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Estate Planning with No Heirs

Old lady gardeningSome people have a somewhat unique estate planning challenge: they’re childless and not sure what should happen to the assets they leave behind or whom to appoint as their proxy decision-maker.

CNBC’s recent article, “Planning your estate when you've got no children or heirs,” says there may be no close family members, resulting in questions of who they should leave their estate to. These folks also often don't know who to name as executor of their will or who to trust to make decisions for them, in the event that they become incapacitated.

Studies show that most childless people don’t make out a will. The issue with having no will (or “dying intestate”) is that the state will decides who gets your assets. Therefore, it is recommended that for those with no family ties or close friends, to focus on your interests and tie them to charitable giving. You can immediately establish your legacy and enjoy it, while still living.

Another tough decision is choosing someone to have medical power of attorney, which allows that person to make important health-care decisions if you’re unable to do so. Usually married couples will name each other as their health-care proxy, but after the death of one spouse, the other with no children has the challenge of naming someone else. The same is true for childless singles who never married.

Likewise, a living will details your wishes if you’re on life support or suffer from a terminal illness.  It also instructs your proxy's decision making. You also should give someone durable power of attorney to act as your agent, if you’re unable to handle your finances. You can designate different people to handle healthcare and financial decisions.

You also need to designate someone to be the executor for your estate. This can be challenging for those without any family. The executor or “personal representative” has the legal authority to handle your estate. It should be someone you trust and someone who has the bandwidth to take on this responsibility.

If you can’t think of a person to name, your bank's trust division may be willing to serve as executor. You may also consider setting up a trust. Remember that some assets have beneficiaries, like 401(k) plans and life insurance policies. These accounts don’t pass through the will.

Doing something is better than doing nothing. Speak with an experienced estate planning attorney to get help with making these decisions and creating a plan.

Reference: CNBC (May 31. 2017) “Planning your estate when you've got no children or heirs”

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Review These Retirement Planning Criteria

401k piggy bankStock Investor’s recent article, “6 Retirement Estate Planning Criteria You Must Address,” says every retiree’s investment objective should address these six criteria:

  1. Minimum required yield. This is the first factor when looking for reliable long term income. It is calculated based on household income requirements and investable assets—typically IRAs, taxable brokerage accounts and other savings that are planned for retirement income. When the required percent of investment (portfolio yield) increases, so does the income risk. When the yield is too high to be practical, traditional thought says to liquidate some of your principal by gradually drawing down your investment portfolio over retirement years or by using an insurance product like a single premium immediate annuity.
  2. Income Reliability. This means the income, just like a paycheck, will be there regularly and will have a low risk of fluctuation—and an even lower risk of being reduced or eliminated.
  3. Income growth that keeps up with inflation. This can come from the investments organically growing their dividends over the years or from the excess income the actual investments produce that are accumulated and used to supplement future household income with inflation.
  4. Liquidity. This is the ease with which investment securities can be converted into cash. This will be a high priority, if you think a need could arise that would require an unplanned tap into the principal of the investment portfolio.
  5. Future capital preservation of the investment principal. Conventional wisdom says that retirement savings will be consumed and the savings will decumulate. Capital preservation is a priority, if you want to maintain the investment capital to meet future possible household major expenses—like assisted living costs or creating a testamentary special needs trust (a trust created at your death in your estate) to provide for a disabled child or grandchild, to provide for a grandchild’s college expenses or to donate a favorite charity.
  6. Simple transfer to the surviving spouse. In many instances, a spousal retirement account has just one person who builds, monitors, and manages the portfolio. Therefore, it’s important to have an easy transition for the surviving spouse to continue the management of the income portfolio.

Reference: Stock Investor (May 24, 2017) “6 Retirement Estate Planning Criteria You Must Address”

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Here’s What an Estate Plan Can Do for You

Wills-trusts-and-estates-coveredThe need for an estate plan applies to everyone, says Trust Advisor’s recent article, Why An Estate Plan Is Beneficial.”

With a small estate, you should be even more careful to avoid unnecessary expenses and to retain the most resources for fulfilling your personal, financial, and charitable goals. The article cites four key reasons why you should have an estate plan:

  1. Stipulating Care for Yourself. This includes a healthcare proxy, power of attorney and living will that states how you want to be cared for, if you become incapacitated.
  2. Financial Security. Your will lets you specify the way that you want your assets distributed and to whom. Without a will, state probate law will determine who receives your assets.
  3. Designating Guardians. If you have minor children, it’s critical to make written arrangements for their care. A will is the only legal way to do so in most states (e.g., California is an exception). You must designate a person that you want to be entrusted with the care of your children.
  4. Designating Beneficiaries. Your estate plan will include completing beneficiary forms for insurance policies and retirement accounts. It’s a good idea to review your designated beneficiaries after any major life event, like marriage, divorce, a death in the family or the birth or adoption of a child. Remember, you can also name a charity as a primary beneficiary or contingent beneficiary in your plan.

