Estate Planning Blog Articles

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Can I Retire in a Bear Market?

Money Talks News’ recent article entitled “Retiring in a Bear Market? 7 Things to Do Now” says that research has shown that this scenario — known as sequence-of-return risk — can permanently reduce the amount of money you will have to live on during retirement. However, savvy retirees can avoid most or all of this damage. If you’re planning to retire right into the teeth of a bear market, consider the following:

Meet with a money pro. If you make the wrong decisions here, it can have life-altering effects. This is the perfect moment to speak with a financial adviser. The right pro can help you develop a plan.

Tighten your spending. A bear market may mean  you must downsize your grand visions. The more money you keep in your wallet when the market is down, the better off you’re likely to be when the bull market returns. When the market recovers, you can pick up your dreams where you left them.

Use your savings. A great way to avoid permanently ruining your finances in retirement is to have cash savings to use when stocks collapse. Living off your liquid savings keeps you from having to cash in stocks when their value is depressed, which allows your portfolio time to recover.

Consider your Social Security options. When retiring into a bear market, you either have to take Social Security now, so you can leave your investments alone and give them more time to recover; or wait to claim Social Security, hoping that there will be bigger checks later in retirement that will help cushion the blow, if your other finances do not recover robustly. There’s no simple answer, and many factors can help you determine which strategy is best. These include your health, your risk tolerance, your marital status and many other considerations.

Review your asset allocation. Bear markets are the ultimate test of your tolerance for risk. With stocks down at least 20% — the definition of a “bear market” — consider your feelings. This can help you determine if your asset allocation is too risky, too conservative, or just right. Making certain that your allocation matches your risk tolerance will put you in a better position for the next bear market.

Going back to working. Bear markets rarely last long, often disappearing in less than a year. A part-time job or freelance work can give you a bit of extra income to ride out the storm, possibly even allowing you to leave all of your savings untouched. When the market recovers, you can return to your full-time retirement.

Stay calm. The tendency is to panic. Resist the urge.

Reference: Money Talks News (July 25, 2022) “Retiring in a Bear Market? 7 Things to Do Now”

Will Inflation Have Impact on My Retirement?

Inflation means fluctuations to the dollar’s purchasing power may have a significant effect on a retiree’s ability to cover costs of living and maintain a quality of life, says Kiplinger’s recent article entitled “Is Inflation Costing You More as a Retiree?”

  1. Why Could Inflation Impact Disproportionately Retirees. Inflation impacts people differently. There are many who may not feel the effects of inflation when compared to others. However, retirees tend to spend larger portions of their income on items highly impacted by inflation, such as housing, food, gas and health care, all of which are seeing the full effect of inflation.

The recent rise of inflation forces a lot of retirees to address tough questions about how to protect their retirement savings, while covering their costs of living.

  1. The Cost of Inflation. Retirees’ sources of income may be at risk to large inflation spikes. Retiree likely have most of their income tied to markets or in fixed income. These two sources are highly impacted by inflation. Social Security does offer COLAs, but the last increase was 5.9%, which falls short of the 8% to 9% increase in prices we’ve seen over the past year.

Retirees frequently use savings to get them through retirement. However, when inflation happens, the purchasing power of savings declines. As a result, retirees must withdraw larger amounts of savings to cover the costs of living. This shrinks the lifespan of retirement savings.

  1. Protect Yourself with Hedges against Inflation. Inflation-protected securities can be a way to keep income on pace with inflation. Treasury Inflation-Protected Securities, commonly known as TIPS, offer an interest distribution rate that keeps pace with the CPI inflation rates. This investment has helped retirees mitigate inflation and maintain their quality of life throughout retirement without worrying about outliving their savings.

Retirees and their savings face a stormy forecast ahead due to inflation. Income sources for retirees are largely inflation-exposed, and their spending habits tend to be on products and services affected by inflation.

Reference: Kiplinger (July 16, 2022) “Is Inflation Costing You More as a Retiree?”

Will Vets Now Get a COLA Increase in Benefits?

The measure was filed by Representatives Elaine Luria, D-Virginia and Troy Nehls, R-Texas, along with Senators Jon Tester, D-Montana and Jerry Moran, R-Kansas. In joint statements, they called the proposal critical to bolstering veteran’s finances, reports Military Times’ recent article entitled “Lawmakers move to guarantee cost-of-living boost for veterans benefits.”

“We have a responsibility to take care of our veterans, many of whom rely on VA for financial support,” said Moran, ranking member of the Senate Veterans’ Affairs Committee.

