Transferring Wealth with a Stretch IRA

Want a way to flex some retirement planning muscle? Then consider a "stretch" (inherited) IRA. Not only can this strategy preserve wealth for future generations, it also has the potential to keep assets growing in a tax-deferred account for years to come. Here's the inside scoop, based on one hypothetical family situation.

One Scenario
Imagine that George has accumulated $50,000 in a traditional IRA. His wife, Amy, should be well cared for through a $500,000 life insurance policy, his work pension plan, as well as several pieces of real estate and investment accounts they have transferred to a trust. Although Amy is also the beneficiary of his IRA, he wonders if it might be better to leave the IRA to their 25-year-old son Robert.

George meets with his financial consultant and finds out that in 2002, the IRS finalized rules simplifying the process of taking required minimum distributions — that's the minimum amount that you must withdraw each year from tax-deferred retirement accounts after you reach age 70 1/2. The new rules extend the IRS's life expectancy table, reducing the amount that must be withdrawn each year and making it much easier to "stretch" IRA assets to future generations.

Weighing the Benefits
George discovers that a non-spousal beneficiary of an IRA can receive distributions based on his or her own life expectancy. That means if Robert is the beneficiary of the IRA, the distributions could be stretched out over his entire lifetime.

Alternatively, Bob could name both his wife and son as primary beneficiaries. If Amy decided she didn't need the income from the IRA, she could then allow Robert to become sole beneficiary of the account. Yet another possibility: George could bequeath the IRA to his one-year-old granddaughter Heather, allowing her to take advantage of tax deferral by taking distributions over a potentially even longer period of time.

"This is complicated," says George to his financial consultant. "We want to be sure we haven't overlooked anything and that we're making the best move for us and our family. At the same time, this appears to be a tremendous opportunity to pass on wealth to future generations."

Have you determined how your retirement accounts fit into your overall estate plan? Consider discussing this topic with your financial advisor.

© 2010 Standard & Poor's Financial Communications. All rights reserved.

© Carmen Coleman, President and CEO

Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300

Rochester, NY 14614

(585)325-2525 

Tracking #623066

Is a Million Dollars Enough?

If your clients left $1 million to their family in the form of a life insurance policy’s death benefit, would it be enough? You may be surprised at the answer.

A Quick Case Study

Tom and Susan are a married couple with:

·         A $200,000 mortgage

·         Annual incomes of $60,000 each

·         Two children, ages 2 and 4

In the event Tom or Susan should pass away, they want:

·         To provide for their children’s education

·         Their family to be able to pay off all expenses and debt

·         Their family’s standard of living to remain the same

·         The surviving spouse to retire comfortably

Upon the passing of one spouse, the other spouse receives the $1 million benefit. Subtract from that the mortgage, college costs of $95,000¹ and funeral and other final expenses of $5,000, leaving a lump sum of $700,000. A hypothetical return rate of 6% would create an annual income stream of $42,000. That amount replaces only 70% of the spouse’s missing income ($60,000) with no adjustment for inflation.

If Tom and Susan would like to maintain the annual pre-tax income of $60,000 (and assuming a 3% inflation rate and an annual pre-tax investment rate of 6%), the lump sum will last only 14 years.

¹  Based upon both children attending school with current tuition of $20,000 a year, taking into account 4% inflation and 8% return on a lump sum of money for 16 and 14 years, respectively.

In the case of Tom and Susan, a surviving spouse would only be able to maintain the family’s current standard of living for 14 years. What are your clients’ needs, and do they have the appropriate coverage in place?

This case study can serve as a valuable illustration and encourage a dialogue between you and your clients regarding the importance of proper life insurance coverage.

© Carmen Coleman, President and CEO

Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300

Rochester, NY 14614

(585)325-2525 

Tracking# 716056

Exp.  3/13

Annuities and Insurance: Filling the Cracks in Your Financial Plan

If you're contributing to an employer-sponsored retirement plan on a regular basis, be sure to congratulate yourself!  You are already taking an important step toward addressing what may be the biggest financial challenge you will ever face. And if you are setting aside money for the college education of a child or grandchild, you deserve credit for that, too.

But take heed: There may be more you can or should be doing. In fact, a well-rounded financial plan might also need to include insurance strategies and the use of annuities to safeguard your vision of the future. However, you should consult a financial professional before deciding whether a particular insurance strategy is an appropriate choice in light of your particular needs and financial position.

