Tag: White papers

ILIT As An Effective Estate Planning Tool

Protecting one’s estate from creditors, predators, in-laws, and outlaws is a key reason clients with larger estates may consider establishing an Irrevocable Life Insurance Trust, or ILIT.

Acronyms can be mystifying, so let’s start with a definition.  An ILIT is a trust wherein the grantor gifts assets (and thereby gives up all incidence of ownership) so that the ILIT itself becomes the owner of the asset(s). That effectively removes the asset(s) from inclusion in the grantor’s estate.  So if all goes as it should, upon death there could be less or no estate taxes because the estate is smaller.  This makes the ILIT an essential tool for financial and estate planning.

As with many things that sound too good to be true, there are downsides.

1. Benefits of Ownership

Top is that the grantor typically also irrevocably forfeits the incidents of ownership.   This may include control as well as economic benefits such as cash flow.  The extent to which this occurs may depend on state law and the trust language.

2. Pull Back

If an individual owner dies within three years of gifting the asset, the value of the asset is pulled back into the estate for tax purposes.  It is important to remember that it is the death of the owner, not the insured, that influences the clock for this three year rule.

Depending on the client’s goals, ILIT’s often have either one or both of these objectives:

3. Liquidity

If the estate size is large enough to potentially be taxable, an ILIT can provide cash at death that could be used to pay estate taxes and estate settlement costs.  Under this scenario, life insurance on either one or both spouse’s lives is often used as the funding vehicle.  This contrasts with life insurance that is owned by the grantor and would thus be included in his or her estate for tax purposes.  It also provides a leveraged effect in that the dollars paid for premium are typically a fraction of what the actual death benefit can be.  The goal is to make sure the estate has sufficient liquidity so there is no pressure to liquidate assets at an inopportune time just to settle the tax bill.

4. Estate Reduction

Since an ILIT can hold virtually any asset of value, another goal may simply be to transfer the asset out of the estate.   This will make the estate smaller at death and thus subject to less or no estate taxes.  The strategy can be even more effective if the asset is expected to appreciate in value, since that appreciation would hopefully be out of the grantor’s estate and therefore also not subject to estate taxes.

So if the husband owns an insurance policy on his wife, as an example, and she dies, the proceeds that would be available to the estate at that time would not be subject to estate taxes.  However, upon the husband’s subsequent death, the value would be included and possibly taxable.

Using life insurance within an ILIT can offer an alternative.  First, life insurance proceeds are generally received income tax free by the policy beneficiaries.  Also, there can be creditor protection, since in many states life insurance proceeds paid to a named beneficiary are not subject to the claims of the policy owner’s creditors.  The specific rules of course can vary from state to state.

If the estate is named as beneficiary, the proceeds are still paid income tax free.  However by doing this we have converted a non-probatable asset into one that is subjected to the probate process.  This can create several disadvantages, including:

  1. Expenses are greater due to attorney and court fees;
  2. More time is needed to go through the probate process as opposed to just a beneficiary payment;
  3. Estate creditors could have access to the insurance proceeds depending, again, on prevailing state laws.  Hence a reason we would not usually recommend the estate as beneficiary of an insurance policy.  This also speaks to the prudence of always naming a contingent or secondary beneficiary;

In short, an ILIT is really a financial bucket designed to hold assets.  In dealing with life insurance, the policy’s value is not the insurance proceeds but rather the cash value or the market value, as determined by an IRS formula.  So when dealing with existing coverage, it is a simple matter of having the owner transfer or assign the policy to an ILIT by filing a change of policy ownership and beneficiary form with the insurance company.  Once the ownership change has been recorded by the insurer, it is also important to now name the ILIT as the new owner as well as the policy beneficiary.  Since this is a gift, a gift tax return form 709 should also be filed with the IRS even if there is no tax due.

Clients often ask how gifting an insurance policy to an ILIT could affect their annual gift exclusion.  In considering this, it is important to remember that the exclusion applies to present interest gifts which can be enjoyed now.  By contrast, gifts to an ILIT are of a future interest so they do not typically qualify for the exclusion.

As an alternative, we use a technique called the “Crummey” provisions.  The Crummey provision is based on prior case law and allows an exception when the ILIT trustee sends a letter to the trust beneficiary saying they have a specific time, say 30 days, to claim their portion of the gift.  Although they may not opt to do so, that the option exists effectively creates a “present-interest” gift exclusion.

