After leaving a job, workers generally have three options when it comes to the money they have saved in their former employer’s retirement plans. They can keep the money in the plan, roll the money directly to an individual retirement account, or cash out and take a lump-sum distribution.
The way in which you handle your retirement plan assets when leaving a company is an important decision that could affect your retirement savings considerably. One of these choices may result in current taxes and penalties. One may end up limiting flexibility and your investment options. Rolling your money directly to an IRA may enable you to avoid the hassle and cost of the other two options while you continue saving for retirement.
Cashing Out
Taking a lump-sum distribution not only subjects the withdrawal to income taxes plus a 10% federal income tax penalty for someone younger than 59½ (with certain exceptions), but companies will withhold 20% for taxes. Despite these disincentives, 46% of workers who left their jobs in 2008 decided to cash out and pay the taxes and penalties.1
Staying Put
Although leaving money in your former employer’s plan may avoid current taxes and penalties, it may not be the ideal saving situation for you. Not all plans allow former employees to remain, so you might get the boot. If your plan allows your funds to stay, you may be subject to certain restrictions and will continue to be limited by the investment options offered by that plan.
Rolling Over
By transferring funds directly to a traditional IRA, you can preserve tax deferral and avoid penalties. Beyond that, IRAs offer benefits that aren’t available with many employer-sponsored plans.
IRAs tend to have more flexible rules than workplace plans. This can affect everything from customizing your investment selections to naming your beneficiaries. IRAs generally have fewer restrictions when it comes to inherited plans, which could make it easier for your heirs to stretch the account into possibly decades of tax-deferred growth potential. Finally, the range of investment options with an IRA vastly outnumbers that of most employer-sponsored plans.
Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty, except in cases of the owner’s death, disability, or a qualified first-time home purchase ($10,000 lifetime maximum).
1) Hewitt Associates, 2009
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.
Santa Barbara Financial Consultant, Janet L. Barr
Friday, August 20, 2010
Thursday, August 12, 2010
Why should you avoid probate?
Avoiding Probate: Is It Worth It?
When you die, your estate goes through a process that manages, settles, and distributes your property according to the terms of your will. This process is governed by state law and is called probate. Probate proceedings fall under the jurisdiction of the probate court (also called the Surrogate's, Orphans', or Chancery court) of the state in which you are domiciled at the time of your death. This court oversees probate of your personal property and any real estate that is located in that state. If you own property located in a state other than the state in which you are domiciled at the time of your death, a separate "ancillary" probate proceeding may need to be initiated in the other state.
Note:"Domicile" is a legal term meaning the state where you intend to make your permanent home. It does not refer to a summer home or a temporary residence.
Items that are subject to probate are known as probate assets. Probate assets generally consist of any property that you own individually at the time of your death that passes to your beneficiaries according to the terms of your will. Nonprobate assets include all property that passes outside of your will. Examples of nonprobate assets include property that is owned jointly with right of survivorship (e.g., a jointly held bank account) and property that is owned as tenants-by-the-entirety (i.e., real property owned jointly by a husband and wife). Another example is property that passes to designated beneficiaries by operation of law, such as proceeds of life insurance and retirement benefits.
Why avoid probate?
Most wills have to be probated. The rules vary from state to state, but in some states, smaller estates are exempt from probate, or they may qualify for an expedited process.
Probate can be slow. Depending on where your executor probates your estate and the size of your probate estate, the probate process can take as little as three months or as long as three years. Three years can be a long time to wait for needed income. It can take even longer if the estate is a complicated one or if any of the heirs are contesting the will.
Probate can be costly. Probate costs usually include court costs (filing fees, etc.), publication costs for legal notices, attorney's fees, executor's fees, bond premiums, and appraisal fees. Court costs and attorney's fees can vary from state to state. Typically, the larger the estate, the greater the probate costs. However, if a smaller estate has complex issues associated with its administration or with distribution of its assets (e.g., if the decedent owned property in several states), probate can be quite costly.
Probate is a public process. Wills and any other documents submitted for probate become part of the public record, something to consider if you or your family members have privacy concerns.
Why choose to go through probate?
