Tax Planning

What has the Average American Saved for Retirement?

It’s the question we all wonder about, but not very many of us will come out and ask. A 2019 analysis of more than 30 million retirement accounts by Fidelity Investments found that the average balance in corporate sponsored 401(k) plans at the end of 2018 was $95,600. When it came to traditional, Roth and rollover IRAs, the number was $98,400, reports Investopedia in a recent article titled “What Is the Size of the Average Retirement Nest Egg?” A look at 403(b) and other defined contribution retirement plans in the non-profit sector found that it was $78,7000. These numbers were down between 7.8%-8% from the same quarter of the prior year. Blame the stock market for that.

Averages like this only indicate a few things. Younger workers, for example, tend to have less in their retirement accounts than older workers. Their salaries are smaller, and they haven’t had decades to accumulate tax deferred income in their accounts. However, that gap is wide.

A June 2018 report from the Transamerica Center for Retirement Studies looked at a nationally representative sample of more than 6,000 workers and broke out retirement savings by generation. The boomer members had estimated median retirement savings of $164,000 in 2017, while Gen Xers had $72,000 and millennials had $37,000.

Aside from age, the big factors in retirement savings success seem to be education and income. People with higher income put more money into their retirement accounts. The Transamerica study shows that households with incomes of under $50,000 had estimated median retirement savings of $11,000. Households with incomes between $50,000 and $99,999 had median savings of $61,000 and those with incomes of $100,000 or more had $215,000.

The higher the level of education, the more money people have set aside for retirement.

Therefore, if you’re wondering how your nest egg compares to the average nest egg, the first thing you’ll want to do is decide to whom you want to compare yourself and your nest egg. You can compare yourself to the U.S. population in general, or to people who are more like you in education, age and income.

Here’s an unnerving thought: no matter if your nest egg is way above your peer group, that doesn’t mean it will be enough when retirement rolls around. Everyone’s situation is different, and life hands us unexpected surprises.

One way to prepare is to have an estate plan. If you don’t already have an estate plan, which includes a will, power of attorney, health care power of attorney, possibly trusts and other strategic tools for tax planning and wealth transfer, make an appointment with an estate planning attorney.

Reference: Investopedia (Sep. 24, 2019) “What Is the Size of the Average Retirement Nest Egg?”

Why Do I Need an Attorney to Help Me with Estate Planning?

Your estate plan can be simple or complicated. The New Hampshire Union Leader’s recent article, “Estate planning is important and may require help from a professional,” says that some strategies are definitely easier to implement—like having a will, for example. Others are more complex, like creating a trust. Whatever your needs, most strategies will probably necessitate that you hire a qualified attorney to help with your estate planning.

do i need an attorney to help me with my estate planning
There is a range of legal issues that should be considered when putting your estate plan together.

Here are some situations that may require special planning attention that an attorney can help you with:

  • Your estate is valued at more than the federal gift and/or estate tax applicable exclusion amount ($11.4 million per person in 2019);
  • You have minor children;
  • You have loved ones with special needs who depend on you;
  • You own a business;
  • You have property in more than one state;
  • You want to donate to charities;
  • You own valuable artwork or collectibles;
  • You have specific thoughts concerning your own health care; or
  • You want privacy and want to avoid the probate process.

First, you need to understand your situation, and that includes factors like your age, health and wealth. Your thoughts about benefitting family members and taxes also need to be considered. You’ll also want to have plans in place should you become incapacitated.

Next, think about your goals and objectives. Some common goals are:

  • Making sure your family is taken care of when the time comes;
  • Providing financial security for your family;
  • Avoiding disputes among family members or business partners;
  • Giving to a charity;
  • Managing your affairs, if you become disabled;
  • Having sufficient liquidity to pay the expenses of your estate; and
  • Transferring ownership of your property or business interests.

Ask your attorney about a will. If you have minor children, you must have a will to name a guardian to raise your children if you can’t be there for them, unless your state provides an alternative legal means to do so. Some people many need a trust to properly address their planning concerns. Some of your assets will also have their own beneficiary designations. Once you have you a plan, review it every few years or when there’s a birth, adoption, death, or divorce in the family.

Reference: New Hampshire Union Leader (July 27, 2019) “Estate planning is important and may require help from a professional”

What Are the Basics About Trusts?

Forbes’s recent article, “A Beginner’s Guide To Reading A Trust,” says that as much as attorneys have tried to simplify documents, there’s some legalese that just can’t be avoided. Let’s look at the basics about trusts and a few tips in reviewing your trust.