Another option is to allow for spousal access.  This means that the trustee in his or her sole discretion may distribute money to the spouse or the grantor for health, education, maintenance or support.  We usually see this in the form of separate ILIT’s for each spouse with the non-insured spouse being the beneficiary.  If done properly, the provision can allow the spouse to withdraw dividends and interest earned by the policy at, say, retirement, while keeping a majority of the death benefit available to the estate.

With any irrevocable trust, and ILIT’s are no exception, there can be an issue of retaining too much control over the transferred assets.  When this occurs, we face the danger of having the policy being pulled back into the estate for tax purposes.  That is why it is often advisable to spend the additional expense in order to involve a professional trustee.  Professional trustees, often a trust company or bank, typically bring a high competence to the table that may help assure all functions as it is intended.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary, no obligation “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara City College and Pasadena City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

Are Your Financial Goals Achievable? The Importance of Having “Your Number”

Regardless of your level of affluence, studies show that you need to know what you want out of life before you can achieve it.  So states the wisdom of Lee Eisenberg in his bestseller, The Number: A Completely Different Way to View the Rest of Your Life.[I]

Eisenberg’s number refers to that amount of savings a person or couple must accumulate to enjoy a “secure” post-career lifestyle. His “completely different view” is based on the premise that the clearer your goals, the more likely they can be achieved. Establishing a precise goal, analogous to business planning, can be the best assurance of its attainment.

In practice, “Your Number” is typically not a single number but rather a series of numbers. Knowing the important role this kind of objective clarity can provide to our clients, we have spent considerable effort to develop this capability. Our version is a process capable of helping clients objectively understand their trade-offs so they can make more informed decisions.

For those still saving, as well as for those near or in retirement, clients often grapple with covering their own financial needs versus how much to leave for their heirs and/or charity. Many have found that by having “Your Number,” they are better able to address these issues once they know the estimated cost of supporting their lifestyle. With what remains, they can more confidently decide how much can go to philanthropy and heirs, and whether that happens during their lifetime or after they pass.

2017-10 Legacy Risk

Lifestyle Goals Feasibility: Determining the feasibility of your lifestyle goals is an important starting point. Certainly if overly ambitious, the low probability of attaining those goals may render other goals inconsequential. Our process involves providing an average, annual after-tax return (ROR) needed for the lifestyle goal’s attainment. That ROR can then be compared to historic returns of different asset classes to determine the associated risk involved.

For example, if to achieve their lifestyle goals the study calculates that a 10 percent average ROR is needed, that figure compared to historical returns, may suggest a more aggressive portfolio heavily weighted in growth stocks.  A specific, meaningful discussion can then ensue wherein the clients can consider how comfortable they may be with that level of risk. If not, to bridge the “gap” they can consider options that may include reducing  current  spending, increasing  savings,  postponing retirement  age,  or some combination.  Whatever they decide, they are able to feel more in control to do so based on objective feedback that can make these oft times nebulous conversations, much more tangible.

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“How am I Doing?” is likely the most common question clients have asked over my 35+ years as an advisor. The “Your Number” process helps address this question by projecting the value a portfolio needs to attain each year to assure we are on track. For example, a couple may have a $133,000/yr. retirement income goal when the husband reaches his desired retirement in five year’s time. To generate that, they may need nearly $2 million. Their “Your Number” study may suggest they will need $1,827,515 in three years to show they are on track to their retirement income goal. We are able to compare their then- prevailing balance to that figure, to readily gauge our progress and, hopefully, ease their concern.

“Am I Running Out of Money?” Concern over spending too much and not having enough later in retirement is another common concern. Again, the “Your Number” process gives us annual benchmarks from which clients can easily determine where they stand and if they may be spending too much, or perhaps not spending all that they could. Similarly, at ten years into retirement, the same client’s plan will show a $1,869,340 balance is needed to help assure they will not run deplete funds prematurely. Comparing that to their then-current balance can quickly help them determine where they stand. This capability gives clients a greater sense of confidence and control over their futures.

Benefiting from Greater Clarity as We Age: The clarity provided by this approach may prove consistent with the normal aging process.  “As people mature, their cognitive patterns become less abstract and more concrete…,” according to psychologist David Wolfe.[ii] Research attributes this to a normal shift from left to right brain orientation during the aging process. The result is a sharpened sense of reality, increased capacity for emotion and an enhanced sense of connectedness.