Retirement Readiness: More Than a Plan?
While most financial experts encourage workers to contribute the maximum amount allowed to their retirement plans, they also warn that such contributions may not be enough to guarantee a secure future.

For example, the Social Security Administration estimates that, on average, retirees receive less than one quarter of retirement income from private pensions (including retirement savings plans); Social Security payments account for only an additional 39% of income. Ultimately, you may be responsible for addressing any shortfalls.¹

Annuities may offer one way to bridge that gap.  An annuity is an investment contract offered through an insurance company and purchased with one or more payments.  Annuities offer a lifetime stream of income and depending on the terms of the contract purchased, generally offer a guaranteed return of principal if you die before withdrawals begin. And because an annuity is a tax-deferred investment account, earnings are not taxable until money is withdrawn, which means the value of your assets have the potential to grow more rapidly than in a taxable account.²

There are many kind of annuities, but these two types of annuities have become more popular: fixed deferred annuities and variable deferred annuity.  Variable and fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes; but the variable annuity contains both an investment and insurance component. 

A fixed annuity pays a fixed rate of return for a stated period of time.  A variable annuity offers a variable rate of potential returns, based upon the wide range of investment options through their underlying subaccounts.  However variable annuities don’t guarantee a fixed return.  However, guarantees are based on claims paying ability of the issuer. 

Since annuities generally do not have contribution limits, they may make sense for workers who have already maximized contributions to their other tax-advantaged accounts, such as retirement plans and IRAs.  It is important to note that purchasing an annuity inside a qualified plan does not provide additional tax deferral beyond what is received when investing in a qualified plan outside an annuity. 

The Insurance Safety Net
You may also want to consider purchasing insurance policies in order to protect against unexpected financial hardships that might otherwise require you to spend money earmarked for other goals.

For example, disability income insurance could enable your family to maintain its current standard of living in the event that you are unable to work for a period of time. And life insurance could provide your dependents with longer-term security after your death. 

Keep in mind that term life insurance only provides coverage for a predetermined amount of time, while whole life insurance can remain in effect indefinitely, provided premiums are paid. Also, whole life insurance typically includes a cash value feature that can allow you to accumulate additional wealth over time.  The cost and availability of life insurance depends on such factors as age, current health, and the type and amount of insurance purchased. 

To learn more about the strategies that could plug holes in your financial plan, consider speaking with a financial professional before you decide whether a particular investment is an appropriate choice in light of your unique financial needs and risk tolerance.

¹Source: Social Security Administration, 2006.

Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and sub-accounts carefully before investing.  The prospectus contains this and other information about the variable annuity contract and sub-accounts.  You can obtain contract and underlying sub-account prospectuses from your financial representative.  Read the prospectuses carefully before investing.

Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.  The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. 

© 2010 Standard & Poor's Financial Communications. All rights reserved.

© Carmen Coleman, President and CEO

Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300

Rochester, NY 14614

(585)325-2525 

Tracking #623105

Roth IRAs — Powerful Planning Tools for All Generations

If the current income restrictions associated with Roth IRAs prevent you from using one for your own planning purposes, consider taking steps to ensure that your children or other younger family members establish and fund a Roth IRA of their own. Roth IRAs offer ample tax benefits for retirement — particularly for younger investors. Yet perhaps the more long lasting benefit of the Roth IRA can be realized when it is used as a wealth transfer mechanism.

Roth IRAs for Minors
One of the main contributors to successful retirement planning is time — the more of it you have, the better the result. For this reason alone, setting up a Roth IRA for a child can be one of your best long-term planning strategies. When investment compounding has upwards of 50 years to run its course, even a relatively modest savings rate can produce substantial wealth.

There is no minimum age requirement for opening a Roth IRA, and many IRA providers will accept accounts for minors. In most cases, the only real issue is whether the child has taxable earned income. Fortunately there is no requirement that the same "earned income" is the money that funds the IRA. If your child earned income from a summer or part-time job, but then spent it, there is no restriction on using money provided by parents to establish and fund the IRA account.

You can contribute up to $5,000 to a Roth IRA in 2009 as long as your child earned at least that much. However, contributions cannot exceed your child's income for the year. Contributions to a Roth IRA are not tax deductible, but earnings are never taxed provided your child meets the distribution requirements — chief among them waiting until at least 59 ½ before tapping the account.¹ While he or she probably cannot imagine ever being that old, there are other ways to put Roth IRA savings to good use prior to age 59 ½, such as the purchase of a first home.

