We have received a number of questions recently regarding the estate settlement process—and in particular the probate process.

What is probate?  Probate is the legal process of administering a person’s estate.  The probate court usually takes an inventory of a person’s assets and liabilities and oversees the distribution of assets to a person’s heirs.

So, why should you avoid probate?  First of all, probate can be a very time consuming process—as the court has to validate your will and supervise the distribution of your estate.   The process can span over several months to a year (sometimes longer).  Secondly, court costs and in some cases, attorney’s fees can become costly.  In addition, the probate process is a matter of public record, which can present privacy concerns for some people.

Like most estate and financial planning strategies, avoiding probate is not always recommended.  In addition, there are tax and other implications that should be considered.  However, for those who prefer avoiding the probate process, there are several simple solutions that will help accomplish this objective.  Here are five of the most common probate avoidance techniques:

• Making Beneficiary Designations: Simply naming beneficiaries on life insurance policies and retirement accounts (401k plans, IRAs, and Roth IRAs) avoids probate.  In addition to naming a primary beneficiary, we would suggest that you also designate a contingent beneficiary (in the event the primary beneficiary predeceases you).  As a note, It is never advisable to name your estate as a beneficiary of retirement accounts and qualified plans.

• Owning Assets Jointly:  Some types of joint ownership provide an easy way to avoid probate.   Accounts whereby the registration is Joint Tenancy with Right of Survivorship or Tenancy by the Entirety are transferred directly to the other owner of the account at the time of one owner’s death.  As such, the assets held in these accounts pass directly to the other owner and avoids probate.

• Gifting to Your Heirs: This may be one of the simplest ways to avoid probate; give away assets while you are alive.  If you do not own the asset when you pass away, then it is not subject to probate.  Currently, everyone is allowed to gift up to $13,000 per year to anyone and avoid gift tax filings on the transfer of the property.

• Establishing and Funding a Revocable Living Trust: A revocable living trust is a legal document that gives the authority to a trustee to distribute assets according to your wishes.  When using this approach to avoid probate, it is important to re-title assets in the name of the trust—a critical step that many people neglect or forget.

• Utilizing Transfer On Death (TOD) Accounts:  In most states, it is possible to convert your bank accounts and other personal investment (non-retirement) accounts to Transfer on Death Accounts.  By simply completing a form to name beneficiaries to your account, at your death the account passes directly to the beneficiary and avoids probate completely.

Sometimes probate cannot or should not be avoided completely.  However, taking a few simple steps can reduce the  burden of probate on your family.  We are happy to discuss your estate plan with you and suggest solutions that may be appropriate to consider.  In addition, we have conducted due-diligence to find attorneys that will be most suitable given your personal circumstances.  Please contact our office to discuss your personal situation.

We believe that from a financial standpoint, retirees need to make financial planning decisions that reflect the high probability that they will live longer.

Consider the following information from the Society of Actuaries:

• A couple at age 65, have a 50% chance that at least one spouse will survive to age 92 and a 25% chance that one spouse will survive to age 97.
• Males age 65 have a 50% chance of living to at least age 85, while females age 65 have a 50% chance of living until at least age 88.

Here are a few recommendations to consider that may help ensure that your retirement assets extend beyond your life expectancy:

Make appropriate investment and asset allocation decisions.

With longer life expectancies, an investor’s time horizon is extended.  As such, retirees need to have a portfolio that not only reflects their risk tolerance, but one that will also endure for an extended period of time.  We would suggest the following:

• Don’t invest your portfolio too conservatively
• Have a “safety net” that consists of low risk investments
• Use investments with low internal fees

Approach Social Security (and other pension) decisions strategically.

The important decision of when to begin receiving Social Security retirement benefits can have far-reaching implications.  When making this decision, we suggest that couples plan together based on their joint life expectancy.  It may be important to consider delaying benefits and/or “filing and suspending” in order to increase your total benefit level.

Make tax-efficient distribution decisions during retirement.

When taking portfolio distributions during retirement, it is critical that the tax impact of these distributions is considered.  Given the changing tax laws and personal circumstances (changes in medical expenses, etc.), the decision of “Which account?” to take money from should be assessed at least annually.

