Klitzman Law Group, PLLC

Roth IRAs Aren’t for Everyone, So Check Your Retirement Income Tax Rate First

“Anyone saving for retirement has probably had to decide between saving in a Roth account versus a traditional retirement account.”

If you think your income in retirement will be higher than it is right now, that’s a reason to put retirement savings into a Roth IRA. However, if you’re already saving for retirement and you expect to maintain the same lifestyle, you’ll want to be sure your retirement income does not exceed your current income, says USA Today in “Why more people should probably use pre-tax retirement accounts instead of Roths”

It’s all about the tax burden!

Comparing your current income as you are working to your expected retirement income, isn’t exactly apples-to-apples. Instead, you’ll need to include calculations of your tax rates for IRA withdrawals and other taxable accounts. People often pay a lower overall tax rate on withdrawals from traditional retirement accounts than they pay on Roth contributions today–even with a higher retirement income.

To fully understand this, you’ll want to understand the difference between marginal tax rates and effective tax rates. The marginal tax rate is the tax rate on your next dollar of income. For example, people say “I’m in the 22% income bracket”—that’s their marginal tax rate. Then there’s the effective tax rate, which is the total tax bill as a percentage of income. This number is always lower than the marginal tax rate.

For every dollar you add to a traditional retirement account, you’re reducing your taxable income and saving on taxes at the marginal tax rate. Every dollar saved in a Roth IRA account is effectively taxed at your marginal tax rate. You could have chosen to save it in a traditional IRA, but you chose the Roth.

Here’s an example: a single person who earns $60,000 annually is in the 22% tax bracket, after taking the $12,000 standard deduction. That single person will have to have an income of $195,105 in retirementto reach a 22% effective tax rate on a traditional IRA withdrawal.

It works better for someone in the 12% income bracket. A man who earns $50,700 annually is right at the top of that 12% bracket, after taking the same standard deduction. He’d have to withdraw $52,605 from a traditional IRA in retirement for it to be worth having a Roth IRA.

This decision requires making correct calculations about how much you intend to spend in retirement. You may not expect your retirement expenses to be higher than your current living expenses, but if you travel a lot or have high health care costs, you may find yourself spending more.

Reference: USA Today (July 8, 2018) “Why more people should probably use pre-tax retirement accounts instead of Roths”

Suggested Key Terms: Retirement Income, IRAs, Roth IRAs, Withdrawals, Tax Rates

What Is the Fascination with Anthony Bourdain’s Estate Plan?

“Ever since his untimely death, the press and the public hasn't been able to get enough of Anthony Bourdain. His name caused another commotion this week, when his will was probated in New York.”

There’s something about a rebel who lives life on his own terms that is like a magnet: it’s sometimes hard to turn away and that’s how many are responding to celebrity Anthony Bourdain’s passing, according to the Forbes’ article “How Anthony Bourdain’s Estate Plan Reflected the Two Most Important Parts of His Life.”

Reports that his net worth was only $1.2 million grabbed a lot of attention. It shouldn’t have surprised anyone, because Bourdain regularly said that until his 40s, he lived paycheck-to-paycheck. What’s really interesting from the estate planning perspective, is how he expressed his wishes in his will. The details became public because it was probated.

Bourdain made provisions for his only child, who will inherit the bulk of his wealth. He also seemed to have been influenced by the enormous amount of travel his career required. What is interesting is that he passed his frequent flyer miles to his estranged wife “to dispose of, in accordance to what she believes to be his wishes.”

Those who travel often and have large frequent flier miles, award points and perks, often overlook them as part of their estate plan. They are often valuable and should be addressed in estate planning.

 However, passing along airline points is not as easy as filling out a beneficiary form. Each airline has their own policies, so you may have to fill out a form for each one. Loyalty programs are basically contracts with a company and you’ll need to read the fine print, since not all airlines allow their points to be assigned. The selection of beneficiaries also may be limited by the airline.

Bourdain’s very public profile makes it unlikely any airline would refuse to honor his request to transfer those points. Because he carefully documented his desire to leave his frequent flier miles to a specific beneficiary, it’s even more likely his points will transfer without too much fuss.

Bourdain is proof that even rebels make sure to put estate plans in place.

His will reflects his personality of authenticity and relentless curiously about the world around him. The final message he leaves us with, is to take care of those we love, even as we travel the globe.

Reference: Forbes (July 6, 2018) , “How Anthony Bourdain’s Estate Plan Reflected The Two Most Important Parts of His Life.”

Suggested Key Terms: Estate Planning, Frequent Flier Miles, Inheritance, Probate

Have These Documents Prepared for a Child Headed to College

“There are documents pertaining to health, money, and college records, that your child can sign to give you some peace of mind. Not all of these are required, but you may want to consider if you need them or not.”

