IN
BRIEF This
is just a quick summary of three planning ideas that can still be
implemented by yearend, along with some related financial math.
Nothing exotic, legally aggressive or risky here – these are
basic techniques you should consider if you’re ready to be
smart about your family’s financial future.
If
I can help you think these through, or implement the financial
aspects of them, please let me know. In the meantime, I hope all
of you have a happy and restful Thanksgiving as a great start to
the holiday season.
MONTHLY IDEA
Are you successful and want to turn
a secure net 5% return earned over 30 years of deposits into the
pre-tax equivalent of over 14%? If you move it out of your
estate, and avoid both 35% income tax and 55% estate taxes,
you’re there. I can show you how to do it. – Jim Hecker
1)
GET YOUR WILLS DONE
I know, preparing a will is an unpleasant task dealing with a situation from the hopefully distant future that most folks would rather not address. But the implications of not having a will – or related legal and medical documents – could be devastating to your family and needlessly cost you hundreds of thousands of dollars.
I know, preparing a will is an unpleasant task dealing with a situation from the hopefully distant future that most folks would rather not address. But the implications of not having a will – or related legal and medical documents – could be devastating to your family and needlessly cost you hundreds of thousands of dollars.
My
home state of Texas, like most, has a will for its residents who
don’t have one themselves. If you’re happy with their
general formula for child care, distribution of financial assets,
and similar decisions, don’t bother preparing a will. But I
would bet you’d rather have things done your way than the
state’s.
From
a financial perspective, for successful folks with estate values
over $1,000,000 (and don’t forget that estate values usually
include life insurance benefits, unless they’ve been
transferred out), the lack of a tax-planned will could be very
costly. Let’s say my hypothetical breadwinner Fred Flintstone
passes away with a simple will, and his wife Wilma makes it
several more years, then passes with a total estate of
$3,000,000. With or without a will, Wilma has her own estate-tax
exemption [this is slated (pun intended) to be $1,000,000 using
2011 rules], but the family lost Fred’s exemption because it
wasn’t preserved in his will and planning documents.
Fred’s
one omission cost their family $550,000 of potentially avoidable
estate tax (again at 2011 rates), and would have only cost
pennies on those dollars in legal fees for Fred to put in place.
Even if Wilma lasted another 30 years past Fred, and the extra
estate-tax cost was deferred that long, the current value of his
planning gaffe (using a net 5% discount rate) is still over
$127,000 at the time of his death!
This
isn’t really a yearend 2010 idea, it’s just a good idea,
period. I know of smart people who died with their tax-planned
will sitting, ready to sign but incomplete, on their desks. Stop
procrastinating and take care of this important matter – it
could mean the world to your family.
2)
USE YOUR GIFTS I
am not speaking vocationally, or charitably, when I say “use
your gifts”. I refer to the estate-planning tactic of giving
away money annually within the IRS-specified gift limits
(currently $13,000 per year per donor and per recipient). For
example, Fred and Wilma and their two hypothetical kids Pebbles
and Bamm Bamm (including a “little Rubble” in my example
family) could EACH transfer $26,000 out of their estate to their
kids, $52,000 in total (not counting additional spousal gifts
that could also boost this number), and trigger no current or
deferred gift or estate taxes.
Your
gifts out of your estate can be into certain types of trusts, to
college savings plans or to financial accounts owned by the
children, each of which has different benefits and potential
drawbacks I would be glad to discuss with you (I am not a lawyer,
so I can’t paper the legal stuff, but I can steer you in the
right direction to get it done). In certain cases (e.g., an
insurance trust with spouse as primary beneficiary), Fred and
Wilma as a couple do NOT have to give up control or access to the
money either of them transferred out of their individual estates
– how’s that for a win/win?
What’s
the math involved? Assuming the money earns 5.5% where it is
invested (yes, I’ve got an idea where you could expect to get
that very reliably…), and further assuming (as if we were
deities, or darned good actuaries) that Fred’s potential estate
taxes will be triggered at 2011 rates in exactly 35 years, the
one-year transfer in 2010 of $26,000 out of his estate could
avoid $186,000 of future estate taxes, at no current tax cost.
Wilma’s potential tax escape via 2010 gifts could be the same.
Next year’s gift, with “only” 34 years to go, could avoid
$177,000 of future estate taxes.
For
industrious couples who plan to be successful [and therefore
subject to potential estate taxes], future tax savings created by
a systematic annual gifting program could add up to some real
money for their families, for generations to come.
3)
CONVERT TO ROTHIt
is still not too late for anyone (no income limits apply in 2010)
to convert regular, tax-deferred IRA’s to Roth IRA’s. Upon
conversion, you pay income tax on the IRA value now. If you use
non-IRA money to fund this tax cost, you are effectively “buying
out” the IRS from their future partial interest in your regular
IRA – and who knows what percentage in taxes they’ll nick you
for – and capturing both the current value and the future
growth (with no tax along the way) all for yourself. In 2010,
you can also defer recognition of the conversion income, half to
your 2011 return and half to 2012, with no interest.
Most
of you know that I like “taxed-never” accounts like Roth
IRA’s [and, if they’re available at your company, Roth
401(k)’s], not just for tax avoidance but also for distribution
flexibility during your retirement years. Therefore, I am
generally a fan of Roth conversions, especially because I think
income tax rates are going up in the future. However, I know
many tax practitioners bristle at the idea of paying taxes
earlier than you have to for any reason. However, a Roth
conversion can make sense in many situations.
What
if you want to convert if it’s to your advantage and especially
don’t want to “jump the gun” by converting if it’s in
Uncle Sam’s favor? You can still get around 11 months of
hindsight for your decision with this simple strategy:
- convert one of your “orphan” IRA’s, say for example with $50,000 of current value to Roth now
- invest the account in the more volatile end of your investment holdings
- if the value goes down over the next few months, “un-do” the Roth conversion [it’s called a “recharacterization”], and your IRA is tax-deferred as if you never converted. Maybe try again in 2012.
- if the value goes up, say to $60,000 or more, by the time you file your income tax return for 2010 (which could be in October 2011), you would commit to pay income tax on $50,000 of conversion income for an account that’s worth $60,000 or more when you affirm that decision.
When
it comes to Roth conversions, especially for those with some
extra cash sitting on the sidelines and who are otherwise
over-weighted in tax-deferred assets, I go back to the old
spaghetti sauce ad that said “try it, you’ll like it”.
*Registered Representative and Financial Advisor of Park Avenue Securities LLC PAS.
Securities products/services and advisory services offered through PAS a registered Broker-dealer and investment advisor.
Field Representative, The Guardian Life Insurance Company of America (Guardian) New York, NY.
PAS is an indirect wholly owned subsidiary of Guardian.
Wealth Design Group is not an affiliate or subsidiary of PAS or Guardian.
PAS is a member FINRA, SIPC.
