Archive for Estate Planning

 

Mr. BudgetPro celebrated his 55th birthday last week. I’m a younger 50-something myself (which is why all you young 20 & 30 year old whippersnappers should listen to me. I’ve been there, done it, done it wrong, know how to do it right)

Retirement saving is front and center in my plans these days, and it’s time we got really serious about evaluating what we have and what we will need. If it turns out we’re short – how do we fix it?

I’ve been self-employed more in the last 30 years than I’ve been an employee. I made a choice many years ago to leave a very good job to work for myself, and I’m wondering if I did the right thing.

I find myself asking questions

• Has being self-employed hurt me when it comes to retirement?
• Would I have been better off to be an employee, banking a 401K with matching contributions and automatic payroll deductions that went straight to savings?
• Would I own more “stuff” if I had relied on a regular paycheck? (stuff = assets)
• Due to my age, has the timing of this recession hurt me more?

It turns out I’m not the only one asking questions

In Dec 2012 an SBA government study was done that examined the retirement savings decisions of small business owners over age 50. Particular attention was paid to how badly the recession might have hurt those retirement savings.

Overall, the study found that small business owners over the age of 50 are significantly less likely than employees to have pension or 401K retirement plans. At the same time, small business owners tend to have significantly greater IRA & Keogh plan savings than employees.

  • Makes sense. People are using the savings vehicles available to them, depending on circumstance.

The study also found that being an employee or being self-employed didn’t really make a difference when it came to how much was saved and how the money was invested.

People, being people, act basically the same when it comes to their retirement money. There was very little difference between the retirement savings habits of a self-employed small business owner and an employee.

  • Think about that one for a minute. We exhibit herd mentality when it comes to our retirement and our money. Wonder if anyone will ever use that knowledge against us?

The report had a few more interesting findings:

The over-50 small business owner had greater financial knowledge than an employee.

  • It’s all those monthly P&L’s, bookkeeping ledgers, and tax returns we self-employed have to immerse ourselves in!

Older small business owners thought about retirement LESS frequently than employees

  •  Could that be because there are no savings to think about? What do your retirement accounts look like? Do you save regularly by paying yourself first?

And, the kicker and take away from the study is, the small business owner has a significantly later expected retirement age than an employee. The small business owner may be LESS likely to retire at all. Small business owners in 2010 reported they would retire, on average, at age 72.6. The expected retirement age of an employee? 68.4.

  • In the end, it’s all about the money. How much thought do you give your retirement savings? Do you make regular contributions to an established account? When you retire, will you be able to continue living in the manner to which you have become accustomed?

 

Small Business Research Summary
"Retirement, Recessions, Older Small Business Owners" 
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May
22

Roy: 74, Bankrupt, & It Isn’t His Debt

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Gavel in CourtRoy’s birthday is next week, and instead of spending the day with a fishing pole and a camp chair on the creek bank, he’ll be in federal bankruptcy court. The day of his hearing, Roy will drive two hours from his home into the city, alone.

Roy really doesn’t understand all the fine print on the paperwork, or the lawyer-speak. Roy really doesn’t have a clue how he hit financial rock bottom so quickly after the death of his wife.

What Roy does understand is that in order to keep his home, he must declare bankruptcy and stop any action that could be taken against him on a recent court judgment.

Roy and June were married 55 years. Roy did not handle the finances in the marriage. June did. June passed away after a very short illness, and suddenly Roy was on his own when it came to his money and the bills. If you ask him, Roy can’t tell you the name of his insurance agent.

Gene, Roy’s son, had been helping his mother balance her checking account at times during the previous year. Gene had on-line access to the account, and after having his name added, it was easy for Gene to step in and start paying the bills for his father.  Roy lucked out there.

What Gene wasn’t prepared for was the large stack of paper he found in the old desk in his parent’s living room. Past due credit card bills, collection notices, letters from lawyers, past-due medical bills – there was a lot to sort through,and it took Gene days.

The final picture that emerged was not pretty. Roy owed approximately $20,000 in non-secured debt, in addition to his home mortgage. Of the $20,000 in non-secured debt, $1500 were medical bills in Roy’s name. The remaining debt did not belong to Roy, but it was in his name – and he was getting sued for most of it.

June had taken out credit cards in Roy’s name and given them to her son, Tom, with a promise from Tom that he’d pay the bills. Tom quickly maxed out the cards – and left his mother holding the bag. Tom’s wife bought a bunch of new appliances, and bought Roy a chair, all on credit. When she didn’t pay, they came after Roy for the $5000 balance because his name was on the contract.  That turned out to be an expensive chair.

