A radio listener of mine recently called to share an estate planning snafu that she experienced with her late father’s estate. Prior to her father’s death she had “put her name” on all of his accounts to avoid probate. However, she recently learned that her father’s broker had opened an additional account for him that must now be probated because it was held in her father’s name individually. She was upset that the broker failed to advise her father about proper estate planning techniques.
I explained to her that most stock and bond brokers are not estate planning lawyers and their primary function is to provide investment advice — not estate planning tips. Additionally, most estate planning attorneys are not investment advisors and they generally don’t provide investment advice, nor do they provide ongoing advice about how to title assets acquired in the future. I frequently meet with clients who have excellent estate planning documents but because their assets are improperly titled, they were not going to be disposed of as intended.
Even if you create a trust, you must diligently make sure that all of the assets are put in the trust if you want the assets controlled by the terms of the trust. For instance, many married couples own accounts or property in joint names. At the death of the first spouse, the jointly owned property will automatically transfer into the name of the survivor regardless of what the will or trust provides.
Other assets like life insurance, annuities and retirement accounts will be distributed pursuant to their beneficiary designation regardless of the terms of one’s trust. Therefore, it’s critical to properly title all assets and make the appropriate beneficiary designations to make sure one’s estate plan winds up functioning as intended. An experienced Certified Financial Planner will generally be able to give valuable advice about how to properly title one’s assets in a way that will be consistent with his or her client’s wishes.
Many people spend decades planning for the day when they can stop working. Those who are conscientious generally try to save and invest enough in a tax-efficient way in order to create sufficient capital to produce the necessary income to last throughout their lives. However, once you reach retirement the planning doesn’t end.
In fact, it’s critical for retirees to make smart choices about how much risk to accept, how to invest, how to efficiently generate income and how to minimize taxes. Everyone gets only one retirement. Planning mistakes will likely have adverse consequences on the ability to maintain one’s lifestyle.
Since having enough income is so critical to most retirees, I recommend that everyone who is in or near retirement, have a written income plan. A proper income plan should include all sources of recurring income, such as social security or pensions. Additionally, an income plan should include a list of all assets, an assumed rate of return, an assumed inflation rate, and sensible strategies for taking income from each account to promote maximum growth while minimizing the impact of taxes.
Anyone who is concerned about running out of money or worried about leaving their heirs a large inheritance will most likely find an income plan extremely valuable. Many times, after delivering customized income plans to our clients, they realize that they can increase their lifestyle without fear of running out of money. Other times, clients realize that they need to make changes if they don’t want to run out of money.
An income plan allows families to measure their progress each year in meeting their financial goals. We are often able to use the income plan as a tool for minimizing income taxes now and in the future. Having this information mapped out on one page can provide substantial peace of mind to a retiree.
Over the past few years, many of you have taken advantage of liquid modified endowment contracts as a way to safely grow your money without stock market or interest rate risk. These insurance contracts, which have similar properties to deferred annuities, can be designed without upfront loads or back-end surrender charges and with full liquidity. However, unlike deferred annuities, modified endowment contracts provide an income-tax-free death benefit.
Certain modified endowment contracts provide a sizable tax-free long-term-care benefit if the insured is unable to perform two out of six activities of daily living. This is an extremely valuable benefit as the population is living longer and the future need for long-term care is expected to increase along with longevity.
On the growth side, the contracts earn interest (currently up to 9 percent) in the years the S&P 500 is up but does not lose in the down years and all gains are locked in annually. Historically, the S&P 500 is up about 70 percent of the time. After insurance costs are deducted, the net expected return is about 4.5 percent to 5 percent. However, those insurance costs, as noted previously, provide the owner with a large, tax-free life insurance benefit.
This vehicle is very attractive for those looking to get full access to their money, high-risk adjusted returns, cover potential long-term-care expenses, and leave their heirs a larger inheritance. However, the insurance companies I have been working with have indicated that they will be phasing out the full liquidity features on contracts issued after June of 2019.
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