For most estates, there's usually little reason to avoid probate. The actual time and costs involved are often modest, and it just doesn't make sense to plan around it. And, there are actually a couple of benefits from probate. Because the court supervises the process, you have some assurance that your wishes will be abided by, and, if a family squabble should arise, the court can help settle the matter. Further, probate offers some protection against creditors. As part of the probate process, creditors are notified to make their claims against the estate in a timely manner. If they do not, it becomes much more difficult for them to make their claims later on.
In addition, some states require that your will be probated before the beneficiaries under your will can exercise certain rights. Among the rights that may otherwise be limited are the right of your surviving spouse to waive his or her share under the will and elect a statutory share instead, the right of your surviving spouse to use your residence during his or her remaining life, the right of your surviving spouse to set aside certain property, and the right of your surviving spouse to a family allowance.
How to avoid probate
An estate plan can be designed to limit the assets that pass through probate or to avoid probate altogether. The major ways property is passed outside of probate are by owning property jointly with rights of survivorship; by ensuring that beneficiary designation forms are completed for those types of assets that allow them, such as IRAs, retirement plans, and life insurance; by putting property in a trust; and by making lifetime gifts.
(C) Forefield Inc. LPL MEMBER FINRA/SIPC
When you die, your estate goes through a process that manages, settles, and distributes your property according to the terms of your will. This process is governed by state law and is called probate. Probate proceedings fall under the jurisdiction of the probate court (also called the Surrogate's, Orphans', or Chancery court) of the state in which you are domiciled at the time of your death. This court oversees probate of your personal property and any real estate that is located in that state. If you own property located in a state other than the state in which you are domiciled at the time of your death, a separate "ancillary" probate proceeding may need to be initiated in the other state.
Note:"Domicile" is a legal term meaning the state where you intend to make your permanent home. It does not refer to a summer home or a temporary residence.
Items that are subject to probate are known as probate assets. Probate assets generally consist of any property that you own individually at the time of your death that passes to your beneficiaries according to the terms of your will. Nonprobate assets include all property that passes outside of your will. Examples of nonprobate assets include property that is owned jointly with right of survivorship (e.g., a jointly held bank account) and property that is owned as tenants-by-the-entirety (i.e., real property owned jointly by a husband and wife). Another example is property that passes to designated beneficiaries by operation of law, such as proceeds of life insurance and retirement benefits.
Why avoid probate?
Most wills have to be probated. The rules vary from state to state, but in some states, smaller estates are exempt from probate, or they may qualify for an expedited process.
Probate can be slow. Depending on where your executor probates your estate and the size of your probate estate, the probate process can take as little as three months or as long as three years. Three years can be a long time to wait for needed income. It can take even longer if the estate is a complicated one or if any of the heirs are contesting the will.
Probate can be costly. Probate costs usually include court costs (filing fees, etc.), publication costs for legal notices, attorney's fees, executor's fees, bond premiums, and appraisal fees. Court costs and attorney's fees can vary from state to state. Typically, the larger the estate, the greater the probate costs. However, if a smaller estate has complex issues associated with its administration or with distribution of its assets (e.g., if the decedent owned property in several states), probate can be quite costly.
Probate is a public process. Wills and any other documents submitted for probate become part of the public record, something to consider if you or your family members have privacy concerns.
Why choose to go through probate?
For most estates, there's usually little reason to avoid probate. The actual time and costs involved are often modest, and it just doesn't make sense to plan around it. And, there are actually a couple of benefits from probate. Because the court supervises the process, you have some assurance that your wishes will be abided by, and, if a family squabble should arise, the court can help settle the matter. Further, probate offers some protection against creditors. As part of the probate process, creditors are notified to make their claims against the estate in a timely manner. If they do not, it becomes much more difficult for them to make their claims later on.
In addition, some states require that your will be probated before the beneficiaries under your will can exercise certain rights. Among the rights that may otherwise be limited are the right of your surviving spouse to waive his or her share under the will and elect a statutory share instead, the right of your surviving spouse to use your residence during his or her remaining life, the right of your surviving spouse to set aside certain property, and the right of your surviving spouse to a family allowance.
