Articles Posted in Financial Planning

Planning for retirement can be difficult; however, if you also plan on leaving money to heirs in your estate plan the process can be even more complex. Deciding which financial accounts should be tapped first for retirement funds and which should be left for inheritance purposes is a tricky question. The answer is often determined by your own financial needs for retirement as well as the needs of your heirs, but you can expect the following to occur with your heirs with each of these retirement accounts.

Roth IRA

As a general rule, a Roth IRA account is a great asset to leave for inheritance. When inherited, Roth distributions are tax-free for your heirs. If planned properly, your heirs can take distributions from the account over the course of their lifetimes and simultaneously leave the bulk of the principal from the account to continue to grow in interest. Additionally, the federal estate tax exemption is now at $10.6 million for a married couple. That means that most Roth IRA accounts that are inherited will be both income and estate tax free.

However, there is one issue that was recently decided by the courts regarding retirement accounts and inheritance. If your heir inherits your Roth IRA and then goes bankrupt your bequeathed Roth IRA is subject to their creditors. You should take the time to explain to your heirs that your retirement accounts are not shielded from their bankruptcy.

Stocks, Bonds, and Mutual Funds

Other types of retirement assets such as stocks, bonds, and mutual funds are good accounts to leave for inheritance if they have greatly increased in value over time. The reason for this is called the “step up” in cost basis. Cost basis is the price of an asset (like a stock or bond) when it was first purchased. This is the price that all increases or decreases in value are measured by. When you sell an asset, the capital gains taxes are determined by the amount of value that your stock or bond has increased. However, if you pass along those assets to your heirs, they get to “step up” the cost basis to the value of the asset on the day of your death. Therefore, when your heirs decide to sell the stock or bond, the tax break on capital gains will be significant.

One common idea for funding retirement, while still leaving assets for heirs, is to focus on selling stocks, bonds, and mutual fund assets that have seen the smallest gain or loss. That way the assets that will have the largest tax breaks are reserved for your heirs. Also, keep in mind when determining which assets will go to heirs that annuities inherited by non-spouses and U.S. savings bonds do not get the “step up” in cost basis.

IRA or 401(k?)

In terms of value, the costliest assets to leave to heirs are tax-deferred retirement accounts such as an IRA or a 401(k). These accounts get no step up in cost basis like stocks, bonds, and mutual funds. Additionally, they are distributed at ordinary tax rates for your heirs, unlike the Roth IRAs.

If you are planning on leaving money to your heirs as well as to charitable causes, consider leaving the tax-deferred assets to charity. Charitable organizations are not taxed on those types of assets, and the tax-free or stepped up assets can then be left for your heirs.

In the spirit of raising awareness of sound money management, April is officially deemed “National Financial Literacy Month.” The U.S. Senate even passed a resolution on the matter a few years ago. The National Foundation for Credit Counseling usually leads the yearly effort, and many others in the financial world also use the occasion to discuss important money matters.

For example, Money Management International, a non-profit credit counseling agency, created a robust website sharing a variety of resources for consumers: www.FinancialLiteracyMonth.com. The website provides helpful tools on basic financial information, income worksheets, debt load calculators, financial goal tracking, and more.

While much of the information is focused on very general money management skills, if recent poll data is accurate, a majority of Americans remain far behind in prudent planning. Consider that a recent National Foundations for Credit Counseling (NFCC) survey found that over 60% of Americans do have any sort of budget. In addition, the survey found that nearly one in three Americans do not put anything from their annual income toward retirement savings. It is perhaps no wonder then that “retiring without having enough money set aside” is the most commonly cited financial issue that worries Americans according to the NFCC survey.

All of this suggests that far too many residents are living each month without a clear assessment of how their spending may affect their savings and long-term financial future.

Estate Planning – Thrive in your Golden Years
It is impossible to know exactly what the future will look like. That holds true for every aspect of life, from health and relationships to finances. Yet, that is not an excuse to avoid any long-term planning. In fact, the uncertainty counsels toward the opposite–taking steps to best position yourself to meet goals regardless of the future. Elder law estate planning is a key component of that preparation. Beyond designating one’s wishes at death, this work also ensures steps are taken to secure a happy retirement with appropriate senior care.

