Posts Tagged ‘estate planning’

Simple and effective estate planning strategies

Friday, March 12th, 2010

By Jim Grant – Parksville Qualicum Beach News

Why do people do estate planning? There are lots of reasons: maximize the value; minimize the taxes; include or exclude a specific person; support a charity, etc.

There are many complex and expensive ways to achieve these and other objectives. But for most people, objectives are simple, and so should be the solutions.

My estate planning goals, for example, can be easily summarized: to be fair — so that hopefully when all is said and done, my children will still speak to each other; and to do what I can to ensure that whatever is left is put to good use, and has some lasting benefit.

When working on an estate plan recently, I came across a little-known strategy that can be executed through an insurance company.

It starts with investments available from insurance companies. This could include vehicles such as annuities, insurance policies, segregated funds, and GICs. In many ways these investment products are similar to their non-insurance counterparts: GIC rates, for example, are competitive with bank GICs, and are covered by insurance up to $100,000. Segregated funds as well, like mutual funds, come in a variety of shapes and forms. But there are some key advantages to both of these.

To begin with, there is the ability to name beneficiaries. Rather than the proceeds of these investments going through the estate, you can elect to have the funds pass directly to those who you name as your beneficiaries — without delay. Right out of the gate there is a savings that could easily exceed two per cent, when you consider the probate fees as well as the legal fees typically associated with settling an estate.

But there is more. Some insurance companies will also allow you to stipulate in their contract how the beneficiaries will receive the funds.

For example, an annuity might be an option. So rather than receiving a lump sum (that some parents fear might be squandered), the beneficiary would instead receive a monthly income for a specified period of time, or for life. The amount of income can be fixed, or can be indexed. Or, in the case of at least one company, the level of income can be tied to the performance of the stock and/or bond market.

As far as I know, the only other way to ensure such an outcome would be through a trust — a document that is complex and expensive to set up and maintain. Instead, by completing a simple form through an insurance company, your wishes could be met, and it wouldn’t cost you anything.

For more information please feel free to call or e-mail.

Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member CIPF.Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. For more information feel free to call Jim at 250-594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.

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Lower the pain of estate taxes

Sunday, November 8th, 2009

The federal estate tax is a tax on your right to transfer property at your death. The tax is imposed on the value of everything you own, less any exemption that is in force at the time of death. In 2009, the federal exemption is $3.5 million per person. If the value of a decedent’s property exceeds the exemption, the excess amount is subject to a tax of up to 45 percent.

For many years, the first $1 million in assets of a decedent were exempt from taxation. Although $1 million is a very large amount of money, a $1 million exemption limit created massive problems for families that owned land, farms or small businesses. If the majority of a decedent’s wealth consisted of real estate or a business instead of more liquid investments, families were often forced to sell assets that had been in the family for generations, just to raise cash to pay the estate tax.

In 2001, to accommodate growing property values, Congress enacted legislation that gradually increased the exemption, lowered the maximum estate rate from 55 percent to 45 percent, and, at least temporarily, eliminated the estate tax altogether. By 2009, the federal exemption grew to $3.5 million, and unless Congress amends the law before the end of this year, there will be no federal estate tax due on the estate of a person who dies in 2010. If the law remains unchanged, the exemption is due to return to $1 million in 2011, and the top estate tax bracket will return to 55 percent.

Before the government’s massive bailout of the financial markets, it was widely expected that Congress would make the $3.5 million exemption permanent. Now, that expectation is unrealistic. With only a few weeks left until Jan. 1, it’s likely Congress will enact a “patch” to extend the 2009 limits for one more year, until a more permanent plan can be developed. Whatever the eventual exemption limits will be, most analysts expect that some form of estate taxation will remain.

Individual estates may also impose their own estate taxes, with exemptions that may or may not be based on the federal limits.

Life insurance has long been used as an estate planning tool. In addition to providing a death benefit to replace the loss of a wage-earner’s income, life insurance is frequently used to help pay estate taxes. In order to avoid subjecting the life insurance proceeds themselves from estate taxation, estate planners often use irrevocable life insurance trusts (ILITs).