There’s no end to what parents and grandparents can worry about, when their child or grandchild heads off to college. Will they make the right decisions, choose good friends and perform well in their studies? One thing you can do to help prepare your college-bound student, is to have certain legal documents prepared before they go, advises getintocollege.com in the article “Legal Documents Your Child Needs to Sign Before Heading to College.”

Once your child turns 18, your access to their medical records ends, unless they complete a form called a HIPAA Authorization. Your child must sign the form to give you access to their records, appointments, test results, etc. If your child is going to a school out of state, you may need a state-specific form. Keep these documents in a safe place, where you can access them quickly, in case of an emergency.

Chances are your student is heading off to college with a debit card and a credit card.  However, do you have access to those accounts? Talk with your estate planning attorney about creating a Financial Power of Attorney form, so you don’t run into any roadblocks, if your child needs help handling their finances. Opening a bank account or having a credit card attached to your account makes it easier for you to transfer money to your student. It also makes it easier for you to keep a watchful eye on their spending. Make a copy of the front and back of all cards so you can easily report them if lost or stolen.

Colleges have a form known as FERPA (Family Educational Rights and Privacy Act), which you usually can obtain at some point during orientation. This is a document that gives you the legal right to your child’s academic and financial information through the college. Think of this as the college’s HIPAA law. It’s not the same, but it can create the same level of obstruction, if you do not address it in advance. With it in place, you’ll be able to discuss their finances with the bursar’s office, their grades with their academic advisor and many other offices in the college that will otherwise refuse to speak with you.

College is a transition time for both students and parents, as well grandparents. Having these documents properly prepared, with the help of an estate planning attorney, will give you some peace of mind, as your child leaves the nest.

Reference: getintocollege.com (March 29, 2018) “Legal Documents Your Child Needs to Sign Before Heading to College.”

Suggested Key Terms: HIPAA Authorization, FERPA, Financial Power of Attorney, College Student, Estate Planning Attorney

Buzz Aldrin, Second Man to Walk on the Moon, Is Fighting Back

“The 88-year-old astronaut, who participated in the historic Apollo 11 mission in 1969, is in the midst of a legal battle, since his family claims he has dementia and is vulnerable to manipulation.”

With his family claiming that he has dementia and is vulnerable to being manipulated, Buzz Aldrin has filed a lawsuit accusing two of his own children and his former manager of taking advantage of their roles in managing his assets. He says the Buzz Aldrin Space Foundation is using its resources against his wishes, by funding “future educational endeavors” instead of current ones, according to an article in MarketWatch titled “Buzz Aldrin is fighting his family’s claim of dementia—revocable trusts can be flawed.”

The lawsuit claims that the family and former manager have forbidden him to marry someone.  It also contends that they are moving money from his accounts without his consent or knowledge, in some cases moving money to his company, Buzz Aldrin Enterprises. His children said in a statement that the allegations are a result of the increased confusion and memory loss he has experienced in recent years.  They say this can be refuted by witnesses and bank or business records. They asked a Florida judge to appoint them as co-guardians because of his reported decline, so they can make decisions on his behalf.

Aldrin has a revocable trust with his son Andrew named as a trustee, which states that Andrew must give written permission before any changes can be made. Aldrin was scheduled to take a competency test in June, although the results have not been released yet.

Revocable trusts are great tools to avoid probate and allow the owner to remain in control, while they are alive. They can also be used to state who will take care of your children.  They provide flexibility for your wishes after death.  However, they are not always the best protection.

In the best situation, the family sits down and has a conversation, while the person is still fully functioning. This allows them to be part of the decision-making process. The challenge with dementia is that the person may not be aware of the prior agreement.

Reference: MarketWatch (July 2, 2018), “Buzz Aldrin is fighting his family’s claim of dementia—revocable trusts can be flawed.”

Suggested Key Terms: dementia, revocable trusts, estate planning, trustees, competency

Top Questions About Your Retirement Plan

“401(k)s are great for saving for retirement.  However, they’re quirky. Even the most-seasoned savers have questions.”

Most employers offer 401(k) plans to employees as a means of encouraging savings for retirement. Some are generous enough to offer matches, although there are fewer of those today than in the past. Even if you’ve been contributing to a 401(k) for a while, you might still have questions, as discussed in USA Today’s article titled “401(k) limits: 7 answers to your top retirement plan questions.”

When can I start building my 401(k)? Some employers let you start with your first paycheck. Others have a waiting period. Enroll as soon as possible to get your money growing.

How much should I save? Remember to adjust your savings rate as time goes on. If you get a raise and you are able to do so, increase your savings. If you start by saving 5% of your salary, move up to 10% when you’re more established in your career, then closer to 15% when retirement is on the horizon.

