Tuesday, December 26, 2006

One Piece of the Puzzle

Cross one more item off the New Year's Resolution list--from 1999--THE WILL IS DONE. Now everything is done, right? Maybe not.

Getting your will or trust is only piece of the puzzle. Equally as important is reviewing you assets that have named beneficiaries: life insurance, 401(k), 403(b), IRA, Keogh and annuities. It may have been some time since you last updated these beneficiaries and your financial advisor or IRA custodian may not have followed up with that assistance. It is not uncommon to see ex-spouses and parents as "surprise" beneficiaries. With large retirement plans and insurance policies, these assets may comprise up a majority of your assets so it is important that you incorporate these beneficiary designations into your global estate plan.

There are certain income tax benefits to having your spouse as a named beneficiary of a qualified (retirement) plan, which permits tax deferral. But as to your contingent beneficiaries and other named beneficiaries assets, it is important that your estate planner assist you with incorporating these items in your estate plan so that you have a complete picture with all of the pieces.

Monday, December 04, 2006

Timing Receipt of Social Security Benefits

I recently attended a seminar sponsored by A.G. Edwards concerning the timing of receiving social security benefits and the impact on retirement planning. Individuals are entitled to begin receiving social security benefits as early as age 62, although at a reduced rate. If the individual waits until the full benefit age (currently 65) the recipient will be entitled to receive their full benefits for the remainder of their life. Thus the question is "do I want some money now, but a in smaller amounts? Or do I wait a few more years and get the maximum monthly payment?" To keep things interesting, there are earnings limitations if a person elects to get their social security benefits prior to their full benefit age.

Every situation is different and there isn't a right or wrong answer as to when you should choose to start receiving social security benefits. Your financial planner can guide you on the ideal timing issues for your particular situation and the impact for your situation. Generally speaking, receiving benefits at an earlier age is the better option although there may be some reasons to wait.

Sunday, November 26, 2006

Pass the Turkey and Your Inheritance

During this time of season, families are gathering together and talking about sports, kids, families, work and other topics. While estate planning, wills, and death aren't exactly raucous discussion topics, it is a good opportunity to go over some topics with your families, whether it be your parents or your adult children. Communication over the plans that have been made or will be made is important in keeping a harmonious family. Take this occasion to be thankful for the family that you have and tell them that you care enough to make plans to make transitions as easy as possible. Whether it is a discussion over who and why you picked a particular person as a guardian for your children or why you are leaving a particular property to someone, you can potentially help avoid disputes at a later point.

Verbalizing your intentions and plans will reinforce the written documentation that you, hopefully, have in place. Without this communication, you just have words on paper that someone else can potentially interpret in different ways. "Why did dad do that to me? Was he still upset over that broken window from the third grade?" "I bet my sister made him write his will that way. Honey, what's the name of that lawyer?"

Hopefully you have a close and understanding family that never fights. Even so, isn't it better that you tell your loved-ones how much you care and what you've done? And if you don't have a "Cleaver-esque" family like the other 99% of families, setting the plan out makes even more sense. So when you get that lull in the conversation this season, take that first step. Chances are you'll be glad you did...and so will your family.

Monday, November 20, 2006

To Revoke or Not Revoke...That is the Question

While a revocable trust can be changed after it is created, an irrevocable trust is a trust that cannot be changed or amended after it is created. In other words, the terms are "written in stone". A careful drafter of an irrevocable trust will be able to implement some provisions which provide for some flexibility in the future, but there are limits as to how much can change and you will lose control over the trust assets, generally speaking.

So why would you create an irrevocable trust if you can't change anything? People and plans change, right? A properly drafted and operated irrevocable trust will be excluded from your taxable estate. Thus, for example, you could purchase a large life insurance policy to be owned by the trust, have the death benefits paid to the trust and then to your selected beneficiaries. While normally life insurance proceeds are included in a taxable estate, by having the irrevocable trust own the policy, those proceeds are fully excluded from your taxable estate and pass to your beneficiaries free of estate tax.

Other assets besides life insurance can be transferred into an irrevocable trust, although you'll have to consider the impact of gift taxes on such a transfer with your advisor.

Sunday, November 12, 2006

Multi-Uses of Life Insurance in the Estate Plan

Life insurance can be an important part of your estate plan and can be utilized in many different ways. For example, if your estate is subject to estate tax, life insurance provides liquidity for the payment of taxes without necessarily having to sell your assets if you don't have the cash available.

Life insurance can also be helpful if you have a small business with another partner and you want to create cash for either the business or your partner to purchase your share of the business, such as through a buy-sell agreement, which then provides cash for your family. Life insurance with a buy-sell agreement enables the business to hopefully continue.

And, of course, life insurance provides income replacement and cash for your spouse and kids in the event of your death for payment of bills and maintenance of a lifestyle.

A good estate plan is more than just a will or a trust, but also may include life insurance for various purposes.

Tuesday, November 07, 2006

Power of Attorney

"Okay, I'm lying in a hospital bed, comotose, hooked up to a machine. Who's going to pay my bills, get my mail, file tax returns, cancel my subscription to Cats'R'Us magazine, . . ."

Good question. Have you made adequate plans? Estate planning is more than just planning what happens to your assets at your death, but also what happens to your assets during your disability. That planning should include executing a power of attorney document.

A General Power of Attorney form authorizes an individual (called the attorney-in-fact, but they don't have to be an attorney, thankfully) to act on your behalf. There are different situations when you may want this. For example, you are going to be out of town but you want someone to sign documents on your behalf in your absence. A power of attorney (POA) form can handle that simple assignment.