Make the correct decision of when to retire.

Because retiring is a critical decision (and usually irrevocable), it is important to determine if you are financially secure enough to retire.  Prior to making the final decision you should carefully consider the following:

• Are my income sources adequate to cover retirement expenses?
• What would be the impact of certain unexpected events (long term care expenses, high inflation, low investment returns, etc.)?
• What can be done to increase the probability of a financially secure retirement?

If you have any questions, or would like to discuss financial planning strategies that can help you make sound retirement planning decisions, please feel free to contact our office today.

In some cases, we may assume lower than expected investment returns or higher than expected tax and inflation rates.  We might also consider the impact of unforeseen medical surprises as we help clients plan for future cash flow needs.

So why is it helpful to discuss and plan for these negative and downright pessimistic financial possibilities?  The answer to this question depends on who you ask:

From our perspective, we believe that by addressing some of the things that can go wrong, we can reduce the potential financial impact of the event.  In doing so, we can help increase the odds of our clients achieving their financial goals.

From our client’s perspective, we hope that by proactively discussing and anticipating negative financial outcomes, clients can approach financial uncertainty with a sense of confidence and peace of mind.

As global economic uncertainty persists, it is our hope that you can find comfort in having a financial game plan that will both provide direction and increase the odds of your financial success. Please feel free to contact our office should you have any questions.

What’s really scary is that I have a pretty good idea of how much college will cost in the year 2023 when I write the check (to NC State of course!) to pay for her first semester.  Fortunately, my wife and I have planned ahead and I hope that you will plan ahead too.  I would suggest that you consider utilizing a 529 College Savings Plan as a component of your college savings strategy.

photo credit: midiman

Section 529 College Savings Plans can be an excellent tool when saving for college.  While there are many benefits when using the 529 Plan, there are also a number of drawbacks to consider.  Here are a number of frequently asked questions:

What are 529 College Savings Plans and what are their benefits? 529 plans are state-sponsored investment vehicles designed to help families pay for expenses associated with college or other qualified post-secondary training.  Contributions to 529 plans are not federally tax deductible but some states, including NC, allow a state tax deduction.  The primary benefit is that investment earnings are not taxable as long as they are used to pay for “qualified” higher education expenses.

What are considered “qualified” higher education expenses? For 529 plans, qualified higher education expenses are generally those that are “required” by the college or university.  It generally includes items like tuition, room and board (with limits),  lab costs and in some cases computers.  The definition of qualified expenses for 529 plans are more restrictive compared to other college savings vehicles such as Coverdell ESAs and UTMA accounts.

Is there a penalty if money is used to pay expenses other than “qualified” education expenses? Yes.  If the money is used for a purpose other than qualified education expenses, the earnings portion of the distribution is taxed and penalized.  It is important that 529 Plans are not overfunded as the penalty for doing so can be significant.

How is money invested in these plans? Investment options vary on a state by state basis.  However, most 529 plans provide a limited list of investment alternatives.  We generally suggest the age-based or objectives-based investment options.

Who can setup and fund a 529 Plan? Anyone can setup a 529 plan and name anyone as a beneficiary.  There are no income restrictions.

Can the “beneficiary” on a 529 Plan be changed? Yes.  The beneficiary can be changed to a sibling or other family members.

Are 529 Plans considered when determining financial aid eligibility? Yes.  A 529 account owned by a parent for a dependent student is considered a “parental asset” when determining the expected family contribution.   However, 529 accounts owned by grandparents, other relatives, etc. would not be considered.

Who controls these accounts? The person establishing the account (usually the grantor) maintains the ability to make investment decisions, distribution decisions and names the beneficiary of the account.  The beneficiary (usually the child) does not have control of the 529 plan at any age, unless he is the owner of the account.

Are 529 plans the best solution for everyone? No.  529 plans should be one component of a college savings strategy.  Each college savings strategy should be customized and based on individual circumstances and preferences.

Where can I find more information? There are a number of online resources that can provide general information about college saving alternatives.  However, we believe that most personal financial decisions should be based on your objectives and your specific financial situation.  This is particularly true when it comes to saving for college.  There is truly no one-size-fits-all approach.  With that in mind, we would suggest that you contact our office to see how we may be able to help you.

