Kansas & Missouri Estate Planning

Small Business Owner Retirement Perspectives

Small business owners, by and large, have a hard time thinking beyond their business. It is a significant part of their very lives. If you are a small business owner, now may be the time to start thinking of your business as its own retirement vehicle, at least according to a recent guest columnist over at Forbes.

For retirement planning, a business owner typically has to take out of the business what would otherwise be capital for growth. You're taking it out to put into a tax advantaged plan like a 401k, hoping it will grow there enough to make up for the taxes to be paid later. In addition, you are doing so in the belief that you'll be in a lower tax bracket when you call upon those funds later on.

But what are the returns on that account?

It may be that a properly capitalized company will give far greater returns.

According to the Forbes article, a small business owner has to exist in a couple capacities, and the self that is an "individual" cannot be eclipsed by the self that is the "business owner," nor the other way around. Ideally, perhaps, they can work in a synergy.

It is a risky strategy, especially for those nearing retirement, but it may be worth looking into the original article's numbers.

Reference: Forbes (January 25, 2012) "Fund Your Business Before You Stuff  Retirement Accounts"

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 Nearly three-quarters of small employers do not sponsor retirement plans for their employees, perhaps because of outdated negative notions about their costs and complexity.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"

Inheriting Inherited IRAs

Survivors and widows have a number of pressing issues to consider. It always has been that way. Now, however, their lot is even more difficult as more is at stake, to include mistakes regarding IRA "gotchas."

Unfortunately, not giving due attention to an inherited IRA can be a big mistake to pay for down the line.

The problem is the IRA rollover penalty. In fact, The Wall Street Journal rates it as one of the biggest mistakes a surviving spouse can make. The standard advice is for a surviving spouse to roll over an decedent's IRA into their own IRA. However, especially in light of current events, this might be a rule of thumb to avoid until you've weighed your own options.

IRAs are tricky and getting increasingly trickier. Not to mention the reality that an ever increasing amount of personal wealth is being held and passed down in the form of IRA investments at this time of incredible market volatility. If you are at or over age 59, then an IRA rollowver may not be a bad idea (since you'll have access to the IRA funds shortly anyhow).

Nevertheless, a great many spouses will receive an IRA before that age and it's not usable wealth to cover all sorts of new expenses, unless you pay the 10% to make early withdrawals. Instead, the IRA could simply be inherited and remain in the name of the decedent. On the downside, this approach would require taking regular and taxable withdrawals on the account right now.

In general, a great deal of thought should go into how to best "inherit" an IRA. The Wall Street Journal article goes on to mention a few other survivor mistakes, along with some interesting statistics about IRA rollovers.

Reference: The Wall Street Journal (November 12, 2011) "Survivors’ Biggest Mistakes"

Wanna B A "Voluntary" Philanthropist? (Hint: Look to Your I-R-A)

So, you'd rather be a "voluntary philanthropist" rather than an "involuntary philanthropist"? If yes, then you need to take action regarding the Qualified Charitable Deduction (QCD).

In short, it's a very powerful tool for both charity and reducing the tax liabilities associated with IRAs. However, on December 31, 2011, will we see it disappear?

Jim Blankenship at Forbes has recently pointed out that the very popular QCDs are not legally extended beyond 2011. As a result, we ought to take stock regarding whether the option will be around in 2012. As you may know, a QCD allows you to forgo taking your Required Minimum Distribution (RMD) by letting you redirect those funds straight to the IRS certified charity (or charities) of your choice. You can contribute as much as $100,000 per year.

It's a pretty powerful tool for a "voluntary philanthropist," if you don’t need the money from your IRA in the first place. Otherwise, taking the distribution just means more "T-A-X-E-S." Note: Making this charitable beneficiary designation gives you an efficient way of contributing to charity and saving on your income taxes.

If you've taken advantage of the QCD this year, then you still have to ensure proper tax filing compliance.

Unfortunately, the only thing that can reinstate the Qualified Charitable Deduction is an act of Congress.

