Kansas & Missouri Estate Planning

Employee Retirement Plans - Easier Than You Think?

It's the last week of the year. If your small business doesn't have an employee retirement plan already in place, then likely you're thinking about it.

Chances also are pretty good that you think it's more difficult, and more expensive, to get started than it really is. Welcome to the fresh air of employee retirement plan reality.

Business owners should rethink what they "know" about sponsoring retirement plans.

Bloomberg Businessweek ran an article earlier this month outlining some of the options, with hopeful advice. Nearly three-quarters of small employers do not sponsor retirement plans for their employees, perhaps because of outdated negative notions about their costs and complexity.

If you are a small business owner, now may be the right time to revisit the concept of employee retirement plans. The options may be more attractive than you think.

Reference: Bloomberg Businessweek (December 6, 2011) "Establishing an Employee Retirement Plan"

More IRA Inheritance Perils (And Pointers)

Parents who have substantial assets in an IRA should plan ahead for how their children may inherit those assets.

The laws governing IRA assets, their transfers, taxation and inheritance, are complex. A single mis-step can be unnecessarily costly. If you needed a reminder of just how byzantine the rules are that govern inherited IRAs—and the importance of preparing your family for receiving such an account—the IRS just handed you one.

A recent article in the Wall Street Journal outlines some of the specific perils, and offers a few salient tips. Above all, this is one aspect of financial and estate planning that truly requires professional advice.

Reference: The Wall Street Journal (December 10, 2011) “Pitfalls of Inherited IRAs”

College 529 Plans Weather The Market

The new figures, from fund researcher Morningstar Inc., show that investments in 529 plans fell an average of 9.5% in the third quarter and are now down 5.9% this year through Sept. 30. That isn't as large as the broader market's drop.

Whether you're a parent or a grandparent, one of the hallmark ways of preparing for the upcoming generation is the college savings 529 plan. There's a bit of bittersweet news there nowadays: overall funds are down, but the alternatives even lower.

According to a recent Wall Street Journal article, and Morningstar research, investments in 529 plans fell an average of 9.5% in the third quarter and are now down 5.9% this year through Sept. 30. This marks the worst setback since the market crash in early 2009. Of course, thanks to market volatility and several rounds of bad news from around the globe, the Standard & Poor's 500-stock index fell 14% and 10% over the same periods. Further, while the S&P has been fairly flat over the past five years, the average 529 plan has returned 4.6%, and accumulated earnings are still tax free.

It just may be, as many uphold, that the 529 is still a great option if you have a future student for whom you need to plan. Indeed, especially for grandparents, the current tax environment might be especially helpful. Whatever investment vehicle you choose, your help and proper planning may be more important now than ever before as the last five years also have seen tuition and fees increases by as much as 38% for in-state, public college students and 30% for private college students.

Reference: The Wall Street Journal (October 18, 2011) "Bad Marks for College-Savings Plan May Not Call  for a Time Out"

Alzheimer's: Be Prepared Now!

Living with Alzheimer’s disease is very difficult for the individuals affected, as well as their loved ones. Nevertheless, by dedicating some time to prepare personally, financially and legally early on in the diagnosis a family can know they have done everything to support their loved one to live a full life and protect their legacy.

You may not have known but September is World Alzheimer's Month. As the month comes to a close tomorrow, it's important not to forget about Alzheimer's all year long. Medical research and advocacy are vital causes to uphold. And, it is a disease that you and your loved ones might have to face directly, if you have not already. The reality of Alzheimer's or dementia striking close to home (along with some understanding and prior planning) can help you come to terms with the extensive economic toll and the unique legal ramifications.

According to a recent Forbes article, Alzheimer's is as widespread as it is demanding. Consider this: Another American citizen will develop Alzheimer's every 69 seconds. Oftentimes, the symptoms are subtle, at least initially. Some estimate that more than 13 million Americans will have the disease by 2050 and run up as much as $1 trillion in costs. Because of the progressive nature of the disease, most of the costs and problems won't develop until later on. Nevertheless, significant planning must take place at the time of diagnosis, if not anticipated beforehand.

So, what is the scope of this "significant planning"? First, you will need to secure medical care, both for now and down the road. That means fundamental financial planning needs to be addressed, to include securing government benefits like Medicare and Social Security Disability Insurance. Second, because of Alzheimer's progressive cognitive degeneration, estate planning must occur early in the process to secure and protect family assets.

