Estate Planning Strategies in a Low-Interest-Rate Environment

The federal government requires the use of certain interest rates to

value various items used in estate planning, such as an income, annuity, or remainder interest in a trust. The government also has interest rates that a taxpayer may be deemed to use in connection with certain installment sales or intra-family loans. These rates are currently at or near historic lows, presenting several estate planning opportunities.

Low interest rates favor certain estate planning strategies over others. For example, low interest rates are beneficial for a grantor retained annuity trust (GRAT), a charitable lead annuity trust (CLAT), an installment sale, and a low-interest loan. On the other hand, low interest rates have a detrimental effect on a qualified personal residence trust (QPRT) or a charitable gift annuity. But interest rates have little or no effect on a charitable remainder unitrust (CRUT).

Grantor retained annuity trust (GRAT)

In a GRAT, you transfer property to a trust, but retain a right to annuity payments for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries, (such as family members). The value of the gift of a remainder interest is discounted for gift tax purposes to reflect that it will be received in the future. Also, if you survive the trust term, the trust property is not included in your gross estate for estate tax purposes. If the rate of appreciation is greater than the IRS interest rate, more of the value of trust assets escapes gift and estate taxation. Consequently, the lower the IRS interest rate, the more effective this technique.

Charitable lead annuity trust (CLAT)

In a CLAT, you transfer property to a trust, giving a charity the right to annuity payments for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries, such as family members. This trust is similar to a GRAT, except that you get a gift tax charitable deduction. Also, if structured so that you are taxed on trust income, you receive an up-front income tax charitable deduction for the gift of the annuity interest. The lower the IRS interest rate, the more effective this technique is.

Installment sale

You may also wish to consider an installment sale to family members. With an installment sale, you can generally defer the taxation of any gain on the property sold until the installment payments are received.

However, if the family member resells the property within two years of your installment sale, any deferred gain will generally be accelerated. The two-year limit does not apply to stocks that are sold on an established securities market.

You are generally required to charge an adequate interest rate in return for the opportunity to pay in installments, or interest will be deemed to be charged for income tax and gift tax purposes.

However, with the current low interest rates, your family members can pay for the property in installments, while paying only a minimal interest cost for the benefit of doing so.

Low-interest loan

A low-interest loan to family members might also be useful. You are generally required to charge an adequate interest rate on the loan for the use of the money, or interest will be deemed to be charged for income tax and gift tax purposes. However, with the current low interest rates, you can provide loans at a very low rate and family members can effectively keep any earnings in excess of the interest they are required to pay you.

Effect of low rates on other strategies

·         Charitable remainder unitrust: You retain a stream of payments for a number of years (or for life), after which the remainder passes to charity. You receive a current charitable deduction for the gift of the remainder interest. Interest rates have no effect if payments are made annually at the beginning of each year, and low interest rates have only a minimal detrimental effect if payments are made in any other way.

·         Qualified personal residence trust: You transfer your personal residence to a trust, retaining the right to live in the home for a period of years, after which the residence passes to your beneficiaries, (such as family members). The value of the gift of a remainder interest is discounted for gift tax purposes to reflect that it will be received in the future. The lower the IRS interest rate, the less effective this technique is.

·         Charitable gift annuity: You transfer property to a charity in return for the charity's promise to make annuity payments for your life (or for you and your spouse's lives). You receive a current charitable deduction for the gift of the remainder interest. The lower the interest rate, the lower the amount of your charitable deduction will be. Also, charities have generally been forced to reduce payout rates offered because of the economic downturn and the low-interest-rate environment.

 

Monthly Health Topic

Get Portion Savvy

Even if you can’t or don’t want to tally the calories you eat at every single meal or snack, adopting these little portion control tips can help you consume fewer calories without trying too hard. These tips can help you recognize what a healthy portion looks like, which can help you keep calories in check:

Think of a tennis ball. It’s the equivalent of one cup of food, which is the recommended portion for such foods as pasta, cereal, and yogurt.