About Beacon Financial Strategies

Beacon Financial Strategies is an advice-driven financial planning, tax and investment management firm that serves clients in Raleigh, Durham, Cary, Apex, Chapel Hill, RTP, NC and nationwide. Beacon offers both ongoing and introductory financial planning arrangements to individuals and families.  For more information, please contact us today.

Watch the full episode. See more NC Now.

During the “accumulation” phase, the decision of where to invest your money is somewhat automated.  Making contributions to 401(k) plans, Roth IRAs and personal brokerage or mutual fund accounts is pretty straight forward and can remain on auto pilot for years.

However, for retirees taking money out of their investment accounts, the decision of “which account?” can be a bit more cumbersome.  In fact, most retirees should reassess their distribution strategy on an annual or even semi-annual basis.

Why is this decision an important one?  To answer this question, it is important to understand how distributions from various types of accounts are taxed.  Consider the tax treatment from each of the following types of accounts:

IRAs and 401(k) Plans (qualified accounts). Distributions from qualified retirement plans are considered “taxable” income and are generally taxed to individuals (at their tax rate) on a dollar for dollar basis.

Personal accounts (non-qualified accounts). Personal accounts can be established at brokerage firms, mutual fund companies and banks.  Income, interest and capital gains generated in these accounts are taxable in the year they are earned or realized.  If a stock or mutual fund is sold, the gain on the sale is a capital gain and is generally taxed at capital gains rates.  Investment losses realized in personal accounts can be used to offset gains and up to $3,000 of taxable income.   Because taxes are paid in the year income is earned or realized, distributions from personal accounts are not taxable.

Roth IRAs. Income, interest and capital gains realized in Roth IRAs are not taxable.  In addition, distributions from a Roth IRA by those above the age of 59 1/2 (with some exceptions) are not taxable.  From a tax standpoint, Roth IRAs are much more favorable than personal accounts or IRAs.

Tax Management

As you can see, each type of account has varying tax attributes.  As such, with proper planning it is possible to effectively control, or at least manage, taxable income.  In doing so, there are a number of other items that may be impacted including:

• Taxability of Social Security
• Deductibility of Medical Expenses and Miscellaneous Itemized Deductions
• Cost of Medicare Part B Premiums
• Effective Income Tax Rates

Other Financial Planning Considerations

While it is important to consider the tax impact when developing a retirement distribution strategy, there are times when it is appropriate to take a more holistic approach.  This is particularly important when making multi-generational and estate planning decisions.  Consider the following example:

You are 65 years of age and are currently in the 15% marginal tax bracket.  You have designated your son, as the beneficiary of your IRA.  As the owner of a successful business, your son expects to remain in the highest tax bracket and has never been able to contribute to a Roth IRA.

Together, you decide that it is appropriate to execute a Roth conversion strategy, whereby you convert a portion of your IRA into a Roth.  In doing so, the distribution from your IRA is taxed to you at your lower tax rate.  At your death, your son will inherit the Roth IRA and distributions would never be taxed.

As you can see, making tax-efficient distribution decisions during retirement can create significant tax savings for you and your family.  Please visit our website or contact our office should you have any questions.

photo credit: Dominique Godbout

Generally, our discussions regarding risk focus on helping clients structure their portfolio to reflect their risk profile.  Or, making sure clients have adequate insurance protection.  However, it is much more difficult to protect clients from headline risk.

What is headline risk you say?  Well, the funny thing about headline risk is that it is not a real risk in the traditional sense.  Instead, headline risk is simply a person’s perception of risk that is created by overly ominous news headlines.  In today’s connected world, headline risk is everywhere!

As harmless as headline risk may seem, it can represent a huge deterrent in making progress towards long term financial goals.  People can get so distracted and concerned with the apparent daily perils, that a sense of panic sets in.  In turn, they can become “frozen in indecision,” or even abandon a sound investment strategy.

Most of you can recall the fear and anxiety you experienced two years ago at the height of the financial crisis.  Most of the pundits interviewed on CNBC and other news channels offered the sage advice to “Sell while you can” or quipped, “This is only the beginning of the financial collapse” – even as the markets had already tumbled significantly.  Can you believe the S&P 500 Index has nearly doubled since March 9, 2009?