Wealth Transfer with a Roth IRA
As effective a retirement planning tool as a Roth IRA can be, its greatest strength may be its potential as a wealth transfer instrument. Unlike traditional IRAs, minimum distributions are not required from Roth IRAs once the owner reaches age 70 ½. Therefore, a child theoretically could have held a Roth IRA his or her entire life never having tapped into it and then pass it on to his or her beneficiaries upon death. At this point the account would fall under the same minimum withdrawal rules that pertain to traditional IRAs. However, beneficiaries may choose to string out those withdrawals over many years, continuing to earn tax-free income on the remaining account balance.

The hidden value of the Roth IRA is its exceptional growth potential. If heirs decide to spend or withdraw Roth IRA assets immediately upon inheritance, the Roth's strategic value as a wealth transfer tool is lost. If however, they choose to let the Roth IRA continue to grow and only withdraw what is required by law each year, the true power of the Roth IRA can be realized.

¹Distributions from a Roth IRA may be tax free if you are at least 59 ½ years old and have owned the Roth IRA for at least five years; your withdrawal of up to $10,000 (lifetime limit) is applied to a first-time home purchase; or you die or become permanently disabled.

© 2010 Standard & Poor's Financial Communications. All rights reserved.

© Carmen Coleman, President and CEO

Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300

Rochester, NY 14614

(585)325-2525 

Tracking #623073

 

In Estate Planning for Same-Sex Couples, What you don’t know will hurt you!

Estate Planning for Same sex couples are unique, challenging, and can make you feel like you are entering a mine field. Partly because, same sex couples are denied 1,100 federal benefits that are recognized for heterosexual couples. Family relationships sometimes play a part depending on whether or not the relationship is accepted.

Working with an experienced team of professionals can alleviate many pitfalls, heartache, and angry feelings in the event of death of a partner. An estate planning attorney, tax accountant, and financial planner are the ideal team needed to get started.

A will is an essential estate planning tool. Without a will, you will die intestate meaning that your property will be distributed according to the interstate succession laws in your state. If you are a same sex couple, dying intestate will almost always yield an undesirable effect because interstate intestate laws rely on legal relationships of marriage and parentage which means that your partner and partner’s children will have no rights to your property. You can be prepared for a challenge to your will with the use of legal formalities that take protective actions.  No contest clauses, can be used to deter a legal challenge. Periodic updates to your Will can help to establish your wishes and intent. In some states you can petition the probate court while alive to declare your will valid. A legal professional can assist you with preparing an effective will.

A Codicil is the part of your will that will provide instruction for your final wishes. It will provide directions for your final arrangements. You can leave details on burial or cremation; embalming; caskets and urns; headstones or burial markers; your final ceremony; and paying for funeral arrangements. Often instructions for minor items like furniture, clothing, and jewelry are documented here. This could become a problem as many states limit the right to make these arrangements to the decedent’s immediate family. Your attorney will be familiar with the estate planning laws of your state to further assist you with final planning.

Providing for children takes special care where there is no guarantee that a judge will grant guardianship to the surviving partner; especially in the case where only one parent is recognized as the legal parent. If that parent dies, or becomes incapacitated, the other parent is at risk of losing all rights and contact with the child(ren). One alternative is to name the surviving partner the guardian of the child’s estate. This will permit the surviving partner to maintain contact in the event that he loses guardianship.

Probate is the court process of settling your estate. Probate is often a long and expensive process which rarely benefits the estate. State law determines who will receive your property. Unless your partner is your legal spouse or is recognized under state law, state statues do not include your partner.

Avoiding probate may be more complicated for same sex couples because they cannot take advantage of marriage laws that allow property to pass to spouses without probate. There are however estate planning tools that can be used to minimize the effect.

One strategy may be to pass property via contract law. Contract law is based on an agreement between two parties of sound mind, and of legal age. Beneficiary designations, Transfer on Death (TOD), Living Trust, Durable Power of Attorney, and Joint Ownership are all examples of legal transfer of property and or rights via contract.

1.       Beneficiary Designations can be made of insurance policies, investment such as annuities, qualified accounts (these can be tricky if you were married previously – check with an attorney), and brokerage accounts. An attorney can help you understand State Law, and your financial planner can assist you with understanding the various investment vehicles.

2.       Joint Ownership is a contract that is often used in real property. It will create an immediate transfer of property upon death to the surviving owner. Some State laws permit Joint Tenants with Rights of Survivorship (JTWROS). Check with your state regarding this option.