Reference: Forbes (November 7, 2011) "Last Chance for Making Charitable Contributions From Your IRA?"

Charitable Gift Annuities - The Benefits Of Giving And Receiving

So, how can a retiree replace the interest income from a "matured" certificate of deposit paying more than 5% when the rate on a new CD is 1.3%? One solution: Donate the principal to a nonprofit in the form of a "charitable gift annuity" in exchange for a lifetime of fixed annuity payments.

Remember the good old days, you know, when you could invest in a certificate of deposit (CD) and the bank would actually pay you something called "interest" on your deposit? No, really, I kid you not. Banks really did that.

Obviously, I am being a bit factitious, but you get the point. It is hard enough to make money these days, let alone accumulate wealth.

Let's say you are retired and are looking for a place to put your money to work. And, you need more of a return on that money than the banks are paying on their CDs. Also, you are intending to leave a bequest from your estate to support your favorite charity (but you don't want to run out of cash flow and become a "client" client of the charity yourself). Here is a win-win idea to consider, especially if you are charitably-inclined – invest in a charitable gift annuity. Recently, none other than The Wall Street Journal ran an article on this very subject, entitled "Earning income by Making a Gift."

Here is how it works: Give the money to your favorite charity… instead of to your favorite bank. However, you may "give and receive" when you make the gift to the charity in exchange for a charitable gift annuity. Ultimately, you'll be giving what remains of that charitable gift to the charity at the time of your death. However, in the interim, you'll receive a fixed and predictable stream of income over your lifetime. The most important detail is that the "annuity rate" is determined by your age, rather than by national interest rates. That means a couple at age 65 would receive around a 4.7% yield and a couple at age 75 would get 5.7% (individuals at age 65 and 75, respectively, would receive even higher yields at 5.3% and 6.5%). Further, the money is tax friendly. The yield is largely tax-free and the initial chartable donation offers a potentially sizable upfront tax deduction.

Note: In case you think your heirs may be a few fries short of a Happy Meal when the charity inherits the remainder, consider some savvy life insurance planning to replace for your heirs the value of the funds contributed to the annuity. How? With the increased return on your money via the charitable gift annuity, you may find enough left over to pay the life insurance premiums.

A charitable gift annuity can help you support yourself, provide for your heirs (via the life insurance "wealth replacement"), and your favorite charity, all in one fell swoop. That noted, however, it can be a little tricky.

Ensure that your charity can support a charitable gift annuity. Not all can. Look before you leap is good advice here. Check out The American Council on Gift Annuities website (acga-web.org.), but remember two important caveats. For starters, a charitable gift annuity locks you into that initial annuity rate for your lifetime. So, what is competitive now may not be should national interest rates rise and the yield will no longer be as competitive. Some regard this as unlikely, especially in the short term (i.e., Ben Bernanke, Chairman of the Federal Reserve Bank has said interest rates will be suppressed for another two years). Second, should the charity itself suffer economic hardship, it may be unable to meet its annuity obligations and cease payments. This is a real possibility, especially in this economy.

Remember: Charitable gift annuities are not backed by the government like CDs. Clearly, if a charitable gift annuity is right for you, then it will take some research and proper planning to pull it off successfully.

You would be wise to seek appropriate legal counsel to help you analyze the appropriateness of a charitable gift annuity in the context of your overall estate planning.

Reference: The Wall Street Journal (September 17, 2011) "Earning income by Making a Gift"

"Complexity" Defined - Estate Planning For Retirement Accounts

As the amount of money stashed in 401(k)s and individual retirement accounts has grown, more and more families are finding themselves locked in battles over who has rights to inherit them.

Even with the many concerns over retirement account balances in America, it's undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the households' assets are in an IRA or 401(k).

So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, the different laws that apply to 401(k)s and IRAs.

The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently addressed this subject. While I commend the full article to your reading file, let's review a few of the highlights here.

