Common Estate Planning Mistakes – Second in a Series

As you’ve seen in previous discussions, Estate Planning can be very complicated and is not something that should be undertaken blindly. So, with that in mind, here are a few more common estate planning mistakes that can be easily avoided:

1. Improperly owned life insurance. Whenever life insurance proceeds are paid to the insured’s estate, these proceeds add to the value of the insured’s estate thereby compounding all sorts of problems. These include increased probate costs; in many states, increased inheritance taxes; and, quite possibly, increased federal estate taxes. All these problems could easily be avoided with a properly structured life insurance policy, i.e., one which is owned outside the estate.

2. When a husband is required by divorce decree to purchase a life insurance policy on his life, he receives no tax deduction for the premiums paid if he owns the policy. The best way to avoid this and to ensure a tax-deduction is for him to increase his tax-deductible alimony payments and to have his ex-wife purchase – and own – the policy on his life.

3. Lack of Liquidity. Most people don’t have the slightest idea of how much it will cost to settle their estate or, worse, how quickly taxes and other expenses need to be paid. Worse still is the “fire sale” of illiquid assets such as real estate or the family business resulting from an insufficiency of cash.

For more info, contact us: http://www.thriftytermquote.com/contact-us/

When to Take Social Security Retirement Benefits

Generally speaking, Social Security benefits make up one-third of a retiree’s income.  Therefore, the decision about when to begin these benefits is a vital one and will have a crucial impact on your quality of life during retirement.

What is “full retirement”?  Full retirement used to mean age 65.  That is still the case if you were born prior to 1938.  However, if you were born in 1938 or later, “full retirement age” gradually increases to age 67.  It all depends on the year in which you were born, and you’ll have to go to the Social Security website (www.SSA.gov/) to be certain.

Early Retirement equals Reduced Benefits.  Age 62 is generally the youngest age at which you can receive Social Security benefits.  Depending on your birth-year, your benefits will be reduced accordingly.  For example, if your full retirement age is 65 and you take Social Security at age 62, your benefits will be reduced to 80% of what they would have been if you had waited until age 65.  Note: you may encounter the term “Primary Insurance Amount (PIA),” which is simply your full Social Security Benefit at your normal retirement age.  In our example, at 62 year old retiree with a full retirement age of 65 will receive 80% of his or her PIA.

Delayed Retirement equals Increased Benefits.  What happens if you delay retirement past your normal retirement age?  You get paid for waiting!  You receive a progressively higher benefit for each year you wait up to the age of 70.  The amount of the increase will vary and depends on your year of birth.  For example, if you were born in 1943 or later, your PIA will increase by 8% per year for each year you wait beyond your normal retirement age up to age 70.

Which is Better:  Earlier or Later?  Great question.  This depends on a number of factors such as longevity in your family.  Obviously, if your parents passed away in their sixties, you might want to take your Social Security the minute you turn 62.  Also, you’ll want to consider what the rest of your cash flow will look like in retirement.  Will you have other guaranteed income sources such as annuities or pensions?  Put together a simple “Cash In / Cash Out” spreadsheet, and be as specific as possible with your income sources.  Add 20% to the “Cash Out” column.

For more info, go to: http://www.thriftytermquote.com/

Long-Term Care: Partnership Programs

In a Long-Term Care (LTC) Partnership program, a state government and private health insurers work together to make available to residents of that state LTC policies that are “linked” to Medicaid. If a buyer of a Partnership LTC policy later faces long-term care needs that exceed the policy’s limits, he or she may apply for assistance from the state’s Medicaid program under more relaxed eligibility rules. This means that the policyholder may keep larger amounts of assets than would normally be allowed under the standard Medicaid guidelines. Please note that these relaxed eligibility rules only apply to assets that may be retained – all other standard Medicaid qualification guidelines apply.

For example, Michelle, a single woman, purchases a partnership LTC policy, which has a total benefit of $100,000. She later uses the full benefit of $100,000. She then applies for, and is eligible for, Medicaid. Because she had first received benefits through a partnership LTC policy, she is allowed to retain $102,000 in assets and her state will not seek to recover that amount after her death. Otherwise, she would have had to “spend down” her assets until she only had $2,000 left.

This can get quite complicated so, for more information, go to: http://www.thriftytermquote.com/contact-us/

Common Estate Planning Mistakes – First in a Series

Estate Planning is especially complicated and, many times, mistakes can be quite costly both financially and emotionally.  I will discuss a number of common – and avoidable – estate planning mistakes over the next few posts.

Mistake #1:  Improper use of Jointly Held Property.

If excessively used or used by the wrong parties (especially by unmarried individuals), the “poor man’s will” becomes just a poor will.  For instance, double estate taxation is a distinct possibility if the joint ownership is between individuals other than spouses.  Also, in the case of a married couple, holding property jointly equates to a total loss of control at death since the surviving spouse can ignore the decedent’s wishes and dispose of the property any way the survivor chooses.  This is especially troublesome when the joint owners are in a second marriage.

Mistake #2:  Improperly Arranged Life Insurance.

Inadequate life insurance on the life of the breadwinner or on the “key-person” in a corporation can bring stinging financial hardship.  Many times, the proceeds of the policy is includable in the insured’s estate because he or she bought the policy and either never transferred the ownership to a third party (not the spouse) or remained in control (called “an incidence of control”) of the policy in some manner.

