Month: December 2015

Helping Parents with Their Finances Is Not An Easy Task

MP900448491The Social Security Administration reports that about 10,000 Baby Boomers will be retiring every day over the next 20 years, and as they move through retirement, they may need caregiving assistance. Many times, it's their adult children who must serve in this role.

The Des Moines Register's article, "How to assist your aging parents with their finances," points out another aspect of care giving: helping parents manage their finances. If that's the case, then be sure to do the following:

Understand your parents' overall goals. When assisting your parents with their finances, helping them to reach their goals should be your main objective. Talk to them and see whether they have financial goals above just covering their day-to-day expenses. It's important to understand what they want their money to do.

Have this conversation more than once. That's a biggie! The "getting-to-know-your-goals" talk shouldn't be a "set it and forget it" one-time conversation. Speak to your parents frequently about their goals. Their plans may change over time, especially after important life events, like the birth of a grandchild or the death of a loved one.

Know the sources of their income. If your parents have a regular income which is enough to pay their bills, then managing their assets may be just keeping track of what they already have and using the regular income to pay their monthly expenses. But if your parents don't have this regular income, then managing their assets will become more challenging.

Find all of the important legal documents. Before your parents can legally let you handle their financial matters, you need to be listed as their power of attorney. Without it, you may be in store for a lengthy court proceeding before being given permission to manage your parents' assets in the event they become incapacitated. If your parents want you to also handle their medical decisions if they become incapacitated, make sure they have health care directives in place as well.

Managing your parents' or any relative's finances can be extremely challenging. Talk with your estate planning attorney. He or she can help you make sure you have all the tools to do the job right.

Reference: Des Moines Register (November 24, 2015) "How to assist your aging parents with their finances"

To Convert or Not to Convert My IRA to a Roth. That is the Question.

Stockbrokerarbitrationfraud4In order to save for retirement, some individuals are considering converting their traditional IRAs to Roth IRAs in order to maximize their low-income years in a challenging economy. But how do you know if that's a good move for you?

MarketWatch recently published an article entitled—simply enough—"Should I convert my traditional IRA to a Roth?" that runs through the what's and the why's of making this decision.

Traditional IRA contributions can be tax deductible, but money taken out is considered income and is taxed. Contributions to a Roth IRA typically aren't tax deductible, but the withdrawals aren't subject to income taxes or capital gains taxes, provided you are over 59½ and have had the account for five years or more.

A big benefit of Roth IRAs is that, unlike a traditional IRA or 401(k) account, there are no required minimum distributions after the investor reaches 70½: the money can grow tax free and be left alone for when it's needed.

Traditional IRA account holders who convert their accounts into a Roth IRA must pay income tax on the amount of the conversion. Whether to convert to a Roth IRA involves a variety of factors, like your age, your financial and life goals, and your current and future income. For some, the tax on the conversion from the traditional IRA to a Roth doesn't compensate the money earned. Here are a few ideas on deciding whether or not to convert:

YES! A conversion from a traditional to a Roth IRA is a good idea if:

  • You're pretty young or a business professional currently in a low tax bracket expecting to be in a higher tax bracket when you retire. A Roth can help to protect you from increased tax rates that you'll encounter during your working life.
  • You break up your conversion in smaller parts so that you don't get bumped up into a higher income-tax bracket immediately since the conversion amount is considered income.
  • You want to decrease your estate for estate taxes.
  • You live in a state that's exempt from income taxes (or it has lower income-tax rates) and plan to move to a state with higher tax rates for your retirement.
  • You are single or a widower. Since federal taxes are usually designed with married individuals filing jointly in mind, converting to a Roth IRA would let you have lower joint tax rates and later the money would be yours tax free during the rest of the years that you're single.
  • You want to enjoy limits on how much your Social Security retirement income is taxed, as up to 85% can be taxed if the remainder of your income is at a certain level. Putting your money in a Roth will help keep your income tax level low. As such, your Social Security benefits will be taxed lower too.
  • You want to help your family succeed financially in the future. A Roth IRA doesn't require distributions; the money can continue to grow even after you die. Your family can make tax-free withdrawals for the rest of their lives.