How to avoid probate
An estate plan can be designed to limit the assets that pass through probate or to avoid probate altogether. The major ways property is passed outside of probate are by owning property jointly with rights of survivorship; by ensuring that beneficiary designation forms are completed for those types of assets that allow them, such as IRAs, retirement plans, and life insurance; by putting property in a trust; and by making lifetime gifts.
(C) Forefield Inc. LPL MEMBER FINRA/SIPC
Monday, July 26, 2010
What you should know about trusteed IRA's!
The tax code allows IRAs to be created as trust accounts, custodial accounts, and annuity contracts. Regardless of the form, the federal tax rules are generally the same for all IRAs. But the structure of the IRA agreement can have a significant impact on how your IRA is administered. This article will focus on one type of trust account commonly called a "trusteed IRA," or "individual retirement trust."
Why might you need a trusteed IRA?
In a typical IRA, your beneficiary takes control of the IRA assets upon your death. There's nothing to stop your beneficiary from withdrawing all or part of the IRA funds at any time. This ability of your beneficiary to withdraw assets at will may be troublesome to you for several reasons. For example, you may simply be concerned that your beneficiary will squander the IRA funds.
Or it may be your wish that your IRA "stretch" after your death--that is, continue to accumulate on a tax-deferred (or in the case of Roth IRAs, potentially tax-free) basis--for as long as possible. Your intent to stretch out the IRA payments may be defeated if your beneficiary has total control over the IRA assets upon your death.
Even if your beneficiary doesn't deplete the IRA assets, in a typical IRA you normally have no say about where the funds go when your beneficiary dies. Your beneficiary, or the IRA agreement, usually specifies who gets the funds at that point. So, in a typical IRA, if you name your spouse as your primary beneficiary, your spouse could name children from a previous marriage, or a new spouse if he or she remarries, as the ultimate beneficiary of your IRA assets. A trusteed IRA allows you to control the ultimate beneficiaries of your IRA, by letting you specify contingent beneficiaries that cannot be changed by your primary beneficiary.
With a trusteed IRA, you can't stop the payment of required minimum distributions (RMDs) to your beneficiary but you can restrict any additional payments. You can direct the trustee to pay only RMDs to your beneficiary. Or you can provide the trustee with discretionary authority to make payments to your beneficiary in addition to RMDs, e.g., for your beneficiary's health, welfare, or education. Or you can impose restrictions on distributions that last only until your beneficiary reaches a specified age. Trusteed IRAs can also be set up to qualify as marital, QTIP, and credit shelter (bypass) trusts, potentially simplifying your estate planning.
A trusteed IRA can also be a valuable tool during your lifetime. It can be structured so that if you become incapacitated, the trustee will step in and take over the investment of assets and distribution of benefits on your behalf, ensuring that your IRA won't be in limbo until a guardian is appointed.
Is a trusteed IRA right for you?
While trusteed IRAs can be as flexible as a particular trustee will allow (not all provide the same level of IRA planning services), they aren't right for everyone. The minimum balance required to establish a trusteed IRA, and the fees charged, are usually significantly higher than for other IRAs, making trusteed IRAs most appropriate for large IRA accounts. You may also incur attorney's fees and other costs.
And in some cases, another approach might be more appropriate. For example, you may be able to assure that your IRA "stretches" after your death by instead naming a trust as the beneficiary of your IRA. If specific IRS rules are followed, RMDs can be calculated using your trust beneficiary's life expectancy (this is commonly called a "see-through" trust).
See-through trusts are generally more expensive, and more complicated, than trusteed IRAs. It's important that you consult an estate planning professional who can explain your options and make sure you choose the right vehicle for your particular situation.
(c)Forefield Inc.
LPL financial
Member FINRA/SIPC
Why might you need a trusteed IRA?
In a typical IRA, your beneficiary takes control of the IRA assets upon your death. There's nothing to stop your beneficiary from withdrawing all or part of the IRA funds at any time. This ability of your beneficiary to withdraw assets at will may be troublesome to you for several reasons. For example, you may simply be concerned that your beneficiary will squander the IRA funds.
