Month: January 2016

Making Your Wealth Last for Generations

Bigstock-Family-Portrait-At-Christmas-4881212You've worked hard for many years to build a successful business. With this, you've amassed a great amount of wealth. The question to ask is whether you should simply leave it to your kids like the Vanderbilt family, or should you be more deliberate like the Rockefellers?

How do you turn a successful business into a financial legacy that will empower your family for generations to come?

If you know your American history and the story of the Vanderbilts and the Rockefellers, you will recall that centralizing your wealth in a carefully planned trust is the best way to perpetuate, preserve, and protect your wealth. Compare the two historic families: the Vanderbilt fortune has been spent, while the Rockefeller fortune is still being enjoyed—six generations after John D. Rockefeller built it.

Forbes, in "How to Create a Family Trust to Empower Your Great-Great-Grandchildren," reports that some families invest substantial time and energy into designing a financial legacy with the assistance of a qualified estate planning and asset protection attorney. He or she can help create a plan that will empower children and grandchildren, as well as generations thereafter. Preserving and protecting financial wealth requires a sound understanding of, as well as a solid plan for, counteracting the three primary forces that erode wealth over multiple generations. The three forces are:

  1. The division of assets among the generations;
  2. Transfer taxes and capital gains taxes; and
  3. Business risks and third-party attacks.

Studies have shown that as a result of these forces, financial wealth often doesn't last beyond the third generation in 90% of high-net-worth families. It takes careful planning to make wealth last. Talk with a qualified estate planning attorney so that your estate endures more like the Rockefellers than the Vanderbilts.

Reference: Forbes (December 23, 2015) "How to Create A Family Trust to Empower Your Great-Great-Grandchildren"

Two Social Security Strategies are Put to Rest in 2016

MP900341744Two popular Social Security strategies—"file and suspend" and "restricting an application"—are being eliminated, says a recent Kiplinger article, "Some Social Security Loopholes Will Still be around in 2016."

Both of these were created by the Senior Citizens Freedom to Work Act of 2000, designed to encourage workers to stay on the job and delay claiming Social Security. This lets their benefits grow to better serve them in retirement. However, as more people took advantage of the changes, yesterday's "freedom" morphed into today's "loophole." And in late October, with no public hearings or debate, Congress voted to end what were termed "aggressive" claiming strategies. However, the good news is that lawmakers are allowing six months to take advantage of the old rules.

File and suspend. When you reach full retirement age (FRA), now at 66 but soon to be 67 for those born in 1960 or later, you can claim your benefits and immediately tell Social Security not to pay you. Only after you claim your benefits can others who qualify for payments based on your work record (your spouse or dependent children) receive those benefits. If you suspend starting the payments for them, you earn delayed retirement credits that will boost your benefit by 8% a year until you reach age 70.

This is the key to many plans to "maximize" lifetime benefits. If you live longer than the average life expectancy, getting higher benefits later (for yourself or as survivor benefits for a spouse) could more than make up for the benefits you passed up earlier. The new law was originally planning to cut off anyone receiving benefits based on the record of someone who had suspended his or her own benefits, and the checks to spouses and dependent children were going to end six months after the bill was enacted. However, lawmakers reconsidered, and now not only will those now benefiting from file and suspend continue to receive payments, but nearly two million others will be able to use this. Anyone who is 66 by May 2 can take advantage of this.

Restricting an application. You are able to apply for Social Security benefits as early as age 62, but waiting until FRA gives you an important opportunity. Before age 66, any application is considered to be a request for your highest possible benefit—whether based on your own work record or your spouse's. But at FRA, you can "restrict an application" to spousal benefits only, even where it's less than you'd get on your own. Why do this? So your own benefit will grow at the 8% annually mentioned earlier until you turn 70. The new law zaps out this option for those who turn 62 after January 1. If you're older than that, you are grandfathered in and can still restrict an application when you reach age 66. Because this is going away, your spouse will be required to be receiving payments for you to get spousal benefits.

Retroactive benefits. These two strategies are for married couples, but another strategy that's being cut also helps singles. Social Security generally won't pay more than six months' worth of benefits retroactively. However, if you file and suspend at FRA, your suspended benefits are in essence banked. So, you can claim all benefits due since age 66 as a lump sum at any point, if you are willing to forgo the accrued delayed retirement credits. This could be valuable if your delayed-claiming strategy based on a long life expectancy is threatened because you become ill at age 69. Under the new law, this "insurance" will be available only to those who turn 66 by May 2.

This is a complex and important part of many retirement income plans, and an estate planning attorney can help you determine what will work best for your situation.

Reference: Kiplinger (January 2016) "Some Social Security Loopholes Will Still Be Around in 2016"

What You Need to Know About Donor-Advised Funds

MP900400337Americans are always very charitable. This year you may hear about the boom in donor-advised funds, which are charitable giving tools that allow you to take tax advantages now but wait with disbursements.