NO! A conversion from a traditional to a Roth IRA doesn't make sense if:

  • You're an older investor or business professional currently in a higher tax bracket expecting to be in a lower bracket when you retire, as the money lost now considered as income in the conversion could wipe out any benefits of a lower income tax rate down the road; or
  • You don't have any financial mechanisms in place that can reduce your year's income subject to taxes, such as tax deductions or loss carryforwards.

You should always talk with your estate planning attorney before executing any conversions or advanced tax strategies.

Reference: MarketWatch (November 25, 2015) "Should I convert my traditional IRA to a Roth?"

Prepare your Estate Planning Now to Help Loved Ones Later

In order to protect your loved ones and ensure that your intentions are clear and carried out, you must do some more planning now, and you’ll need to share your thoughts with your family.

The Arkansas City Traveler’s article, “Planning your estate,” includes some very worthwhile moves to consider:

Make a list of your assets and debts. Your family needs to have an accurate accounting of your assets and debts. Share this information with them.

Sign a durable power of attorney. Entrust a good friend or family member with the authority of durable power of attorney so that he or she can pay your bills and make financial choices on your behalf if you are incapacitated.

Designate an executor. The executor is the individual that you select to carry out your wishes in your will.

Keep your will up-to-date. Events in your life may have changed, so examine your will with your estate planning attorney to ensure it reflects your current situation and wishes.

Consider a living trust. A will may not cover all of your estate-planning needs. You might want to look at a living trust. A trust can give you flexibility in distributing your assets and can help you avoid probate. In order to create a trust or other estate-planning documents, work with a qualified and experienced estate planning attorney.

Review your beneficiary designations. These designations on your financial accounts, like your 401(k), IRA, retirement plan, and insurance policies will trump the directions you put in your will, so keep them updated.

Share where your legal documents are located. Your family needs to know where you keep documents. These include your birth certificate, will, and living trust.

Communication. You need to tell your family and heirs about your final wishes. Communication about these sensitive topics is not always easy, but doing so will help your family after you have passed.

Work with an estate planning attorney to make sure all of the bases are covered.

Reference: Arkansas City Traveler (November 14, 2015) “Planning your estate”

How to Slice Your Pie of Assets into Unequal Slices That Your Kids will Enjoy

Bigstock-Family-Portrait-At-Christmas-4881212When the time comes to write a will, the Boston Globe says that many parents opt to divide their wealth equally. The article “An unequal sharing of the wealth,” explains that they respond based on a sense of fairness or a desire to preserve family harmony. However, in the past two decades, those who leave unequal amounts to children have more than doubled.

A study published last month by the National Bureau of Economic Research revealed that the share of parents with wills that give unequal amounts to their children grew significantly between 1995 and 2010—from 16% to 35%. One important element of this increase is the growing number of “complex” families, or blended households with stepchildren and biological children, as well as families where a parent doesn’t have any contact with one or more biological children (e.g., children from a previous relationship).

Among parents who had created a will, 61% of those with stepchildren and biological children planned to divide their assets unequally, compared with 27% of parents with just biological children. Among parents who were divorced at the time they were surveyed, the difference was even greater: 75% compared to 29%. However, researchers noted that living with a stepparent for at least 7 to 10 years eliminated the stepchild “penalty.”

The study concentrated primarily on complex families, but there are other scenarios in which parents might choose to pass on their wealth unequally. Parents may have given more to one child in the past and decide to leave more to their other children. Or, they may want to split assets unevenly to try to put their kids on more equal footing. Parents may have the best of intentions in making these decisions, but they should speak to their children to prevent hurt feelings.

An estate planning attorney can provide valuable guidance.

Reference: The Boston Globe (November 16, 2015) “An unequal sharing of the wealth”