Or it may be your wish that your IRA "stretch" after your death--that is, continue to accumulate on a tax-deferred (or in the case of Roth IRAs, potentially tax-free) basis--for as long as possible. Your intent to stretch out the IRA payments may be defeated if your beneficiary has total control over the IRA assets upon your death.
Even if your beneficiary doesn't deplete the IRA assets, in a typical IRA you normally have no say about where the funds go when your beneficiary dies. Your beneficiary, or the IRA agreement, usually specifies who gets the funds at that point. So, in a typical IRA, if you name your spouse as your primary beneficiary, your spouse could name children from a previous marriage, or a new spouse if he or she remarries, as the ultimate beneficiary of your IRA assets. A trusteed IRA allows you to control the ultimate beneficiaries of your IRA, by letting you specify contingent beneficiaries that cannot be changed by your primary beneficiary.
With a trusteed IRA, you can't stop the payment of required minimum distributions (RMDs) to your beneficiary but you can restrict any additional payments. You can direct the trustee to pay only RMDs to your beneficiary. Or you can provide the trustee with discretionary authority to make payments to your beneficiary in addition to RMDs, e.g., for your beneficiary's health, welfare, or education. Or you can impose restrictions on distributions that last only until your beneficiary reaches a specified age. Trusteed IRAs can also be set up to qualify as marital, QTIP, and credit shelter (bypass) trusts, potentially simplifying your estate planning.
A trusteed IRA can also be a valuable tool during your lifetime. It can be structured so that if you become incapacitated, the trustee will step in and take over the investment of assets and distribution of benefits on your behalf, ensuring that your IRA won't be in limbo until a guardian is appointed.
Is a trusteed IRA right for you?
While trusteed IRAs can be as flexible as a particular trustee will allow (not all provide the same level of IRA planning services), they aren't right for everyone. The minimum balance required to establish a trusteed IRA, and the fees charged, are usually significantly higher than for other IRAs, making trusteed IRAs most appropriate for large IRA accounts. You may also incur attorney's fees and other costs.
And in some cases, another approach might be more appropriate. For example, you may be able to assure that your IRA "stretches" after your death by instead naming a trust as the beneficiary of your IRA. If specific IRS rules are followed, RMDs can be calculated using your trust beneficiary's life expectancy (this is commonly called a "see-through" trust).
See-through trusts are generally more expensive, and more complicated, than trusteed IRAs. It's important that you consult an estate planning professional who can explain your options and make sure you choose the right vehicle for your particular situation.
(c)Forefield Inc.
LPL financial
Member FINRA/SIPC
Monday, July 5, 2010
One way to boost retirement income!
Social Security: File-and-Suspend for Higher Benefits
If you're married and looking for opportunities to
increase retirement income, you may want to
look closely at your Social Security benefits.
One opportunity for maximizing Social Security
income, called "file-and-suspend," may enable
a married couple to boost both their retirement
and survivor's benefits.
What is file-and-suspend?
Generally, a husband or wife is entitled to
receive a Social Security retirement benefit
based either on his or her own earnings record
(a worker's benefit), or on his or her spouse's
earnings record (a spousal benefit), whichever
is higher. But under Social Security rules, a
husband or wife who is eligible to file for
retirement benefits based on his or her
spouse's record cannot do so until his or her
spouse begins receiving benefits. However,
there is one exception--someone who has
reached full retirement age may choose to file
for retirement benefits, then immediately
request to have those benefits suspended, so
that his or her eligible spouse can file for
spousal benefits.
File-and-suspend is a strategy that may be
used in a variety of situations, but is commonly
used when one spouse has much lower lifetime
earnings, and thus will receive a higher
retirement benefit based on his or her spouse's
earnings record. (A husband or wife's spousal
benefit may be as much as 50% of what his or
her spouse is entitled to receive at full
retirement age.) Using this strategy not only
allows the eligible spouse with lower earnings
to immediately claim a higher (spousal)
retirement benefit, but can also increase the
amount of available survivor protection. The
spouse with higher earnings who has
suspended his or her benefits can accrue
delayed retirement credits at a rate of 8% per
year (the rate for anyone born in 1943 or later)
up until age 70. Because a surviving spouse
will generally receive a benefit equal to 100% of
the retirement benefit the other spouse was
receiving (or was entitled to receive) at the time
of his or her death, suspending a benefit to
accrue delayed retirement credits may
substantially increase the survivor's benefit.