The left hemisphere helps us with rational functions such as logic and organized, quantitative processes. The right hemisphere is the intuitive side that gives us creativity and analogic reasoning. Theory suggests that many of us may be slightly dominant in one side or the other, which may lend insight into how best we learn.  “In other words… ,” as Daniel Pink notes in his recent book, A Whole New Mind, “… as individuals age they place greater emphasis in their own lives on qualities they might have neglected in the rush to build careers and raise families; purpose, intrinsic satisfaction and meaning.”[iii]  It makes intuitive sense that as we age and face our own mortality, we would become more sensitized to higher level emotional issues. That there might be a neurological or bio-chemical reason for this seems intriguing. Evidence of this trend may be found in the fact that over 10 million U.S. adults now engage in some form of regular meditation, double the number in 2005. Further, about 15 million people currently practice yoga, twice that in 1999.

While greater specificity is needed around the quest for money, Eisenberg cautions that we need to know ourselves and spend some time determining what makes us happy before we can make informed plans for leaving the world of active income.  What do you want your retirement to be? Who do you want to be in retirementEisenberg’s research shows that even the affluent tend to procrastinate on addressing these issues.

Thus it would seem that, when tackling the three main questions we each must address—What will my retirement look like? When can my retirement plan happen? How much will it cost?—the traditional financial services approach makes a fundamental error in attempting to address the last question first. Eisenberg muses that we need to know what we need the money for before we can estimate how much. Hence the rise of various types of “life coaches” to help us wrestle with these more elusive issues.

The bottom line of the “Your Number” process is that, regardless of your state in life, better planning can often help both from an aesthetic and practical standpoint. As Eisenberg notes, “An unexamined life may or may not be worth living, but it is certainly more expensive.”

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

[i] The Number: A Completely Different Way to Think About the Rest of Your Life, by Lee Eisenberg  Free Press 2006

[ii] A Whole New Mind, by Daniel Pink  Riverhead Books 2006 Pg. 60

[iii] A Whole New Mind, by Daniel Pink  Riverhead Books 2006

Year End Financial & Tax Planning Tips

A take-off on the old adage “significant savings can often be had to those who ‘don’t wait’” states the case with year-end tax planning.  A few smart moves prior to Dec. 31st can make a significant difference in your April tax bill.  The key for most of us will be to defer income and accelerate deductions.

Continue reading “Year End Financial & Tax Planning Tips”

Top Five Financial Challenges Facing Business Owners & Professionals

As many business owners painfully discover, successfully building their enterprise does not always directly translate into successfully building their personal wealth.  Especially given day-to-day business demands, it is easy to lose sight of the ultimate business’s purpose, which is enhancing the owner’s personal wealth.  Converting a business into a wealth enhancement vehicle requires ongoing concerted, systematic effort.  At some point the owner must also worry about the business if something should happen to him/her.

These are the five critical challenges I have most often encountered after having worked extensively with business owners over the past 35 years.  These can represent opportunities if properly addressed on a timely basis; if not, they may become detriments.

1. What strategies can help keep my taxes as low as the law allows? 

With the goal of helping the owner and business keep more of what is earned, there are a wide range of tax planning opportunities that come with business ownership:

  • Business Entity: Effective tax management starts with the firm’s chosen business structure.  In certain instances, for example, a Sub Chapter S Corporation could allow operating losses to pass to the owners, thereby providing personal tax benefits. In other situations, a regular “C” corporation may protect owners from pass through income that could otherwise have an adverse effect on their personal taxes. An LLC may offer advantages of each.  It is important to periodically review the structure in light of current and anticipated business performance over the foreseeable future.
  • Tax-Advantaged Benefits: In addition, there are a wide range of options that may provide benefits to the owner as well as selected employees on a tax-advantaged basis.  These can include health & welfare trusts, individual pension plans, retirement compensation arrangements, holding companies, charitable donations and estate freezes.  How beneficial these may be requires careful consideration of the individual situation.
  • Tax Deductible Payments to Owners: Often it can be advantageous for an owner to purchase an asset personally, then rent or lease it to the business.  This can involve equipment or real estate, and can not only allow the entity to deduct the payment from its tax return, but also allow the recipient owner to shelter a portion of taxation from that payment with depreciation, interest and other expenses, thereby enhancing the owner’s benefit.