It was the judgment, recently entered against Roy for the furniture bill, that landed Roy in federal bankruptcy court.

At 74, Roy’s credit is ruined for the rest of his life. The bankruptcy could also affect his insurance rates, and the mortgage loan that is due to balloon in 3 years. Roy is paying an interest only mortgage payment now. He can’t afford for his mortgage interest rate to go up.

Roy filed Chapter 7 bankruptcy, which means all of the non-secured debt will be wiped out. He won’t have to pay the debt back, and none of the creditors can take any judgment enforcement action against him, such as levying his checking account or putting a lien on his house.  In the overall scheme of things, $20,000 is not enough to declare bankruptcy over.  In Roy’s case, however, he’s elderly and on a fixed income.  If his checking account is garnisheed, he’ll starve.

Roy really doesn’t understand any of this, because he never played an active role in his finances. Gene, of course, blames himself. He should have made it his business to know, he thinks. Maybe he could have stopped things from getting to this point, he thinks – if he only knew.

 

  • Are you actively involved in your parent’s finances, or the finances of a elderly relative?
  • Do you know if your parents have loaned money to anyone or given anyone their credit cards? What kind of financial hit would they take if they lost that money?
  • Do you owe your parents money? What would happen to them if you couldn’t pay them back?
  • If you’re married or in a significant relationship, who pays the bills?
  • How involved are you in your finances?
  • Do you know the name of your insurance agent?

 

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Nov
13

Give Your Money Away – Tax Free!

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The end of the year is coming fast, which makes tax season right around the next corner.  Quite a lot of people receive income tax refunds, so they are in a hurry to file and get that money back! There are bills to pay and things to do!  The kids need shoes! 

There are things you can do now that will make filing your income taxes easier when the time comes.  In the coming months I’ll be writing about different tax topics you should be aware of, and tax saving tips you can use to get back the maximum refund you’re owed! 

White Gift Box with Red Ribbon BowJanie is a friend of mine, and every year her parents gift Janie and her husband Steve a 5 figure check – each.  This year, each of them received $13,000 from her parents – for a total of $26,000 – and that is completely tax free income.  Janie and Steve don’t owe any taxes on the money, and Janie’s parents don’t have to pay any gift taxes for giving their money away.

If your estate is sizable, and you’re trying to minimize estate taxes, you can use the Annual Gift Tax Exclusion to reduce your estate tax liability.  You can give away up to $13,000 tax free this year to any individual, and to as many individuals as you want – and, if you are married filing joint, your spouse can also give $13,000 to the same people.  Tax free!

According to the tax code, any gift is a taxable gift.  Gifts can be property, money, the use of property, or the right to receive income from a property.  According to the tax code, there are exceptions to this “any gift is a taxable gift” rule.  (Of course there are, Congress wouldn’t have it any other way!)

The following gifts are usually not considered taxable:

  • Gifts that are not more than the annual calendar year exclusion (from 2009 through 2012 this has been $13,000 annually for each gift)
  • Tuition or medical bills paid for someone else (you must pay the institution directly, not the person)
  • Gifts to your spouse
  • Gifts to a political organization
  • Gifts to charities

If someone receives a gift that is valued at more than $13,000, taxes are owed on the amount that is above the $13,000 exclusion.

Any gift you receive is not treated as income.  The person giving the gift is responsible for paying the gift tax.

For example:

1.  Mary gave Joe a cash gift of $9,000 during the calendar year.  This gift is not taxable because it is under the $13,000 exclusion.

2.  Jack gave Susan a cash gift of $16,000 during the calendar year to pay for college tuition.  IF Jack had paid this gift directly to the state university Susan attended, the entire $16,000 would be non-taxable due to the education exclusion.  BUT, Jack gave Susan the money personally – so the first $13,000 is not taxable due to the annual exclusion, but the remaining $3,000 is considered a taxable gift.  Jack, as the donor or gift giver, is responsible for paying any gift tax due.

3.  Aunt Joan gave Lisa $20,000 cash to purchase a used car.  The first $13,000 of this gift falls under the yearly exclusion and is not considered taxable, but the remaining $7,000 is considered a taxable gift.  Aunt Joan is responsible for paying any gift tax due.

4.  Pete and Sally are married.  Sally gave a cash gift of $25,000 to her daughter during the calendar year.  Pete gave his son a gift of $15,000.  Neither of the gifts are taxable, both are completely excluded from the the gift tax.