Our advice?  Recognize the sources or providers of headline risk and remove them from your daily routine.  Also, keep in mind that when it comes to the financial markets, bad news is generally not that bad and good news is not that good.

Most importantly, have a financial game plan.  A comprehensive financial plan can instill a sense of empowerment, allowing you to accept short term uncertainty and embrace the opportunity of the future.  We hope that you will contact our office should you have any questions.

photo credit: timefornurses

Consider the following statistics provided by the US Department of Health and Human Services regarding the cost of long term care services (in 2009):

• For a home health aid, the average cost is $21/hour
• The average daily cost for adult daycare services is $67
• The cost of a semi-private room in a nursing facility averages $198 per day.
• The cost of a private room in a nursing facility averages $219 per day.

While long term care insurance can also be expensive, paying a known cost (insurance) to protect against an unknown expense (long term care) can provide peace of mind.  However, prior to shopping for long term care insurance, an understanding of the basics may be helpful.

What is long term care?

Long term care is not just skilled nursing care.  Long term care can include all the assistance required should you have a chronic illness or disability that leaves you unable to care for yourself for an extended period of time.  Long term care can be received in your home (home health care) or in a nursing or assisted living facility.

What are the costs of long term care services?

The total cost of care varies based on the types of services needed and where you live.  In NC, skilled nursing costs average about $176/day while home health and custodial care services average $20 to $25 per hour.

When would long term care insurance begin paying for services received?

Most policies provide that benefits are “triggered” by certain physical and/or mental impairments. The most common method for determining when benefits are payable is based on the insured’s inability to perform certain activities of daily living (ADLs). The primary ADLs are as follows:

1. Eating
2. Bathing/Hygiene
3. Toileting
4. Dressing
5. Continence
6. Transferring (i.e. getting out of bed)

Typically, benefits are payable when the insured is unable to perform a certain number of the ADLs, (such as two or three out of the six) and has satisfied the elimination period or deductible on their long term care insurance policy.

Reasons to consider obtaining a long term care insurance policy

For those above the age of 50, I would suggest that you consider obtaining long term care insurance in any of the following circumstances:

• Your current retirement assets cannot support an extended long-term care need.
• Your primary source of paying for long term care expenses would be your IRA, 401(k), or other retirement plan in which all distributions are taxable.
• You do not want to depend on your spouse or children to provide you with custodial care.
• You are afraid you will experience a change in health that may make you unable to obtain (or afford) a long term care insurance policy in the future.

If you would like to discuss your long term care insurance needs in more detail, feel free to contact our office.  Remember, we do not sell life insurance or represent any insurance company—so you can rest assured that you will get unbiased and objective guidance.

States and municipalities are experiencing severe budget issues. Oil is approaching $100 per barrel. The dollar is steadily declining. Portugal, Ireland, Greece and Spain have massive debt problems to address. The unemployment rate remains stubbornly high. The housing market is weak. Interest rates are rising. You get the point.

There are many things that can go wrong and I assure you that there will be another crisis—it’s inevitable.

So the question becomes, are you prepared for the next crisis? Not just one created by turbulent financial markets, but what about a personal financial crisis? To us, this is the more important question, and one that should be addressed through the financial planning process. We would suggest that you take steps now, before the next crisis, to prepare for an event that will certainly occur. Now is the time!

That’s right, now is the time to adjust the asset allocation of your portfolio if the stress of the Great Recession was too much. Now is the time to formulate a savings strategy to help you reach your goals. Now is the time to rebuild your emergency fund, reduce debt levels and reign in spending. Now is the time to address your insurance and estate needs, more closely monitor your 401(k) plan and take steps to reduce your tax burden. Begin now and chart the course for a successful financial future, regardless of which crisis ultimately rears its head.

Wouldn’t it be great to feel the assurance and peace of mind associated with having a financial “game plan” in place before the next crisis strikes? Or have the ability to confidently make sound financial decisions during periods of duress or even personal turmoil—simply because you have taken measures to prepare for the unknown?

Now is the time…let us help you! We hope that each of you have a happy, healthy and prosperous 2011.