Reference: Trust Advisor (April 29, 2017) Why An Estate Plan Is Beneficial

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Learn More about Deferred Charitable Gift Annuities

Lee’s Summit Journal says in a recent article, “Retirement planning power tool,” that a Deferred Charitable Gift Annuity may be a great retirement planning tool for charitably-minded baby boomers, who may already be maximizing contributions to their IRAs.

A Charitable Gift Annuity (CGA) is a contract with a non-profit. The agreement states that, in exchange for a contribution, the non-profit guarantees an annual payment of a set amount to an individual or a couple for their lifetime. The remainder of the gift is used by the charity for their own purposes. A Deferred CGA is where the contribution is made now and the annuity payment is deferred to a later time.

Here’s an example to illustrate how this works and the benefits. Let’s say we have a married couple, Bob and Fran, who are now both 56 and in the prime earning years of their careers. They have IRAs and are making the maximum contribution annually, but they’d still like to put some more away into a retirement account.

They could always use another tax deduction, and they’d like to create a legacy gift to benefit their church. Bob and Fran create a Deferred CGA contract with a local community foundation. They are planning on contributing $4,200 annually for six years. That’s a total contribution of $25,200. Bob and Fran will defer their annuity payment, until they reach their full retirement age for Social Security, age 67. Over the six years they’re making the contribution, Bob and Fran receive a partial tax deduction for their contribution of $5,392. This saves them $1,779 in taxes, since they’re in a 33% tax bracket.

At age 67, they start to get an annual annuity of $1,512 based on a 6% annuity contract (that’s 6% of the contribution amount), which they’ll keep receiving for the rest of their lives. This amount doesn’t change from year to year, but will remain at $1,512. In addition, more than half of this amount ($858) will be income that’s tax free. A similar taxable investment would need to earn 8.2% to have the same return. It’s estimated over their lifetimes that Bob and Fran will receive $42,741.

The foundation investment committee and professional advisers will invest the contributions and track the investment returns and annuity payments in a fund specifically set up for this annuity. Estimating a conservative average annual return of 5%, the fund would have $54,547 remaining in the fund after their lifetimes, to create an endowment to benefit their church that would pay out approximately $2,700 annually to their church.

The Deferred Charitable Gift Annuity allowed Bob and Fran to provide an impactful legacy gift to their church. They also received reliable income for themselves in their retirement and a tax deduction during their peak earning years. This example shows why this is a powerful retirement planning tool for those who want to leave a legacy and support their favorite charity.

Reference: Lee’s Summit Journal (March 28, 2017) “Retirement planning power tool”

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How is Life Insurance Taxed in an Estate?

Question mark with peopleNJ.com’s recent post asks “Is inheritance tax owed on life insurance?” The article advises that it's important to understand how your assets will be taxed when you die. Here’s a review of all the rules in New Jersey. Those residents must look at three potential death taxes: the federal estate tax, the New Jersey estate tax and the New Jersey inheritance tax.

The current IRS code lets each taxpayer pass $5.49 million federally tax-free to anyone cumulatively during life or at death. There’s also the notion of portability. With portability, a surviving spouse may be able to use any unused federal estate and gift tax exemption of his or her "last deceased spouse." Therefore, with proper planning, a married couple may be able to pass at least $10.98 million federal estate and gift tax free.

The New Jersey estate tax is scheduled to be repealed next year.  However, until that time, anyone dying in 2017 can pass $2 million free of estate tax. It is important to note that the state doesn't recognize portability.

New Jersey and federal estate taxes are calculated based on the decedent's gross estate less certain deductions, like funeral and administrative expenses, debts, charitable donations and outright bequests to a surviving spouse or bequests made to the surviving spouse in the form of qualified trusts. All assets owned or controlled by the decedent are typically going to be included in the gross estate. This will include any life insurance owned or controlled by the decedent and paid to either a third-party beneficiary or the estate.

However, the state’s inheritance tax is assessed differently—it’s levied against certain bequests and transfers within three years of death, based on the relationship between the deceased and the beneficiary, and the value and nature of the asset transferred. There’s no inheritance tax imposed, if the beneficiary is a spouse, domestic partner, civil union partner, grandparent, parent, descendant or stepchild of the decedent (called “Class A beneficiaries) or a charity. The value and nature of the bequests are irrelevant, if the beneficiary is in one of these categories. These relationships are exempt from inheritance tax. If the beneficiary is not in one of these categories, then the relationship to the beneficiary and the value and/or nature of the bequest must be examined.

Some assets are also exempt from the New Jersey inheritance tax, such as life insurance. But it must be paid to a named beneficiary or a trust for the benefit of that beneficiary. Life insurance owned by a decedent isn’t exempt from the inheritance tax, if it’s paid to the estate.

Reference: NJ.com (March 28, 2017) “Is inheritance tax owed on life insurance?”

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