequal monetary status. Money may not always be the principal cause but in fact is usually combined with other forms of reasons for divorce. In any case, it is still a significant contributor and should be managed with fairness from both sides, mutual understanding and a tiny dose of compromise.

But even couples that are financially compatible should sit down from time to time to review their financial situation. Our books: BEFORE I GO and BEFORE I GO WORKBOOK were written to help people do this.

If there is a difference in the financial mind-sets of a couple, a financial advisor may be able to act as a facilitator to reconcile the differences.

A financial advisor can educate the couple about investing, budgeting and retirement planning. Regular meetings with a couple’s financial advisor provide them with the opportunity to share critical family financial issues, keep everyone informed and help resolve issues before they lead to conflict.

Having a trusted financial advisor in place, one who is already familiar with a couple’s finances, can also help in case you find yourself “suddenly single.”

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Survivors’ Income

We are frequently asked to help people whose spouses have died to help settle the estate and plan for life as widows or widowers.  One of the big questions that they face is determining what it costs to live as a single instead of a couple and where the income is going to come from.

We wrote a book specifically designed to help answer those questions.

Below is from page 53 of BEFORE I GO – WORKBOOK

Keep in mind that it’s a lot easier to determine the answer to many of these questions ahead of time, while both husband and wife are still living, and access to information about survivors’ pension benefits, social security income and annuity income are easy to determine.

For a copy of BEFORE I GO and BEFORE I GO – WORKBOOK contact us or order it from Amazon.com

My Survivors’ Income:

“GUARANTEED” INCOME
Social Security:         $__________________
Pension income #1: $__________________ Source:_____________________
Pension income #2: $__________________ Source:_____________________
Pension income #3: $__________________ Source:_____________________
Annuity #1:                $__________________ Source:_____________________
Annuity #2:               $__________________ Source:_____________________
Other Guaranteed:   $__________________ Source:_____________________
SUBTOTAL GUARANTEED: $__________________

PORTFOLIO INCOME:
Interest Income:       $__________________ Source:_____________________
Dividend Income:    $__________________ Source:_____________________
Rental Income:         $__________________ Source:_____________________
Business Income:     $__________________ Source:_____________________
Other:                         $__________________ Source:_____________________
Other:                         $__________________ Source:_____________________
SUBTOTAL PORTFOLIO: $__________________
GRAND TOTAL:                   $__________________

 

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Estate taxes and you.

Have you reviewed your estate plans recently? If not, you may want to do so now. The reason is that there have been some big changes in the amount of money you can leave to your heirs free of estate taxes.

For the 2014 tax year, the estate tax exclusion amount is $5.34 million. It increases to $5.43 million for 2015.

That’s good news, right?  Maybe not.

There may be a problem if your estate plan was drafted in 2001 when the exemption was $675,000. Since then, the exemption has fluctuated wildly from 2001 though 2011. During this time, many people had wills and trusts drafted that would double the exemption by creating “family” trusts.

It’s possible that the formula for determining how much of the couple’s assets will go to the “family” trust will now cause all of the assets go into the trust rather than to the surviving spouse. This may not be the result that most people want.

For added information about estate planning, get a copy of our book “Before I Go” and the accompanying workbook.

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Does my financial advisor need to be local to my area to be successful with me?

The question in the headline was recently posted on a website which helps people get answers about basic financial questions.  It’s an interesting question.  Here is my answer:

The question is a good one and influences both clients and advisors. Because the majority of advisors have limited budgets, they have a tendency to focus their outreach on the city or region where they are located. From the perspective of people seeking financial advice, most assume that they will have greater confidence in advisors they have been able to meet in person.

After decades in the business I can attest that many of my client relationships began with a personal meeting. On the other hand, I have some clients whom I have never met. Today many of my clients live far enough away that personal meetings are not practical. Some have changed jobs and moved to another state, others moved to be nearer to their children. They have all remained clients and almost all have become friends. Regular telephone, e-mail and other forms of electronic communication have made the old-fashioned personal meeting much less necessary or even desirable. Why drive or fly when you can have the same meeting from the comfort of your home or office?

Many of the people we advise are retired and a fair number of them are widows.  For many of these we provide the investment management that was once the sole responsibility of the husband.  We provide this critical support no matter where the widow lives, even if she moves to be nearer her children.  We are frequently asked to mange the estate, and the investments of the children who inherit the estate, often despite the fact the we may never have met.

So the answer is: no; it’s not necessary to have a local financial advisor to have a successful relationship.  What it requires is confidence that the financial advisor will work in your best interest, no matter where he is located.

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Preparing for the unexpected.

What happens if you have to live on less income because you lost your job or your spouse died? The economy has not been kind to many people and job loss can happen before we’re ready to retire. That’s when a financial advisor can help.

It can be tough to find a good paying job if you’re within a decade of retirement age.  Companies are reluctant to hire you.  You may be wondering what you should do when you realize that the best path is early retirement. Where can you cut back? How should your money be invested for an extra-long retirement? These are all questions that you should not tackle on your own because the wrong decision at this age can haunt you a few years down the road.

If the major breadwinner in your family dies how will the survivor cope? One 61-year-old woman left work to care for her dying husband. After his death she could not return to work but had a lot of decisions to make. Decisions about social security, insurance, where to cut back (fewer trips, sell the motorcycle and the RV), as well as decisions about her investments.

Each case is unique, but a financial advisor should be more than a money manager. He should advise his clients about all aspects of their lives that impact their financial well-being. Ideally you will have developed a good relationship with a financial advisor before an unfortunate event occurs. But if you have not, this is definitely the time to find one.

 

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