Mistake #3:  The Unholy Triangle.  This is really an offshoot of #2 but it deserves it’s own paragraph.  This occurs when three separate entities / people are party to a life insurance contract.  For example, if the wife is the owner of a life insurance policy on the husband (the insured) and the children are made the beneficiaries, then the proceeds are considered a taxable gift to the children.  We will cover more on this topic in a later post.

For more info, go to:  http://www.thriftytermquote.com/

Business Continuation for More Than Two Owners – First in a Series

One of the most perplexing issues facing business owners is how to transfer a business to successive owners. This gets especially more complicated when the transfer involves more than two business owners. Assuming that the owners (called shareholders) have a competently written Buy / Sell Agreement, the question becomes how to structure the funding mechanism. That is, what entity owns the life insurance policies that cover each shareholder and how do you make this the most tax-efficient for everyone involved?
The easiest – and least tax-efficient – is for the Company to be the owner and beneficiary for all the life insurance policies. This way, when an insured dies, the life insurance proceeds get paid directly to the Company, which then retires the deceased’s shares and pays the heirs the fair market value of those shares, which is presumably the amount of the death benefit of the life insurance paid. By extension, the remaining owners’ shares appreciate by the value of the deceased shares. The trouble with this arrangement is that the tax basis for these shares remains the same. This means that, when the remaining owners sell their shares in the business, they pay capital gains on everything over-and-above their original tax basis – including on the appreciation from the newly acquired shares.

Can they do better? Most definitely yes! For more info, go to: http://www.thriftytermquote.com/

The Unholy Triangle

This is sometimes referred to as “The Unholy Trinity.”  Either way, it’s bad news for the life insurance policy owner and family!  Every life insurance contract has three parties:  the owner, the insured and the beneficiary.  You’ll want to make sure that two of the three parties are the same person.  For example, the owner and the insured are typically the same person while the beneficiary is someone else.  In most cases, this means that the death benefit will remain tax free.

If, however, each party is different, then the life insurance proceeds are considered a taxable gift to the beneficiary!  This happens more often than you may think.  For example, a wife (the owner) may take out a life insurance policy on her husband (the insured) and designate their son as the beneficiary.  Oops.  Three different parties equals a taxable event that no one saw coming!

Best way to avoid this?  Get a competent advisor!  For more info, go to:  http://www.thriftytermquote.com/

Life Insurance AND Long-Term Care Together?

Yes, you read that right! The life insurance industry has put together these two products. One major reason why many people (including me) never bought a long-term care insurance policy is that, if you never use the policy, you lose all the money that you invested in it. Can you afford to throw your money away?

Another reason is that, with a stand-alone Long-Term Care policy, the premiums can increase at any time – for any reason. Doesn’t quite give you that “warm and fuzzy,” does it?

Well, the Life Insurance and Long-Term Care policy addresses those and other concerns. For instance, if you pass away never having used the Long-Term Care part of the policy, that’s where the Life Insurance kicks in, and your family receives the tax-free death benefit. In my world, this is what we call “cost recovery.” Also, once you’ve been approved, your premiums remain the same! No changes in your premiums should your health deteriorate or if you do what most people want to do and that is get older.This combination has many more advantages. Please contact me if you’d like to know more: http://www.thriftytermquote.com/contact-us/

Tax-Free Life Insurance Policy Exchanges

Also known as a 1035 exchange, a tax-free life insurance policy exchange involves the transfer of the cash value of one policy into another, permanent life insurance policy.  What should be obvious is that, once the cash-value transfer is made, the old policy is cancelled.

Why would you want to make this move?  Throughout my career, I have encountered a number of good reasons to do this:

1.  Because of a number of factors (discussed in previous articles), your old policy is projected to lapse.  So, instead of throwing good money after bad, you’ll want to invest those funds into a life insurance policy that will be around when your family needs it.

2.  Because of market efficiencies and increased longevity, life insurance costs have decreased over the last decade.  This means that your old life insurance policy simply costs more than a new one. You may also be able to get more life insurance protection by changing to a newer, less expensive life insurance policy.

3.  Your life and priorities have changed, and your old life insurance policy doesn’t fit your new needs.  For example, you’ve gotten older and have seriously thought about getting a long-term care policy.  Well, now you can get both: a no-lapse guarantee life insurance policy combined with a long-term care rider – all in one policy!  That may work very well for a number of consumers.

To learn more, go to:  http://www.thriftytermquote.com/

Term Life Insurance

Life insurance comes in many varieties and forms that are designed to fit your specific needs and, ultimately, help you protect your family.  First, the basics:  Term life insurance is “pure insurance.”  It does not accumulate cash value (see our previous discussion on “Cash Value” for more info)  and only lasts for a specific period of time.  Let’s go over a few of the varieties:

1.  Annual, Renewable Term Life Insurance.  This type of term life insurance is characterized by low initial premiums that increase each and every year.  This may work in the beginning but, over time, the premiums become so high that you’ll wind up dropping the policy.

2.  Level Term Life Insurance.  This tends  to be the most efficient type of policy as both the premiums and the death benefit remain the same over the term of the policy.  You can get polices that last for 5, 10, 15, 20, 25 and even 30 years.

3.  Decreasing Term Life Insurance.  This is typically sold to cover a large loan like a mortgage.  This is not a fan-favorite simply because the premiums stay the same as your coverage goes down (as, presumably, your loan balance goes down too).  Essentially, you’re paying the same for less and less.  Not particularly economical.

My office can help you determine which type of life insurance policy is best for you.  Go to:  http://www.thriftytermquote.com/