Boomers are known for our desire to look and feel good. We strive to eat right and exercise to live a long, healthy and independent life. We also schedule regular medical checkups to ensure our bodies will continue to run smoothly into our golden years.
But it’s not just our health that needs regular checkups; financial planners also recommend boomers evaluate our estate planning periodically to make sure it is in line with changing laws and our life circumstances. Life doesn't stand still and neither should your estate planning. You may acquire more assets, beneficiaries may have passed away, your children have grown up or you and your spouse may have split up making some of your estate planning obsolete and in need of changes.
I had a chance to speak with Mike Piershale, ChFC, president of Piershale Financial Group in Crystal Lake, IL, and discussed the importance of baby boomers performing annual checkups on their estate plans. Here are some key tips Piershale had to offer:
Boomer: What is meant by an estate planning check up?
Piershale: Consumers interested in estate planning need to find a real financial planner who knows what they are doing. If I had a serious illness, I could go to a medical advisor or I could go to a medical doctor. If I had cancer I would go to a medical doctor because he has the license to prove to me that he knows what he is doing. In our field it works basically the same way. There are alot of people that call themselves financial advisors, but it takes a license to call yourself a financial planner. A financial planner will make sure the primary estate planning goals are going to be accomplished.
Most of the time there are three reasons people do estate planning. One is to eliminate probate which can really waste alot of money. In our opinion, probate is an outdated, unnecessary system that is being kept alive by attorneys that make alot of money off of it. The official definition of probate is the court process where your assets go through the system to demonstrate the authenticity of your legal documents and to decide who is going to get what asset. If you set up your estate planning right, probate is unnecessary. You set up a trust and make sure all of your non-retirement assets are titled into the trust. Probate can cost your heirs 6% of the gross estate. If you own a $500,000 house with a $400,000 mortgage, they are going to charge you 6% of the $500,000, or $30,000 of your $100,000 equity.
The second thing is to eliminate the death tax which can also waste alot of money if you end up paying it unnecessarily. If someone has a financial worth of $5,120,000 in 2012 and they die this year, there is no death tax. Beginning Jan.1, 2013, the federal estate exclusion will return to the 2002 level, which is $1 million. The bottom line is this, if someone has a net worth of $1.5 million and they have done no estate planning, starting next year--if that couple dies and they have kids, the first $1 million will be sheltered with that death tax deduction, but the kids will lose 43% of the last $500,000. So it is important to check on net worth with estate planning as we can save these couples hundreds of thousands of dollars on death tax.
With proper estate planning and something called a credit shelter trust, every dollar over a million and up to $2 million can be sheltered from the death tax. One of every four families I work with have more than $1 million in net worth and 2 out of 3 has no estate plan in place. It is a major national problem that you don't hear talked about alot. If Warren Buffet died tonight, he could leave his massive estate to his wife with no death tax because of the unlimited marital deduction, which means you can leave as much money as you want to your surviving spouse. But at the death of the surviving spouse is when it hits the fan and the heirs lose up to 43% of their inheritance.
The third reason is just to make sure the inheritance gets to the right people. A properly-drafted estate plan uses a QTIP, a qualified terminal interest property trust which means if I have a certain amount of money that I want to leave to my biological kids, a QTIP means that if I die first my spouse can use the income but can't touch the principle and then when she dies the principle goes to my kids.
These are a few red flags that a good financial planner will look for. Is everything titled right so they won't go through probate? If their net worth is over a $1 million, do they have a properly- drafted trust so they are not paying death tax that they shouldn't have to pay? And is that estate plan set up right so that the inheritance gets to the right people?
Boomer: Besides a good financial planner, what other professionals would you recommend being involved?
Piershale: The only other critical professional would be a good estate planning attorney. The vast majority of financial planners don't have law degrees, therefore they can't get involved in drafting legal documents like trusts or wills. While I personally believe a qualified financial planner is a much better professional to look at the larger picture and give the client what kind of documents they need in order to achieve their estate planning goals, you still need a good attorney to draft the documents. Make sure your attorney specializes in estate planning.
Boomer: What are the common estate planning mistakes people make that increase tax liability?
Piershale: In addition to the information in my first response, if you have property in other states, whatever state you draft your trust in, you have to be very careful about titling property into that trust that you own in other states. The important thing to remember is trusts are valid under state law, not federal law. So, if you draft a trust in NJ and you own a condo in Florida and you title the condo in Florida into your trust that you drafted in NJ, that trust may not work which could then subject the property to probate. The advice we give is to be sure to get an attorney in the other state you have property to be sure you are covered correctly.
Boomer: What needs to be done if your spouse dies?