Basis about trusts
Understanding basic trust terms is essential.

First, familiarize yourself with the terms. There are basic terms of the trust that you’ll need to know. Most of this can be found on its first page, such as the person who created the trust. He or she is usually referred to as the Donor, Grantor or Settlor (here in Florida we use the term Settlor). It is also necessary to identify the Trustee and any successor trustees, who will hold the trust assets and administer them for the benefit of the Beneficiaries.

You should next see who the Beneficiaries are and then look at the important provisions concerning asset distribution. See if the trustee is required to distribute the assets all at once to a specific beneficiary, or if she can give the money out in installments over time.

It is also important to determine if the distributions are completely left to the discretion of the trustee, so the beneficiary doesn’t have a right to withdraw the trust assets.  You’ll also want to check to see if the trustee can distribute both income and principal.

The next step is to see when the trust ends. Trusts usually end at a specific date or at the death of a beneficiary.

Other important basic trust provisions include whether the beneficiaries can remove and replace a trustee, if the trustee has to provide the beneficiaries with accountings and whether the trust is revocable or irrevocable. If the trust is revocable and you’re the settlor, you can change it at any time.

If the trust is irrevocable, you won’t be able to make any changes without court approval. If your uncle was the donor and he passed away, the trust is most likely now irrevocable.

In addition, you should review the basic trust boilerplate language, as well as the tax provisions.

Talk to an estate planning attorney about any questions you may have and to help you interpret the basic trust terms.

Reference: Forbes (June 17, 2019) “A Beginner’s Guide To Reading A Trust”

What Do I Tell My Kids About Their Inheritance?

knowing whether to tell your kids about their inheritance can be tough decision

For some parents, it can be difficult to discuss family wealth with their children and knowing whether to tell your kids about their inheritance can be tough decision. You may worry that when your kid learns they’re going to inherit a chunk of money, they’ll drop out of college and devote all their time to their tan.

Kiplinger’s recent article, “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth,” says that some parents have lived through many obstacles themselves. Therefore, they may try to find a middle road between keeping their children in the dark and telling them too early and without the proper planning. However, this is missing one critical element, which is the role their children want to play in creating their own futures.

In addition to the finer points of estate planning and tax planning, another crucial part of successfully transferring wealth is honest communication between parents and their children. This can be valuable on many levels, including having heirs see the family vision and bolstering personal relationships between parents and children through trust, honesty and vulnerability.

For example, if the parents had inherited a $25 million estate and their children would be the primary beneficiaries, transparency would be of the utmost importance. That can create some expectations of money to burn for the kids. However, that might not be the case, if the parents worked with an experienced estate planning attorney to lessen estate taxes for a more successful transfer of wealth.

Without having conversations with parents about the family’s wealth and how it will be distributed, the support a child gets now and what she may receive in the future, may be far different than what she originally thought. With this information, the child could make informed decisions about her future education and how she would live.

Heirs can have a wide variety of motivations to understand their family’s wealth and what they stand to inherit. However, most concern planning for their future. As a child matures and begins to assume greater responsibility, parents should identify opportunities to keep them informed and to learn about their children’s aspirations, and what they want to accomplish.

The best way to find out about an heir’s motivation, is simply to talk to talk to your kids about their inheritance.

Reference: Kiplinger (May 22, 2019) “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth”

What is a Transfer on Death (TOD) Account?

Transfer on Death accounts allow for assets to avoid probate and be transferred directly to a beneficiary after the death of the account holder.

Most married couples share a bank account from which either spouse can write checks and add or withdraw funds without approval from the other. When one spouse dies, the other owns the account. The deceased spouse’s will can’t change that.

This account is wholly owned by both spouses while they’re both alive. As a result, a creditor of one spouse could make a claim against the entire account, without any approval or say from the other spouse. Either spouse could also withdraw all the money in the account and not tell the other. This basic joint account offers a right of survivorship, but joint account holders can designate who gets the funds, after the second person dies.

Kiplinger’s recent article, “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning,” explains that the answer is transfer on death (TOD) accounts (also known as Totten trusts, in-trust-for accounts, and payable-on-death accounts).

In some states, this type of account can allow a TOD beneficiary to receive an auto, house, or even investment accounts. However, retirement accounts, like IRAs, Roth IRAs, and employer plans, aren’t eligible. They’re controlled by federal laws that have specific rules for designated beneficiaries.