Effective tax management requires continual effort; strategies need to adjust as the owner’s goals and financial situation changes. 

2. How can I protect my business and personal assets against liability? 

Especially in this litigious age, protecting business and personal assets against a liability claim is critical to financial success.  Again, a starting point lies in the limited liability protection found in the appropriate business entity.  While this may not protect the business itself, it may protect the owner’s personal assets.  Beyond that, it is important to:

  • Periodically review the basic corporate documents (articles of incorporation, bylaws, meeting minutes, etc.) to assure they are in good order and properly maintained. 
  • Make sure employees are not given the appearance of greater authority than the owner intends they have.  Their job titles should be consistent with their function, with appropriate checks and balances that a “prudent business person” would take to assure employees are acting within the scope of their authority.
  • Review capitalization levels to make sure that excess cash or unrelated assets are not being left in the firm unnecessarily.
  • Consider general and professional liability insurance that could protect against allegations of negligent activities or failure to use reasonable care.

3. How can I protect my business against the death, disability or departure of one or more key people, and do that before events take my choices away? 

Because small businesses are so dependent on one or a few key employees, their inability to perform can result in tremendous lost revenue.  A multitude of planning tools is available, such as

  • Key Person Life and Disability Insurance, to provide the business with cash compensation to help replace such a costly loss. 
  • Buy-Sell Agreements can provide contracts to compensate families and provide for smooth ownership transition in the event of death. 
  • Split Dollar Life Insurance: Adds tax-advantaged savings features to the aforementioned benefits the business might receive should one of its key personnel die unexpectedly. 

Owners typically want to make sure their family is duly compensated for the business they’ve built and that the right people are at the helm in their absence. All told, it is important to have a comprehensive protection plan that can provide continuity and protect the business value should the owner or a key person be lost or become disabled.

4. How can I convert my business into planned retirement income?

Key to this is the business’ ability to successfully operate separate and apart from its owner, and the potential that it can be objectively and accurately valued.  With all businesses, especially those that are primarily service oriented, it is important to transition from one that is “Lifestyle Based” to one that can be “Equity Based.”  Lifestyle, as the name implies, is purposed to support the owner’s living standard according to his/her schedule, income and tax benefit needs.  As such, the value is based on the owner and typically diminishes or vanishes when he/she retires or passes. 

By contrast, an Equity Based organization is designed and run with the intention of providing a value that can be accessed by the owner or his/her family at some future time.  Keys to developing an Equity Based entity include:

a) Team Staff: The owner must be surrounded by people capable of replicating the product or service, thereby extricating him/her from the day-to-day business operations.  Critical in this is the staff’s capability to handle routine matters especially those that involve customer contact.  The owner involvement of course remains, but is elevated to a significantly higher level like new business development and strategic planning.

b) Structured Procedures: Key to the businesses equity value is its ability to deliver a consistently high quality product or service independent of the owner’s involvement.  A “replicable” process can only be based on developing clear procedures and guidelines that motivated staff can follow without the owner’s constant oversight and direction.  Michael Gerber’s “E-Myth Revisited” provides an excellent foundation for proceduralizing that replicable process.

c) Developing & Retaining Key Employees:  Depending on size, having one to three key employees who can act as the owner would, take pride in the business’ success, and have effective incentives to thrive personally along with that success, is essential.  Elements can include bonus based on performance and results, and even potential incremental ownership over time.   

Succession can involve ownership transference to family members, co-owners, current employees or an outside third party.  The key is that the entity be capable of operating separate from its owner, and that the transference done in the most tax advantaged manner possible. Depending on the circumstances, this can result in a lump sum, a payment over time, an on-going interest in the entity or some combination of these. 

5. Which Qualified Retirement Plan is best for my situation?

401(k), Profit Sharing, Defined Benefit Pension, SIMPLE or Simplified Employer Pension.  Several factors need to be considered, including:

