The Fine Art of Flexible Estate Planning

Specialized trusts & private loans can help address some “what ifs.”

Provided by Ron R. Richards

Estate planning professionals often contend with ambiguities. A plan may need to be modified in the future when some development in family life occurs – and there are some estate planning tools that may help to provide that kind of flexibility.

Standby trusts. These are unfunded revocable living trusts that go into effect when and if families need them. (Sometimes they are referred to as contingent trusts.)1

In a common scenario, a family has a history of hereditary illnesses, and mom or dad worry about one day being mentally or physically disabled to the point where they cannot make financial decisions. So a standby trust is declared through a living trust document – or alternately, a will may contain a provision authorizing one when necessary.2  

A standby trust goes into effect upon a triggering event. It could be the death of the grantor; it could be a diagnosis of a terminal illness or a form of dementia for that individual. At that point, the revocable standby trust can become an irrevocable trust with assets transferred into it via a durable power of attorney.3

Should the grantor recover from a prolonged disability or illness, the standby trust can remain revocable and the grantor can regain control over the assets.4

From a life insurance standpoint, the mechanics work as follows. One spouse buys either a survivorship life insurance policy or a single life policy insuring the other spouse, naming the standby trust as the contingent owner of the policy. The policy owner has control plus access to the cash value of the policy. If the policy owner dies first, the policy is transferred to the trust and the trustee names the trust as the policy beneficiary. Only the fair market value of the policy is added to the estate of the decedent; the trust pays the policy premiums until the surviving spouse dies, at which point the trust receives the policy death benefit tax-free.5

Spousal lifetime access trusts. If it seems that one spouse might live decades longer than the other, a spousal lifetime access trust (SLAT) may offer a helpful estate planning option. A SLAT essentially gives a longer-living spouse access to a trust established by a spouse who passed away.6

A SLAT is actually a form of irrevocable life insurance trust (ILIT) that one spouse creates for the benefit of the other. One spouse is the grantor, and the spouse expected to live longer may be named the trustee (or another party can be named as such).5

Premiums on the life insurance policy are paid by the trust. These payments are funded by gifts of property from the grantor. A SLAT is funded with separate property of the grantor spouse rather than community property.5

Basically, this is an irrevocable life insurance trust (ILIT) with one key difference: the spouse is a beneficiary as well as the children/grandchildren. The surviving spouse (trustee) may distribute assets out of the trust for his/her own benefit as well as the benefit of the heirs. As a SLAT is also an ILIT, heirs receive a tax-free life insurance benefit when the longer-living spouse passes away.5 

What if the spouse dies before the grantor dies? If that happens, the trust assets (including the life insurance policy) are usually inaccessible to the grantor as this is an irrevocable trust.5

Private demand loans. Similar to a SLAT, these are also arranged with the help of either a survivorship life insurance policy or a single life policy. In this instance, an ILIT is created but the grantor loans funds to the ILIT instead of gifting them. The trustee uses these loaned funds to pay premiums on a single life policy on the grantor or a survivorship policy on the grantor and the other spouse. (The annual gift to the ILIT may vary depending on required interest rates stipulated by the IRS.) The loan is payable on demand if the grantor needs the money; the trustee can do so using the cash value of the policy. So the couple retains indirect control over the policy while they live (with access to its cash value) while also establishing an irrevocable trust.5

Could these ideas work for you? They may be worth exploring. These flexible estate planning techniques all use life insurance creatively, offering couples access to cash value while aiming to keep the death benefit of the policy out of the taxable estate of the spouse.

Ron R. Richards may be reached at 208.855.0304 or ron@cir1daho.com.

www.cir1daho.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.    

Citations.

1 – info.legalzoom.com/contingent-trust-trustee-22534.html [3/16/15]

2 – avvo.com/legal-guides/ugc/california-revocable-living-trusts [3/16/15]

3 – tyelaw.com/practice-areas/trust/ [3/16/15]

4 – californiaestatecorp.com/RevocableLivingTrust.aspx [3/16/15]

5 – internal.nfp.com/webfiles/public/2012/emails/brk/qrtly-sales-ideas/links/3FlexibEstateLiquidityIdeas.pdf [9/11]

6 – tinyurl.com/mmfoqnz [1/18/13]

An Estate Planning Checklist

What to check (and double-check) before you leave this world.

Presented by Ron R. Richards

Create a will if you do not yet have one. A valid will may save your heirs from some expensive headaches linked to probate and ambiguity. A solid will drafted with the guidance of an estate planning attorney will likely cost you a bit more than a “will-in-a-box,” but may prove to worth the expense.

Complement your will with related documents. Depending on your estate planning needs, this could include some kind of trust (or multiple trusts), durable financial and medical powers of attorney, a living will and other items.

Review your beneficiary designations. Who are the beneficiaries of your retirement plans and/or insurance policies? If you aren’t sure, it is probably a good idea to go back and check the documentation to verify (or change) who you have designated as beneficiary.

Create asset and debt lists. You should provide your heirs with an asset and debt “map” they can follow should you pass away, so that they will be aware of the little details of your wealth.