Don’t eat straight out of the container. It’s a recipe for mindlessly overeating. Instead, measure a serving size of whatever you’re snacking on — almonds, soy chips, or other snacks — and put it on a plate or in a bowl.

Use smaller plates. Trick your mind into thinking that you have more food by downsizing your large dinner plate for a smaller salad-sized one. A healthy portion can look teeny on a huge plate but will seem more normal when you shrink its surroundings.

Spoil your appetite with nutritious food. Try eating celery sticks with peanut butter an hour before mealtime, You’ll eat less at the meal and feel more satisfied later.

Questions and Answers about Social Security

Whether you're close to retirement or years away from receiving Social Security benefits, you may not know much about the intricacies of this important program. Here are some questions and answers that can help you learn more.

Will Social Security be around when you need it?

You've probably heard media reports about the worrisome financial condition of Social Security, but how heavily should you weigh this information? While it's very likely that some changes will be made to Social Security (e.g., payroll taxes may increase, benefits may be reduced by a certain percentage, or cost-of-living adjustments may be calculated differently) there's been no proposal to eliminate Social Security. Although no one knows what will happen, if you're approaching retirement, it's probable that you'll receive the benefits you've been expecting. If you're still a long way from retirement, it may be wise to consider various options when planning for Social Security income.

How does the Social Security Administration know how much you've earned?

If you work for an employer, your employer will deduct Social Security taxes from your paycheck and report your wages to the Social Security Administration (SSA). If you're self-employed, you pay yourself-employment Social Security taxes and report your earnings to the SSA by filing your federal income tax return. To view your lifetime earnings record, you can sign up to access your Social Security Statement online at the SSA's website,www.socialsecurity.gov.

Will a retirement pension affect your Social Security benefit?

If your pension is from a job where you paid Social Security taxes, it won't affect your Social Security benefit. However, if your pension is from a job where you did not pay Social Security taxes (such as certain government jobs) two special provisions may apply.

The first provision, called the government pension offset (GPO), may apply if you're entitled to receive a government pension as well as Social Security spousal retirement or survivor's benefits based on your spouse's (or former spouse's) earnings. Under this provision, your spousal or survivor's benefit may be reduced by two-thirds of your government pension (some exceptions apply).

The second provision, called the windfall elimination provision (WEP), affects how your Social Security retirement or disability benefit is figured if you receive a pension from work not covered by Social Security. The formula used to figure your benefit is modified, resulting in a lower Social Security benefit.

If someone else receives benefits based on your earnings record, will your benefit be reduced as a result?

Your benefit will not be affected if other people, such as your spouse, former spouse, or dependent children, receive Social Security benefits based on your earnings record.

If you delay receiving benefits until after full retirement age, should you still sign up for Medicare at age 65?

Even if you plan on waiting until full retirement age or later to take your Social Security retirement benefits, make sure to sign up for Medicare three months before you reach age 65. If you enroll late for Medicare Part B (medical insurance) your coverage may be delayed or cost more later. Visit the Medicare website, www.medicare.gov to learn more.

Do IRA withdrawals count toward the Social Security earnings limit?

Prior to full retirement age, an earnings limit applies if you receive Social Security benefits. If you earn more than this amount, your benefit will be reduced. However, only wages from a job or net earnings from self-employment count toward this limit. Unearned income, such as IRA withdrawals, investment earnings, or capital gains, does not count.

What if you change your mind about when to begin Social Security benefits?

You have a limited opportunity to change your mind after you've applied for benefits. You can complete Form SSA-521, Request for Withdrawal of Application, and reapply at a later date. But if you're already receiving benefits, you can withdraw your claim only if it has been less than 12 months since you first became entitled to benefits, and you're limited to one withdrawal per lifetime. In addition, there are financial consequences--you must repay all benefits already paid to you or your family members based on your application, as well as any money withheld from your checks, including Medicare premiums or income taxes.

Are there resources available for retirees heading back to college?

