Pennsylvania Estate Planning

Contributions to 529 Education Savings Plans Rise, Despite Lagging Returns

Making plans for the next generation often involves planning for their education. And with educational costs rising, many families are using 529 education savings plans to help offset the future expense of college tuition, boarding, books, and related fees.

A 529 plan is a tax-advantaged account that encourages savings now to put toward exorbitant college costs later.   What do I mean by tax-advantaged?  Some states including Pennsylvania allow contributors to these plans to deduct those contributions from their taxable income in the year they are made, up to a certain amount.  In addition, the contributions grow tax-deferred and the earnings on the 529 investments are not subject to federal tax or state income tax as long as they are used to pay for qualified educational expenses. 

Because of these attractive tax advantages, 529 can be an excellent tool for families worried about the ever-rising cost of college. That said, not all plans are created equal, and anyone considering investing in a 529 plan should be sure to compare it with other investment alternatives before making a decision.

A recent Morningstar Inc. analysis found a sharp increase in contributions to Section 529 plans in 2012.  The Morningstar analysis also noted that despite their recent surge in popularity, 529 education plans as a whole underperformed against some traditional mutual funds.  Reuters reported on these findings in “Morningstar: 529 college savings plans up in 2012 despite some lags.”

One notable difference between 529 and traditional funds is that the costs and fees associated with some 529 plans are higher than those of comparable mutual funds.   The higher the fees, the lower the overall return.   Of course, fees vary from fund to fund, so investors should be sure review the fees of their specific plan carefully.

In some cases, the performance and tax advantages of a 529 plan will clearly favor its use over a traditional fund.  However, the Morningstar analysis found that some 529 plans were simply not worth it when all factors were considered and compared against non-529 plans.

What does that mean for you, the college tuition-minded investor?  It means that you must look at all of the factors that will affect your likely overall return – fees, performance record, and tax effects – and only then decide whether the 529 plan you’re considering is the right vehicle for you.  As always, it is a good idea to discuss any investment questions with your financial advisors and attorney, who can help you assemble a plan that best fits your goals and specific financial circumstances.

Reference: Reuters (April 22, 2013) “Morningstar: 529 college savings plans up in 2012 despite some lags”

Just Do It: Basic Planning Now will Save Your Loved Ones from a HUGE Mess Later

Managing your own finances can be tough.  If you had to explain the ins and outs of those finances to another person right now, you might both find yourselves scratching your heads trying to keep things straight. So imagine how difficult it would be if you became the executor of someone else’s estate – with no guidance whatsoever.

Since we will not live long enough to make all of life’s mistakes, it can be helpful to learn from the mistakes of others. In this spirit, you should take a read through a recent autobiographical article in Forbes titled “What My Dad's Death Taught Me About Money.”

As you read this article, you’ll see that there are many lessons to be learned from the experiences of the author, an only child, in her role as executor of her father’s estate. Unfortunately, the author had to learn these lessons the hard way.  When her father, a long-time entrepreneur and business owner, died suddenly without a will, she was left to pick up the pieces with no guidance or “road map” of any kind. 

Cleaning up the mess took years from start to finish, and consumed almost 100% of her time for a whole year (she took freelance work assignments while handling the estate probate process full-time).  It also required the involvement – and payment – of countless lawyers and other professionals in several states. The worst part of the author’s story is that her life was turned upside down without unnecessarily – a result her father definitely would not have wanted if he had taken the time to think about it.

I highly recommend reading the full article, but for those of you short on time here are the essential takeaways:

Lesson #1: Everyone Should Have an Estate Plan … or at Least a Will.  Without a plan in place, and a means to carry out that plan, the grieving loved ones you leave behind will be forced to stumble their way through the estate administration process “blind.”  Not only will they be under an incredible amount of stress trying to figure everything out, but they will end up spending far more on attorneys and other professional helpers than it would have taken to put a plan in place ahead of time. A Will is the first step and an absolute necessity, but a more detailed plan will make an otherwise complicated and often wrenching process a lot easier to get through.