Think about consolidating your “stray” retirement and/or bank accounts. This could make one of your lists a little shorter. Consolidation means fewer account statements, less paperwork for your heirs and fewer administrative fees to bear.

Let your heirs know the causes and charities that mean the most to you. Write down the associations you belong to and the organizations you support.

Select a reliable executor. That personal should have copies of your will, forms of power of attorney, any kind of healthcare proxy or living will, and any trusts you create. In fact, any of your loved ones referenced in these documents should also receive copies of them.

Talk to the professionals. Do-it-yourself estate planning is not recommended, especially if your estate is complex enough to trigger financial, legal and/or emotional issues among your heirs upon your passing.

Ron R. Richards may be reached at 208.855.0304 or ron@cir1daho.com.

www.cir1daho.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Should You Apply For Social Security Now…or Later?

When should you apply for benefits? Consider a few factors first.

Provided by Ron R. Richards

Now or later? When it comes to the question of Social Security income, the choice looms large. Should you apply now to get earlier payments? Or wait for a few years to get larger checks?

Consider what you know (and don’t know). You know how much retirement money you have; you may have a clear projection of retirement income from other potential sources. Other factors aren’t as foreseeable. You don’t know exactly how long you will live, so you can’t predict your lifetime Social Security payout. You may even end up returning to work again.

When are you eligible to receive full benefits? The answer may be found online at socialsecurity.gov/retire2/agereduction.htm.

How much smaller will your check be if you apply at 62? The answer varies. As an example, let’s take someone born in 1953. For this baby boomer, the full retirement age is 66. If that baby boomer decides to retire in 2015 at 62, his/her monthly Social Security benefit will be reduced 25%. That boomer’s spouse would see a 30% reduction in monthly benefits.1

Should that boomer elect to work past full retirement age, his/her benefit checks will increase by 8.0% for every additional full year spent in the workforce. (To be precise, his/her benefits will increase by .67% for every month worked past full retirement age.) So it really may pay to work longer.2

Remember the earnings limit. Let’s put our hypothetical baby boomer through another example. Our boomer decides to apply for Social Security at age 62 in 2015, yet stays in the workforce. If he/she earns more than $15,720 in 2015, the Social Security Administration will withhold $1 of every $2 earned over that amount.3

How does the SSA define “income”? If you work for yourself, the SSA considers your net earnings from self-employment to be your income. If you work for an employer, your wages equal your earned income.4

Please note that the SSA does not count investment earnings, interest, pensions, annuities and capital gains toward the current $15,720 earnings limit.4

Some fine print worth noticing. Did you know that the SSA may define you as retired even if you aren’t? (This actually amounts to the SSA giving you a break.) For 2014, the SSA considered you “retired” if you were under full retirement age for the entire year and your monthly earnings were $1,290 or less.5

If you are self-employed, eligible to receive benefits and under full retirement age for the entire year, the SSA generally considers you “retired” if you work less than 15 hours a month at your business.5

Here’s the upside of all that: if you meet the tests mentioned in the preceding paragraph, you are eligible to receive a full Social Security check for any whole month of a year in which you are “retired” under these definitions. You can receive that check no matter what your earnings total for all of that year.5

Learn more at socialsecurity.gov. The SSA website is packed with information and is quite user-friendly. One last little reminder: if you don’t sign up for Social Security at full retirement age, make sure that you at least sign up for Medicare at age 65.

Ron R. Richards may be reached at 208.855.0304 or ron@cir1daho.com.

www.cir1daho.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.    

Citations.

1 – socialsecurity.gov/retire2/agereduction.htm [11/6/14]

2 – socialsecurity.gov/retire2/delayret.htm [11/6/14]

3 – forbes.com/sites/janetnovack/2014/10/22/social-security-benefits-rising-1-7-for-2015-top-tax-up-just-1-3/ [10/22/14]

4 – ssa.gov/retire2/whileworking2.htm [11/4/14]

5 – socialsecurity.gov/retire2/rule.htm [11/6/14]

   

How Do You Know When You Have Enough to Retire?

There is no simple answer, but consider some factors.

Provided by Ron R. Richards

You save for retirement with the expectation that at some point, you will have enough savings to walk confidently away from the office and into the next phase of life. So how do you know if you have reached that point?

Retirement calculators are useful – but only to a point. The dilemma is that they can’t predict your retirement lifestyle. You may retire on 65% of your end salary only to find that you really need 90% of your end salary to do the things you would like to do.

That said, once you estimate your income need you can get more specific thanks to some simple calculations.

Let’s say you are 10 years from your envisioned retirement date and your current income is $70,000. You presume that you can retire on 65% of that, which is $45,500 – but leaving things at $45,500 is too simple, because we need to factor in inflation. You won’t need $45,500; you will need its inflation-adjusted equivalent. Turning to a Bankrate.com calculator, we plug that $45,500 in as the base amount along with 3% annual interest compounded (i.e., moderate inflation) over 10 years … and we get $61,148.1

Now we start to look at where this $61,148 might come from. How much of it will come from Social Security? If you haven’t saved one of those mailers that projects your expected retirement benefits if you retire at 62, 66, or 70, you can find that out via the Social Security website. On the safe side, you may want to estimate your Social Security benefits as slightly lower than projected – after all, they could someday be reduced given the long-run challenges Social Security faces. If you are in line for pension income, your employer’s HR people can help you estimate what your annual pension payments could be.