You've decided to go back to school--congratulations! As it turns out, you're not alone. According to the National Center for Education Statistics, the number of full-time students age 65 and over in degree-granting schools increased 36% between 2007 and 2009, while the number of 50- to 64-year-old full-time students increased 42%.

Heading back to college later in life can be fulfilling; however, the many decisions involved--from choosing the right school and determining a course of study to budgeting for the various costs--can be overwhelming. Fortunately, a number of resources exist for older adults seeking information about higher education devoted to their needs.

A few years ago, the American Association for Community Colleges launched the Plus 50 Initiative, which encourages community colleges across the country to develop programs for those age 50 and older. The website Encore.org, provides links to college search tools and financial aid tips.

Encore.org is a nonprofit organization devoted to helping baby boomers seek new careers that are dedicated to serving the greater good. Among the many programs the organization runs is the Encore College Initiative, which provides resources for individuals looking for specific college-level programs for older adults.

Elderhostel, Inc., a nonprofit organization that provides educational and travel opportunities for retirees, helps support Lifelong Learning Institutes. Through these locally run membership organizations, participants select courses based on needs, interests, and the simple desire to learn. Most LLIs are sponsored by local colleges and universities, and offer a wide variety of programs.

Finally, many colleges and universities offer discounts--and, in some cases, even free tuition--for students over age 65. Consider starting your search by calling a local institute of higher learning and asking about special programs for seniors.

Real-life Financial Tips for Different Generations

Do you remember The Game of Life®? In Milton Bradley's popular board game, players progress through life stages making decisions that affect their prosperity. Like those players, today's generations face financial decisions with lasting effects. Here are some tips for staying focused despite life's ups and downs.

 

Generation Z (teens to early 20s):

Accustomed to instant gratification, the "Digital Generation" may need to recognize that financial success takes diligence and patience. Consider sharing the following advice with the

Gen Zers in your life:

     Live within your means. Your first paycheck
     provides the chance to learn valuable
     lessons, such as creating a budget and
     spending less than you earn.

     Build a saving habit. You have one powerful advantage over other generations--time. Why not

     make saving automatic and direct a part of your paycheck into a savings or investment account?

     Understand credit and credit reports. A good credit history helps you get a car loan and a

     mortgage, but a bad one can ruin your borrowing chances for years. Reviewing your credit report

     regularly can help you manage your finances and protect your identity.

Generation Y (20s and early 30s):

In this group, you could be juggling your first "real" job, college loans, marriage, a first home, and young children. Consider these points:

Risk management isn't just for companies. Save 6 to 12 months' worth of living expenses in a savings account for unexpected emergencies. Review your insurance, and at a minimum, have health and property coverage. Also consider disability insurance, which helps pay the bills during a health crisis.

Start saving for retirement ... Like Generation Z, time is your strongest ally. Participate in a retirement savings plan at work, if offered, and if your employer offers a match (free money!), contribute enough to get all of it. If you don't have a plan at work, open an individual retirement account (IRA) and invest what you can (up to annual limits).

... And your children's college. In 18 years, a four-year degree could cost as much as several hundred thousand dollars. Give your children a head start by saving now.

Generation X (30s and 40s):

Home ownership, older children, a career in full swing--if you're in this group, your finances may take a back seat to life's daily demands. To help stay focused, consider the following:

Retirement savings trump college savings. Don't risk your future to pay for your children's entire education. There's no financial aid office in retirement.

Don't neglect your health. Are you experiencing new aches and pains? At this age, medical issues can begin to surface, demanding time, energy, and financial resources. Take care of yourself, and before an emergency arises, review your health and disability coverage.

Create a will, if you don't already have one. This important document can help ensure your children are cared for and your assets are distributed according to your wishes. Medical directives should also be established now.

Baby boomers (50s and 60s):

If you're in this age group, you may have both adult children and elderly parents who need assistance, as well as an impending or current retirement. Pointers for you include:

Shift your retirement savings into high gear. People over 50 benefit from higher savings limits on 401(k)s and IRAs. Strive for the maximum.