What about taxes? Most 401(k)s are “tax deferred,” meaning that your contributions are made with pre-tax dollars. If you contribute $250, your take-home pay is reduced and so is your tax burden. Note that you don’t pay taxes on capital gains, interest or dividends.  However, the IRS does take its share, when you withdraw funds during retirement.

When do I withdraw my retirement money? You can start taking withdrawals from your 401(k) anytime after age 59½.  However, you’ll have to pay income taxes.  If you are younger than that, you must pay income taxes PLUS a 10% early withdrawal penalty. That’s a retirement no-no. You can take a loan from your 401(k)—$50,000 or half your total savings, whichever is lower.  However, you must pay yourself back with interest. Penalties can add up quickly, so only do this in an emergency.

How much can I sock away? If you’re under 50, you are limited to a $18,500 contribution in 2018. If you are over 50, an additional $6,000 is allowed to help you catch up.

Can I save more? You might be able to use a traditional IRA or a Roth IRA. It depends upon your age and your income level. Talk with an estate planning attorney about how to best structure your savings to max out retirement savings and tax benefits.

What if I get a new job? If you have saved more than $5,000, you can leave the money in the account.  However, don’t forget about your 401(k). If it’s less than that, your old employer will want you to roll the money into a different retirement account. If you don’t respond to their request, it’s possible that they will send you a check, minus taxes and early-withdrawal penalties. Don’t lose money because you forgot to transfer your money!

Reference: USA Today (July 1, 2018) “401(k) limits: 7 answers to your top retirement plan questions”

Suggested Key Terms: 401(k)s, retirement savings, taxes, IRAs, Roth IRAs

Why You Need to Update Your Estate Plan

“Got a dusty old binder with your will and estate plan? Even if you had your paperwork set up a few years ago, your documents are all now out of date, thanks to new tax laws that went into effect at the turn of the year.”

Are you still coming to terms with the impact of the new tax laws? If you have not already reviewed your estate plan with your estate planning attorney, you still have time to review it and make necessary changes. Many of the provisions end in 2026. Unless you can predict with great accuracy when you will pass, you need to update your estate plan, according to Reuter’s article “Your estate plan needs an update even if it is new.”

Even though the exemption for the federal estate tax has doubled to $22 million for couples, one of the important parts of estate planning has to do with your financial well-being, while you are alive: power of attorney forms and healthcare proxies, in case you are unable to make decisions on your own.

You also should make sure that your beneficiary designations are up-to-date, especially on life insurance policies and 401(k)s from previous employers.

The central focus of estate planning is keeping control over your assets, even after you die. You might want your responsible younger daughter to be in charge of your estate and not your older son. You may also want to skip a generation and ensure that your wealth passes to grandchildren and not your children at all.

If your family includes a special needs individual, you’ll want to make sure you have made provisions for their future with a Special Needs Trust (SNT).

Many families who find themselves dealing with Alzheimer’s disease, drug or alcohol addition or troubled marriages, use trusts in their estate planning to protect their loved ones and control the distribution of assets.

Trusts are also used for families who wish to keep their assets private and out of probate, where information about the family’s assets are public documents. Property that is not jointly owned or set to transfer directly to a beneficiary, can end up being part of the probate process.

Finally, even with the doubling of the estate tax limit, charitable giving still has a role to play in estate planning. By leaving a substantial IRA to charity through a trust, you can avoid the taxes heirs would pay when they liquidate the account. You can also give appreciated stock to a charity through a donor advised fund and bypass capital gains taxes.

Talk with your estate planning attorney about reviewing your estate plan, in light of the new tax laws.

Reference: Reuters (Jan. 18, 2018) “Your estate plan needs an update, even if it is new”

Suggested Key Terms: Wills, estate plan, trusts, power of attorney, healthcare proxies, life insurance, beneficiary designations, Special Needs Trust

Your Biggest Estate Plan Challenge: Your Family!

“When the topic of estate planning comes up, talk about taxes is soon to follow. That train is rarely late. Taxes are important, but they aren’t what keeps planners up at night in 2018.”

Estate planning attorneys, trust officers, accountants, charitable giving professionals, insurance advisors, elder law attorneys and nonprofit advisors, who recently attended a major conference on estate planning, were surveyed by TD Wealth. Their biggest worry for the success of client’s estate plans: family conflict.

An article from WealthManagement.com, “Family Conflict Tops the List of Estate Planning Challenges in 2018,” says 44% of all planning professions consider family conflict more of a threat to estate planning than tax reform (25%) and market volatility (12%). That is not a small number.  It should be considered, while creating or revising an estate plan.

One reason for these results is that the response to the Tax Cuts and Jobs Act has received mixed reactions from estate planning attorneys and financial professionals. Some believe it may help their clients, while about a third of those queried in the TD Wealth survey aren’t sure. Only 16% feel the tax reform will have a negative impact on their clients.