After a decedent’s death, taking control of the account is a simple process. What is typically required, is to provide the death certificate and a picture ID to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the will establishes), they may be subject to income, estate, and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

Account custodians (such as financial institutions) are often cautious, because they may face liability if they pay to the wrong person or don’t offer an opportunity for the government, creditors, or the probate court to claim account funds. Some states allow the beneficiary to take over that responsibility, by signing an affidavit. The bank will then release the funds, and the liability shifts to the beneficiary.

If you’re a TOD account owner, you should update your account beneficiaries and make certain that you coordinate your last will and testament and TOD agreements, according to your intentions. If you fail to do so, you could unintentionally add more beneficiaries to your will and not update your TOD account. This would accidentally disinherit those beneficiaries from full shares in the estate, creating probate issues.

TOD joint account owners should also consider that the surviving co-owner has full authority to change the account beneficiaries. This means that individuals whom the decedent owner may have intended to benefit from the TOD account (and who were purposefully left out of the Last Will) could be excluded.

If the decedent’s will doesn’t rely on TOD account planning, and the account lacks a beneficiary, state law will govern the distribution of the estate, including that TOD account. In many states, intestacy laws provide for spouses and distant relatives and exclude any other unrelated parties. This means that the TOD account owner’s desire to give the account funds to specific beneficiaries or their descendants would be thwarted.

Ask an experienced estate planning attorney, if a TOD account is suitable to your needs and make sure that it coordinates with your overall estate plan.

Reference: Kiplinger (March 18, 2019) “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning”

When Do I Need a Revocable Trust?

A will is a legal document that states how your property should be distributed when you die.  It also names guardians for any minor children. Whatever the size of your estate, without a will, there’s no guarantee that your assets will be distributed, according to your wishes. For those with a desire to simplify asset transfers after death and avoid probate, those with substantial assets, more complicated situations, or concerns of diminished capacity in later years, a revocable trust might also be considered, in addition to a will.

Revocable trusts have many benefits
A revocable trust is useful for anyone who wants to simplify the transfer of their assets or avoid probate.

Forbes’ recent article, “Revocable Trusts And Why Should You Consider One,” explains that a revocable trust, also called a “living trust” or an inter vivos trust, is created during your lifetime. On the other hand, a “testamentary trust” is created at death through a will. A revocable trust, like a will, details dispositive provisions upon death, successor and co-trustees, and other instructions. Upon the grantor’s passing, the revocable trust functions in a similar manner to a will.

A revocable trust is a flexible vehicle with few restrictions during your lifetime.  You usually designate yourself as the trustee and maintain control over the trust’s assets. You can move assets into or out of the trust, by retitling them. This movement has no income or estate tax consequences, nor is it a problem to distribute income or assets from the trust to fund your current lifestyle.

A living trust has some advantages over having your entire estate flow through probate. The primary advantages of having the majority of your assets avoid probate, is the ease of asset transfer and the lower costs. Another advantage of a trust is privacy, because a probated will is a public document that anyone can view.

Even with a revocable trust, you still need a will. A “pour over will” controls the decedent’s assets that haven’t been titled to the revocable trust, intentionally or by oversight. These assets may include personal property. This pour-over will generally names the revocable trust—which at death becomes irrevocable—as the beneficiary.

Another reason for creating a revocable trust is the possibility of future diminished legal capacity, when it may be better for another person, like a spouse or child, to help with your financial affairs. A co-trustee can pay bills and otherwise control the trust’s assets. This can also give you financial protection, by obviating the need for a court-ordered guardianship.

Talk to an experienced estate planning attorney about the best options for your situation to protect your estate and provide the peace of mind that your family will receive what you intended for them to inherit, with the least possible costs and stress.

Reference: Forbes (March 11, 2019) “Revocable Trusts And Why Should You Consider One”

How Will My IRA Be Taxed?

The most common of IRA tax traps results in tax bills through Unrelated Business Taxable Income (UBTI). The sources of business income from stocks, bonds, and funds like interest income, capital gains, and dividends are exempt from UBTI and the corresponding tax.

Careful consideration of your IRA’s tax treatment is necessary to avoid high taxes.

Fox Business’s recent article, “Your IRA and taxes: Don’t get a surprise tax bill” explains that IRAs that operate a business, have certain types of rental income, or receive income through certain partnerships will be taxed, when the total UBTI exceeds $1,000. This is to prevent tax-exempt entities from gaining an unfair advantage on regularly taxed business entities.