Visit a financial professional. When should you tap Social Security and your retirement savings? How should you invest your assets to potentially provide a lifetime of income? A financial professional can be a critical coach at this time of your life.

Investigate long-term care insurance. These policies help protect your family's assets from the potentially devastating effects of long-term care. The older you get, the more expensive these policies can be.

Retirees:

The Game of Life ends when players reach retirement, but not so in real life--you still have years ahead of you. Consider the following:

Review the basics. Whether you plan to travel to exotic locales or play board games with your grandchildren, a key to happiness is living within your means. Develop a realistic budget and don't exceed your spending limits.

Manage your income stream. A financial professional can help you choose vehicles and determine an investment strategy to help ensure you don't outlive your assets.

Plan for your family's well-being. A properly crafted estate plan can help you ensure that your wishes are carried out--for both you and your family's peace of mind.

How Does Health-Care Reform Affect Women?

The Patient Protection and Affordable Care Act (ACA) expands women's access to health insurance and adds several reforms to the existing health-care system that are specifically beneficial to women.

Access to care and affordability are important issues for women. According to the U.S. Department of Health and Human Services, because almost twice as many women than men who receive employer-provided health insurance are covered as dependents, they are susceptible to losing that coverage should they become widowed, divorced, or if their husbands lose their jobs.

In addition, the cost of coverage may significantly impact women. Women earn less than men, on average, and are more likely to be out of the workforce to care for children, parents, or other dependents. Because of this trend, out-of-pocket costs such as co-pays, deductibles, and premiums can pose a particular threat to women's access to affordable care.

The ACA provides for the creation of state-level health insurance exchanges, available to small businesses and uninsured individuals that will serve as a marketplace of private and public health plans. Individuals and families purchasing insurance through insurance exchanges may be eligible for subsidies or tax credits (based on income) that can be applied towards the cost of insurance.

According to the U.S. Census Bureau, 20% of women between the ages of 18 and 64, or about 19 million women, are uninsured. Of those, it is estimated that 36% will be eligible for tax credits and subsidies. ACA specifies essential health benefits for women that must be offered by non-grandfathered plans. These benefits include maternity and newborn care, including prenatal visits and pediatric services. Several preventive services must be offered without co-payments or deductibles, including mammography exams; Pap tests; colonoscopies; type 2 diabetes screening; obesity screening; several immunizations including hepatitis, influenza, and HPV; and alcohol and tobacco counseling. Specific coverage benefits will continue to be shaped by U.S. Health and Human Services regulations.

What Health-Care Provisions Are Effective 2013?

With the Supreme Court's favorable ruling on the constitutionality of the Patient Protection and Affordable Care Act (ACA), more of the law's provisions will become effective in 2013. Here are some of the new features that may be important to you.

 

Medicare Part D participants who reach a gap in their drug coverage (the "donut hole") are required to pay the entire cost of prescription drugs out-of-pocket. In 2013, the ACA will continue to close this gap by increasing subsidies to reduce the cost of brand-name and generic drugs to participants who reach the donut hole. These subsidies will continue until 2020, when the participant's maximum contribution toward the cost of prescriptions will be reduced to 25%.

 

The threshold for the itemized deduction for medical expenses increases from 7.5% to 10% of adjusted gross income, beginning in 2013. However, this increase is waived for taxpayers age 65 and older through 2016.

 

In 2013, the annual pretax employee contribution to a Section 125 cafeteria plan flexible spending account (FSA) is reduced to $2,500, subject to annual increases for cost-of-living adjustments. The reduction does not apply to certain employer non-elective contributions (e.g., flex credits).

 

Beginning in 2013, the hospital insurance (HI) portion of the payroll tax, commonly referred to as the Medicare portion, increases by 0.9% for individuals with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

 

In addition, 2013 marks the imposition of a new 3.8% Medicare contribution tax on the unearned income of high-income individuals. This 3.8% contribution tax generally applies to the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

 

Looking ahead, 2014 brings the implementation of the health insurance exchanges, premium and cost-sharing subsidies, and the requirement that most individuals have health insurance.

