Atlantic Capital Management

Atlantic Capital Management (92)

Friday, 13 November 2015 14:22

TOD or Living Trust?

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A look at two basic methods for shielding assets from probate.

How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective. 

One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed.1 

If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.2 

This is not an either/or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should transferred via a TOD arrangement versus a trust?     

Many investment accounts can be made TOD accounts. Originally, that was not the case – for decades, only bank accounts and certain types of savings bonds could pass to beneficiaries through TOD arrangements. When the Uniform Transfer on Death Security Registration Act became law in the 1980s, the variety of assets that could be transferred through TOD language grew to include certificates of deposit and securities and brokerage accounts.2   

Many investment & retirement savings accounts are TOD to begin with. Take IRAs and workplace retirement plans, for example. In the case of those assets, the beneficiary form legally precedes any bequest made in a will.3

The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.

One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage but by account, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way, in fairness to one another? Perhaps, and perhaps not. 

Placing valuable property items into a living trust makes sense. Real estate, ownership shares, precious metals, pricy collectibles such as fine art, classic cars, antiques, and rare stamps and coins – these are all worthy candidates for inclusion in a living trust. If your net worth happens to run well into the millions, these assets may constitute the bulk of it, and a trust offers a degree of protection for such assets that TOD language cannot. A trust also allows you to name a successor trustee, which TOD language cannot do for you.2  

A “pour-over” will usually complements a revocable living trust. As your net worth will presumably keep growing after the trust is implemented, a “pour-over” will may be used to allow your executor to “pour over” assets not already in the trust at your death into the trust. That will mean added privacy for those assets in most states – but the downside is that these “poured-over” assets will be subject to probate.1

Of course, you can add and subtract from the original contents of a revocable living trust as you wish during your lifetime – you can remove assets retitled into it when it was originally created and retitle them again in your name, you can “pour in” new assets, and you can sell or give away specific assets in the trust.4

Is it ever wise to name a trust as the beneficiary of a retirement account? Under three circumstances, it might be worth doing. If you worry about your heirs rapidly spending down your IRA assets, for example, naming a trust as the IRA beneficiary more or less forces them to abide by a stretch IRA strategy. Are there “predators and creditors” who want some of your net worth? That is another reason to consider this move. If you want to leave your retirement account assets to someone who is currently a minor, this idea may be worthwhile as well.4  

How complex should your estate planning be? A conversation with a trusted legal or financial professional may help you answer that question, and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.

 

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 - individual.troweprice.com/public/Retail/Planning-&-Research/Estate-Planning/Considering-a-Trust/Revocable-Living-Trust [11/10/15]

2 - fdcpa.com/Tax/0807TaxNewsEstatePlanning.htm [11/10/15]

3 - forbes.com/sites/deborahljacobs/2014/01/03/how-to-leave-your-ira-to-those-you-love/ [1/3/14]

4 - nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter7-7.html [11/9/15]

Wednesday, 28 October 2015 19:28

Dealing With Sudden Retirement

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How ready are you?

What if you are laid off or forced into retirement before 65, or even before 60? If that happens to you, what do you do in response now that the next phase of your life is starting sooner than you planned?

As a first step, gauge where you stand financially. It could be that the full-time job you just left will be your last. It could be that you have been thinking seriously about retirement. Depending on your outlook, you may see your glass as half-empty or half-full – but no matter your outlook, you need to assess your financial position.

With no income from work, your household will be more reliant on your spouse’s income or savings (assuming you are married at the time). So how big is your emergency fund? Is your cash position strong enough so that you can lean on it for a while until you decide how much you want or need to keep working?

Do you want (or need) another full-time job? Do you see yourself transitioning into part-time work? Or are you looking forward to retirement? Regardless of your employment prospects, you will have to calculate the amount of income you receive (or can potentially receive) from other sources – the pension or termination payout you were (hopefully) given, your investments, and other sources of passive income.

If that income doesn’t appear to be enough, should you apply for Social Security as soon as you can? Many financial professionals will tell you no, and here is why: for each year you delay filing for Social Security benefits, your benefits grow by about 8% (from age 62 to age 70). If you were born in 1954 and you file for Social Security benefits at 62 in 2016, you will reduce your monthly Social Security benefit by 25% as a consequence.1,2

On the other hand, some people really need the money and/or are in poor health, so they would rather have the income sooner rather than later. Your projected lifetime Social Security benefit remains the same regardless of when you first file for benefits, so even healthy retirees sometimes sign up as early as they can. In fact, in a June survey of more than 600 retirees taken by the Nationwide Retirement Institute, 76% of Americans who had been retired less than 10 years and 68% of Americans who had been retired 10 years or longer said that looking back, they felt they applied for Social Security at the right time.1

Nevertheless, a time like this is a great time to examine Social Security claiming strategies with help from a financial professional – especially if you are married or have been married. The wrong move could leave a great deal of money on the table.

Can you take advantage of any benefits as you leave work? Talk to the HR officer. If you have not been informed of your eligibility for severance pay or an early retirement package, ask about it. Depending on the circumstances of your exit, you may also qualify for Social Security disability benefits or unemployment benefits.

It will not be cheap to secure health insurance if you need it. If you are lucky, you worked for a big company, giving you COBRA eligibility. Maybe you are even luckier – perhaps your employer offered you the option of retiree health benefits when you were hired. (Hopefully, that offer still stands.)

See what you can do to reduce spending & taxes. Leaving work early might mean that your retirement is longer than anticipated. This calls for a reassessment of your retirement income strategy and your probable retirement expenses, including your day-to-day spending habits.

What fixed expenses are non-negotiable? What can you trim? If you are married, you and your spouse should be on the same page regarding how much you spend and what you spend money on. Perhaps gifts to children or grandchildren should be ceased. Maybe you could sell the house and move someplace cheaper. Maybe just one car is enough. You could eat out less. Spending less on mere wants is appropriate in your situation.

Every tax dollar you can save is a dollar back in your wallet. So pay attention to investment location and the impact of taxes on your portfolio, as you may be deriving income from investment accounts.

Stay positive. You may not have left work on your own terms, but you have an opportunity I your hands – the chance to change, and perhaps even reconceive, the way you live and work from this moment forward. If you have significant retirement savings, you may even be surprised at the potential your future holds.  

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 - cnbc.com/2015/09/23/when-you-should-file-for-social-security-benefits.html [9/23/15]
2 - ssa.gov/retire2/retirechart.htm [10/22/15]

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