“As rampant inflation is driving up the cost of living, this legislation helps make certain that veterans are able to keep up with our changing economy and receive the benefits they have been promised.”

The bill linking the two government benefits is largely routine.  Lawmakers typically approve the annual proposal to couple VA benefits increases with Social Security benefits increases by large bipartisan margins.

However, this isn’t automatic. Even with the efforts of advocates in the past, an annual cost-of-living increase in veterans benefits requires congressional action.

Social Security benefits, in contrast, are adjusted based on an automatic formula that is triggered whether lawmakers vote on it or not.

In 2021, as inflation pressures began to impact the American economy, that increase was 5.9%. Officials haven’t said what this year’s adjustment may be. However, continued rising costs across the economy could push that figure even higher. The VA COLA increase legislation would apply to payouts for disability compensation, clothing allowance, dependency and indemnity benefits and other VA assistance programs.

“Transitioning from active duty to civilian life is not always easy, and a cost-of-living adjustment is the least we can do for the men, women and families who served our country,” said Luria, herself a Navy veteran.

Tester, who serves as chairman of the Senate Veterans’ Affairs Committee, said the bill will “ensure [veterans] benefits are keeping pace with the changing economy.”

No timetable has been set for when either chamber could vote on the proposal.

Reference: Military Times (May 23, 2022) “Lawmakers move to guarantee cost-of-living boost for veterans benefits”

When Should I Think About Business Succession?

The pandemic has made many business owners rethink their business succession and retirement planning. Insurance News Net’s recent article entitled “Succession Planning For Business Owners: More Important Than Ever” reports that according to PwC’s 2021 US Family Business Survey, only a third of US family businesses have a robust, documented and communicated succession plan in place.

If you wait too long, you may not have the right people in place to run the business. It also restricts the tax planning options for the business and your personal estate. Either error can cause a business to fail, when it passes from one generation to the next.

An exit that is too sudden or without direction can leave a vacuum at the top and damage relationships with existing clients and customers. With clear objectives, a sense of urgency and an experienced estate planning attorney, you can help ensure that your business, and your future, are secure.

There are a number of areas of transition that should be addressed:

  1. Founder Transition: Determine how long you plan to stay with the business, and what your retirement plans are;
  2. Family Transition: If you plan to leave your business to your children, determine the way in which the roles and power relationships will change;
  3. Business Transition: How will the company’s operations and customer relations be maintained through other transitions;
  4. Management Transition: Decide who will make up the new management team, such as family, non-family, or both, and how new leadership will be evaluated. You should also map out the schedule for transferring control of day to day decisions;
  5. Ownership Transition: Determine how ownership is to be transferred; and
  6. Estate Transition: see how you will coordinate your estate plan to ensure that the other transitions above occur as planned.

Many of these transitions will be accomplished through formal documentation, such as an operating agreement, buy-sell agreements and trusts. Sit down with an attorney soon rather than later to sort this out.

Reference: Insurance News Net (December 30, 2021) “Succession Planning For Business Owners: More Important Than Ever”

Should I Withdraw more than RMD?

As most know, once a person hits 72, the IRS require you to take a certain minimum amount from your IRA each year. Many do take only the minimum, believing that this will leave more assets to grow tax deferred. However, recent tax changes are a reason to revisit one’s IRA distribution strategy.

MSN’s article entitled “Should You Take an Extra Big RMD This Year?” says that although some people are worried about paying more in taxes this year than they need to may want stay to the bare minimum of their required minimum distribution (RMD), others seek to find a broader tax strategy.

Those people may want to consider going big with their RMDs. Let’s look the wisdom of taking more than the required minimum distribution from your IRA.

The article gives us four considerations to help with your RMD decision about possibly taking more than the IRA RMD in any year:

  1. Your tax bracket. Determine the amount of additional income you can recognize this year, while still staying within your current tax bracket. Taxpayers in the 10% and 12% tax brackets should be especially cognizant of maximizing ordinary income in these relatively low tax brackets.
  2. Your income. See what your income’s projected to be next year and consider whether you (or you and your spouse) will have other sources of income in future years, such as an inherited IRA, spouse’s IRA RMD or annuity income to add to the mix.
  3. Your beneficiaries. Look at the way in which your current tax rate compares with the tax rates of your IRA beneficiaries. If you have a large IRA and children with high incomes of their own, your heirs could be pushed into a much higher tax bracket when they start their inherited IRA distributions.
  4. Your Medicare premiums. An increase in income can also result in higher Medicare Part B & D premiums in coming years. As a result, consider this in the context of total savings.