Lesson #2: Adequate Medical Insurance is a Must.   The author’s father had allowed his medical insurance to lapse about a year before his fatal brain hemorrhage at the age of 54.  Why?  Because he was starting a new company, was in relatively good health, and thought the expense could be eliminated for a short period of time.  He clearly couldn’t have predicted that an unexpected medical catastrophe would land him in the intensive care unit, racking up tens or hundreds of thousands of dollars – dollars that could have gone to his family instead of the hospital.

Lesson #3: No, You Really Can’t Take it With You, So Be Sure To Stop and Smell the Roses Every Once in a While.  The one lesson that really resonated with me in this story is that no matter how hard you’re working to ensure your financial future, you’ve got to remember not to leave everything to the future.  Work hard, but not to the exclusion of everyone and everything in your life now.  While it’s great to be able to leave your loved ones money when you’re gone, all the money in the world can’t make up for missed quality time together.

One of the best and most lasting gifts you can leave your loved ones is a well-planned and organized estate.  To begin the process of creating your own estate plan or to schedule a complimentary estate planning consultation, contact us at Peak Legal Group.

Reference: Forbes (April 19, 2013) “What My Dad's Death Taught Me About Money”

If You’re Not Careful, Living Overseas Can be Quite “Taxing”

Traveling abroad can be exhilarating enough, but living abroad comes with a whole other level of excitement … and a number of complications if you aren’t careful.  If you are one of those hopping back and forth across a U.S. border, and keeping earning or keeping money on both sides, beware of the financial hurdles and heightened attention of the IRS.

If you are no stranger to frequent border traffic, then likely you are aware of the recent adjustments in IRS practice, not to mention several large developments involving overseas accounts and income. Essentially, the IRS is on a mission to capture more and more overseas accounts and assets taxable under U.S. law. How are they doing this? By working with international banking institutions to make sure they comply with more stringent reporting requirements on American account holders.

Ostensibly, the targets are tax-evasion type accounts in Swiss banks. In reality, however, the dragnet is catching – and penalizing – a broader group of individuals and families of all means and intentions. The potential targets include middle class overseas workers, as well as immigrants working in the U.S. but still maintaining a bank account in their home country.  Many of these individuals and families are unaware that they are targets – and even fewer are aware of the rules of the (tax) road, and the steep penalties they may face if they don’t comply.

This problem has been growing with the recent uptick in IRS attention to overseas matters.  In fact, The New York Times tackled the issue not too long ago in an article titled “Overseas Finances Can Trip Up Americans Abroad.”

Bottom line?  If you’re going to be crossing borders regularly, whether for work, for family, or even as part of your retirement, then this is an important reminder to keep the tax laws of all countries involved in mind.  If you’re not sure of how the rules apply to you, be sure to consult with your attorney.   With your financial security at stake, it’s vitally important to be aware of the new international tax complications arising from where you make – and keep – your money.

 

Reference: The New York Times (April 5, 2013) “Overseas Finances Can Trip Up Americans Abroad”

Pennsylvanians, Don’t Forget About “Death Taxes” at the State Level

It is a certainty that Capitol Hill will see budget battles in the near future. However, estate planners are more relaxed this time around due to the outcome of the last battle, which resulted in the enactment of the American Taxpayer Relief Act (ATRA) at the beginning of the year.  As a result of ATRA’s “permanent” $5.25 million estate tax exemption for individuals, most taxpayers have been spared the federal estate tax – at least until there is a change in the law.

If you are solely focused on the recent federal tax changes, then you might think you are completely home free because the value of your “estate” is less than the federal exempt amount. But before you start celebrating, don’t forget about those taxes levied at the state level. Unfortunately, these state taxes generally kick in at a much lower amount than the federal exemption.  

As a recent Kiplinger article titled “Beware States With Their Own Estate Taxes” warns, 21 states (plus the District of Columbia) currently impose some kind of transfer tax, whether an estate tax, an inheritance tax, or both simultaneously. Pennsylvania is one of those states, with an inheritance tax that ranges from 4.5% to 15%.  And unlike the federal estate tax, Pennsylvania’s inheritance tax does not have an exemption amount.  The only transfers that do not trigger an inheritance tax are those between husband and wife.

