Atlantic Capital Management

Atlantic Capital Management (79)

Friday, 05 June 2015 00:00

Are Your Kids Delaying Your Retirement?

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Some baby boomers are supporting their “boomerang” children.

Are you providing some financial support to your adult children? Has that hurt your retirement prospects?

It seems that the wealthier you are, the greater your chances of lending a helping hand to your kids. Pew Research Center data compiled in late 2014 revealed that 38% of American parents had given financial assistance to their grown children in the past 12 months, including 73% of higher-income parents.1

The latest Bank of America/USA Today Better Money Habits Millennial Report shows that 22% of 30- to 34-year-olds get financial help from their moms and dads. Twenty percent of married or cohabiting millennials receive such help as well.2

Do these households feel burdened? According to the Pew survey, no: 89% of parents who had helped their grown children financially said it was emotionally rewarding to do so. Just 30% said it was stressful.1

Other surveys paint a different picture. Earlier this year, the financial research firm Hearts & Wallets presented a poll of 5,500 U.S. households headed by baby boomers. The major finding: boomers who were not supporting their adult children were nearly 2½ times more likely to be fully retired than their peers (52% versus 21%).3

In TD Ameritrade’s 2015 Financial Disruptions Survey, 66% of Americans said their long-term saving and retirement plans had been disrupted by external circumstances; 24% cited “supporting others” as the reason. In addition, the Hearts & Wallets researchers told MarketWatch that boomers who lent financial assistance to their grown children were 25% more likely to report “heightened financial anxiety” than other boomers; 52% were ill at ease about assuming investment risk.3,4 

Economic factors pressure young adults to turn to the bank of Mom & Dad. Thirty or forty years ago, it was entirely possible in many areas of the U.S. for a young couple to buy a home, raise a couple of kids and save 5-10% percent of their incomes. For millennials, that is sheer fantasy. In fact, the savings rate for Americans younger than 35 now stands at -1.8%.5 

Housing costs are impossibly high; so are tuition costs. The jobs they accept frequently pay too little and lack the kind of employee benefits preceding generations could count on. The Bank of America/USA Today survey found that 20% of millennials carrying education debt had put off starting a family because of it; 20% had taken jobs for which they were overqualified. The average monthly student loan payment for a millennial was $201.2

Since 2007, the inflation-adjusted median wage for Americans aged 25-34 has declined in nearly every major industry (health care being the exception). Wage growth for younger workers is 60% of what it is for older workers. The real shocker, according to Federal Reserve Bank of San Francisco data: while overall U.S. wages rose 15% between 2007-14, wages for entry-level business and finance jobs only rose 2.6% in that period.5,6

It is wonderful to help, but not if it hurts your retirement. When a couple in their fifties or sixties assumes additional household expenses, the risk to their retirement savings increases. Additionally, their retirement vision risks being amended and compromised. 

The bottom line is that a couple should not offer long-run financial help. That will not do a young college graduate any favors. Setting expectations is only reasonable: establishing a deadline when the support ends is another step toward instilling financial responsibility in your son or daughter. A contract, a rental agreement, an encouragement to find a place with a good friend – these are not harsh measures, just rational ones. 

With no ground rules and the bank of Mom and Dad providing financial assistance without end, a “boomerang” son or daughter may stay in the bedroom or basement for years and a boomer couple may end up retiring years later than they previously imagined. Putting a foot down is not mean – younger and older adults face economic challenges alike, and couples in their fifties and sixties need to stand up for their retirement dreams.

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 - pewsocialtrends.org/2015/05/21/5-helping-adult-children/ [5/21/15]

2 - newsroom.bankofamerica.com/press-releases/consumer-banking/parents-great-recession-influence-millennial-money-views-and-habits/ [4/21/15]

3 - marketwatch.com/story/are-your-kids-ruining-your-retirement-2015-05-05 [5/5/15]

4 - amtd.com/newsroom/press-releases/press-release-details/2015/Financial-Disruptions-Cost-Americans-25-Trillion-in-Lost-Retirement-Savings/default.aspx [2/17/15]

5 - theatlantic.com/business/archive/2014/12/millennials-arent-saving-money-because-theyre-not-making-money/383338/ [12/3/14]

6 - theatlantic.com/business/archive/2014/07/millennial-entry-level-wages-terrible-horrible-just-really-bad/374884/ [7/23/14]

Wednesday, 27 May 2015 00:00

Special Needs Trusts

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Estate planning vehicles created with disabled heirs in mind.