Example
Let's look at one hypothetical example of how
filing for, then suspending, Social Security
benefits might help a married couple increase
their retirement income and survivor's benefits.
Henry is about to reach his full retirement age
of 66, but he wants to postpone filing for Social
Security benefits. At full retirement age his
monthly benefit will be $2,000, but if he waits
until age 70 to file, his benefit will be $2,640
(32% more) due to delayed retirement credits.
However, his wife Julia, who has had
substantially lower lifetime earnings than Henry,
wants to retire in a few months at her full
retirement age (also 66). Based on her own
earnings record, Julia will be eligible for a
monthly benefit of $700, but based on Henry's
earnings record she will be eligible for a
monthly spousal benefit of $1,000 (50% of
Henry's entitlement).
So that Julia can receive the higher spousal
benefit as soon as she retires, Henry files an
application for benefits, but immediately
suspends it. That way, he can also continue to
earn delayed retirement credits, which will
result in a higher monthly retirement benefit for
him later.
Using the file-and-suspend strategy not only
increases Julia and Henry's retirement income,
but it also offers increased survivor protection.
Upon Henry's death, Julia will be entitled to
receive 100% of what Henry was receiving (or
was entitled to receive) at the time of his death.
So by suspending his own retirement benefit in
order to increase it through delayed retirement
credits, Henry has ensured that Julia will
receive a survivor's benefit that is up to 32%
higher for the rest of her life should he die first.
(Note, though, that this hypothetical example is
for illustrative purposes only and does not
account for cost-of-living adjustments or taxes.)
Points to consider
• Deciding when to begin receiving Social
Security benefits is a complicated decision.
You'll need to consider a number of
scenarios, and take into account factors such
as both spouses' ages, estimated benefit
entitlements, and life expectancies. A Social
Security representative can help explain your
options.
• Using the file-and-suspend strategy may not
be advantageous when one spouse is in poor
health or when Social Security income is
needed as soon as possible.
• The spousal benefit will be reduced if the
spouse claiming it is under full retirement age.
If you're married and looking for opportunities to
increase retirement income, you may want to
look closely at your Social Security benefits.
One opportunity for maximizing Social Security
income, called "file-and-suspend," may enable
a married couple to boost both their retirement
and survivor's benefits.
What is file-and-suspend?
Generally, a husband or wife is entitled to
receive a Social Security retirement benefit
based either on his or her own earnings record
(a worker's benefit), or on his or her spouse's
earnings record (a spousal benefit), whichever
is higher. But under Social Security rules, a
husband or wife who is eligible to file for
retirement benefits based on his or her
spouse's record cannot do so until his or her
spouse begins receiving benefits. However,
there is one exception--someone who has
reached full retirement age may choose to file
for retirement benefits, then immediately
request to have those benefits suspended, so
that his or her eligible spouse can file for
spousal benefits.
File-and-suspend is a strategy that may be
used in a variety of situations, but is commonly
used when one spouse has much lower lifetime
earnings, and thus will receive a higher
retirement benefit based on his or her spouse's
earnings record. (A husband or wife's spousal
benefit may be as much as 50% of what his or
her spouse is entitled to receive at full
retirement age.) Using this strategy not only
allows the eligible spouse with lower earnings
to immediately claim a higher (spousal)
retirement benefit, but can also increase the
amount of available survivor protection. The
spouse with higher earnings who has
suspended his or her benefits can accrue
delayed retirement credits at a rate of 8% per
year (the rate for anyone born in 1943 or later)
up until age 70. Because a surviving spouse
will generally receive a benefit equal to 100% of
the retirement benefit the other spouse was
receiving (or was entitled to receive) at the time
of his or her death, suspending a benefit to
accrue delayed retirement credits may
substantially increase the survivor's benefit.