Or, you can have a Power of Attorney authority that "springs" into existence only when you are disabled, as determined by your physician. With a "springing power of attorney", your attorney-in-fact only has authority when you are unable to act due to a disability. Until that point, they don't have any authority.

Upon your death (which we hope doesn't happen soon), all authority under the POA is extinguished and your attorney-in-fact no longer has any ability to act. What happens in that scenario is a topic for another day.

Getting a will or trust executed is an important part of the estate planning process, but don't forget to cover all the bases and have a POA executed.

Tuesday, October 31, 2006

"Death Taxes" in Iowa

As the only things in life that unavoidable are death and taxes, what better way to produce tax revenue than to tax someone at their death? While there are no such thing as "death taxes" (that term is a political term conjured up by politicians), there are some potential taxes that may be paid shortly after a person's death. In short, there are two "death" taxing systems for Iowa residents: the state imposed Iowa Inheritance tax and federal imposed estate tax.

The Iowa inheritance tax is actually a tax assessed against the person receiving an inheritance (and not the estate of the deceased person) and is based on their relationship to the decedent and the amount they receive. Spouses and lineal descendants and ascendants (children, grandchildren, parents, etc.) receive their inheritances 100% inheritance tax free. Inheritances by siblings, friends, cousins, nephews, etc. would have to pay inheritance taxes. Proper planning by a knowledgeable estate planner will provide who actually pays those taxes and whose shares are reduced by those inheritance taxes.

The federal estate tax is a tax that is imposed on the estate of a deceased person. Any portion that passes to a surviving spouse or a charity are fully deductible. All other assets that pass to others are taxable if the total taxable estate exceeds $2 million. Life insurance, retirement plan proceeds, and all other assets owned by a decedent are included in determining whether the $2 million figure applies. Through various planning methods, you can structure a plan to optimize the transfer of assets with a limited tax bill.

This is only a basic synopsis of "death taxes". You should, of course, contact a knowledgeable estate planning attorney to review your personal situation. If you don't know one, you do now.

Monday, October 30, 2006

Will/Trust vs. Jointly owned assets

Think if you have a will or trust established that you have your estate plan completed? Guess again. If you own an asset jointly with someone else, it is possible that by operation of law that particular asset will pass automatically at your death to that person. Doesn't matter what your will provides or what a trust provides. The fact that you jointly own that asset is the "estate plan" for that particular asset.

While property passing to a joint owner may fine for most situations, many "planned" estate plans have been ruined by this "quick and dirty" estate plan. What if you have children from an earlier relationship that you have provided for in your will/trust? Jointly owned asset cut those beneficiaries out of the picture entirely.

Executing a will or trust is a good first step in the estate planning process. A careful and complete review of your assets and the way those assets are owned is also necessary for a complete estate plan.

Contact an estate planning attorney for further information.

Sunday, October 29, 2006

Avoiding Probate

An alternative to having your estate go through the probate process through the court system is through the use of a revocable trust. Sometimes also called a "living trust" or "inter vivos trust", this form of an estate plan, if properly set up, can remove the necessity of going through the probate process.

A revocable trust acts as a will substitute by providing for the terms of distribution of your assets upon your death. In addition, a trustee can administer your assets during you life if you are unable to do so, operating much as a power of attorney.

A trust may or not be suited for your situation. For more information. Check out this article for more information on living trusts.

Saturday, September 23, 2006

Do I need a will?

Its estimated that only 1/2 of the population actually has a will. So how important is it to have a will? It depends. (How's that for an answer? Kind of what you'd expect from an attorney.)

One key element is that if you have minor children, a will can provide significant direction on who takes responsibility for your kids and how your assets are handled for them. If you don't provide that direction, the courts and family members are left trying to sort out the options, and quite possibly resulting in disputes. (And we know who wins if there are disputes - lawyers.)

Another key element as to whether you need a will depends on how your assets are owned. You can own assets jointly with another person, in which case they may pass automatically to that joint owner. Or you can have a named beneficiary (like an insurance policy) in which that asset passes automatically to a named person. Under either of those scenarios, it doesn't matter if you have a will or not, as those assets, which may be all of your assets, will pass to those individuals. However, while you may be able to get by without a will and save a few hundred dollars in attorney fees, but is that really the right answer for your legacy? What if your kids are minors? What if your surviving spouse gets re-married? Do you want to have control over what happens to your wealth?

These are just a couple of the issues to think about when determining the basic question of whether you need a will. The quick answer is that most people need a will of some variety. Contact an experienced estate planning attorney for additional information as to your personal situation.

Sunday, August 27, 2006

What is "Probate"?

Probate is a term that is often mentioned but many people don't understand what it really is. Probate is the legal process where, through a court-supervised process, a deceased individual's assets are transferred to their heirs/beneficiaries; taxes are paid; and debts/claims are handled. The probate process also includes the validation of a will.

It is not necessary to have the attorney who drafted the will handle the process. The "administrator" or "executor" can select whatever attorney they choose.

In Iowa, the probate process primarily consists of 5 stages.

  1. The filing of the inital set of documents to open the estate.
  2. Publication of notice in a newspaper for filing of claims.
  3. Waiting the time period for the filing of any claims or contests to the will.
  4. Filing of the report and inventory and payment of taxes.
  5. Distribution to beneficiaries/heirs and discharge of the executor/administrator.

Every state is different in how the probate process is administered and you should contact a knowledgeable attorney to handle the probate process. Feel free to contact me if you have any questions about the probate process in Iowa.