Following is a very simplified explanation of the typical way an ILIT works: Generally, the first step is to create the trust, and name a trustee. The trust purchases a life insurance policy on the life of the person who creates the trust (the grantor). The trust becomes the owner and the beneficiary of the policy. Each year, the grantor makes a gift of cash to the trust, which the trustee may use to pay the life insurance premium. At the death of the grantor, the life insurance proceeds are paid to the trust. The terms of the trust state how the death benefit is to be distributed. If the trust has been properly created, the death benefit does not become part of the grantor’s estate, and the proceeds may be used to either pay any estate taxes that might be due on the grantor’s other assets, or paid to his or her heirs.

Regulations permit an existing life insurance policy to be transferred into an ILIT, but the policy’s death benefit will be included in the grantor’s estate if death occurs within three years of the transfer. It is essential to change both the owner and beneficiary of the policy to the trust to avoid inadvertently failing to remove the proceeds in the grantor’s estate.

With so much uncertainty about the existence or extent of future estate taxes, ILITs continue to be popular estate planning vehicles. In order to fully benefit from this strategy, you must be especially diligent to comply with strict rules about the language of the trust, the selection and powers of the trustee, the procedure and documentation of gifts to the trust, and other constraints. For this reason, it is especially important to work with a competent and experienced estate planning attorney.

Elaine Morgillo is a Certified Financial Planner and president of Morgillo Financial Management Inc. She has offices in Portsmouth and North Andover, Mass., and can be reached at emorgillo@morgillofinancial.com

In Lafayetta, LA contact Andrew Ahrems at:
http://www.ahrensinvptr.com/new/ahrensinvptr/

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Watch Those Beneficiary Designations

Friday, July 17th, 2009

We all want to live a long and productive life, with our retirement account landing at zero as we take our final breath. But of course it rarely works out that way. So when was the last time you reviewed and updated the beneficiary designations of your 401(k), 403(b), or IRA?

Did you know that how you designate a beneficiary–or your failure to do so–can dramatically affect the taxes owed and whether or not the account might keep growing after you’re gone?

Over the years, you’ve been able to defer income taxes through account contributions and (hopefully) through growth of the investments. But at age 70 ½ or your death if earlier, Uncle Sam wants his pound of flesh…at least annually.

If you’re married and have named your spouse as beneficiary, there’s considerable flexibility. Your spouse can remain as beneficiary and follow the distribution rules or can treat the retirement account as his or her own.

If you’ve named a beneficiary who is not your spouse, then that person(s) will have the opportunity to stretch the annual required minimum distributions (RMDs) over their own life expectancy. Depending on the beneficiary’s tax bracket and the size of the distributions, it may result in lower overall taxes spread over many years–plus the potential for continued tax-deferred account growth.

Note that the IRS differentiates between “beneficiary” and “designated beneficiary.” An entity such as a charity or your estate can never be a designated beneficiary. Charities and estates have no life expectancy over which to stretch the required distributions. While ABC Charity can be named a “beneficiary,” you must have a pulse to be considered a “designated beneficiary” and be eligible for the stretch option.

Unless there’s a compelling reason to control account distributions from beyond the grave (spendthrift children or second marriage situations, for example), you generally will want to avoid naming a trust as beneficiary of your retirement account. There is no particular tax benefit to be gained by it and it simply creates an additional layer in the distribution process. Be sure to consult a qualified attorney if you are considering this option.

Failure to designate a beneficiary doesn’t necessarily mean that your family won’t eventually benefit from your retirement account. But it does mean the account must be distributed over a much shorter period, likely resulting in a bigger tax bite and curtailing any potential ongoing growth.

So be sure to review and update your beneficiary designations periodically–especially if you’ve had a change in marital status or previously designated beneficiaries have gone before you.

© 2009 Larry McClanahan

Larry McClanahan, MBA, CASL®, CFP® is an independent, fee-based advisor in the Portland, Oregon area, providing retirement income planning and wealth management to retirees and those approaching retirement. He can be reached at http://www.larrymcclanahan.com Advisory services and securities through KMS Financial Services, member FINRA/SIPC.

It’s important to find a financial advisor who is knowledgable in the field of estate planning to assist you in such matters.
You can find a listing of the best financial advisors in your community at www.BestofUS.com

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