Fundamentally, it's important to understand that Alzheimer's is not the same as other diseases. Through it all, competent counsel will be necessary to properly assess the needs and possibilities, as well as to ensure that everything is in place when needed most.

Reference: Forbes (September 21, 2011) "September Marks World Alzheimer's Month as Advocates Push for Early Diagnosis and Health Care Planning"

Harnessing Market Volatility For Wealth Transfer Magic

You enjoy riding the current wild and wooly stock market rollercoaster, yes? Weeeeee! (A little sarcasm there, but indulge me.) Regardless, I have a little good news for you in terms of the "upside" to market volatility - leveraging tax advantaged wealth transfer opportunities.

Look, I know watching the market lately is no fun. Once again we're watching dissipation of our financial security in ticking numbers and advancing (and declining) line graphs. There is, nevertheless, perhaps some solace to be found in volatile markets for the careful estate planner. Intrigued? Read on.

There are a number of ways present market woes can seque into a wonderful estate planning environment. In fact, a few of them can be found in this recent article from the Wall Street Journal. In large part the WSJ's advice depends on whether you have holdings in private or public stock. Regardless, the article showcases three ideas.

First, if you have holdings in private stock, then volatility raises the possibility of greater "discounts" when gifting. Generally, private stock can have discounts up to 30% or 35% applied when gifted simply because, without public trade, it would have been harder to find a buyer and the IRS acknowledges that fact. In addtion, the IRS also can be persuaded to note of market volatility and its attending affect on the sale of private stock. With volatility too high (hovering around 40 by the Chicago Board Options Exchange Volatility Index) discounts might range as high as 40% to 50%. Sweet.

On the other hand, if you have public stock, then consider a Grantor Retained Annuity Trust (GRAT). As many readers already know, a GRAT works like a trust turned annuity. How? Because you put assets in a trust and thereafter receive fixed payments for a set period. The principle benefit is the ability to give away assets without paying tax on the appreciation. With markets as they are, and with interest rates at such lows, this could be the (economic) perfect storm to form a GRAT funded with depressed assets and lock out the tax-man when those assets bounce back. [Sidebar: The GRAT value merely has to rise above the IRS's "hurdle rate," presently 2.2% a year.]

Finally, even simple options can work wonders in the present volitile environment, with low interest rates and low stock prices. For instance, you might want to consider making an intrafamily loan to fund an investment. Using the loan to purchase depressed stock (or depressed real estate if you have faith in that market) can secure that appreciation for your family member.

These are a few of the WSJ's ideas to get started. Note: You'll find some more out there background reading in support (like Deborah Jacobs’s recent advice on gifting), but, in general, it's a good time to look over your assets and make appropriate plans with your legal counsel. You need to weather the present financial storm, yes, but there's more work to be done, too.

Reference:  The Wall Street Journal (August 20, 2011) "How Volatility Eases Estate Planning"

Property Title Trevails

How do you hold legal title to your assets? Not sure? When it comes to protecting your assets from the divorces, lawsuits, bankruptcies and even the estate plans of others, title trevails are rarely trivial.

Whether it's their real estate, bank accounts, brokerage accounts or many other asset classes, many people own property without truly understanding how they hold title to it – or the ramifications of the title that they do hold. Not fully understanding your property ownership can have some dire consequences. Trust me here... ignorance is not necessarily bliss.

While owning property with someone else is fairly common, understanding how you own it is an important aspect of your estate planning. If you own property with someone else as tenants-in-common, when one of the tenants dies, their ownership interest passes on to their heirs and assigns. This means that their heirs automatically enter into a legal relationship with the surviving tenant. The options at this point usually include selling the property and splitting the proceeds; or one of the tenants buys-out the rights of the other(s). 

Consider a recent case out of Greenwich, Connecticut, as reported in The Greenwich Citizen that  provides a vivid illustration regarding the dangers of tenants-in-common. In this case, a Greenwich cohabitating couple entered into the ownership of a home as tenants-in-common. Thereafter, they split with the woman remaining in the home and the boyfriend leaving.