With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA*). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly.

What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider "rolling" your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your Will and Trust.

Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your Will and Trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator. (See Egelhoff v. Egelhoff.)

IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it's all about the "designated" beneficiary (unless there is a state law to the contrary). One thing remains consistent, however - The beneficiary on file with the plan administrator takes precedence over any provisions under your Will and Trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinheriting an ex-spouse as beneficiary, unless you've completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.

Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too.

* How about a little estate planning humor? Question: What does the acronym ERISA really mean? Answer: "Every Rotten Idea Since Adam"!

Reference: The Wall Street Journal (September 7, 2011) "Family Feuds: The Battle Over Retirement Accounts"

Reversing Your Roth IRA Conversion

Your 2010 Roth IRA conversion can be reversed. That's right, it's like the conversion never happened. Better yet, inflated conversion tax bill disappears, too.

Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it's over. Hopefully the upcoming months will bode better.

The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you also have a bit more (self-defense) work to do. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is.

So, what's all the fuss? Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement, or even a tax-efficient wealth transfer tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal... nor do your heirs. That is why the Roth IRA is so special.

Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill come tax day.

Good news: Before it's too late, "re-characterize" your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly-situated family members and friends.

Reference: SmartMoney (September 7, 2011) "Should You Reverse That Roth Conversion?"

Inherited IRAs - The Ins And Outs

Have you inherited an IRA, or may inherit one in the future? If yes, then it is not as simple as you may think. But, like most things in life, it is best to be prepared than (unpleasantly) surprised. Read on.

Retirement accounts can be one of the trickiest assets one can inherit. Wrong moves are often irreversible and costly, especially when it comes to ponying up income taxes. Fortunately, a recent article in Forbes offers seven steps you ought to consider as an IRA beneficiary. Similarly, you may want to pass this information along to the beneficiaries of your own IRA. Here is the gist of the Forbes article, retooled a tad:

1. Find out if a required minimum distribution (RMD) needs to be taken for the year you receive it. If the account is tax-deferred (like a traditional IRA or 401k) and the owner was at least 70½,  then you need to contact the account custodian to be sure it has been taken and to take it yourself if needed. Big excise tax penalities await those who fail this test.
2. If there are multiple beneficiaries, then consider splitting the account into separate IRAs for each, thus avoiding investment disputes and allowing the younger beneficiaries greater leverage in stretching out RMD's.
3. If there are secondary beneficiaries consider "disclaiming" the IRA, especially if it's not something that you need or may even become a tax burden. Once disclaim, the IRA then passes to the secondary beneficiaries.
4. You need to figure out when to begin taking RMD's. Unless your are the spouse of the deceased, this means re-titling the account to reflect that it is yours by way of a beneficiary inheritance. If you are the spouse this either means waiting until your spouse would have begun taking them (when they would have turned 70½) or rolling it into your own IRA and taking it as your own.
5. Determine whether you want to keep the account in the original institution. Some institutions don't permit you to take distributions across your own lifetime and you may just want to shift it over to a more agreeable institution. In that case, it is often best to open an account at another institution and ask them to retrieve the account (rather than effecting the transfer yourself, as that can be risky!).
6. Be sure to name your own beneficiaries and secondary beneficiaries, ensuring the protection of the account and giving flexibility to your heirs.

Reference: Forbes (August 23, 2011) "7 Steps to Take When Inheriting a Retirement Account"

Elder Homeowners - Betwixt And Between

Are you a seasoned citizen, or do you care for someone who is? Perhaps you can relate to this sentiment: "But for these doggone depressed home prices, I'd sell this paid-off home I can't keep up and move into one of those nice everything-included senior housing places." If you can relate, you are not alone.

The housing market is still idling at terribly low levels. That's not news, I know. While many younger families may "want" to move for the additional space, many seniors "need" to move. Both, when you get right down to it, are betwixt and between. The younger folks cannot sell their smaller home to buy the larger homes of the seniors. And, the seniors must get top-dollar for their homes to afford the "nice everything-included senior housing places."