  1. Variability of business revenues and income: Generally, greater tax benefits are available at the cost of higher committed plan contribution levels.  The downside, of course, is that in lean years it could be difficult to maintain those higher contributions.  It is important to carefully weigh these, and often advisable to err on the side of greater flexibility and lower contribution levels.  This is especially so given recent enhancements to the traditional 401(k) plan.
  2. Owner or Employee Emphasis: ERISA is the major body of regulations that specifies minimum participation requirements for rank and file employees.  Typically all must participate equally for any contributions made for owners and key employees up to specific levels.  Within these rules is some flexibility that can allow owners to receive a relatively greater proportion of dollars contributed.  This is especially so if the firm is willing to make prescribed minimum contributions under “Safe Harbor” provisions, and/or if the key employees have a significantly higher average age under “Age Weighted” arrangements. 
  3. Retention: Ensuring that the dedicated staff built through the years is sufficiently compensated so to not be tempted to look elsewhere for employment is important.  It may also be a priority to provide them with an incentive to begin saving for their futures. This is especially so since many workers are not saving enough to be able to live comfortably after retirement and the owner worries about their well-being.

Every business weighs the relative importance of these issues differently.  Generally, each plan has tradeoffs between amounts of annual tax-deductible contribution allowed, flexibility of varying that contribution in good and lean years, and a desire to reward employees versus encourage them to save for themselves.  When properly done, the right retirement plan can provide the owner with effective tax benefits now, a stream of reliable income well into retirement, and a motivational-retention tool for important employees.

A Motivational Fact: Every owner will one day leave the business.  The question is, will it be on his/her own terms or dictated based on health or financial circumstances?  When it is properly planned, it can be a positive, life changing, wealth creation event that brings financial independence to the owner and/or family, and has the added benefit of leaving the business a healthy, viable entity that can flourish long after the owner departs. 

A qualified financial advisor can help develop a clear picture of the business’s value and then integrate that information with the owner’s personal financial situation to give a comprehensive view needed to plan for a successful future.

Note: Any information contained herein is not a complete summary or statement of all available data necessary.  It is important to check with your tax professional and attorney.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory firm like ours—one that delivers services according to the needs and perspectives of its clients. 

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.  Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent.  He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community. 

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981.  Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

Are You Effectively Managing Your Social Security Retirement Benefits?

With employment opportunities becoming increasingly challenging for seniors, more and more clients in their 60s are addressing social security issues sooner than they expected, and many of them have these questions:

  1. Early Retirement Benefits: When should I begin taking my benefits?
  2. Taxation of Benefits: How can I minimize the tax on my benefits?
  3. Delayed Retirement Credits: Does it make sense to postpone my benefits?
  4. Spousal Benefits: When should my spouse take benefits?
  5. Benefit Contingency Plans: How can I replace some/all of my benefits if social security changes?
  6. Strategies to Consider: What tactics might enhance my lifetime benefits?

Early Retirement Benefits

Allows eligible recipients to begin receiving their benefits four to five years prior to their full retirement age (65-67 depending on year of birth). The major disadvantage is that benefits are reduced by 20-30 percent for the recipient’s lifetime; spousal benefits can also be limited depending on circumstances.

Despite these drawbacks, about 45 percent of eligible Americans elect to receive early benefits (SSA Annual Statistical Supplement, released Feb 2015). Early benefits have appeal to those who are not working, need cash flow, and/or are concerned that social security’s days may be numbered—a “take the money and run” philosophy.

Helping clients calculate their “break-even age” can assist with this decision. As an example, if you are currently 62 and your full retirement age is 66, your monthly benefit of $1,600 would be reduced to $1,200 (by 25 percent) if you started today.  By about age 77, you could break even (total early benefits would equal those received at full retirement) at $230,400.  The break-even age increases to age 82 if we assume the early benefits were invested at 6 percent annually.  So, in this simplified example, if the client has a high probably of living past 77 (or 82, depending on your assumptions), he/she would be better off waiting until full retirement.  The Social Security Administration’s on-line calculator (http://www.ssa.gov/pubs/10147.html) is a great resource to help with these calculations. 

Early Benefits Earning Limits

For those who take early benefits and are employed with compensation over the “earnings limit,” Social Security will take back $1 of benefit for every $2 earned over the limit. This continues until the year in which full retirement age is reached. During the year they reach full retirement age, the new earnings limit applies only for the period before the month they reach FRA. If earnings exceed the limit in this period, benefits are reduced $1 for every $3 earned over the annual earnings limit.

The amount that is withheld, however, may not be lost. That is because the SSA will, after full retirement age, recalculate the benefit amount and give credit for any months when benefits were reduced because of earnings.