Our team of legal professionals is proud to work with families throughout New York on a range of estate planning matters. We encourage all residents to take use National Financial Literacy Month as a time to re-evaluate current practices and take necessary steps to lead a safer financial life. From personal budgeting and saving to crafting long-term plans, getting a handle on these issues brings enormous peace of mind. Give us a call today to see how we can help.

Intricate financial and estate planning details are understandably hard for many residents to wrap their head around. There are hundreds of thousands of page written in federal statutes, case opinions, and regulations dictating what can be done and what cannot. Making matters even more complex is that fact that even professionals can disagree on how certain rules should be applied.

For example, many financial planners are up in arms following a recent opinion by a U.S. Tax Court related to IRA rollovers.

The Case
The ruling examines a provision in the tax code that allows one to withdraw money from an IRA without tax or early withdrawal penalties so long as the funds are put into a different account within 60 days. Based on federal law, account owners are required to wait one year before making the move again. In other words, you cannot keep changing accounts every month.

According to many, based on guidance repeatedly published by the IRS for nearly three decades, this “one year wait” rule applied separately to individual IRA accounts.

However, earlier this year a federal Tax Court judge issued a ruling in a case that the once per year rule applies to all IRA account collectively. Essentially then, as an American College of tax Council brief in the case explained, the issue is whether the once per year rule applies per IRA or per taxpayer.

In the aftermath of the decision, many tax attorneys and other practitioners are calling for the decision to be vacated. They argue that it undermines public confidence for taxpayers to be punished even when following the IRS’s own guidance. However, following the ruling, IRS officials released information suggesting that updated guidance will reflect this most recent decision, limiting IRA rollovers to once per year per individual.

Keeping an Eye Out for Legal Changes
The specifics of this case are somewhat nuanced and based on statutory interpretation. But rolling over IRA funds is a common practice that is used by residents of all income brackets, and so this issue has direct relevance for many.

In addition, one of the many lessons to take from this particular debate is the fact that you need to constantly have eyes on your long-term plans to determine if they need to be updated or changed. That is one value of having professional oversight of your affairs, peace of mind comes with knowing someone else watching out for changes on the legal landscape that must be reflected in your planning.

For sports fans, all eyes this weekend are planted squarely on New York City with the Super Bowl set to kick off early Sunday evening. Beyond the usual chatter about who will win and lose, many commentators are discussing how this single game will impact the long-term legacy of many players in it.

Of course, at the end of the day, this game represents just a single game in a career. And for many players, that career is relatively short-lived. Football is a demanding sport, and it is not uncommon for players to retire in their late twenties or early thirties. It is only a rare few who play successfully into their late thirties.

This presents an unique dilemma for players who must then find other careers and/or properly manage their affairs early in life ensure financial stability for what is hopefully a many-decades long retirement. As you might imagine, many players are clumsy in this regard, making a plethora of estate planning mistakes that cause harm to themselves and their families down the road.

Professional Athletes Estate Planning Mistakes
In honor of football’s biggest night, this week Life Health Pro discusses a list they dubbed the “Six Biggest Estate Planning Mistakes NFL Players Make.” Most of the list centers on the basic idea of failing to think long term.

First, estate planning professionals who work with athletes explain that athletes often do not get out of the present. No matter how big one’s check in any given month, the entire purpose of planning is to stretch today’s earnings to an uncertain tomorrow. That need is especially acute for those in unique positions, like professional football players, who earn the vast majority of their lifetime earnings within a specific window that is often no more than a decade.

Along the same lines, a common NFL player planning mistake is spending outside their means. It is easy to mistake a large paycheck now for a license to make luxury purchases. And perhaps those purchases are feasible. But without an actual idea of the funds needed to sustain a decades-long retirement, in too many cases that high living comes at the cost of financial struggles down the road.

Be sure to take a look at the full article for the entire list of common planning errors.