Kaiser Health News recently released an article taking stock of the situation and new reactions from assisted-living and nursing home facilities.

For many seniors, the gameplan had been to use the equity in their home as the investment to keep them afloat in retirement. BA-BOOM. The value in those homes dropped like a rock in 2008. Regardless how much the house may have been worth before the crash, it's tough to sell a house these days. Really tough. To make matters worse, they tend sit on the market for years, or fetch too little money to make the sale feasible. End result: Seniors are waiting much longer before they can enter into a facility. That wait, incidently, isn't good for their finances or health.

But seniors aren't the only ones unhappy with this trend. The facilities themselves aren't happy. In certain facilities in locations hardest hit by the housing bubble, the occupancy rate has dropped as much as 10%. It seems nursing homes and continuing care facilities have been hit the hardest and assisted-living only slightly better.

In the face of such challenges, however, some facilities are working to help ease the transition for seniors. For example, certain facilities have begun incentive programs, ranging from simple real estate education classes to more fluid contracts. The contracts allow the entrance costs of the facility (usually something akin to the cost of a home itself) to be paid whenever the house is sold. One management company, Brookdale Senior Living, has even begun offering to buy houses of senior residents at pre-determined prices, if they do not sell within a designated timeframe.

For you or a loved one it means that there are a number of planning possibilities. For those who are just not ready to leave home, consider in-home care services or perhaps having a younger loved one move in (e.g., many grandchildren are unemployed or underemployed, yet responsible). Still, if a facility is necessary, then be sure to checkout potential options, depending on the facility and where you live.

It might be possible to work with the administration on a creative solution. Remember: Chances are you're not the only one with the problem and they may offer a solution you hadn't considered.

In the end, if you don't ask, the answer is always "no."

Reference:  Kaiser Health News (August 21, 2011) "Housing Bust Derails Some Seniors’ Assisted-Living Care"

Long-Term Care - Insuring The Risk

Gretchen and I secured our Long-Term Care insurance polices several years ago. Why? We see the need for such asset protection on a daily basis in our conference room. Unfortunately, most folks wait until they are uninsurable before considering Long-Term Care insurance. As a result, oftentimes the last resort for those who tarry is "Medicaid Planning" (i.e., "welfare") to pay for their nursing home expenses... and the taxpayer dollars to fund Medicaid already are in short supply.

Fact: Healthcare costs are steadily rising and will only continue to rise in the foreseeable future. Accordingly, healthcare inflation must be considered when planning to protect your health, your family, and your financial well-being. One of the greatest threats is long-term care, especially as we age. For many, Long-Term Care insurance remains the best protection against long-term care poverty. Thankfully, as reported in a recent Reuters article, the Long-Term Care insurance market is growing to accommodate the growing need and several new options are becoming available.

Granted, we don't like thinking about growing old and frail, perhaps with dementia or Alzheimer’s to boot. And, look, I know it's easy to procrastinate. Besides, who wants to pay policy premiums? As a result, people who will need Long-Term Care insurance protection later, may not have purchased policy protection now.

Matthew Sharpe of Genworth Financial notes that "Long-term care (insurance) is definitely under-penetrated, there's no doubt about it. About 4 percent of the population that is eligible actually has a policy." Because of this disturbing statistic, Genworth and other companies are developing newer and easier tools for consumers to use, and that just might translate into newer and better policies for you to consider.

Whether any policy option is the right option for you depends on your unique circumstances. As pointed out in the original article, the strongest reason to secure a policy may be the possibility of dementia or Alzheimer's. While there are many ideas presented in the Reuters article for your consideration, nothing can replace the advice and counsel of an experienced Long-Term Care insurance agent to help you navigate your options.

Looking for more information, visit the Long-Term Care Planning education page on our website.

Reference: Reuters (August 16, 2011) "Long-Term Care Insurance Gets a Makeover"