Almost 75% of those taking part in the survey felt that clients who do benefit, will do so because of wealth transfer tax changes. About a third expect that clients will see the biggest benefits from new estate tax laws, followed closely by generation-skipping tax and gift tax updates.

What is the biggest challenge that people face when addressing their estate plan, according to this survey? It is naming guardians for minor children and beneficiary designations.

Talking with family members about your estate plan and even bringing them to your estate planning attorney’s office for a family meeting, can be one way to head off potential conflicts. Your estate planning attorney can work with you to create a plan for discussing challenging topics. If all else fails, the attorney may be able to recommend a social worker who is familiar with family conflicts that arise during the estate planning process.

Reference: WealthManagement.com (March 28, 2018) “Family Conflict Tops the List of Estate Planning Challenges in 2018”

Suggested Key Terms: Family conflicts, estate planning, guardians, beneficiary designations, tax planning, wealth transfer taxes, generation skipping tax, gift tax

 

You Do Not Have to Get Married

If you have a long-term partner who you want to make sure is taken carry of after you pass away, getting married is not your only option. You can get an estate plan.

The laws around estates and inheritances developed at a time when it was assumed that almost everyone would be in a heterosexual marriage. At the time, men and women would get married young and when one of them passed away before having any children, all of his property would pass to the surviving spouse. If a person passes way without a will today, that is still what default intestate succession laws say will happen.

However, there are no provisions for people who are not married but are in a long-term relationship. That is one reason why the LGBTQ community and its allies fought so hard for gay marriage. Today, many heterosexual couples do not want to get married and many LGBTQ partners would rather not as well. Regardless, there still is a way to protect partners outside of marriage, as the San Francisco Bay Times discusses in "Want to Protect Your Partner? Marriage Isn't the Only Option."

The default rule of intestate succession in estate law is not the only option. Most of the benefits of marriage can be had by other couples, as long as they plan ahead. With an estate plan, you can direct that your property go to your partner after you pass away. There are even ways to make sure your partner is taken care of for life, but then afterwards someone else ultimately inherits any remaining property.

Marriage is not for everyone. If it is not for you, it may be wise to speak with an estate planning attorney about how to make sure your partner is protected.

Reference: San Francisco Bay Times (June 21, 2018) "Want to Protect Your Partner? Marriage Isn't the Only Option."

Suggested Key Words: Estate Planning

Check Asset Titles

If you do not hold title to your assets in a way that compliments your estate plan, then your estate can face difficulties.

It is a common misunderstanding in estate law that the provisions in a will are the ultimate factor in determining what happens to their assets, after they pass away. For some assets, that makes sense. For example, if your will directs that your niece receives your fine china, then she will inherit them. Other assets do not necessarily work in the same way.

Houses, cars, retirement accounts and bank accounts can all be owned and transferred outside of the control of your will. Daily Local News discusses this in "Asset titling can change the estate plan."

For example, you might own a home with your second wife as joint tenants with rights of survivorship. If you have a child from a previous marriage, you might want that child to get the house or your half of the ownership after you pass away. It does not matter if you express that in your will. When you pass away, the second wife will immediately become the sole owner of the home. That is how such joint ownership works.

This type of problem is avoidable. An estate planning attorney can work with you to create an estate plan that coordinates the proper titling of your assets to carry out your distribution objectives.

Reference: Daily Local News (June 26, 2018) "Asset titling can change the estate plan."

Suggested Key Words: Estate Planning, Wills

Start Estate Planning Early

You should start planning for your estate much earlier than you probably think.

Americans generally do not start planning for their estates, until they think their plans could possibly go into effect soon and they fear the consequences of not having a plan. Americans do not engage in estate planning until they get older. This is unfortunate.

Other life events should trigger proper estate planning much sooner. This includes events like getting married or having children. Nevertheless, some people put estate planning off, until they reach the age of retirement. The Times Herald-Record recently weighed in on this topic in "When to start an estate plan."

Once someone reaches the age of 18, they need to start estate planning. Everyone at this point needs to at least have power of attorney and advance health care directives drawn up, so someone can assist them, if they have an accident and are incapacitated. Once a person reaches the typical age of legal adulthood, their parents can no longer assist them, without first going to court. Most 18-year old individuals can probably get away without also creating a will.  However, there is little reason not to get a simple one while at the estate planning attorney’s office getting a power of attorney and advance health care directive prepared.

Once you have some people and property to protect, it is a good idea to decide how to protect the people and distribute the property, after you pass away. The best way to do that is to get an estate plan.

Reference: Times Herald-Record (June 23, 2018) "When to start an estate plan."

Suggested Key Words: Estate Planning