If you have a child with special needs, you face long-run financial demands that cannot be fully met through federal and state assistance. What can you do to try and meet them?

A special needs trust may provide an answer to this dilemma. This is a trust designed to provide for assorted care and lifestyle needs not covered by public benefits – medical and dental needs, transportation needs, therapy and more. A trustee uses such a trust to make purchases of goods and services on behalf of a “permanently and totally disabled” person (as defined by the federal government’s Supplemental Social Income standards). In addition, a properly implemented special needs trust lets a disabled heir receive assets without the inherited funds reducing their chances of securing Medicaid, SSI or state benefits.1,2

There are two kinds of special needs trusts, defined by who funds them. A third-party special needs trust is funded by someone other than the beneficiary. Should the beneficiary of the trust die before the trust assets are exhausted, the remaining assets may be distributed to secondary beneficiaries. Third-party special needs trusts can be either living trusts (i.e., created during a grantor’s lifetime) or testamentary trusts established by a will.2

A first-person (or “self-settled”) special needs trust is funded by the beneficiary, often by assets received from a personal injury lawsuit or legal settlement. You have probably heard stories of lump sum cash settlements quickly evaporating; this trust is designed to guard against that. A trustee can oversee the distribution of the assets with an eye toward conserving them. The beneficiary maintains eligibility for public benefits. When the beneficiary of a first-person special needs trust dies, assets remaining in the trust go to the state to repay Medicaid benefits conferred to the disabled person during his or her life. Any assets left over after that may be distributed to secondary beneficiaries.1,2

In either special needs trust variation, a beneficiary cannot withdraw funds from the trust or directly receive distributions from it (distributions are overseen by the trustee). The beneficiary is also legally prohibited from revoking the trust.2   

Informal arrangements have their drawbacks. It is still common for a sister or brother of a newly disabled person to hold assets that once belonged to that sibling. Too often, these assets became “easy pickings” in a bankruptcy or divorce. A special needs trust protects such assets from litigation and creditors.1

Standard estate planning efforts may fall short. Some families set up basic life insurance trusts for disabled heirs, but these trusts are often flawed. The trust language fails to specify that the life insurance proceeds should head directly into a special needs trust. If that next step never occurs, the beneficiary of the life insurance trust loses eligibility for Medicaid due to inheriting that large, tax-free insurance benefit.1

Anyone with more than $2,000 of countable assets ($3,000 for a married couple) loses Medicaid and SSI eligibility. So if you want to bequeath or gift assets to the beneficiary of a special needs trust, you have to name the special needs trust as the heir or beneficiary of those assets, rather than the individual named as beneficiary of the trust.1,3

How do these trusts function? The core principle is that the trust assets supplement government benefits, so they work according to a sliding needs scale; for example, should public benefits somehow be able to provide for 100% of the beneficiary’s needs, the trust will provide 0% and vice versa. Trust assets may be invested conservatively, with the resulting income stream paying expenses for the beneficiary.4  

The trust language must express a goal to provide “supplemental and extra care” to the trust beneficiary in addition to public benefits (as opposed to basic financial support). The trust must also be without a Crummey clause (a proviso allowing future interest gifts to be treated as present interest gifts, thereby making them eligible for the annual gift tax exclusion).4

ABLE accounts are also emerging. The federal government has authorized a new tax-favored account to benefit disabled individuals, on track to appear in 2016. Distributions from an ABLE account will be tax-free if they are used to cover qualified disability expenses; individuals will be able to contribute up to $14,000 a year to these accounts. Even with this tax break, families may prefer the special needs trust as it has no limits on contributions and permits funds to be spent on a wider range of expenditures.5

The bottom line: if you wish for your loved one to have a good quality of life for years to come, a special needs trust may prove instrumental in allowing you to provide it. 

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 - tinyurl.com/meqw7va [4/8/15]

2 - getevolved.com/trust-fiduciary/special-needs-trusts [5/14/15]

3 - pacer.org/publications/possibilities/saving-for-your-childs-future-needs-part1.html [5/14/15]

4 - nsnn.com/frequently.htm [5/14/15]

5 - tinyurl.com/mbufwvy [2/2/15]

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