Retirement Planning and Job Changes
March 5, 2014
A career change can be one of the most confusing times in a person’s life. One particular cause for confusion concerns how a person’s retirement plans might change as a result of the transition. A recent article discusses what to do with your retirement plan if you change jobs.
In general, financial planners agree that individuals should not cash out their retirement plans. However, this is often the case. A recent study conducted by benefits consultant Aon Hewett reveals that the current trend among young adults in their 20’s is to cash out their 401(k) plans when they change jobs. Of those changing jobs in their 50’s, approximately one third cash out their plans.
The article suggests three questions an individual should consider concerning his or her retirement plan when changing jobs:
1. Can I leave my money in the retirement account at the other job?
In most cases, an individual can leave money in his account so long as he or she contributed over $5,000. If the amount is below $5,000, the employer may let the individual retain the account, but is not required to.
2. What are the steps to complete a rollover?
If you would like to rollover the funds from your first job to the pension account for your new job, the human resources department of your new job will be able to assist you with this process. If your new job does not offer a retirement account, you can also roll the funds over into an individual IRA.
3. What if my old employer mailed me a check for the money in my retirement account?
If the balance of your retirement account was below $5,000, your former employer may have closed the account and mailed you the balance. If you receive a check and decide you would like to put it into an IRA, you have 60 days in which to do so.
What is a Charitable Lead Trust?
February 26, 2014
One of the many tools people utilize in order to give to their favorite charitable causes is the charitable lead trust (CLT). As a recent article explains, former first lady Jacqueline Kennedy Onassis put a large amount of her assets into a CLT that was designed to pay out to her selected charities for 24 years. In 2018, her heirs will receive the remainder of the assets within the trust. This recent article discusses the basics of CLTs.
Like most trusts, a CLT is used to transfer assets while avoiding tax liability. A charitable lead trust makes a fixed payment to a charitable entity for a fixed period of time. This could be a set number of years, or the duration of a person’s life. After this period expires, anything left in the trust is paid out to a third party. This could be the trust creator, or his or her heirs.
If an individual designates that the CLT will return the trust assets back to him or her, he or she will receive an income tax deduction at the creation of the trust. If the trust is designed to pay the remainder assets out to another beneficiary, any tax liability that would otherwise have been imposed is reduced or eliminated. CLT’s are therefore a popular option for those looking to give to their favorite charity, while still leaving assets to their loved ones and avoiding transfer tax liability.
Is Online Recordkeeping Hindering Your Estate Plan
February 19, 2014
An estate plan is an important document, however it cannot stand alone. Whoever you select to execute your estate plan will require a multitude of other documents and information in order to fully implement your wishes. As a New York Times article discusses, the growing tendency for individuals to keep important information electronically means that these individuals may be hindering the implementation of their own estate plans.
Once upon a time, everyone stored his or her important documents in a file cabinet, safe-deposit box, or with a trusted adviser. Even where these documents were disorganized or incomplete, they provided a paper trail. Now, sensitive information is contained on computers or online and password protected or encrypted. In this absence of a paper trail, your executor will find it difficult or impossible to carry out your wishes.
The problems that stem from digital recordkeeping are most prevalent in cases where a person is incapacitated, rather than deceased. This is because a person who is merely incapacitated often has bills and other expenses that need to be taken care of despite the incapacity.
In order to manage your online accounts, as well as any sensitive information that is stored online, it is important to maintain a list of accounts, login names, passwords, and the answers to any security questions. Be sure to update this document regularly. Finally, keep the document in a safe place where only people that you trust can find it.
Estate Planning as a Family
February 12, 2014
Estate planning should be a family affair. However, many individuals create their estate plans without ever consulting or otherwise discussing it with their family members. Although the topic of estate planning and money has long been one shrouded in secrecy, a recent article explains why this silence can lead to family conflict and hurt feelings long after you pass on.
When an individual does not discuss his estate plan with his or her family, surprise necessarily ensues after his or her death. This surprise can turn to anger when the heirs are not happy with, or simply do not understand, the estate distribution. In these situations, a person’s estate is the sum total of not just assets, but also emotions including love, control, and power.
The only way to avoid this is to have an estate planning discussion with your family. Although, this is much easier said than done. As managing director of Citi Private Bank Lisa Roberts explains, it is often difficult to get older members of the population to have this discussion with their families. Said Roberts, “They’re in the mind-set of, ‘Let’s create a trust and you get a third at 30, a third at 35 and a third at 40.’”
In contrast, Roberts noted that her younger clients were much more willing to be open about their finances and estate plan with their children. Roberts reminds her clients to be mindful of the tone they use in these discussions, and perhaps use the topic of philanthropy as an icebreaker. If you plan as a family now, your family is less likely to fall apart later.
Legacy Giving May Be Least Effective Way to Make a Difference
February 5, 2014
It used to be that charitable giving among the wealthy centered around some variation of an estate planning tool that would last in perpetuity, thereby helping the lucky charity forever. As a recent article explains, however, forever is falling out of fashion when it comes to gift giving through estate planning.
Philanthropy experts may have encouraged this change. Not only do they agree that perpetual giving is not the most effective way to give to a charity, but they also warn that so-called perpetual gifts may not live up to the name. As Malcom Burrows, head of the philanthropic advisory services for the Bank of Nova Scotia explains, “It’s kind of fallen out of fashion . . . I, for one, am very skeptical of the concept, because if you look at anything too long-term, it’s just not sustainable. It ends up creating burdens on the trustee and on the organizations that aren’t justifiable.”