Taxation on Benefits

Benefits can be taxed as ordinary income, depending on the recipient’s Preliminary Adjusted Gross Income. Preliminary Adjusted Gross Income (P-AGI) includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits.  For P-AGI over certain amounts, a percentage of benefits become taxable. This applies to all social security recipients; there is no age forgiveness so it is important to check the prevailing AGI threshold to coordinate discretionary income such as IRA withdrawals.  We might consider “bunching” income and deductions in alternate years.

Delayed Retirement Credits

For those who postpone benefits and continue working past full retirement age, their lifetime benefit can be increased up to 8 percent for each additional year worked through age 69. The precise formula is based on birth year.  So for a client who is 66 this year and entitled to $1,600 of full retirement benefit today, working an additional two years could increase their monthly benefit to $1,856.  Thus, for clients who are active, in good health and have a family history of longevity, there may be benefit to continue working. (see http://www.ssa.gov/OP_Home/handbook/handbook.07/handbook-0720.html)

Spousal Benefits

For those age 62 and over whose spouses are alive and receiving benefits, they may be eligible for spousal benefit even if they do not have enough of their own work credits or have never worked at all. The maximum is 50 percent of the spouse’s benefit and may be reduced depending on how many months prior to full retirement age that payments begin.  Upon application, the Social Security Administration will automatically pick the greater of the spousal benefit or actual benefit based on own work credits.

The wife’s benefit may be optimized if she claims her benefit at age 62 (see study by Steven A. Sass, Wei Sun Center for Retirement Research at Boston College http://works.bepress.com/anthony_webb/26/). Because most husbands have higher lifetime earnings and shorter life spans, women often receive the majority of spousal and survivor benefits.  When a spouse dies, the survivor can claim the greater of their own earned benefit or their spouse’s earned benefit.  This may be reduced if claimed prior to full retirement age.  

Benefit Contingency Plans

We prepare clients for a number of possible changes as the social security system works to remain viable. Proposals that may be considered include:

  1. Raising the ceiling on the maximum wage base from current levels ($127,200 in 2017) to $250,000;
  2. Accelerating by 5 years the gradual increase in full retirement age to 67;
  3. Modifying the benefit calculation to reduce benefit growth;
  4. Introducing “means testing” that could increase taxation and/or reduce benefits for recipients with household income over specified thresholds.

Whatever the outcome, it is critical that we offer clients “contingency plans” capable of replacing benefits that could be lost as a result.

Strategies to Consider

Taking Early Benefits and Investing the Cash: Consider the above example wherein a client begins his $1,200 early benefit at age 62 and invests it at 6 percent annually. After 5 years he would have about $57,811 accumulated, which could potentially generate the $400 per month difference (between full and early retirement benefit) for about 22 years.  But if the money earns 3 percent, that benefit is only generated for about 13 years.  Obviously much here depends on actual investment returns and longevity.

Make Up for Low Earnings Years: In general, for those born after 1928, benefits are calculated by averaging 35 highest years of indexed earnings. For those who made little or nothing in one or more of those 35 years (often those who took off to raise family), waiting to retire until normal retirement age might increase benefits because each year they wait to retire gives a chance to earn enough to replace a lower year of earnings in the calculation.

Social Security Buy Back: Undoing a decision to receive early retirement benefits could be advantageous under certain circumstances.   Say a couple, both now 70, took early benefits at 62 and now receive $11,556 annually.  Had they waited until 70, they would be receiving $20,000 annually instead, despite their not having worked since age 62.  If they each pay back $79,305 in benefit and reapply, they effectively purchased an additional $8,444 of annual inflation adjusted annuity benefits.

Bottom line, there are no hard fast rules as each client situation needs to be evaluated based on their individual circumstances. Also, while we can educate, there is no substitute for the client having a face-to-face meeting with a Social Security Administration representative and consulting their tax adviser. As advisors we can add tremendous value by making clients aware of the various issues and guiding them through their decision making process.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

Can Innovative Strategies Help Address Your Long-Term Care Challenge?

When planning for retirement, all possible risks must be considered and evaluated. One of the most commonly overlooked is the potential need for long-term health care (LTHC) for you and/or your spouse. The cost of LTHC can be staggering and can derail even the best laid financial plans. When evaluating the risk of the cost for LTHC, the old adage about three ways to manage risk can be clearly applied.

Continue reading “Can Innovative Strategies Help Address Your Long-Term Care Challenge?”

How Can You Avoid Wealth Transference Failure?