Get Legal Help
The specific estate planning needs of most New York residents will be quite distinct from professional football players. High net worth individuals who are likely to have uneven earnings over the years present very unique planning challenges. But the underlying principles of prudent foresight and seeking out tailored advice to ensure your own actions fit your actual needs is important for all of us, regardless of our age, career, or particular challenges.

For help with estate planning for you and your family be sure that you contact an attorney as soon as feasible and secure the peace of mind that it brings.

The words “Social Security” remain synonymous with retirement benefits for seniors. Earlier generations grew up with the understanding that Social Security would provide an income net in their golden years, allowing a modest but safe retirement. However, the current generation does not have nearly the same picture of the system. Political debates are daily filled with arguments about the “impending” collapse of the system and the bare bones support given to those on the program.

For many New Yorkers, Social Security represents only a small part of their retirement plans. Still, considerations must be given in estate planning to when one should begin collecting Social Security. There are different options for taking early withdrawals, regular withdrawals, or delaying payments for potential benefit down the road.

In general, payouts range from 75% of “entitled benefit” for payments at age 62; 100% of benefits of age 66; and 132% of benefit at 70. Lawmakers are frequently discussing changes to this scheme, particularly in light of rising life expectancies, and so it is critical to be aware of the potential alterations down the road.

What is Best for You?
No two people are in the exact same financial situation. For various reasons, some may be required to take the payouts at age 62, even though that means a significantly lower payment. Waiting a few years results in significant payment increases, particularly considering that those annual payments will last for years (or even decades) into the future.

A Forbes story this month mentioned a few of the individual factors that affect the decision of when to take payments. Current health, ability to work, desire to work, and access to other retirement resources will all factor significantly into the prudent decision in your case. In addition, there are complex issues related to spousal benefits. Full spousal retirement benefits are usually 50%–meaning a spouse can take 50% of their spouse’s benefit amount instead of their own. This is common if one spouse did not work or only worked minimally.

For most New Yorkers today, Social Security considerations are just one part of their overall retirement planning. However, it remains prudent for residents to discuss Social Security issues with financial experts and estate planning attorneys to ensure that they make logical choices regarding when to take withdrawals. Tens of thousands (or even hundreds of thousands) of dollars may still hang in the balance. The Social Security Administration itself is not around to provide tailored strategic advice in your case, so you must ensure you find advocates who can look out specifically for your interests.

In October of 2014, the Affordable Care Act, also known as Obamacare, will finally come into effect. As a result, many across America (including seniors) will have access to more affordable healthcare options. However, with these benefits come a variety of considerations and issues that the elderly must be aware of.

In fact the New York State Office for the Aging (NYSOFA) has developed a list of advice for helping elderly New Yorkers avoid health law fraud, and also provides tips for navigating all of the health law changes that will occur once Obamacare comes into effect.

The Tips
The NYSOFA is an organization whose goal is to ensure the protection and equal treatment of the elderly in New York. The NYSOFA recommends that all elderly who use Medicare or Medicaid should become aware of their local communities Senior Medical Patrol programs, or SMPs. SMPs are designed to assist the beneficiaries of Medicaid and Medicare, so that they can detect, prevent and avoid healthcare fraud. The NYSOFA wants the elderly to be aware that they are often perceived as an easy target for healthcare fraud, and thus they must be outfitted with knowledge and protections so that their rights are upheld and protected.

The NYSOFA has three key points of advice to assist the elderly in avoiding health care fraud. First, they recommend that all New York citizens go through great measures to protect their personal information, including closely guarding Medicare and Medicaid membership information. Identity theft used to procure Medicare and Medicare benefits costs the federal government billions of dollars and prevents those who need medical treatment the most from receiving the help they deserve. NYSOFA advises people to never give out their Medicare, Medicaid or social security numbers, and to remember the Medicare representatives never call or make home visits to beneficiaries.

Second, the NYSOFA recommends that the elderly take the steps necessary to be able to quickly detect discrepancies and other signs of fraud in their Medicare accounts and medical bills. Tips for doing so include reviewing every Medicare statement received for discrepancies, and always closely reviewing medical billing statements, instead of just blindly accepting the charges.