UBIT can take a chunk from an IRA, and the Tax Cuts and Jobs Act of 2017 replaced the tiered corporate tax structure with a flat 21% tax rate. That begins in tax year 2018 (this tax season). These tax bills often have penalties, because IRA owners aren’t even aware that the bill exists.

Master Limited Partnerships (MLPs) held within IRAs are a good example of how UBTI can catch investors by surprise. MLPs are fairly popular investments, but when they’re held within an IRA, they’re subject to UBIT. When the tax is due, the IRA custodian must get a special tax ID number and file Form 990-T to report the income to the IRS. That owner must pay the tax, and is typically unaware of the bill, until it arrives as a completed form to be submitted to the IRS (completed and signed on behalf of the owner). In some instances, the owner may have to pay estimated taxes throughout the year. This can mean a significant underpayment penalty.

Working with prohibited investments will also result in a tax bill. Self-directed IRAs can violate the rules. Alternative investments such as artwork, antiques, and precious metals (with some exceptions) are generally considered as distributions and are subject to taxes.

Prohibited transactions are a step above prohibited investments and can result in the loss of tax-deferred status for the entire IRA. This includes using an IRA as security to obtain a loan, using IRA funds to purchase personal property, or paying yourself an unreasonable compensation for managing your own self-directed IRA. Executing a prohibited transaction can result in the entire IRA being treated as a taxable distribution to you.

Therefore, like fund holdings, and other investments, it’s critical to understand exactly what you own and how to deal with the tax liabilities.

Reference: Fox Business (March 6, 2019) “Your IRA and taxes: Don’t get a surprise tax bill”

Can I Use My Life Insurance to Give to Charity?

As Forbes explains in the article “2 Ways To Combine Charitable Giving And Life Insurance,” one of the core products for protecting wealth is life insurance. As you age, your need for life insurance may lessen, but sometimes it will increase. If you have a life insurance policy that you no longer need, one option might be to use your life insurance to give to charity. You can simply donate your policy to a charity of your choosing.  There are several ways that life insurance policies can be gifted or used for charitable purposes.

Donate your life insurance policy to charity
Use your life insurance policy to make a charitable donation.

Gift Your Existing Policy. You can simply give away an existing policy, if you no longer need the policy for estate liquidity or estate taxes. You could gift the policy outright to your favorite charity or use a Donor Advised Fund (DAF). If you give the policy to a charity outright, you can change ownership of the policy and pretty much be done with it. You might get a charitable income tax deduction for the value of the policy at the time of the gift (it’s measured by the sum of the interpolated terminal reserve plus unearned premiums rather than the death benefit amount).

If the policy has ongoing premiums, those would be the responsibility of the charity. However, you can help them, by continuing to make the premium payments on behalf of the charity by directly paying the insurance company. You could also pay the value of the premiums to the charity and let it pay the insurance company. The premiums would then be tax deductible, since the charity owns the policy.

You could also simplify your life as the donor, where you could convert the policy to a reduced and paid-up policy and donate it with no ongoing premiums needed. This may be easier, because you don’t need to create an additional outflow of cash, after the gift is made to keep the policy in effect for the charity. You just transfer the policy value without any further obligations.

Charities typically like to receive gifts of policies with no ongoing premiums, because it eliminates the task of sending the donor a gift receipt, every time a premium payment is made. It also eliminates the issue of whether the donor or the charity is to pay future premiums.

Gift a New Life Insurance Policy. Another tact is to give a new life insurance policy. This can be a bit more involved, because if the charity’s going to be the owner, they must have an insurable interest in the donor. However, if you have a strong ongoing relationship with the charity, this requirement can be satisfied. You can then pay up the policy completely at the start or make ongoing premium payments over time.

Reference: Forbes (March 6, 2019) “2 Ways To Combine Charitable Giving And Life Insurance”

Should I Designate a Trust as Beneficiary of my IRA?

There are many pros and cons to naming a trust, rather than an individual as a beneficiary of the IRA. However, there are some complex rules. You need to get it right, because this may be your biggest asset.

Name a Trust as Beneficiary of my IRA
Naming a trust as beneficiary of your IRA has many benefits.

Investment News’ recent article on this subject asks “Should you name a trust as an IRA beneficiary?” The article explains that individual retirement account assets can’t be put into trusts directly during a person’s lifetime, without destroying the IRA’s tax shelter. Therefore, a trust may only be named as the beneficiary of the IRA. The trust would inherit the IRA upon the owner’s death, and beneficiaries of that trust would have access to the funds.