Pershale: The first thing to do when a spouse dies is to get the surviving spouse into the office of a qualified financial planner as quickly as possible. They should be coached as to what they need to do in retitling their assets. A simple example would be if they have retirement accounts like IRA's or a 401(k): you really need to discuss with them what to do with that retirement account.
If the surviving spouse is above 59 1/2 there is no 10% penalty for taking money out of an IRA. We usually recommend if they are over 59 1/2 they roll their deceased spouses IRA or 401(k) over to the surviving spouses account. If they are under 59 1/2 and they need the money to live on, we may recommend they leave the money in the deceased spouses account until the surviving spouse turns 59 1/2 and the reason why is if they leave it in the deceased’s IRA account, they could use it without the 10% penalty.
Along with that we look at any accounts that have beneficiaries like life insurance and CDs to make sure all of the beneficiaries listed are updated. Alot of these accounts most likely listed their surviving spouse as beneficiary, but that is not going to work anymore so they just have to do a check to update all beneficiary accounts. We would also look at retitling all non-retirement assets. For example, they might have an account that is in joint tenants with rights of survivorship, now one of those joint tenants is deceased so you want to get their name off of that account because until you do you really can't move that money or sell it or anything. Also, let’s say the deceased spouse had an asset in only his/her name and it wasn't in joint tenancy, well now that asset is very likely going to go through probates. In that case we would coach our client in getting a good estate planning attorney to take them through probate as painlessly as possible.
We check life insurance and other assets that have death benefits and these would be assets in the name of the deceased spouse. For example, it's not only life insurance, you can have death benefits on annuities and you want to make sure all the death benefits are exercised so the surviving spouse gets the money, keeping in mind that death benefits on annuities are taxable as ordinary income whereas death benefits on life insurance are tax free.
Boomer: What are some of the key areas in financial planning that need review and how often?
Piershale: We look at 5 key areas that I have listed below:
1. I recommend to all of my clients they bring tax returns once a year for tax analysis. What I do is different than a CPA’s role. I am not preparing their tax return, I am looking at more pro active tax strategies to help them eliminate unnecessary taxes. I also check for common errors that CPA's make. Often we look at the first page of the 1040 form, and if we see that our client has alot of taxable interest and they are in a higher taxable bracket we often recommend they reallocate some of that taxable interest and dividends to tax free income like municipal bonds. Another thing we get into is taking an intentional tax loss when stocks are down and buying them back in 31 days because you have to wait 31 days to buy them back, so that you are able to declare a loss, we call this loss harvesting, and then later in life when they really want to sell out a position permanently, they can use those losses that we created intentionally to offset capital gains.
2. The second thing we look at is estate planning, which I have already discussed to avoid probate, unnecessary death tax and make sure the assets get to the heirs as smoothly as possible.
3. Retirement planning is the third thing we look at even though the whole general area is retirement planning we have a specific specialty or subject we call retirement planning where we make sure all the beneficiaries are properly titled keeping in mind there are five different possible beneficiaries. The IRS rules are different for each beneficiary. You can have a spouse, your kids, a charity a trust and you can even have a boyfriend or girlfriend and the rules for each of these are different, so this needs to be looked at too. We also run a retirement cash flow analysis which gives our client an idea of how much money they can spend over the rest of their life, making sure they will not run out of money.
4. We analyze life insurance policies to make sure they are still appropriate for our retirees. When your assets get above a certain size it may no longer be necessary to keep paying life insurance premiums. The most common example would be having a 50K life benefit with 40K of cash benefit. At death you will not get both, so these clients are tying up 40K of their money at a very low rate of interest to keep 10K of life insurance in force that often they no longer need. We often advise to move that cash value to investments the government allows you to move it to without triggering tax so it has the potential to add a much better rate of income. In my experience the number one thing that wipes families out is going into a nursing home so we do a long term care analysis. We don't normally look at casualty insurance like homeowners, auto and umbrella liability but we do recommend that they talk to their agent every 2 years to review those coverages.
5. Lastly, we review investment planning. We recommend an analysis to make sure the portfolio is properly diversified. I believe in the stock and bond portfolio, most clients need at least 10 different investment asset classes. We want to make sure they are being rebalanced every year so they don't overweight any positions. Sometimes one investment grows faster than another and we will tell them at the end of the year to trim the bushes and maybe add more money to an asset class that didn't grow as fast because the lineup of who performs the best will change every year. We look at their tax bracket to consider certain types of tax advantage investments like tax free bonds. We discuss if clients want their portfolio to be more tactical where we use momentum indicators and other tactical research to determine when the stock market risk is too extreme and therefore we exit the stock and bond markets and go into lower risk investments such as cash equivalence.
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