At the woman's death, her ownership rights transferred to her heirs but – and you can see it coming – the boyfriend came back into the picture for his ownership rights as well. The ex-boyfriend persisted in arguing for a lower and lower valuation of the house, complicating efforts to partition and sell it … and also making it easier for him to buy out the woman's heirs. In other words: Ownership fell into many bickering hands, each with an agenda, and none of whom where necessarily intent on upholding up the woman's intentions.

Some people might say joint tenancy with rights of survivorship (JTWROS) is a simple answer to this problem. Well, not so fast there, either. In this particular case, joint tenancy would have left the property entirely to the surviving tenant, the ex-boyfriend; and the woman's heirs would have been cut out entirely.

You can learn more about property ownership and joint tenancy in the January 2011 issue of our estate planning newsletter, Joint Tenancy Troubles.

Reference: The Greenwich Citizen (July 20, 2011) "Another Estate Planning Nightmare: Tenant-in-Common"

Preventing Affluenza in Your Heirs

An inheritance can be a blessing or a curse. Why is it a dollar given spends easier than a dollar earned? Such is human nature, or is it? Consider inoculating your estate plan from an outbreak of affluenza among your heirs.

There is an old saying, quite true, that wealth is difficult to amass but easy to squander. Many parents and grandparents come to us seeking to leave an inheritance to their loved ones without "spoiling" them. They want the fruit of their labors – the wealth they pass on – to inspire their loved ones to greater causes, and not cause that dread disease known as "affluenza."

[You likely can recognize some of the common symptoms of affluenza, too. Commonly it presents with wealth amassed over a generation being converted into depreciating consumer goods or high living in short order.]

One means to prevent or limit an outbreak of affluenza it estate planning that includes "incentive trusts." These trusts offer an opportunity to try and nudge younger generations to solid values, but as explained in a recent issue of Palisades Financial's "Sentinel," they don't always work as planned.

An incentive trust can be a beautiful tool. Through it you can specify certain "benchmarks" to be accomplished before the trust can be unlocked. For example, you could specify that your child must graduate from college, get a full-time job, and maybe even become a philanthropist before some or all of the trust funds can be paid out. Alternatively, the trust terms can be arranged such that the trust provides a sort of "matching funds" program to match the beneficiary's annual income, thus offering the incentive to work harder.

The problem is that rigid incentives may defeat your purpose. For example, some beneficiaries may not learn the intended lessons, but instead learn how to "game the system." They may work around the benchmarks either by technically meeting the requirements (but not the lessons), or they may even forge diplomas and pay-stubs to sneak their way in. More worrisome, however, is the beneficiary who does become that "good person" you hoped for, but fails to meet the rigid benchmarks of the trust (e.g., college is not for everyone).

If the trust is too rigid, it may not instill the values you had hoped, but rather force a predetermined life-plan upon the beneficiary. The key to a successful incentive trust is a keen awareness of this problem. Sometimes, the same spirit can be better utilized within a "results-oriented trust." These are a less intrusive arrangement without set benchmarks, but rather with guidelines to be pursued, a mission statement to be upheld, and the solid judgments of a trustee to carry out the spirit of the trust. The down side, of course, is that this is a more lax approach and may be easier to undermine.

It is a difficult line to walk, but if you have come to appreciate the power of using your assets to instill good values, then you also appreciate the importance of striking the proper balance. Your best course may be to consult competent counsel and share your unique situation and your goals, and then work together to design a plan with the greatest chance of success for you and your family.

Reference: Shomari Hearn, CFP®, EA. Sentinel. Palisade Hudson Financial Group LLC. (June 17, 2011)  "Do Incentive Trusts Encourage Responsibility?"

Avoiding IRA Distribution "Gotcha" Penalty

Famous bank robber Willie Sutton was once asked "Willie, why do you rob banks?" His reply: "Because that 's where the money is." Duh. Point of the story - Why do the Internal Revenue Code and the Treasury Regulations contain so many rules regarding retirement plan distributions? Because that's where the money. Trillions, in fact, that have never been subject to income taxation.

Teaching point: If you’re turning 70½ this year, get ready to start taking those mandatory annual payouts (your "required minimum distributions" or RMD's) from your IRA accounts. Unfortunately, this is not something you can afford to put off. As SmartMoney points out in a recent article, the IRS wants you to take those distributions, and pay the additional income taxes sooner rather than later. Warning! There are stiff penalties for non-compliance.