3.       Annuities, Qualified Accounts (IRA, ROTH, 401K, 403B, 457), deeds, and insurance policies permit transfers via beneficiary designation.

a.       The rules for inheriting an IRA or 401K plan are different for spouses and non-spouse beneficiaries. Because the IRS does not recognize same-sex partnerships, non-spouse inheritance rules will be followed.

b.      When an IRA is transferred to your partner, he/she will have to begin withdrawing required minimum distributions from the plan beginning the year after death. Until the beginning of 2010, non spouse beneficiaries had to declare it all as income when inherited and pay the applicable tax.

c.       Beginning January 1, 2010, non-spouse beneficiaries can roll the plan into an inherited IRA. They will still be required to take the minimum distributions, but are no longer subject to the upfront tax.

4.       Bank accounts, deeds, and some investment accounts can use transfer upon death (TOD) clauses so that assets immediately transfer freeing up assets that can be used to pay immediate funeral expenses after death.

5.       Trusts are key estate planning tools that are very helpful. Trust may not get around estate tax issues, but it is a private arrangement that is more difficult than a will to overturn. There are many types of trust and each has different rules. Consult with your attorney and financial planner when setting these up.

6.       Living Trust are legal vehicles that permit you to transfer assets privately to your partner naming him/her the trustee.

Insurance takes on many forms: life, accident, disability, health, automobile, home owners, renters, long term care, etc. Are you aware that your homeowners insurance does not cover your partner if his/her name is not on the deed? (Solution: Renters insurance) Lifetime Financial Group will assist you with insurance decisions, planning and analysis.

Healthcare Concerns are another aspect of your estate that same sex couples should not overlook. Healthcare directive are a vital aspect of a same sex couples estate plan because it provides clear and legal instruction to healthcare professions of your wishes without any speculation about the legality of the couple’s relationship. Without these, your partner may not have any legal authority to make decisions or even visit you while in the hospital.

1.       Healthcare Power of Attorney names a person responsible for making healthcare decisions for you in case you lose capacity. It makes your partner the preferred decision maker. Without it, the hospital might instead turn to biological family relatives.

2.       HIPPA authorization gives your partner access to your medical information and records.

3.       Durable Power of Attorney names someone to take care of your finances in case you cannot do it yourself. Note: The durable power of attorney ends once the person who granted it ends. In other words, when your partner is deceased, the durable power ends.  So it is important to name an executor of your estate to spring into action once you are deceased.

4.       Executor of Estate will execute your final wishes and settle your estate.

Estate Taxes are another matter to consider. In 2013, only estates larger than $5.25 million will pay federal estate taxes. Your state might have its own estate tax law. Check with your accountant to see what impact it will have on your estate plan. Although most people do not have to worry about estate taxes.

Heterosexual married couples can rely on the federal marriage law that permits couples to pass property to your spouse tax free. Same sex couples cannot take advantage of this law because the federal government does not recognize same sex marriage even if it is legal in their state.

Same sex couples have no rights under intestacy laws and they do not get the unlimited estate tax marital deduction which could result in a death tax of up to 50%. The surviving same sex partner will receive nothing from his/her partner upon the death without careful planning. Family resistance must be a consideration so the estate plan must be constructed to withstand any potential challenges.

A qualified tax advisor, attorney and financial advisor will help you create an estate plan that is ideal for you! It is best to get sound legal advice before making any decisions.

Keep in mind that estate planning is about what you want while you are alive – not just after you are dead. It is more than deciding who gets your stuff after you die.  

Sources:

1.       6 Estate Planning Issues for Gay and Lesbian Couples, http://www.nolo.com/legal-encyclopedia/six-key-estate-planning-issues-gay-lesbian-couples

2.       Unique Estate Planning Issues for Same Sex Couples or Unmarried Couples, Harlan S. Louis and Mary Jo Hudson

3.       Estate Planning Issues for Gay and Lesbian Couples, Jaon M. Burda, JD

4.       Estate Planning for Same Sex Couples, Joan M. Burda, http://www.americanbar.org/publications/solo_newsletter_home/estateplanning.....

5.       The Estate Planning Tips for Same-Sex Couples, http://www.investopedia.com/financial-edge/0911/top-estate-planning-tips-for-same-sewx-couples

© Carmen Coleman, President and CEO

Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300

Rochester, NY 14614

(585)325-2525 

Carmen Coleman, MBA, CRPC™ is the owner of Lifetime Financial Group. She is a financial planner and insurance consultant. http://www.lifetimefinancialnews.com