If you believe that everything has been done to preserve your estate as it passes to your heirs, you may want to think again. Almost 70 percent of family wealth transference and business succession plans fail, according to studies cited by Victor Preisser and Roy Williams, in their book Preparing Heirs.

Continue reading “How Can You Avoid Wealth Transference Failure?”

How Can You Avoid the Top 10 Estate Planning Pitfalls?

Upon your death, the best thing you can do for loved ones upon death is allow them to resolve your estate quickly and easily, so they can get on with their lives. But people often fall into 10 estate planning traps. Here is how to avoid them. Understanding and avoiding these common errors can help minimize the tax bite for your heirs and assure that your wishes are fulfilled.

1.  Not funding your living trust

This important trust places your assets “in bin” while you are alive. Postmortem a pre-appointed trustee is provided to manage them. Living trusts can usually help avoid probate (a costly court proceeding that decides which heirs receive your assets after your death) and help reduce taxes on your estate. No matter how thorough your living trust is, it needs to be adequately funded. Generally, to be effective, you must move property and assets into the trust by making the trust the legal owner of those assets. If you don’t make the appropriate title transfers, assets may be subject to probate and eventually, estate taxes.

2.  Too much JTWROS property

Joint-tenancy-with-right-of-survivorship (JTWROS) is a type of brokerage account that you share with your family members while you are alive. After you pass away, your survivors inherit your share of the account. While titling assets under JTWROS does avoid probate, it does not avoid estate taxes. It is important to keep in mind that property titled JTWROS goes to the surviving joint tenant regardless of what a will or trust says.

3.  Leaving too many assets to a surviving spouse

Under the current tax laws, you are allowed to transfer as many assets in your estate as you wish to your spouse either while you are alive or at your death. The problem and extra tax may come when those assets pass to the next generation. A major goal of a living trust is to preserve the first-to-die spouse’s applicable exclusion amount. This is the amount that is exempt from estate and gift taxes. It is advisable to check the current amounts with your attorney.

4.  Not equalizing assets through gifts between spouses

This is another example of improper titling and wasting the applicable exclusion amount. Having all property titled in one spouse’s name can create problems when the non-titled spouse dies first and does not pass on any property under his or her credit.

5.  Not having a will

If you die without a will, the disposition of property falls under the purview of the state intestacy laws. In effect, a judge decides who gets what according to a preset formula based on lineage. Not only can your wishes be thwarted, but this process can also bring additional legal costs, taxes, delays and frustrations to your heirs.

6.  Improper ownership of life insurance

Policies are often owned by the insured, payable to the insured’s estate or survivors. This is included in the owner’s taxable estate and is therefore subject to estate taxes. You can avoid this by giving the policies directly to the beneficiaries or transferring them to an irrevocable trust.

7.  Being donor and custodian of a UTMA account

If you are the custodian and donor to a uniform transfer to minors account, that account will be included in your estate and possibly subject to painful estate taxes.

8.  Not knowing where all the documents are

Heirs are often burdened with hunting down accounts and documentation. A scattered estate plan by a secretive deceased person may cause some assets to be left uncollected, undistributed and even lost. It is best to keep copies of documents, recent account statements and safe deposit box information in a notebook and to make your trusted heirs aware of its contents.

9.  Naming the wrong executor

The tasks facing an executor are often formidable and demanding. If you are concerned that your spouse, relatives or friends are not up to the task, consider hiring a professional or a trust company.

10. Not periodically updating an estate plan

It is human nature to think about dying. That makes estate planning one of the most frequently procrastinated aspects of our financial plans. Often when the original documents are drafted, people are tempted to put it on a shelf and be done with them.

As your economic situation, health, family and the tax code inevitably change, so too should your estate plan. You should review your estate plan at least every couple of years. It’s best to work with an experienced advisor who can help make the necessary modifications.

Even the most sophisticated estate planning tools can go awry due to some simple oversights. Be sure to work with an experienced financial professional to help you achieve your estate planning goals.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

Financial Confidence in Retirement: 10 Planning Mistakes to Avoid

As more Baby Boomers approach their golden years, they are faced with a plethora of challenges. Especially for those with greater resources, the issues can be formidable. To the extent that these are effectively addressed, the promise of those Golden Years can be more readily achieved with less stress—both during and after the transition.