If you’re married and plan to leave everything to your spouse, you might think you don’t need to worry about this.  But what happens if your spouse predeceases you, or if you want to leave something to your children or friends as well?   Yup, the PA inheritance tax will rear its ugly head. 

In addition, there is no guarantee that the “permanent” $5.25 million federal exemption is around forever.  Already the new budget battles have given rise to calls for a change in the so-called “permanent” federal estate tax exemption. In fact, the Obama Budget Proposal would reduce the just-agreed-upon “permanent” exemption from $5.25 million to $3.5 million within the next five years (see the The Washington Times discussion of this proposal here).

Fortunately, there are ways to plan around the application of the inheritance and/or estate tax, or at the very least minimize its impact.  The only way to do that is to plan ahead, and take steps to ensure that your estate plan is flexible enough to adapt to changing exemption levels.  Because of the complexity of the tax issues involved and the ever-changing legal environment, you should seek the help of your estate attorney who can advise you regarding the law as well as the pros and cons of your available options.

For more information about what you can do to minimize the impact of death taxes on your estate and your heirs, contact us at Peak Legal Group to schedule a complimentary estate planning consultation.

Reference: Kiplinger (May 2013 issue) “Beware States With Their Own Estate Taxes”

How to Create a Living Will that’ll be Understood when it’s Needed

End-of-life decisions are complicated,which is why they require proper planning today to ensure that they will be carried out when the time comes. This is especially important when it comes to decisions about the type of care and treatment you wish to receive – or not receive.

Like it or not, there may come a time when you will not be “available” to communicate your wishes regarding medical care.  What happens at that point will depend, in large part, on whether you have provided instructions about your treatment – and how clear those instructions are.

Medical directives and living wills are documents designed to speak for you and make your wishes known when you are unable to speak for yourself.  So have you executed your medical directive and living will?  And if you have, are they documents that you created on your own or downloaded from the internet?  If your answer is ‘yes,’ you might want to reconsider that move.  

Bloomberg recently published an article called “The Right Way to Craft a Living Will” that discouraged taking the self-help approach to this essential component of your estate planning. It is important to know there is a “right way to craft a living will” and it does involve more than simply signing on the dotted line of a pre-printed form.

One all-too-common mistake many people make is to sign a medical directive and living will without completely understanding what it says, or to simply put it in a drawer (or even in their doctor’s
medical file) without discussing it with loved ones, and then think everything is taken care of.   

Unfortunately, written documents (particularly those “one size fits all” forms found online) can be vague and open to misinterpretation.  So in addition to making sure that you understand everything
your document says, and that it accurately expresses your specific wishes, you need to share your wishes with your loved ones to avoid any confusion.  

You should appoint a trusted family member or friend to be your health care agent to guide the
decision-making process if and when the time comes.  You should also make sure that your agent understands the wishes your documents are intended to convey so your loved ones won’t have
to “interpret” the documents in a time of crisis.

For more information about how to create an effective and understandable Medical Directive and Living Will, or for answers to your other estate planning questions, contact us at Peak Legal
Group to schedule a complimentary estate planning consultation.

Reference: Bloomberg
(April 9, 2013) “The Right Way to Craft a Living Will”

Virtual Asset Protection Online Becomes a Little Easier

Technology has changed the way we view assets, as we now have virtual assets to protect in addition to our tangible property. Our estates now include digital assets like online banking and brokerage accounts. Web-based businesses are increasing and owning property in cyberspace has become a reality. But what happens to our virtual life when our physical life is over?

In other words, what happens to everything on “the cloud” when you die?

From your personal information to Facebook accounts to iTunes collections, an incredible amount of information about your life – and your property – exists online. Until recently, there have been few solutions available to keep everything straight, let alone remembered and handled, after a person dies.