This example messed up your thinking, didn’t it?  If Sally gave her daughter $25,000, then the amount over $13,000, which is $12,000, should be taxable, right?  What about the gift Pete gave his son – that was $15,000, or $2000 over the exclusion limit.  That $2000 is taxable, isn’t it?

Not so fast.

When you are married, and both spouses agree to the gift, Gift Splitting becomes a factor.  When Pete and Sally agreed to split the gifts they made during the year, each gift was split equally between the two of them.  That $25,000 Sally gifted her daughter?  When split, Sally gave $12,500 and Pete gave $12,500 – this is under the exclusion amount of $13,000, and therefore this gift is not taxable.  The same math works with Pete’s son:  his gift was $15,000, but when equally split between Sally and Pete, the gift becomes $7500 from each – well under the $13,000 exclusion and not taxable.

Take a minute and realize how powerful a tool this can be – you can get creative and give gifts that will benefit you as well as the gift receiver.  You can gift your children yearly to the max, and not only build a nest egg for their future, you can do it relatively tax free.

Let’s try one more example:

5.  This year, Sonny decided to give 10 of his grandchildren checks for $13,000 each.  Sonny also paid the college tuition for a nephew, writing a check to the local college for $15,000.  Sonny paid a local hospital $14,000 for medical care his son, Carl, received.  The $14,000 bill was the balance due after Carl’s health insurance paid in full.  Carl was off work for 3 months, recuperating from his injuries.  During this time, Sonny also paid $2500 in health insurance premiums for his son.  Carl’s wife, Connie, took an unpaid leave of absence from her job to care for Carl.  Sonny gave Connie a gift of $25,000 to replace her lost income.  Sonny gave $20,000 to Shari, a good friend of his.  Shari promptly sailed to Hawaii.  Sonny also gave $25,000 to his sister, Ellen.

  • None of the $130,000 gifted to the grandchildren is considered a taxable gift.  The $13,000 exclusion applies in each case.
  • The $15,000 paid for college tuition falls under the education exclusion.  This gift is non-taxable.
  • The $16,500 Sonny paid for Carl’s medical bills and health insurance premiums is non-taxable due to the medical exclusion.  (Sonny paid the hospital and the insurance company directly, which classifies this as medical exclusion.  If Carl would have been paid directly, only $13,000 would have been excluded from tax)
  • The first $13,000 of Connie’s gift is not taxable.  $12,000 remains after applying the exclusion and is considered taxable.
  • $7000 of the gift Sonny gave Shari is taxable.  ($20,000 – $13,000 = $7000)
  • Sonny owes gift tax on $12,000 of the gift he gave Ellen.  ($25,000 – $13,000 = $12,000)
  • Sonny gave away $231,500 in cash gifts this year.  $31,000 of that is subject to gift tax.

Sonny will be required to file a Form 709, US Gift Tax Return, and $6,220.00 in taxes will be assessed on the $31,000 we’ve determined is the taxable amount of all the gifts Sonny gave this year.  But guess what?  Sonny won’t pay a dime in gift tax.

I’ve really confused you now, haven’t I?  (Please don’t bang your head on your desk, and stop pulling your hair – this will eventually make sense) Let me explain about the Unified Credit to Gift Tax.

You see, because Congress writes the tax code, and because Congress is made up of of millionaires and billionaires, they write the tax code to benefit themselves and their friends.  Become familiar with what is in the tax code as it applies to your situation, and use the law to your benefit.

In addition to an Annual Gift Tax Exclusion amount, and in addition to a list of gifts that are not considered taxable, there is a Unified Credit available.  This credit is used to eliminate and/or reduce any gift tax due.  As an added bonus, any Unified Credit not used to eliminate gift tax can be used to eliminate or reduce estate tax.

Back in 1979, the Unified Credit available was capped at $38,000.  In the year 2012, the Unified Credit is $1,772,800.  (The Unified Credit to may increase – it was steady at $330,800 from 2002 through 2010, but then jumped to $1,730,800 in 2011 and increased another $42,000 in 2012)

Remember:  this is a tax credit – as you can see by the example above, $31,000 in gifts generated $6220 in tax – the Unified Credit available is $1,772,800 – and Sonny will use this credit to offset his gift tax due.  Tax credits are applied to tax due, reducing or eliminating tax.  A tax credit “pays” for the tax instead of you – and everyone gets the credit.