Food For Thought . . . Simple Steps to Increase Your Life Expectancy

·         The leading cause of death and the number one cause of shortening life expectancy in the U.S. is heart disease. As your heart ages, there can be a build- up of gunk in your arteries and your arteries themselves can become harder (see heart aging for more information). This causes your blood pressure to rise and your heart to work harder, leaving you at risk for heart disease. Vegetarians (whole foods vegetarians) have some of the best arteries around because eating healthy vegetables avoids bad fats and other unhealthy foods.

·         People who eat lots of vegetables take in lots of antioxidants. Antioxidants help your body repair some of the damage caused by aging. The more plants you eat (and the greater variety) the more raw materials your bod has to make repairs. Read more on antioxidants and their evil counterpart, free radicals.

·         Finally, vegetables simply fill you up with very few calories (if prepared without creams, butter or cheese). A healthy vegetarian diet should help maintain or lose weight. A healthy weight is tied to a longer life expectancy.

So be more like a vegetarian to increase your life expectancy and live healthier.    

Source: http://longevity.about.com/od/liveto100/ss/life-expectancy_6.htm

Healthy Personal Finance

Develop a budget and stick with it

A good way to start the year on the right track financially is to make sure that you have a budgeting system in place. Start by identifying your income and expenses. Next, add them up and compare the two totals to make sure you are spending less than you earn. If you find that your expenses outweigh your income, you'll need to make some adjustments to your budget plan (e.g., reduce discretionary spending).

Once you have a budget, it's important to stick with it. And while straying from your budget from time to time is to be expected, there are some ways to help make working within your budget a bit easier:

•          Make budgeting a part of your daily routine

•          Be sure to build occasional rewards into your budget

•          Evaluate your budget regularly and make changes if necessary

•          Use budgeting software/smart phone applications

Set financial goals or reprioritize current ones

The new year is also a good time to set new financial goals and reprioritize your current ones. Take a look back at the financial goals you set for yourself last year--both short- and long-term. Perhaps you wanted to increase your cash reserve or save money for a down payment on a home. Maybe you wanted to invest more money towards your retirement.

Did you accomplish any of your goals? If so, do you have any new goals that you would now like to achieve?

Finally, have your personal or financial circumstances changed during the past year

(e.g., marriage, a child, job promotion)? If so, would any of these changes warrant a reprioritization of some of your goals?

Make it a priority to reduce debt

Any healthy financial plan is one that makes reducing debt a priority. Whether it is debt from student loans, a mortgage, or credit cards, it is important to have a plan in place to pay down your debt load as quickly as possible.

Review/take steps to improve your credit history

Having good credit is an important part of any sound financial plan, and the New Year is as good a time as any to check on your credit history. Your credit report contains information about your past and present credit transactions and is used by potential lenders to evaluate your creditworthiness. A positive credit history is important since it allows you to obtain credit when you need it and at a lower interest rate. Good credit is even sometimes viewed by employers as a prerequisite for employment.

Textophiles Love the Lowly Pen

Guess what remains one of today’s most popular instruments of communication – even in our wired world? Here’s a hint: Look around your desk, your car and your briefcase and you’ll find a common denominator.

Another hint? It’s everywhere, it’s accessible and it’s the solution to leaving your smartphone at home. The answer is the pen, and don’t go writing it off anytime soon.

The pen’s importance to consumers was investigated recently in a study cosponsored by BIC Graphic USA, a well-known company selling – you guessed it – pens. The study interviewed 1,114 consumers on their writing habits, and as researchers fast discovered, we consumers love our pens. Here are some of their findings:

·       Of those surveyed, 73% carry a pen at all times.

·       Almost 92% of car owners keep one or two pens in the car.

·      And, somewhat surprisingly, respondents under age 35 ranked the importance of pens higher than did those over age 65.

You know it’s in for the long haul when even textophiles love it.