If you fail to take at least the required amount each year, the IRS can assess a 50 percent penalty on the shortfall – the difference between what you should have taken and what you actually took.

SmartMoney offers a quick run-down on RMD basics, but remember, the requirements are fairly complex, and penalties for non-compliance are pretty stiff. You are well-advised to seek qualified counsel on this one. The most important lesson here is – do not delay. If you have reached age 70-1/2 and you have IRA accounts, you have some big decisions to make now. As SmartMoney puts it, "If you sit on your hands, you will be in the RMD double-dip mode next year, which might result in a higher tax rate that could have been easily avoided."

In the meantime, have a wonderful (and safe) "Independence Day" weekend.

Reference:  SmartMoney (June 22, 2011) "Don’t Blow Off Minimum IRA Withdrawals"

Rooms For Rent?

Remember that scene in "It's a Wonderful Life" when George Bailey is on his (mis)adventure in a world into which he was never born? Well, on of the stops was a Ma Bailey's "boarding house." It seems the boarding house idea is making a comeback for some retirees to make a little extra income by putting their erstwhile empty rooms to work.

In today's rough and tumble economy, it seems that everything old is new again… albeit with a bit of a twist. Years ago, it was common for older couples – and frequently widows (e.g., Ma Bailey) – to rent out rooms for extra income. Taking in boarders was a viable way to supplement income.

The past is now the present, as Baby Boomers face the cold, hard facts of retirement. Increasingly, they are changing the definition of "retirement" to include at least some form of work. While you may not be ready to post a "Rooms for Rent" sign on your home, you might consider becoming a landlord. In fact, the venerable Wall Street Journal writes that it may be just the e-ticket, especially given the uncertain prospects for stocks and bonds (not to mention the meager interest rates on time deposits).  

Think about it. It's a buyer's market now and purchasing a multi-family home is more financially feasible. Moreover, the trend toward the renter's lifestyle is picking up steam.  All this means you have a low cost of entry into a market that's only expected to expand. Starting to make investment sense?

Sure, it's a career of sorts, but you also need to think of it as an investment. Weigh everything in the short term, including start-up and maintenance costs, as well as the marketability of the location you're considering. Nevertheless, keep your long-term goals in mind, including appreciation and eventual sale. Buying in a depressed market, after all, is only a steal if that market bounces back. Finally, don't overlook the possible danger of having all your eggs in one basket, since being a live-in landlord will unite your home, equity, and employment, into one potentially risky asset.

Like any retirement move, don't make this one too quickly. Discuss your plans with a professional who can help you sort out the details, including how an investment rental property could affect your Social Security benefits. Remember, too, that this lifestyle may not suit you. [Can you say "3 a.m. tenant calls to report an overflowing toilet"?] In which case, you would be wise to explore other, more enjoyable options.

Reference: The Wall Street Journal Online (June19, 2011) "Want a job? Become a landlord."

Tick, Tick, Tick... Leverage Your $5 Million Gift Tax Exemption Now!

Once in a blue moon a window of opportunity opens for significant tax planning. That time is now, especially if you own a family business. The $5 million lifetime gift tax exemption is in play until December 31, 2012, but its lifespan beyond that is, at best, uncertain. Act now before it's too late.

The Tax Relief Act of 2010 included a 400 percent increase in the lifetime gift tax exemption, from $1 million in 2009 to the current $5 million ($10 million for a married couple). If you are considering a gifting strategy, you are wise to start exploring your options now, while you have time to carefully consider, since giving away assets requires careful thought and planning,

There are several strategies we could use to maximize the value of the exemption, to include an advanced strategy known as an installment sale to an Intentionally Defective Grantor Trust (IDGT). Gavin Morrissey of Commonwealth Financial recently wrote in detail about how this strategy works. Bottom line: This complex strategy, when properly executed in the proper circumstances, can result in quite significant tax savings.  As Morrissey points out, the strategy works best when the assets to be transferred are rapidly appreciating – such as private business interests or pre-IPO stock.

Reference: ADVISORONE.COM (June 15, 2011): Estate Planning: Time Running Out on $5M Gift-Tax Exemption.