Example
Let's look at one hypothetical example of how
filing for, then suspending, Social Security
benefits might help a married couple increase
their retirement income and survivor's benefits.
Henry is about to reach his full retirement age
of 66, but he wants to postpone filing for Social
Security benefits. At full retirement age his
monthly benefit will be $2,000, but if he waits
until age 70 to file, his benefit will be $2,640
(32% more) due to delayed retirement credits.
However, his wife Julia, who has had
substantially lower lifetime earnings than Henry,
wants to retire in a few months at her full
retirement age (also 66). Based on her own
earnings record, Julia will be eligible for a
monthly benefit of $700, but based on Henry's
earnings record she will be eligible for a
monthly spousal benefit of $1,000 (50% of
Henry's entitlement).
So that Julia can receive the higher spousal
benefit as soon as she retires, Henry files an
application for benefits, but immediately
suspends it. That way, he can also continue to
earn delayed retirement credits, which will
result in a higher monthly retirement benefit for
him later.
Using the file-and-suspend strategy not only
increases Julia and Henry's retirement income,
but it also offers increased survivor protection.
Upon Henry's death, Julia will be entitled to
receive 100% of what Henry was receiving (or
was entitled to receive) at the time of his death.
So by suspending his own retirement benefit in
order to increase it through delayed retirement
credits, Henry has ensured that Julia will
receive a survivor's benefit that is up to 32%
higher for the rest of her life should he die first.
(Note, though, that this hypothetical example is
for illustrative purposes only and does not
account for cost-of-living adjustments or taxes.)
Points to consider
• Deciding when to begin receiving Social
Security benefits is a complicated decision.
You'll need to consider a number of
scenarios, and take into account factors such
as both spouses' ages, estimated benefit
entitlements, and life expectancies. A Social
Security representative can help explain your
options.
• Using the file-and-suspend strategy may not
be advantageous when one spouse is in poor
health or when Social Security income is
needed as soon as possible.
• The spousal benefit will be reduced if the
spouse claiming it is under full retirement age.
Sunday, June 27, 2010
Rolling GRATs Are Rockin'
A grantor retained annuity trust (GRAT) is an irrevocable trust into which you make a one-time transfer of property and from which you receive a fixed amount annually for a specified number of years (the annuity period)..At the end of the annuity period, the payments to you stop, and any property remaining in the trust passes to the persons you've named in the trust document as the remainder beneficiaries (e.g., your children) or the property can remain in trust for their benefit.
A GRAT is generally used to transfer rapidly appreciating (or high income-producing) property to heirs with the main goal of transferring, free from federal gift tax, a portion of any appreciation in (or income earned by) the trust property during the annuity period.
Because a GRAT is an irrevocable trust, when you transfer property to the GRAT, you're making a taxable gift to the remainder beneficiaries. The value of the gift is discounted because of your retained interest. The amount of the discount is calculated using IRS valuation tables that assume the property in the trust will realize a certain rate of return during the annuity period. This assumed rate of return is known as the Section 7520 rate, discount rate, or hurdle rate. If the property in the trust grows more than the IRS assumed rate of return, any excess growth will pass to the remainder beneficiaries gift tax free.
The catch to this strategy is that you must outlive the annuity period. If you die before the annuity period expires, the value of the property in the trust on the date of your death will be included in your estate for estate tax purposes. This, however, merely puts you in the same position you would have been in had you not used the GRAT (except for the costs to create and maintain the trust). GRATs are typically created with a long term (5, 10, or 20 years), especially when the Section 7520 rate is low. The longer the term, the more growth that can potentially be removed from an estate. However, the longer the term, the greater the risk that you'll die during the trust term and that all of the GRAT assets will end up back in your estate.
What is a rolling GRAT? A spinoff of the GRAT is a strategy known as a "rolling GRAT." A rolling GRAT is actually a series of GRATs with short terms (i.e., 2 to 5
years). For example, say you establish an initial GRAT (GRAT 1) for a term of 2 years. At the end of Year 1, you receive your first annuity payment, and with that payment you fund a second GRAT. When GRAT 1 terminates at the end of Year 2, you take your second annuity payment and fund a third GRAT. Any assets remaining in GRAT 1 are excess returns that are distributed to the beneficiaries. Depending on how the GRAT is initially funded, excess returns on GRAT assets may consist of interest, dividends, and any market increase (appreciation) in the value of the assets. The creation of subsequent GRATs can go on for as long as you want.