Asset protection is one rationale for making this move, because some trusts shield IRA assets from lawsuits, business failures, divorce and creditors. Taxpayers enjoy state and federal protections for IRA assets during their lifetime. However, heirs who inherit an IRA directly—not through a trust—don’t receive those protections, unless provided by state law. Trusts also allow for some control over the assets. The terms of a trust can stipulate the way in which distributions are made if an heir is a minor, disabled, financially unreliable, incapacitated or vulnerable.

Naming a trust as an IRA beneficiary may not be practical for people who plan to bequeath their IRA to a spouse, rather than their children, grandchildren or others. Spouses are allowed roll over the decedent’s IRA assets into their own IRA tax-free.

There are some technical rules to follow, like the IRA beneficiary form must indicate before a person’s death, that the trust is the primary beneficiary. After death, the IRA must be retitled as an inherited IRA. Required minimum distributions (RMDs) would still also be required for the IRA. This is an area where using the right type of trust is important. A “see-through” or “look-through” trust may be the best bet.

Structuring a trust this way maintains the IRA’s preferential tax treatment. That allows a trust beneficiary to spread the RMDs over a long period based on his life expectancy. This is called a “stretch IRA.” The RMD amount would be based on the oldest beneficiary of the trust. However, beneficiaries with separate trust shares would have different RMDs.

In addition, the trust’s language must also state that distributions from the IRA can only go to “designated beneficiaries,” not to pay expenses. The risk of not creating the trust as a see-through or including this language, is that the IRA assets are distributed and the resulting tax paid within a much shorter time frame—potentially five years.

Trusts may also be set up as “conduit” or “discretionary” trusts. With a conduit trust, the annual RMDs pass through the trust to beneficiaries, who pay tax at their individual rates. Discretionary trusts don’t distribute the RMDs out of the trust and they pay tax at the more punitive trust tax rates. However, they keep the most post-death control over assets.

Talk to an experienced estate planning attorney about these trusts and how they can work with your IRA.

Reference: Investment News (February 22, 2019) “Should you name a trust as an IRA beneficiary?”

Why Is a Revocable Trust So Valuable in Estate Planning?

There’s quite a bit that a revocable trust can do to solve big estate planning problems for many families.

As Forbes explains in its recent article, “Revocable Trusts: The Swiss Army Knife Of Financial Planning,” trusts are a critical component of a proper estate plan. There are three parties to a trust: the owner of some property (settler or grantor) turns it over to a trusted person or organization (trustee) under a trust arrangement to hold and manage for the benefit of someone (the beneficiary). A written trust document will spell out the terms of the arrangement.

One of the most useful trusts is a revocable trust (inter vivos) where the grantor creates a trust, funds it, manages it by herself, and has unrestricted rights to the trust assets (corpus). The grantor has the right at any point to revoke the trust, by simply tearing up the document and reclaiming the assets, or perhaps modifying the trust to accomplish other estate planning goals.

Revocable Trust
A Revocable Trust is one of the most useful estate planning tools

After discussing trusts with your attorney, he or she will draft the trust document and re-title property to the trust. The grantor has unrestricted rights to the property and assets transferred to a revocable trust and can be reclaimed at any time. During the life of the grantor, the trust provides protection and management, if and when it’s needed.

Let’s examine the potential lifetime and estate planning benefits that can be incorporated into the trust:

  • Lifetime Benefits. If the grantor is unable or uninterested in managing the trust, the grantor can hire an investment advisor to manage the account in one of the major discount brokerages, or he can appoint a trust company to act for him.
  • Incapacity. A trusted spouse, child, or friend can be named to care for and represent the needs of the grantor/beneficiary. They will manage the assets during incapacity, without having to declare the grantor incompetent and petitioning for a guardianship. After the grantor has recovered, she can resume the duties as trustee.
  • Guardianship. This can be a stressful legal proceeding that makes the grantor a ward of the state. This proceeding can be expensive, public, humiliating, restrictive and burdensome. However, a well-drafted trust (along with powers of attorney) avoids this.

The revocable trust is a great tool for estate planning because it bypasses probate, which can mean considerably less expense, stress and time.

In addition to a trust, ask your attorney about the rest of your estate plan: a will, powers of attorney, medical directives and other considerations.

Any trust should be created by a very competent trust attorney, after a discussion about what you want to accomplish.

Reference: Forbes (February 20, 2019) “Revocable Trusts: The Swiss Army Knife Of Financial Planning”

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