Let’s say Social Security + pension = $25,000. If you anticipate no other regular income sources in retirement, this means you need investment and savings accounts large enough to generate $36,148 a year for you if you go by the 4% rule (i.e., you draw down your investment principal by 4% annually). This means you need to amass $903,700 in portfolio and savings assets.  

Of course, there are many other variables to consider – your need or want to live on more or less than 4%, a gradual inflation adjustment to the 4% initial withdrawal rate, Social Security COLAs, varying annual portfolio returns and inflation rates, and so forth. Calculations can’t foretell everything.

The same can be said for “retirement studies”. For example, Aon Hewitt now projects that the average “full-career” employee at a large company needs to have 15.9 times their salary saved up at age 65 in addition to Social Security income to sustain their standard of living into retirement. It also notes that the average long-term employee contributing consistently to an employer-sponsored retirement plan will accumulate retirement resources of 8.8 times their salary by age 65. That’s a big gap, but Aon Hewitt doesn’t factor in resources like IRAs, savings accounts, investment portfolios, home equity, rental payments and other retirement assets or income sources.2

For the record, the latest Fidelity estimate shows the average 401(k) balance amassed by a worker 55 or older at $150,300; the Employee Benefit Research Institute just released a report showing that the average IRA owner has an aggregate IRA balance of $87,668.2

Retiring later might make a substantial difference. If you retire at 70 rather than at 65, you are giving presumably significant retirement savings that may have compounded for decades five additional years of compounding and growth. That could be huge. Think of what that could do for you if your retirement nest egg is well into six figures. You will also have five fewer years of retirement to fund and five more years to tap employer health insurance. If your health, occupation, or employer let you work longer, why not try it? If you are married or in a relationship, your spouse’s retirement savings and salary can also help.

Can anyone save too much for retirement? The short answer is “no”, but occasionally you notice some “good savers” or “millionaires next door” who keep working even though they have accumulated enough of a nest egg to retire. Sometimes executives make a “golden handshake” with a company and can’t fathom walking away from an opportunity to greatly boost their retirement savings. Other savers fall into a “just one more year” mindset – they dislike their jobs, but the boredom is comforting and familiar to them in ways that retirement is not. They can’t live forever; do they really want to work forever, especially in a high-pressure or stultifying job? That choice might harm their health or worldview and make their futures less rewarding.

So how close are you to retiring? A chat with a financial professional on this topic might be very illuminating. In discussing your current retirement potential, an answer to that question may start to emerge.

Ron R. Richards may be reached at 208.855.0304 or ron@cir1daho.com.

www.cir1daho.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

Citations.

1 – bankrate.com/calculators/savings/simple-savings-calculator.aspx [5/30/13]

2 – marketwatch.com/story/how-to-know-if-you-have-enough-to-retire-2013-05-25 [5/25/13]

Creating a Budget For Retirement

It only makes sense – yet many retirees live without one.

Presented by Ron R. Richards

The importance of budgeting. You won’t be able to withdraw an unlimited amount of money in retirement, so a retirement budget is a necessity. Some retirees forego one, only to regret it later.

Run the numbers before you retire. Years before you leave work, sit down for an hour or so and take a look at your probable monthly expenses. Perhaps you decide that you’ll need about 75-80% of your end salary in retirement. Perhaps closer to 65-70%. There’s no “right” answer for everyone. Online calculators may help you get at least a basic understanding initially, but remember – a qualified financial professional is likely going to be able to take more into account for you than a simple calculator could.

You first want to look for changing expenses: housing costs that might decrease or increase, health care costs, certain taxes, travel expenses and so on. Next, look at your probable income sources: Social Security (the longer you wait, the more income you may potentially receive), your assorted IRAs and 401(k)s, your portfolio, possibly a reverse mortgage or even a pension or buyout package.

While selling your home might leave you with more money for retirement, there are less dramatic ways to increase your retirement funds. You could realize a little more money through tax savings and tax-efficient withdrawals from retirement savings accounts, by reducing your investment fees, or by having your phone, internet and TV services bundled from one provider.

Budget-wreckers to avoid. There are a few factors that can cause you to stray from a retirement budget. You can’t do much about some of them (sudden health crises, for example), but you can try to mitigate others.

* Supporting your kids, grandkids or relatives with gifts or loans.

* Withdrawing more than your portfolio can easily return.

* Dragging big debts into retirement that will nibble at your savings.

Budget well & live wisely. A carefully thought-out budget – and the discipline to stick with it – may make big difference in the long run.

Ron R. Richards may be reached at 208-855-0304 or ron@cir1daho.com .

www.cir1daho.com

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.