Fortunately, that is changing. The Wall Street Journal reported in a recent article titled “Google Lets Users Plan ‘Digital Afterlife’ By Naming Heirs” that Google has become one of the first and likely the largest company to offer users a proactive digital-estate planning tool - the “Inactive Account Manager.”

The important take-a-way from this welcome new development is the importance of planning in both the “real” and “virtual” world.  So, what can you do to ensure the proper handling of your accounts and other bits of data snaking across the web? What plans have you made – or should you make – to transition your virtual life when you’ve transitioned to the afterlife?

For more information about how to set up a virtual asset protection plan, or to discuss your other estate planning-related questions, contact us at Peak Legal Group to schedule a complimentary estate planning consultation.

Reference: The Wall Street Journal (April 11, 2013) “Google Lets Users Plan ‘Digital Afterlife’ By Naming Heirs”

Is Portability of Lifetime Tax Exemptions Really Here to Stay?

With budget uncertainty over our heads, it’s nice to know there are some laws that are (supposedly) set in stone. The American Taxpayer Relief Act of 2012 (ATRA) has allowed us to breathe a bit easier; however, many people still don’t trust any tax law claimed to be “set in stone” by the Government.

When it comes to making estate plans, certainty is essential. Any uncertainty can wreak havoc on even the most carefully crafted plans. One popular “permanent” part of estate planning under ATRA is “portability.” Which begs the question: can we trust that it’s really here to stay?

For those of you unfamiliar with the concept, “Portability” is the new ability of a spouse to pass his or her unused unified gift tax lifetime exemption and/or estate tax exemption to their surviving spouse. It grew out of budget deals and then was made “permanent” under ATRA, also known as the bridge over the Fiscal Cliff.

As a questioner in a recent Wall Street Journal Q&A (“Is Estate-Tax Portability Permanent?”) pointed out, estate tax “portability” is a great option – but an act of Congress could just as easily undo it. What happens then?

The general consensus is that portability is probably here to stay, for a multitude of reasons. Assuming that remains true, the key to portability is to separate myths from realities. One myth: portability is automatic. One reality: the real-world application of portability can be rather complex in terms of unintended consequences.  For example, what happens when the surviving spouse remarries?

For now, perhaps it is enough to be able to breathe a little easier as to portability. But as you give thought to what you and your spouse hope to achieve through your estate plan (from both tax and non-tax perspectives), the concept of portability should definitely be examined in greater depth.

For more information about how you can take advantage of portability in your own estate plan, or for answers to you other estate planning questions, contact us at Peak Legal Group to schedule a complimentary consultation.

Reference: The Wall Street Journal (March 31, 2013) “Is Estate-Tax Portability Permanent?”

While Not for Everyone, Prenuptial and Post-Nuptial Agreements Can Reduce Financial Uncertainty and Protect Blended Families

Spring brings with it more than just April showers and May flowers.  Don’t forget about those Spring weddings!  For many soon to wed couples, financial discussions will (should!) arise and lead to deep thought and planning – well before the wedding bells ring.

Marriage is not just “tying the knot:” it involves legally tying together all of your financial resources and interests.  Indeed, it has been said that the most important financial decision you will ever make is who to marry.  These days, many couples with important financial resources and interests in the marital mix elect to use a prenuptial agreement as sort of an “insurance” policy in the event the marriage doesn’t work out as planned.  Others, especially those couples remarrying or blending families, use prenups to ensure the predictability of their estate distributions and to protect the future interests of their respective children.

Prenuptial agreements are nowhere as exotic as they are portrayed in the popular imagination. In fact, they can be reliable and extremely useful documents when produced through a process of full mutual disclosure, careful discussion and deliberation, and independent legal representation. However, no prenuptial agreement is ironclad unless it is done correctly and, essentially, treated like the contractual understanding that it is.

Recently, Forbes provided some guidance to double-check the effectiveness of your prenuptial agreement in an article titled “Five Reasons Your Prenup Might Be Invalid.” In addition, The Wall Street Journal offers some specific guidance to get your prenuptial agreement ship-shape in an article titled “Shoring Up Your Prenup.”