The Top 10 Most Common Mistakes to Avoid

  1. Procrastinating

Often people do not begin their retirement planning until retirement is upon them. Depending on your situation, most experts urge that this process begin no later than 5 years prior; ideally, at least 10 years or more.1

  1. Not Considering How Much Retirement Income Will Be Needed

Estimates vary as to how much a person’s or couple’s expenditures will change once they retire. Generally, 75 percent of current income is the rule of thumb. Obviously this has to be adjusted for factors such as projected mortgage (if any), downsizing of residence, travel, etc.

  1. Not Estimating How Long Retirement Income Will Need to Last

You hear it all the time: People are living longer, and hopefully you will be among the growing number of centenarians. Other issues may arise as well, such as the likelihood of needing to provide financial assistance to your parents, children or even siblings. Careful, objective planning and on-going management will be needed to make sure there will be enough income.

  1. Overreliance on Social Security

This program was always intended as a safety net and not to meet all of a retiree’s income needs. With questions arising as to the system’s soundness, it is more important than ever to have sound planning in our financial affairs.

  1. When to Begin Taking Social Security Benefits

While it is certainly tempting to begin retirement benefits as soon as eligible, there are some important considerations. First and foremost is the fact that, while benefits can start as early as age 62 for eligible recipients, taking those early benefits can permanently reduce the monthly amount by up to 25 percent for a recipient’s entire lifetime! And if the recipient is working and earning over the prevailing threshold amount, they could see up to a 50 percent reduction of benefits until they reach full retirement age. On the other hand, some studies imply that recipients can benefit by taking early payments and investing the amount until full retirement age is reached, while others suggest that receiving a lower benefit for a longer time can be more advantageous. Before making any decisions, it is important to consult with your local Social Security Administration Office, then carefully review your circumstances with your tax and financial advisors.

  1. Dismissing the Possible Need of Long-Term Care

It is easy to dismiss the prospect of long-term care, particularly if someone close has not fallen victim to chronic diseases such as Alzheimer’s. The reality is that if not properly planned, the ever-increasing costs of long-term home and nursing care can rapidly deplete a lifetime’s savings. If necessary, long-term care insurance can make the difference between a comfortable, calm retirement and one filled with financial insecurity.

  1. Retiring Early Without Adequate Planning

An early retirement can present exponentially greater challenges to one’s savings. Not to say it should not be done, but it is particularly critical that a game plan be developed well ahead of time to help ensure there will be enough income to last.

  1. Assuming Retirement Planning is a One-Time Event

Especially with the rapidity of life’s changes today, a plan constructed even a year ago could be sorely in need of revision. Changes in the markets, interest rates, even our own personal preferences, necessitate periodic, on-going review and adjustments.

  1. Forgetting About Income Taxes

Just because we retire does not mean income taxes go away, starting with how best to handle lump sum distributions from a retirement plan. During retirement, income tax planning can be even more critical to preserve the nest egg. Especially with the onset of required retirement plan distributions, it is important to continually evaluate whether to take the minimum or to accelerate withdrawals.

  1. Believing in Retirement Nirvana

Just like “the grass is always greener…,” retirement can be seen as the cure for many of life’s woes. For those unprepared, the added time available can create a whole new set of challenges. Statistics show that the average new retiree spends about 45 hours a week watching television (see http://www.cebcglobal.org/index.php?/knowledge/the-age-wave/). For a fulfilling retirement, it is important to prepare for the psychological as well as the financial aspects.  Just as a surgeon is advised not to operate on herself or loved ones, it is often invaluable to have independent, objective, expert advice in developing and managing a program for your retirement years.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

1Anspach, D. (2016, November 17). Steps You Must Take Within 5 Years of Retirement.Retrieved from http://www.thebalance.com.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Fargo Financial Network LLC (WFAFN).  The information has been obtained from sources considered to be reliable, but Wells Fargo Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years. Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community. 

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), SIPC.  Kauffman Wealth Management is a separate entity from WFAFN, Member SIPC.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

A Unique Approach to Life Transitions

“What am I going to do after I retire?” “How can I stay relevant?” “Do I have all of my bases covered to help assure financial independence after I stop working?”

Certainly questions such as these are often posed by both men and women as they ponder their future after retiring from a career. Considering 75 million baby boomers will be reaching retirement age over the coming years, there will be no shortage of inquisitors in the foreseeable future. Continue reading “A Unique Approach to Life Transitions”