Perpetual gifts are often set up with a large chunk of capital. The interest on that capital, minus costs, is paid out to the charity. Even with a large chunk of capital, these payouts are often small. This is often frustrating for those who give during their lifetimes, as many people want to see the results of their gifts.
For those considering making large gifts in life or in death, consider setting up a foundation that can accumulate assets. Then, lump sum gifts can be given from this foundation to various charities at the foundation’s discretion.
Proposed Changes to New York’s Estate Tax
January 29, 2014
In New York, the high estate taxes are a major concern during the estate planning process. Fortunately, a solution to this problem might be on the way. A recent article explained a proposed plan to drastically lower the estate tax in New York.
The plan, proposed by the New York State Tax Relief Commission, recommends lowering the estate tax in two ways. First the exemption amount would be raised from $1 million to $5.34 million, in an attempt to match the federal exemption. This means that New York residents would not pay federal or state estate tax unless their estate was valued at over $5.34 million. Second, the tax rate for estates beyond the exemption would be lowered from 16 percent to 10 percent.
These proposed changes to New York’s tax law are expected to be part of Governor Cuomo’s executive budget. This means that the law could be voted on early next year. If the law goes into effect, the new tax law could have a large effect on estate planning in New York. While it might still be wise to avoid sending your estate through probate, estates of $5.34 million or smaller would no longer be subject to any estate tax in New York, either state or federal.
Plan for Your Retirement Now, Not Later
January 22, 2014
In the midst of all the commotion of everyday life, it is easy to delay planning for your retirement. Many people delay. However, it is important to start planning as soon as possible, and not to wait until it is too late.
A recent article examined whether the baby boomers generation is prepared for retirement as they approach retirement age. Surprisingly, more than 75 percent of baby boomer participants in the study said they are either not prepared for retirement or unsure of whether they are prepared. These survey respondents are 55 to 59 years old, and might have a limited number of work years left to save before they plan on retiring.
Many of the people who responded to the study had established a retirement plan. However, they were still not prepared to retire. Even among the retirees who participated in defined contribution plans, 37 percent said they were not ready for retirement.
Preparing for retirement is much less of a daunting task if you approach it at an early age. In addition, you might want to consult a retirement plan professional to assist you in creating a plan that allows for comfortable retirement at the time you chose.
“Stepped Up Basis” for Assets in your Estate
January 15, 2014
Preventing assets in your estate from passing through probate is a common strategy to avoid paying estate tax. However, there are some situations where transferring assets through probate may have tax benefits. This is due to a combination of the estate tax exemption and the rule of “stepped up basis.”
The federal estate tax exemption is $5.25 million for 2013. The New York estate tax exemption is $1 million. As a result, estates of $1 Million will be charged zero estate tax. For an estate of this size, there would be no tax incentive to prevent assets from passing through probate.
The stepped up basis rule affects the way inherited assets are taxed after they are sold. For example, let’s say your mother buys a house in 1950 for $50,000 and today its value is $200,000. If your mother sells the house, she will have to pay capital gains tax on the profit. Instead she decides to leave you the house in her will. You then sell the house for its fair market value of $200,000. Under the stepped up basis rule, you are not considered to have made a profit, because you received a house for the same value that you sold it for. The result is that neither you nor your mother have to pay the capital gains tax on the sale of the house.
Intestacy: The Result of Not Having a Will
January 8, 2014
Even though it is a good idea to draft a last will and testament, not everyone does. The result is that some of your closest relatives will inherit your assets through a process known as intestacy or intestate succession.
The obvious drawback of allowing your estate to be divided by intestacy is that you have no control over who inherits your property and how they will inherit it. The process is controlled by state law. In New York, if you have a spouse and no descendants, your spouse will inherit your estate. If you have descendants and no spouse, your descendants will inherit your estate. If you have a spouse and descendants, the spouse will inherit $50,000 of the estate, plus half of what remains. The descendants will inherit the other half. If you have no spouse or descendants, your parents will inherit your estate, then your parent’s descendants, then your grandparents, then your grandparent’s descendants.
Importantly, not all property owned at your time of death will become part of your estate and pass on through interstate succession. For example, the proceeds of a life insurance policy will go to the beneficiary of the policy and the contents of a joint bank account will be owned outright by the other owner of the account.
Quick Answers to Your Medicaid Questions
January 1, 2014
With the changing field of Medicaid, many people have questions concerning how to navigate their health insurance possibilities. A recent article discusses several of these frequently asked questions.
Could I be Eligible for Medicaid?
Medicaid is a state-run health insurance program that provides for low-income individuals. Prior to the expansion, it was difficult for single, childless individuals to qualify for Medicaid. Following the Affordable Care Act, the number of people eligible for Medicaid has been greatly expanded.
How Can I Determine Whether I Qualify?
If you live in a state that has participated in the Medicaid expansion, you will qualify if you are under the age of 65 and have a modified adjusted gross income under $16,000 (individual) or $32,500 (family of four). California has chosen to participate in the Medicaid expansion.
If you live in a state that has chosen not to participate in the expansion, the rule will very depending on what state you live in. In these states, the income cutoff is much lower than the $16,000 and $32,000 levels. Moreover, if you are a childless adult, you likely do not qualify.
What if I Move to a State That Didn’t Expand Medicaid
Nearly half of the states chose not to participate in the Medicaid expansion. If you move to one of these states, you may be able to enroll in your state’s insurance exchange.