The benefits of rolling GRATs
The main purpose of the rolling GRAT is to maximize return and minimize risk. One benefit is that if one GRAT loses money or the growth of trust assets fails to surpass the
Section 7520 rate, you can start over with another GRAT. Rolling GRATs are typically
funded with specific stocks or asset classes. This segregation of assets can be an investment hedge, for example, to help prevent losses, if any, on one stock from offsetting gains on other stocks.
Additionally, you can reduce the risk of having all of the GRAT assets included in your estate because of an early death. If, for example, you die 5 years into an arrangement as described above, any excess returns from 3 of the GRATs would have been removed from your estate. Further, assets from the rolling GRAT strategy are distributed to the beneficiaries earlier than with a long-term GRAT. With a 10-year GRAT, for example, assets are distributed only at the end of the 10-year period. With a series of 2-year rolling GRATs, some assets start to become available to the beneficiaries after the second year.
Finally, you can stop creating the GRATs whenever you want to. For instance, you may
feel that you have gifted enough already or that you need to focus instead on rebuilding your wealth due to poor market performance.
The drawbacks
The use of rolling GRATs assumes that you do not need the annuity payments for other
purposes. Additionally, there is a risk that the Section 7520 rate may increase and keep increasing after the first year. Whereas a long-term GRAT can lock in a low initial Section 7520 rate for the entire GRAT term, rolling GRATs may be subject to fluctuating Section 7520 rates. You'll need an attorney to draft the GRAT
A GRAT is generally used to transfer rapidly appreciating (or high income-producing) property to heirs with the main goal of transferring, free from federal gift tax, a portion of any appreciation in (or income earned by) the trust property during the annuity period.
Because a GRAT is an irrevocable trust, when you transfer property to the GRAT, you're making a taxable gift to the remainder beneficiaries. The value of the gift is discounted because of your retained interest. The amount of the discount is calculated using IRS valuation tables that assume the property in the trust will realize a certain rate of return during the annuity period. This assumed rate of return is known as the Section 7520 rate, discount rate, or hurdle rate. If the property in the trust grows more than the IRS assumed rate of return, any excess growth will pass to the remainder beneficiaries gift tax free.
The catch to this strategy is that you must outlive the annuity period. If you die before the annuity period expires, the value of the property in the trust on the date of your death will be included in your estate for estate tax purposes. This, however, merely puts you in the same position you would have been in had you not used the GRAT (except for the costs to create and maintain the trust). GRATs are typically created with a long term (5, 10, or 20 years), especially when the Section 7520 rate is low. The longer the term, the more growth that can potentially be removed from an estate. However, the longer the term, the greater the risk that you'll die during the trust term and that all of the GRAT assets will end up back in your estate.
What is a rolling GRAT? A spinoff of the GRAT is a strategy known as a "rolling GRAT." A rolling GRAT is actually a series of GRATs with short terms (i.e., 2 to 5
years). For example, say you establish an initial GRAT (GRAT 1) for a term of 2 years. At the end of Year 1, you receive your first annuity payment, and with that payment you fund a second GRAT. When GRAT 1 terminates at the end of Year 2, you take your second annuity payment and fund a third GRAT. Any assets remaining in GRAT 1 are excess returns that are distributed to the beneficiaries. Depending on how the GRAT is initially funded, excess returns on GRAT assets may consist of interest, dividends, and any market increase (appreciation) in the value of the assets. The creation of subsequent GRATs can go on for as long as you want.
The benefits of rolling GRATs
The main purpose of the rolling GRAT is to maximize return and minimize risk. One benefit is that if one GRAT loses money or the growth of trust assets fails to surpass the
Section 7520 rate, you can start over with another GRAT. Rolling GRATs are typically
funded with specific stocks or asset classes. This segregation of assets can be an investment hedge, for example, to help prevent losses, if any, on one stock from offsetting gains on other stocks.
