It’s Your Inheritance

Posted on January 26th, 2012 in Inheritance, Newsletter Articles by wayne

Recent studies have found that over two-thirds of the baby boomer generation will receive inheritances from parents and/or other family members.  While many of these inheritance gifts will be small, almost 54% will likely receive gifts of $100,000 or more.

Often, the beneficiary has a difficult time treating their inheritance as their own.  As a financial adviser, one of my primary responsibilities is helping clients to appreciate that an inheritance belongs to them and should be treated as well as, if not better than, any other financial assets that they possess.

Below are some common reasons why beneficiaries, often times, do not provide the appropriate care and attention to their inherited resources:

  1. Guilt – Beneficiaries often feel guilty about their inheritance, sometimes believing that they are not worthy of the inheritance or feeling guilty that the grantor had not spent more of the funds on him/herself.  It is important for beneficiaries to realize and accept that they would not have received these gifts had the deceased not wished them to have them.  Many parents of baby boomers held the belief that it was their responsibility to leave an inheritance for their children.  As the beneficiary, it is your responsibility to gratefully accept this generous gift and to use the inherited funds to make your life more financially abundant.
  2. “I did not earn it” – Where a person may take full responsibility for the financial resources that they have earned, the fact that an inheritance is “unearned income” often accompanies a reluctance to treat these resources as carefully as earned income.  The ramifications of this perspective will often take one of these directions for the beneficiary.  Some people will endeavor to spend this “unearned” inheritance as quickly as possible.   This often leads to extravagant purchases that are later regretted. The other common direction is to effectively ignore the inherited funds, without ever incorporating them into personal financial resources.
  3. “Dad/Mom would not want me to change their investments” – In this scenario, the beneficiary will likely keep their inherited funds invested exactly as they were when inherited.  The beneficiary often believes that the deceased would want the funds left in the same investments that they inherited.  Even if the deceased was still an active and capable investor up until their death, the most appropriate way to honor their capable investment management would be to continue to have these funds actively managed in a style that meets your goals and objectives.

If you have inherited funds or expect to inherit funds in the future, it is important to honor this inheritance by treating the inherited funds as your savings.  Unless the deceased’s will contains specific instructions to the contrary, they would want you to treat these funds as respectfully as possible in enhancing your own financial abundance.

As the beneficiary, you and only you are responsible for inherited funds.  You may be tempted to leave the inherited funds with the current brokerage firm that a parent or other relative may have used out of respect.  Unless you know that you can trust and have a personal relationship with the deceased’s broker, who can provide you with the full financial planning support that you require, it will be in your best interest to interview other financial professionals and find the person who is best suited to help you meet your family’s financial goals.

If you have a financial plan, have your advisor incorporate the inheritance into the plan.  This will likely allow you to expand your goals and objectives. If you do not already have a trusted financial advisor, consider getting a comprehensive financial plan, provided by a fee only Certified Financial Planner (CFP®).   A comprehensive financial plan will include your life’s goals and objectives and help you determine how your current savings, plus the inherited funds, can help you meet all of your financial goals.

If you are one of the fortunate baby boomers who either has or will receive a significant inheritance, use this wonderful gift as a tool to help you obtain the financial abundance that you desire and the deceased would have wanted for you.

Maximize College Savings

Posted on January 26th, 2012 in Educational Expenses, Newsletter Articles by wayne

There are two main financial planning goals that my clients most often want addressed.  One goal is attaining an abundant retirement and the second is saving for college expenses.  One method of minimizing your child or grandchild’s college expenses is to maximize tax savings.  Another is to maximize college aid opportunities. Here are some ideas on how to maximize your college savings funds:

1. Section 529 College Savings Plans

Section 529 College Savings Plans allow a one year donation up to $65,000 per person, to each potential beneficiary.  While the donor does not have “direct control” of the plan’s contributions/earnings, the donor can choose among the limited number of investment options available in the chosen 529 Plan.  Investment options can be changed as often as every 12 months and the account beneficiary may be changed to another qualifying family member at any time.

Distributions from the Section 529 College Savings Plan can be used for any qualified higher education expenses, including tuition, books, fees, equipment, special needs services, and/or room and board costs.  All distributions that are used for qualified college expenses are never taxed.  Thus, the growth and income from a 529 Plan are tax free, as long as the funds are used for qualified college expenses.

For Colorado residents, a Colorado income tax deduction is available for contributions to the Colorado College Invest Plan.  If you contribute $20,000 to a child’s or grandchild’s College Invest 529 Plan in 2012, you will be able to deduct $20,000 from your 2012 Colorado income taxes.

2. Coverdell Educations Savings Accounts

A Coverdell Educations Savings Account (ESA) allows for annual non-deductible contributions of up to $2,000 per year for each child that is age 18 and under.  Parents with three children can save up to $6,000 annually in Coverdell ESAs for their children’s education.  A Coverdell ESA is similar to an IRA, where most custodial firms, such as Schwab, Ameritrade, etc. provide low or no cost ESA accounts.   When used for qualified educational expenses, Coverdell ESA funds can be withdrawn on a tax free basis.  The investments allowed with a Coverdell ESA are virtually unlimited, which may provide for a better investment return than the limited selection of funds offered in a 529 Plan.

3. Series EE Bonds and Series I Bonds

While the current return is very low on both Series EE and Series I Savings Bonds, they virtually guarantee that slightly more than the original amount invested will be available when withdrawn.  When used for qualified educational expenses, the interest that is earned on these government backed savings bonds is received tax free.

4. Maximize College Aid

The most important single year for maximizing the potential of receiving college aid is the year that begins on January 1st of the student’s junior year in high school.  This is often called the “base income year” for financial aid.  During this financial year, parents should accelerate all expenses possible, including paying property and income taxes for the following year. It is also important to minimize your controllable income and capital gains during this year.

Another method for lowering income is to maximize retirement contributions during the base income year.  Retirement contributions are not considered as income, and retirement savings assets, held in a qualified retirement plan, are not considered as financial resources available for college tuition by financial aid assessors.

A final tip for maximizing financial aid is to minimize the assets owned by your children. 20% of a student’s assets are considered available for college funding, as opposed to only 5.64% of parental assets.  If your child has a UTMA or UGMA account, it might be advisable to roll these account assets into a 529 College Savings Plan, with your child as the plan beneficiary.  This approach will significantly reduce the amount of assets that will be counted against available college aid funds.

Planning is the key to successfully maximizing the funds that will be available for your children’s education.  An excellent website to gather more information on this is www.savingforcollege.com .   Every parent and grandparent wishing to help fund their children’s college education should work with their financial adviser to devise the best possible plan to maximize college savings funds.