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Archive for December, 2012


Is Your Will Up To Date

Wills and trust can be an essential part of financial planning. The planning includes the accumulation, enjoyment, conservation and distribution of your assets. Wills and trust are two of the most common documents used to control the disposition of your assets.

Wills are a legal document that states your intent of how your assets should be disposed of after your death. A will can be changed during your lifetime, assuming you are legally competent, and applies to the situation at the time of your death.

A trust is a legal arrangement in which you transfer property to another (trustee) for the benefit of you and your beneficiaries. There are many types and uses for trusts. Some can be changed, some are effective at the time of a specific event (such as death), and some exist for a specific time period. The powers of the trustee can be crafted to the specific use and purpose of the trust. The trustee is acting on behalf of the person creating the trust and the beneficiaries.

Other estate planning documents include: durable power of attorney, advanced medical directives and letters of instruction. The documents needed depend on the many factors unique to each individual.

It is a good idea to review your will and other documents when you experience a major life event, such as marriage, divorce, birth of a child, death of a parent, retirement, change in occupation or other significant milestones. Even if there are not any major life events, you should review the documents every few years to see if they still reflect your intent. Changes in the value of your assets and liabilities may require adjustments to the documents. The existence or likelihood of an heir requiring special needs may require changes in the documentations.

Your reviews may indicate that changes may be needed in other areas of your financial planning. Financial planning is not a onetime event. It is a continuous process that requires review and follow-up.
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Required Minimum Distributions from IRAs and Defined Contribution Plans

You may have read (possibly in one of my posts) or heard that when you are 70 1/2 you are required to start taking distributions from your Individual Retirement Plans (IRAs) and Defined Contribution Plans (generally profit sharing plans).  The distributions are called Required Minimum Distributions (RMD).  The Internal Revenue Service has posted on its website some useful tools to help understand the rules.
The RMD Comparison Chart (READ MORE) provides some of the basics.   The chart covers the following questions:
“When do I take my first RMD…”
“When do I reach age 70 1/2?”
“What is the deadline for taking subsequent RMD’s after the first RMD?”
“How do I calculate my RMD?” A link is provided to a distribution worksheet (READ MORE).
“How should I take my RMDs if I have multiple accounts?”
“May I withdraw more than the RMD?”
“May I take more than one withdrawal in a year in a year to meet my RMD?”
“What happens if I do not take the RMD?”

There are links to other resources.

These resources are very helpful in understanding the general rules.  Unfortunately they do not highlight the planning opportunities.  Titleling of the accounts and naming beneficiaries are 2 areas that require a deeper understanding.  Not considering these and other technical areas may result in an outcome that is not consistent with your financial planning.  This could result in reducing the funds available to you and your heirs.  Everyone should review their planning periodically.  Annually the titling and beneficiary designations should be reviewed.  Life events may require changes that might not otherwise be made.


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IRA planning includes and understanding of what can go wrong.

Robert Powel summarized “…Top IRA-planning mistakes” created by Robert S. Keebler in his Nov. 29th and Dec. 5th column .  His column appears in the Market Watch, The Wall Street Journal. Mr. Keebler is a noted authority on IRAs and frequently lectures on IRAs and related topics.

Following are the highlights.
1. Failure to make timely Required Minimum Distributions (RMD).  There is a 50% penalty on the amount not timely paid.  A common mistake is not to aggregate all your IRAs when calculating the RMD.  Once you reach 70 1/2 make sure you understand the rules.

2. Generally you should name an individual (a qualified designated beneficiary) and not an estate or trust as beneficiary.  A qualified designated beneficiary has a longer period to receive the funds from the IRA. Spreads out the distribution over a longer time period allowing the funds to grow tax-free for a longer period and the amount taxed in any year is less.  Usually this results in less tax.  This applies to your primary and contingent beneficiaries.

3. Unnecessarily accelerating IRA distributions is another mistake to avoid.  There are times when distributions should be accelerated.  Available loses and higher future income and/or taxes are to common examples.

4. Failure to properly title inherited IRAs is another planning mistake.  This could cause the entire account to be taxed in one year substantially increasing taxes.

5. Failure to meet the requirements when a trust is named as a primary or contingent beneficiary.  In the right circumstances a trust may be appropriate.  This is an exception to the general approach not to name a trust (see 2. above). Trust may provide needed protections, controls, management and planning.  An experienced professional should be involved to make sure the requirements are met.

6. Make sure that any rollover of an IRA is completed within 60 days.  Failure to meet this requirement could result in taxation of the amount rollover.  If you are younger than 59 1/2 you could be subject to a 10% penalty.

7. Understand the surviving spouses option of treating the inherited IRA as their own or rolling the IRA assets into their own IRA.  If the funds will be needed by the surviving spouse and the surviving spouse is younger than59 ½ it may be best to treat the IRA as an inherited IRA.

8. IRA assets can be accesses prior to age 59 ½ if taken as a series of equal periodic payments.  Failure to meet the requirements can result in the 10% early withdrawal penalty plus retroactive interest.

9. Do not deal directly or indirectly with the IRA assets.  This would be a prohibited transaction.  The IRA would become taxable and various penalties could apply (10%, 15% and 100%).

10. Br aware borrowing, hedging and similar transaction in an IRA.  These can result in unrelated taxable income that is taxable.

There are many technical requirements relating to IRAs.  Failure to follow them could unnecessarily increase the tax you or your heirs will have to pay.  Each custodian has its own requirements and restrictions.  Planning requires an understating of the tax ramifications and the custodians terms on its IRAs.

The above is not intended as a complete discussion of the requirements, restrictions, exemptions, etc.  The discussion is to highlight some of the planning that can maximize the benefits of IRAs.


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Are there better uses for cash values within a life insurance policy or if the policy is no longer need?

There seem to be an increasing number of articles about these issues relating to cash value insurance policies.  This discussion is not applicable to term insurance.  Cash value life insurance policies have a cash value in addition to its death benefit.  The amount of the cash value is funded by a portion of the premiums and the earnings net of expenses over the period that the policy is in force.

Over a long period the cash values within a life insurance policy may be significant.  You can access the cash by taking withdrawals some of all of the funds.   If the amount withdrawn is less than the premiums you paid, less any prior withdrawals, there are not any tax consequences from the withdrawals.  Otherwise the excess amounts will be taxed at ordinary tax rates.

An alternative would be to borrow some or all of the cash values.  Life insurance coverage is reduced by the amount borrowed and interest on the amount borrowed.

The earning on the cash values can also be used to pay premiums.

If the life insurance is no longer needed there are various alternatives.  It is possible to exchange a life insurance policy for an annuity or a long-term care policy.  This can be done without recognizing taxes on your gains.  If the value is more than the premiums paid less any prior withdrawals.

The issues are different if the premiums paid, less prior withdrawals, are more than the cash values.   The loss on surrender or sale of the policy would not be tax deductible.  Alternatively the policy could be exchanged for an annuity.  The loss in the policy would still not be deductible.  However, the loss would reduce future gains in the annuity.  Ellen E. Schultz’s November 3oth article in The Wall Street Journal, “Insurance Can cut Your Taxes” discusses this issue in more detail.

These alternatives must be considered in relation to you complete financial plan.  No one approach applies to every situation.  Among the factors to consider are: the amount of coverage needed, the returns within the policy compared to alternative returns available and the tax consequences.   An understanding of the alternatives and related consequences must be understood.
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