Will Your Estate go to Your Desired Beneficiaries?

Posted on April 22nd, 2009 in Estate Planning, Newsletter Articles by wayne

It appears likely that the individual federal estate tax exclusion will remain at least $3.5 million after 2009. If this occurs, most Americans will no longer need to worry about estate planning techniques such as bypass trusts, marital trusts, etc. With this change, you may think that estate planning is no longer necessary. If so, think again. Regardless of your wealth, without proper planning, your estate may not go to your desired beneficiaries. Here’s how this might occur.

Over the past several years, you and your spouse have successfully built a portfolio of investments. As your house has grown in value and the mortgage principal has declined, you also have a significant amount of equity in your home. To avoid the complications of probate, you have been advised to title your house, your brokerage accounts and your savings accounts in Joint Tenancy with Rights of Survivorship (JTROS). JTROS serves as a “Will substitute” and allows property to pass to the surviving spouse outside of probate.

You and your spouse want your children to inherit the fruits of your labor. Your wills make this decision very clear. Since your total estate is below $3.5 million, you are convinced that your estate planning is complete.

Unfortunately, your children may receive none of these JTROS assets when the second spouse dies. With JTROS, when the first spouse dies, the surviving spouse receives complete ownership and control of the property. The surviving spouse may remarry and put the property into JTROS with a new spouse. If your surviving spouse predeceases their new spouse, the new spouse receives total ownership and control of the house and all of the remaining assets, regardless of what is stated in the deceased’s Will.

To avoid an outcome that neither you nor your spouse wish, pay close attention to how your property is titled. To assure that your children will receive at least a portion of any remaining assets at the second spouse’s death, you can own your investments accounts individually or put them in individual living trusts. It may also be wise to own your house as Tenants in Common (TIC).

With TIC, each spouse typically owns an equal share of the house and has an undivided right to use the property. However, when one spouse dies, the deceased spouse can designate in their will who inherits their interest in the property. You could have your TIC property go into a trust. The trust can allow the trustee to provide income and even principal from any assets to be used to support your surviving spouse. When the house is sold, your 50% of the sale proceeds would go into the trust. When the surviving spouse dies, the remainder of the trust could pass on to your children.

If all of your property is currently titled as Joint Tenancy with Rights of Survivorship, you and your spouse should have a discussion about the pros and cons of this approach. If you decide that this does not accomplish your objectives, meet with an estate planning attorney and discuss the options available that will meet your estate planning goals.

Estate laws are complex. However, changing how property is titled is a simple and low cost procedure. Be sure that you address how your property is titled when you do your estate planning. If you don’t, your estate may never reach your desired beneficiaries.

401(k) Plans – To Fund or Not to Fund?

Posted on April 22nd, 2009 in Blogroll, Newsletter Articles, Retirement Planning by wayne

If you are a small business owner who provides a 401(k) plan to your employees, is the cost of providing this plan justified? If you are an employee of a company that offers a retirement plan, should you participate in the plan? In our current economic environment, it is more important than ever to carefully consider your answers to these questions.

Business Owners

As a business owner, you feel a responsibility to provide the best possible benefits for your employees. However, with current economic conditions, many small businesses can no longer afford to provide employer matching funds for their company sponsored retirement plans. Even without employer matching, you may still feel that it is your duty to provide your employees with a 401(k) plan.

As a small business owner, the types of 401(k) plans that are available are often limited. To keep the plan affordable, your plan may only provide a small number of mutual funds from a single family of funds. Typically, these mutual funds will have a front end load (sales charge).

There are three problems with this type of 401(k) plan:

  1. A front end load provides for an immediate reduction in the investment returns for you and your employees.
  2. If the number of mutual funds is limited, you may not be able to provide adequate diversification for you and your employees
  3. The plan sales person may not have the training, knowledge and investment skills that are required to provide comprehensive investment advice on how to safeguard and grow your 401(k) investments.

If your plan has some or all of these drawbacks, examine your employee’s 401(k) contributions. You may find that most employees are contributing less than $5,000 per year to the plan. If that is the case, your employees will get the same tax deferred benefits and much greater investment flexibility with a traditional IRA.

If your 401(k) contributions are more than $5,000 per year, you must weigh your reduced amount of tax deferral against the cost and limitations of your plan. If the 401(k) is mainly for your employees, you may be doing them a favor by eliminating the company plan.

Employees

If your company offers a 401(k) plan, and you are under age 50,you may contribute up to $16,500 per year to the 401(k) plan plus an additional $5,000 per year to a Roth IRA. Full Roth IRA contributions can only be made if your AGI (Adjusted Gross Income) is under $105,000 as a single tax payer or under $166,000 as a joint tax filer. Let’s assume that you qualify for both a 401(k) and a fully funded Roth IRA.

If your company offers a 401(k) with an employer match, try to contribute the full amount that the employer matches. This “free money” from your employer provides an immediate 100% return on your 401(k) investment.

Now, let’s explore your options once you reach the employer match or if your company offers no employer matching funds. If your 401(k) plan comes with a wide range of no load investment options and skilled investment advice, it is likely wise to fund your 401(k) plan to the maximum amount possible. However, if your company provides a limited number of mutual funds with sales charges (loads) and offers limited (or poor) investment advice, you may want to fund a Roth IRA up to the $5,000 ($6,000 if you are over age 50) maximum, before funding your 401(k).

A Roth IRA can be established with a discount brokerage firm such as Schwab, Fidelity or Vanguard. You may then use no load, low cost mutual funds or exchange traded funds (ETFs) for your investment vehicles. You or your investment adviser can establish a diversified portfolio that meets your investment goals and matches your risk tolerance levels. Even though a Roth IRA contribution is not tax deductible, the contributions and investment returns can be withdrawn tax free during retirement.

Many larger companies have excellent 401(k) plans, offering low cost, no load funds, extensive diversification and skilled investment advice. However, if you own or work for a company where this type of plan is not available, consider your options. They are not as limited as you might think.