Additionally, you can reduce the risk of having all of the GRAT assets included in your estate because of an early death. If, for example, you die 5 years into an arrangement as described above, any excess returns from 3 of the GRATs would have been removed from your estate. Further, assets from the rolling GRAT strategy are distributed to the beneficiaries earlier than with a long-term GRAT. With a 10-year GRAT, for example, assets are distributed only at the end of the 10-year period. With a series of 2-year rolling GRATs, some assets start to become available to the beneficiaries after the second year.
Finally, you can stop creating the GRATs whenever you want to. For instance, you may
feel that you have gifted enough already or that you need to focus instead on rebuilding your wealth due to poor market performance.
The drawbacks
The use of rolling GRATs assumes that you do not need the annuity payments for other
purposes. Additionally, there is a risk that the Section 7520 rate may increase and keep increasing after the first year. Whereas a long-term GRAT can lock in a low initial Section 7520 rate for the entire GRAT term, rolling GRATs may be subject to fluctuating Section 7520 rates. You'll need an attorney to draft the GRAT
Friday, June 18, 2010
Managing Cash
How Can I Better Manage My Short-Term Cash?
For the vast majority of people, it is essential to keep a portion of their assets in liquid form in order to meet monthly commitments.
For example, most families have to meet their mortgage or rent payments, grocery, utility, and transportation bills out of their monthly paychecks. There are a host of other expenses that arise from month to month, such as auto insurance, that help keep the pressure on the family cash flow.
If people are fortunate enough to have anything left over once all the expenses have been met, then they can worry about saving or investing for the future.
The paychecks that you deposit in your checking account, which seem to swiftly disappear as you pay monthly expenses, constitute a portion of your short-term cash. The money is no sooner in your bank account than it flows out again as payment for goods and services.
However, because the money that we use to meet our monthly expenses is so liquid, there is a tendency to simply look at it as a method of payment. We often leave more than we need in our checking accounts, gaining little or no interest until we need it for a future expense.
By actively managing the short-term cash that passes through your hands, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal.
Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.
There are numerous alternatives available to enable you to get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding the alternatives and choosing the one most appropriate to your particular needs and circumstances.
Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Bank CDs are insured up to $250,000 by the FDIC.*
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.
For the vast majority of people, it is essential to keep a portion of their assets in liquid form in order to meet monthly commitments.
For example, most families have to meet their mortgage or rent payments, grocery, utility, and transportation bills out of their monthly paychecks. There are a host of other expenses that arise from month to month, such as auto insurance, that help keep the pressure on the family cash flow.
If people are fortunate enough to have anything left over once all the expenses have been met, then they can worry about saving or investing for the future.
The paychecks that you deposit in your checking account, which seem to swiftly disappear as you pay monthly expenses, constitute a portion of your short-term cash. The money is no sooner in your bank account than it flows out again as payment for goods and services.
However, because the money that we use to meet our monthly expenses is so liquid, there is a tendency to simply look at it as a method of payment. We often leave more than we need in our checking accounts, gaining little or no interest until we need it for a future expense.
By actively managing the short-term cash that passes through your hands, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal.
Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.
There are numerous alternatives available to enable you to get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding the alternatives and choosing the one most appropriate to your particular needs and circumstances.
Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Bank CDs are insured up to $250,000 by the FDIC.*
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.
This material was written and prepared by Emerald.
© 2010 Emerald
© 2010 Emerald
Friday, June 11, 2010
Is having a living trust beneficial?
How Can a Living Trust Help Me Control My Estate?
Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.
A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.
When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away.
Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.
There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes.
When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.
This will create two taxable entities, each of which will be entitled to use a personal exemption.
The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, support, or maintenance.
On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.
The information provided here is to assist you in planning for your future. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.
A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.
When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away.
Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.
There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes.
When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.
This will create two taxable entities, each of which will be entitled to use a personal exemption.
The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, support, or maintenance.
On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.
The information provided here is to assist you in planning for your future. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
This material was written and prepared by Emerald.
© 2010 Emerald
© 2010 Emerald
Subscribe to:
Posts (Atom)