A recent report from CNN Money, "Everything You Need to Know about Giving to Charity Through a Donor-Advised Fund," says that assets in donor-advised funds increased 25% in 2014 to $70.7 billion. Charitable gifts from the funds grew 27% to $12.5 billion.

Is this right for you? It depends on a few key issues to consider before you decide how to give.

How Do They Work: Donor-advised funds are philanthropic vehicles that are created by a public charity. The funds are promoted to donors as tax management strategies that allow large, immediate tax deductions in good times and then disburse the money later. The funds are managed by nonprofit entities, typically a charitable organization under a financial services company or a local community foundation. This money grows tax-free while it's in the fund, but you will have to pay administrative fees in addition to any investment costs. Usually, the more money you have in the fund, the lower the fees.

Who Should Utilize Them: The upfront tax deduction makes these funds especially interesting if you see a bump in your income, such as an inheritance or business sale proceeds. Since this type of contribution is deemed a gift to a 501(c)(3) public charity, you are permitted to deduct up to 50% of your adjusted gross income (AGI) for cash gifts—and 30% for donated appreciated securities—to maximize your tax benefit. This can also be a wise move for those interested in donating assets other than cash to a charity. Giving the appreciated assets of stock or complex holdings like real estate or small business shares to a donor-advised fund lets you avoid capital gains tax. Another potential advantage is that if you prefer to remain unnamed, donor-advised funds often allow gifts to be anonymous.

When to Not to Use: This type of strategy is best suited for wealthier donors. If you donate less than a few thousand dollars each year, you may want to just contribute directly to your favorite charities. It won't be worth paying the administrative fees, and most funds require a higher minimum contribution and restrictions on follow-on donations and grant size.

There are other limitations, such not receiving goods or services in exchange for your donation. That creates issues with the IRS since you've already received a tax deduction on the full amount of your donation. Taking advantage of donor perks, which reduce your charitable donation by what it costs the organization to offer such rewards, would be like cheating on your taxes. If you want to keep the money in the fund for several years, remember that your investment choices are usually limited to those offered by the company with which you opened your account. In addition, donor-advised funds can only make grants to other public charities that are in good standing with the IRS, so you can't make gifts to split-interest trusts like a charitable remainder or charitable lead trust.

Lastly, donors should know that donor-advised fund operators aren't legally required to follow the donor's wishes about how to invest the money or where grants should be made. Although many do, you don't have absolute control over the fund.

Reference: CNN Money (December 22, 2015) "Everything You Need to Know About Giving to Charity through a Donor-Advised Fund"

Out with the Old Junk… In with the New Year!

MP900382633A recent article on the Value Walk website, "Cleaning out Your Financial Trunk – Year-End Tips," describes the not-so-pretty sight that can be found when you take a look at what's inside your car trunk: clothes, jumper cables, sports equipment, camping gear, and maybe even a box of tissues. This unique collection of potentially valuable items can accumulate over months. Many of us will just shut the trunk and procrastinate. Without too much effort, you might transform that portable dumpster into a clean, useful space of organizational Zen.

Many folks have the same issue with scattered finances: IRA here, 401(k) there, trust account, savings account, bank CD, insurance policy—plus a spouse's accounts. Is there any cohesive strategy behind these accounts? Generally, the answer is "no." Like a messy car trunk, a sloppy investment portfolio with no objective, time horizon, or defined risk tolerance could take your retirement off-road where it can get lost.

The first step in de-cluttering your financial mess is determining what your targeted retirement number is. This requires you to calculate the following:

  • Your Annual Budget
  • Annual Income
  • Planned Retirement Date
  • Life Expectancy

Examining this data with your risk tolerance and expected return should help you see if your retirement goals are realistic or overly optimistic. After you find a reasonable dollar figure target for retirement, you still need to incorporate important facets of financial planning into your fiscal affairs. Here are some financial planning priorities on which to focus:

Estate Planning: No excuses, you need to have an estate plan in place with a living trust, a will, a financial power of attorney, and an advanced healthcare directive. Without these, heirs could be left fighting with the courts and other family members over rightful transfers of assets and important decision-making if you become incapacitated.

Tax Planning: Don't forget about the IRS. Talk with an experienced estate planning attorney about ways to legally lower your tax liability. Contributing to your 401(k)/IRA accounts and recognizing various deductions (e.g., charitable contributions, business write-offs) are just a few strategies to keep more of your money.

Insurance: Look into protecting your nest egg with some term life insurance.

Clean up your messy financial trunk with comprehensive investment and financial planning and reach your Zen-like retirement goals.

Reference: Value Walk (December 20, 2015) "Cleaning Out Your Financial Trunk – Year-End Tips"