Do you understand how powerful gift giving can be when it comes to reducing your estate tax burden?  You can give away your money, not pay any taxes on it when giving it away, reduce your estate, and in the end save major dollars when it comes to any estate tax assessed!  Set up accounts for your children, gift them to the max, and they don’t have to report the gift as income.  It sounds unbelievable, doesn’t it?  See how nice Congress is when it comes to making the law concerning gifts and taxes – and take note that one of those examples above of non-taxable gifts is money given to “political organizations”!

I hope I’ve given you food for thought when it comes to your income, giving cash gifts throughout the year if you can afford it, building wealth for family members, and possible tax strategies when it comes to the tax on those gifts and your estate.

 

There is a spirit in the world of generosity that brings good things to all of us, whoever we may be … A Christmas Carol

Note:  Please consult a qualified tax professional when mapping out your gift giving.  This is a brief overview, and there are more rules when it comes to the definition of a non-taxable gift.  If a husband and wife are gift-splitting, certain tax forms must be filed.  The gifts you give may or may not have have to be reported to the IRS.  When gifting to grandchildren, Generation-skipping Transfer Tax may apply.  Giving away real property may come with tax disadvantages, and may be better left in an estate until death.  Usually, the gift giver is responsible for paying the gift tax, but if he doesn’t, the gift recipient may have to pay the gift tax.  Nest eggs built for children could impact them in a negative way when it comes to qualifying for college financial aid.  Exclusion and credit amounts are subject to change based on changes to the current law.

 

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Nov
12

A Death In The Family

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White Dove in FlightTwo weeks ago, my mother-in-law passed away very unexpectedly.  She left a surviving spouse, four children, seven grandchildren, and two great-grandchildren.  She did not leave any life insurance.  She did not have any sort of pre-paid burial plan in place, nor were any funeral arrangements made in advance.

When a death occurs in a family, the living are busy grieving.  On top of the emotional hit that happens, there are many things to do when it comes to a funeral.  We had people coming in from out of town and out of state to stay here for most of the week, others stopping by as they were coming and going.  In addition to shopping for extra groceries, we were also shopping for new clothes to wear to the service.  For almost a week, daily trips were made “home” and back, driving more than an hour each way.  A lot of stress was added to the grief.

Take a minute, right now, to stop and think about your own situation.  What is in store for your loved ones when faced with your demise?  It could happen tomorrow, you know – or six months from now.  Or six years.  Or 60 years.  There is only one thing absolute in life, and that is death.  You never know when it is going to happen – and that’s the rub.  You just don’t know.

When death happens, when your family is grieving, do you want your loved ones to suddenly have to deal with a lot of decisions concerning your death and funeral?  There are medical decisions to be made, legal decisions, financial decisions, plus many more.  Do you want family members arguing about what casket to choose, what music to play, or what pictures should be selected for the video memorial?  Do you want your loved ones to make your funeral arrangements based on what may or may not be in their bank account, or yours?  Do you want to leave your loved ones struggling emotionally and financially over what kind of service they want to give you vs. what they can really afford?

Death is a necessary part of financial planning.  You should treat life insurance as a mandatory expense, as mandatory as your car insurance, or your homeowners policy.  There are situations where life insurance may not be a viable or affordable choice, and there are alternatives.  Pre-paid funeral plans are available through just about every mortician or funeral home.  Buy a plan now and have it in place for the future – it doesn’t matter if you are 26 or 76.  Do it now.

A funeral home here in my village has a pre-paid program that allows you to make all of your funeral arrangements in advance.  You decide what kind of ceremony to have, whether there will be a casket and what color, what kind of vault, and does that vault need a name plate, what kind of flowers, the type of music, what kind of printed funeral programs, how many pall bearers, whether there should be a family car – there is a long list of decisions when it comes to a funeral. Prices are locked in at the time you make the arrangements.  The funeral home will present you with a price quote and a contract.  You can pay in full or set up a payment plan.  Payment plans are normally set up through a third party (usually a bank), who collects the money in trust and forwards it to the funeral home.  Everything is arranged and paid for in advance.  When the time comes, your family will be dealing with the only thing they should have to deal with at your passing – their grief.

Most funeral homes will also work with you if life insurance is pending when death occurs.  When my grandmother passed away twenty years ago, she had all of her funeral arrangements in place, down to her dress.  She had made a partial payment when she set up the arrangements years before, and she had life insurance.  The funeral took place, and a month later when the life insurance paid out, the balance due was paid.  If you do have life insurance that will be used for your funeral, you still need make your own funeral arrangements.  Don’t leave that kind of stress to your family.  It’s going to be all they can do to handle the loss of you.