Used correctly, a prenuptial agreement, or even a post-nuptial agreement as the case may be, can help a couple frame their financial resources and interests and ensure a measure of financial predictability in the context of their life together.  This can provide great peace of mind, especially when blending families and the children from those families.

Granted, actually executing a prenup or post-nup is not for every couple – especially those who may have religious or other objections.  However, the process of discussing the financial issues associated with a prenup can be useful for everyone, regardless of whether the discussion ultimately leads to a signed agreement.

For more information about prenuptial and post-nuptial agreements, or to explore whether one may be appropriate for you or a loved one, contact us at Peak Legal Group to schedule a complimentary consultation.

Reference: Forbes (April 2, 2013) “Five Reasons Your Prenup Might Be Invalid”

The Wall Street Journal (March 29, 2013) “Shoring Up Your Prenup”

Obama’s Proposed Budget Rumored to Go after IRAs

You may have heard of a few budget plans meandering around the capitol, including President Obama’s proposed budget. While we don’t have many details as of yet, self-employed professionals should take note, as they could be tax targets when it comes to their retirement savings.

For retirement savers and those making powerful use of an IRA, here’s at least one tidbit the rumor mill has been circulating well before the budget’s release. If enacted, “wealthy” individuals would be pinched with a $3 million cap on their IRA holdings.

Several sources have reported on this, including Time Magazine in an article titled “Obama’s Budget Would Cap Tax-Advantaged Savings.” Although $3 million may sound like a lot, it may end up affecting more savers who otherwise might not be considered traditional tax targets: specifically, self-employed individuals like doctors, lawyers, and entrepreneurs. The self-employed all have unique abilities (and needs) to contribute large amounts to their IRAs.

So who is the intended target of this kind of a cap? One name keeps surfacing: Mitt Romney. Remember his fabled $100+ million IRA?  You can read about it in a Boston Globe article titled “Obama budget would pinch IRAs of wealthy with $3m cap.”

Caveat: The analyses of the proposal are still being churned out, and there are a number of important details to be hammered out as well. At present, this cap is no more than a proposal and part of a budget plan that is, frankly, none-too-well-liked by either side. Nevertheless, this kind of cap and its potential repercussions for tax-advantaged plans is worth keeping an eye on.

Reference: 

Time Magazine (April 10, 2013) “Obama’s Budget Would Cap Tax-Advantaged Savings”

The Boston Globe (April 10, 2013) “Obama budget would pinch IRAs of wealthy with $3m cap”

Bankruptcy Protection of IRA Assets Increases Again

A cardinal rule of asset protection planning is the more assets you have, the more you have to lose. And if you have accumulated savings in an IRA, then you should be aware of the asset protection allotted for your IRA.

As recently reported by the Slott Report, the IRA bankruptcy exemption has just increased. The article is titled “IRA Bankruptcy Exemption Amount Increases.” Background: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) cleared the way and exempted the first $1 million of IRA funds (including Roth IRAs) in the event of bankruptcy.

Fortunately, this amount is subject to cost of living adjustments.  As of April 1, 2013, the new number is $1,245,475. This is great news for most American savers, since the average IRA is less than $1 million. Still, it’s also a figure worth knowing for larger IRAs given the important function they serve in many retirement and/or estate plans.

But take note: the limitations to the exemption are just as significant as the exemption itself. The exemption only applies in the case of filed bankruptcy, and may be voided in certain circumstances.  In addition, certain events like divorce may easily trigger a levy on the IRA.

The important thing to remember is that significant IRA protection is available, but it should be considered only one piece of a comprehensive asset protection strategy.  Assembling such a strategy requires careful consideration of several factors including state law, proper asset titling and insurance coverage, to name a few.

Proper asset protection planning is not a do-it-yourself project, so be sure to consult with knowledgeable counsel when putting a plan in place.

For more information about available asset protection methods, or for answers to your other estate planning questions, contact us at Peak Legal Group to schedule a complimentary consultation.

Reference: The Slott Report (April 9, 2013) “IRA Bankruptcy Exemption Amount Increases”