Third, the NYSOFA recommends that you immediately report any discrepancies or health fraud that you become aware of. Proper reporting of such issues to your local SMP as soon as you become aware of them will allow the local SMP office, as well as other federal agencies, to swiftly take action in order to minimize any damage that could occur to the health care benefits that you are allotted.

Obamacare will undoubtedly have significant impact on the healthcare benefits afforded to the elderly in New York. The confusion regarding these changes may expose the elderly to health care fraud and other related issues. The NYSOFA is so committed to preventing health law fraud against elderly New Yorkers that they have made it their goal to assist the elderly in protecting their rights, so that frauds are not easily perpetuated.

Many New Yorkers know that, as part of the federal tax package compromise that was passed on January 1st of this year, the capital gains tax rate was increased. Last year the top rate was 15% but that is now up to 20%. In addition, some individuals will also face a 3.8% investment surcharge tacked on top.

Prudent estate planning always takes tax considerations into account, and transferring assets which have accumulated in value is one of the most important (but trickiest) aspects of the process. As such, it is prudent to closely consider ways to legally save on taxes, particularly considering the new rates.

Forbes on Capital Gains
A personal finance article from Forbes delves into some general strategies that may be used to legally save on those capital gains taxes. For one thing, there may be great benefit to saving assets until death so that heirs get a “stepped up” basis on assets which have appreciated considerably. In many cases, this results in those assets moving to heirs without the capital gains tax coming due at all. Though, don’t forget that other taxes (like the estate tax) will still be in play at those times.

Yet, depending on your situation, there may come a time when assets must be sold before death. For one thing, seniors are often forced to sell assets in order to pay for retirement or long-term care. This may risk a huge capital gains tax bill. [Sidenote: this is one of many reasons why it is prudent to invest in long-term care insurance].

So what can one do to save on capital gains while alive? For one thing, passing on gifts to children or others under the annual tax exemption rate may be prudent. As the WSJ story reminds, “you can give $14,000 a year in cash or property each to as many individuals as you’d like without eating into your lifetime gift/estate tax exemption.”

Other strategies can be used to keep one’s income below the mark which imposes the 3.8% investment tax ($200,000 for singles/$250,000 for couples). One way to do so is to put more money into retirement savings accounts like 401(k)s as pre-tax contributions. This won’t eliminate all capital gains, but it is always worth saving even smaller amounts like 3.8% from leaving your bank accounts.

The story delves into many other specific financial strategies, some which impact long-term estate planning. It is worth perusing the entire story, and hopefully acts as a spur to seek out professional guidance on all of these matters to protect assets for you and your family.

Retirement saving. Those two works often strike immediate fear and worry in the heart of New Yorkers. It is hard enough for many families to meet their weekly needs, from mortgage payments to children’s tuition payments and everything in between. In the end, there is often little left over to stock away for one’s golden years. Add in the 2008 economic recession, which hurt many plans, and it is no wonder that New Yorkers are worried about the inadequacy of their retirement.

Fear not. Depending on your age, there is still time to put strategies in place to ensure access to resources for later in life. Even if you are knocking on retirement’s door, there are still steps that can be taken to catch-up.

Strategies from Forbes
A Forbes article last week shared five basic tips to help boost your retirement savings. The strategies, while straightforward, are worth repeating. Take a moment to look at the entire list.

First, for those still young, it is tremendously helpful to set up automatic saving withdrawals. The story reminds that every dollar saved now is worth two dollars in a decade. The principle applies indefinitely, the earlier you start, the more time compound interest has to work to grow your nest egg. By having the savings taken out automatically–without requiring an overt act on your part–there is a much greater chance that you will save adequately.

For those closer to retirement, it may be prudent to downsize earlier than planned. Upon retiring, many get rid of unnecessary expenses–extra cars, large homes, etc. One way to boost savings near the end is to take these steps a bit before actually retiring. Moving into a smaller living space and getting rid of other unnecessary expenses can go a long way.

If you have very little time left, you still have options. One common recommendation is to work one extra year–live on retirement resources, and save 100% of the last year’s salary. In this way, your retirement nest egg can receive one extra boost. If that step still is not enough, there is always the option of working part-time in retirement. After all, many retirees find themselves looking for new activities anyway. It may make sense to turn the free-time into a part-time retirement career to help with expenses.