Can your survivors survive the sudden financial burden of a funeral?  A few years ago, a grandfather died in our family.  We soon found out that his life insurance policy had been cashed in a few years before, and there was no pre-paid funeral plan or funeral arrangements made in advance.  It fell to a few of the grandkids to pay for his funeral.  At the time, we were able to write a check for our portion – but can your family do the same?  Can your family afford to be saddled with a bank or finance company loan and a monthly payment that will be due 30 days after your death and continue for 2 to 5 years?

None of us want to leave our loved ones with these type of circumstances.  Pick up the phone, get quotes on a term life insurance policy, and set that up to automatically pay through your bank account or a credit card.  Check into pre-paid funeral plans, check the history and reputation of the company, make those plans, and pay that bill while you are living.  Do it today, and do it for your family.

You must prepare for the only absolute in life you can count on:  your death.

 

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Oct
04

Free One-on-One Financial Planning Help

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Financial Planning Day What is Financial Planning?

What financial goals would you like to obtain?  What’s on your “Wish List” when it comes to money?

Do you want to buy a home?  Do you own your home, but dream about a vacation home in the mountains or a weekend home at the lake?

Do the kids want to go to Disney World next summer, but you’re not sure you can afford a local pool pass for the season?

Are you able to save today for college for the kids, or have you put that off until tomorrow? Tomorrow is already here, you know.

What about your retirement – how many retirement accounts do you have, and do you regularly fund those to the max?  Is your retirement diversified, or do you have all of your eggs in one basket?  Can you retire without Social Security and live in the manner to which you are now accustomed?  Have you thought about retirement very much, or is that something you’re going to do “tomorrow”?

Financial planning is a must, no matter who you are or what your circumstances are.  What is your financial plan right now?  What strategy do you have in place – right now – that will allow you to retire financially independent?  Do you know where to start to make your financial dreams your reality?  Do you know how to make your dreams your reality?  Are you lost when it comes to implementing changes to your money situation?

We all have money dreams, but most of us aren’t smart enough to know how to make our dreams come true.  We don’t have the time to do the research we need in order to know where to invest, or how, or how much.  We don’t know what goal to tackle first.  We aren’t sure of the quickest way to the goal line.  We’re lost when it comes to the math.  We need help.  During the month of October 2012, personal, one-on-one help is available in many cities across the country.

Financial Planning Days Initiative

During the month of October 2012, “Financial Planning Days Initiative” is taking place.  Four different non-profit organizations**  are bringing together highly qualified, professional, Certified Financial Planners to provide one-on-one counseling sessions to the public.  There will also be classroom style learning sessions held, and free packets of financial literature given away.  All of the work being done by the professionals is on a volunteer basis, and no payment is expected.  Services are free.  You can sit down with a financial planner and ask for personal advice – with no strings attached.  The volunteers will not try to sell you anything, they won’t even give you their business card.  No business will be promoted at all – the professionals are there to answer your questions and help – that’s it.  (If you are a professional, certified financial planner and would like to volunteer, you can find out how here)

Gather your questions about retirement planning, debt, credit issues, budget questions, taxes, college, mortgage loans, investments, estate planning, small business finance, and insurance together, and find out if the Initiative is available where you live:

Click here to find a Financial Planning Day in your area

A list of 2012 events can be found by clicking here

A list of participating states:

  • Arizona
  • California
  • Colorado
  • District of Columbia
  • Florida
  • Illinois
  • Indiana
  • Maryland
  • Minnesota
  • Nebraska
  • New Jersey
  • Ohio
  • Oregon
  • Pennsylvania
  • Texas
  • Virgina
  • Washington

Can’t go?  You Can Still Get the Same Information Packet Being Handed Out

If there is no Financial Planning Initiative in your state, the free information packet information is still available to you and can be found at the links below.  Take a look at the information available, and give yourself a quick education in the basics of financial planning.  Pick up tips and advice on everything from a college savings plan to long term care insurance.

You Can Organize & Simplify Your Financial Life:  A How To Guide

Saving and Investing:  A Roadmap to Your Financial Security Through Saving and Investing

Savings Fitness:  A Guide to Your Money & Your Financial Future

Smart Saving for College – 529 Plans & Other College Savings Options

Guide to Disability Income Insurance

Guide to Long Term Care Insurance

Consumer Guide to Financial Self-Defense

 

** Certified Financial Planner Board of Standards, Inc.®, Financial Planning Association®, the Foundation for Financial Planning, and the U.S. Conference of Mayors

 

 

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