It is prudent to visit with financial planning professionals to understand your options. At the same time, it is important to weave your retirement plan into an estate plan, so that you can take full advantage of various trusts to protect assets.

There is no such thing as universal financial advice. When reading any news story, blog post, or magazine article, one must remember that any advice or discussion about financial topics are general–they may not be best choice in your particular case. Many decisions about investments, use of trusts, and similar matters should only be undertaken after consultation with a professional upon explaining your exact situation.

But that is not to say that it isn’t important to learn about some of the general issues beforehand to better understand common financial planning themes. For example, what are the pros and cons of delaying the receipt of Social Security benefits?

A Q&A story from the Herald provides a helpful summary of the issue. A questioner just turned 62 years old. He was wondering if he should start taking Social Security now ($1,800 a month), wait until he is 66 years old ($2,4000 month), or wait even longer.

The answering financial advisor provides an overview of how the system works. For those born before 1954, the retirement age is 66. Collecting Social Security early, at 62, results in payment of 75% of the monthly benefit. On top of that, if you are still working at that point, you will take a 50% cut of any amount over $15,120 annually.

Conversely, delaying until 70 actually results in a large bump–around 32% higher than the “regular” payment amount at 66 years old. In fact, this figure may be even higher, because annual cost of living increases may be applied to deferred payments. For the man in the above scenario, his monthly amount would be around $3,200–or even higher.

So which option is best?

There is no easy answer. One on hand, waiting until 70 obviously results in the highest monthly payments. Those payments are guaranteed for life, which is a huge perk. Considering the benefit of delay, it may be prudent to do everything possible to survive financially without taking Social Security early by using all other resources first (savings accounts, IRAs, etc.).

However, not everyone has those alternative sources of income to survive until 70. At that point the assessment is a balance between working longer (if that is an option) or deciding to bite the bullet and take the earlier Social Security payments.

Many other factors come into play in these decisions, as well. At the very least, it is critical to evaluate all of your options and closely consider your long-term needs and goals before making any permanent financial decisions.

Do you have enough money to retire? It is a questions that tens of thousands of New Yorkers ask themselves every day. When talking with attorneys and financial advisers, many factors are weighed to determine whether enough resources are available for one to have the type and length of retirement that they want and need.

One of those factors, as always, is taxes. Retirement income is frequently taxed, with a portion of money going to state and local government. These are not necessarily trivial amounts, as the exact size of the tax burden may affect whether or not the nest egg is large enough to cash in one’s chips and begin the next phase of life.

Federal taxes will obviously be the same everywhere, but the rules about retirement taxes vary considerably from state to state. When making long-term plans regarding finances, it is critical to understand how state tax rules will affect your retirement
New York Retirement & Taxes — High Burden
One recent report from Kiplinger includes a helpful map that compares relative state retirement tax burdens nationwide. New York is rated as one of the “worst” for retirement purposes, because of its relative lack of senior-related retirement tax benefits. As you can see in this full map, New York is one of ten group into the “least tax friendly.”

The designation was based on analysis of various factors, including: state sales tax, social security tax, income tax, estate/inheritance taxes, and other special treatment of income used for retirement.

For example, New York has a 4% sales tax, an income tax ranging from 4-8.82%, and a relatively aggressive state inheritance tax. Compare that to a relatively senior “tax friendly” state like Florida, which has a 6% sales tax but with no state income tax and no state inheritance tax.

None of this is to say it is all bad news for local retirees. New York does not tax Social Security benefits or public pensions, and provides some tax exemptions for private and out-of-state pensions. However, our state does have some of the highest property tax rates in the country, which can hit seniors hard.

More and more seniors are at least taking a look at this data when making future plans, including any thoughts about relocating. Even if the tax issue does not ultimately affect your retirement decision, it is still important to appreciate the differences if you are moving out of New York or into it. Those families entering the state should account for the effect that our relatively high rates may have. While those moving elsewhere should be sure to check on their eligibility for different senior-based retirement tax breaks.

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