Reference: MSN (Nov. 23, 2021) “Should You Take an Extra Big RMD This Year?”

 

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

  1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
  2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
  3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
  4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
  5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
  6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

How Should I Plan to Sell My Business?

For many business owners, between 70% and 80% of their wealth is tied up in their business. Research also shows that just 20% to 30% of businesses that go to market actually sell. That leaves 80% of business owners with limited options to monetize the value of their business and wealth for future financial security.

The Tampa Bay Business Journal’s recent article entitled “Selling a family business: Plan to maximize value and preserve wealth” explains that there are several factors facing Boomer business owners, as they consider selling their businesses:

  • They may be worried about forfeiting their income stream.
  • They may feel trapped because the business funds a certain lifestyle.
  • They could be worried about what they’ll do in the next chapter of life after leaving.
  • They may not have a sense of urgency or plan for an unexpected life event, such as an illness or death; and
  • They could be misinformed about options for a strategic exit to capitalize on the business’ value.

It’s critical to start business exit planning now.

It’s not uncommon that when businesses are passed on from one generation to the next, family conflicts can occur. With about three-quarters (70%) of family businesses failing after being passed to the next generation, there’s good reason to reconsider leaving your business to your children in the traditional sense.

More business owner children either can’t afford to buy the family business or would prefer to not be saddled with it. In fact, UBS Global Wealth Management found that 82% of the next generation would prefer the money from the sale of the business. Half of family business owners also don’t know their exit options and have no transition team or transition plan.

About half of all exits from a family business aren’t voluntary. The five Ds — death, disabilities, divorce, distress, and disagreements — can derail a sound business exit strategy. Instead of holding on too long and focusing on just income generation, business owners should look at growing the enterprise value of the business, thus making it more attractive and transferrable to new ownership.

Business owners should have secure contracts, an experienced management team and a sound succession plan to keep the business operating and demonstrate its market value.

You should aim to exit your business when it’s at peak enterprise value and while you have control to depart on your terms.

Simply gifting a family business to the next generation may not be the right decision. Ask an experienced estate planning attorney about other options to consider.

Reference: Tampa Bay Business Journal (Nov. 29, 2021) “Selling a family business: Plan to maximize value and preserve wealth”

How Can I Rescue My Retirement?

A 2019 survey by Global Atlantic Financial Group, which sells annuities, asked more than 4,000 Americans, pre-retirees and retirees, about their retirement savings. Of those surveyed, 55% said they had regrets. The top three were that they:

  • Did not save enough.
  • Relied too much on Social Security.
  • Did not pay down debt before retiring.

However, you can avoid some of this remorse, by taking steps now. Let’s look at how you can avoid those major retirement regrets.

  1. Failing to save enough. A recent survey found that 62% of respondents were confident about their current financial health. However, when people looked ahead to their retirement finances, that changed. Part of the issue is planning. Only 18% of the Fidelity survey respondents had a financial plan for retirement. Without planning, it’s hard to know if you have enough saved. See how much you’ll be spending in retirement. Go through your expenses and increase your savings. The most common financial surprises for retirees are inflation and unexpected medical costs.
  2. Depending too much on Social Security. Rather than looking at Social Security as your main source of income in retirement, view it as one of several legs of a stool. Social Security isn’t designed to provide all the necessities of life. It is supplemental. It is not intended to be replacement income. Your planning should include other resources, including:
  • Tax-advantaged retirement plans
  • Pensions
  • Taxable investment accounts
  • Personal savings
  • A health savings account
  • Income from businesses or properties.
  1. Not paying off debt before you retire. For retirees on fixed incomes, debt makes it difficult to really enjoy retirement. Therefore, retire any debt you have before you stop working. You should systematically focus on one debt at a time, while making minimum payments on other debts. Get started by targeting the debt with the highest interest, or perhaps the one with the smallest balance. The goal is to be debt-free in retirement, so your financial resources can go toward helping you enjoy life. However, you shouldn’t concentrate too much on paying down debt and overlooking your retirement savings.

The best way to avoid retirement regret is planning. Start now and evaluate your situation. Then develop a retirement roadmap that helps you get from today to tomorrow.

Reference: Money Talks News (Oct. 13, 2019) “The 3 Biggest Regrets of Retirees — and How to Avoid Them”

What are Earnings Limits for Disability Retirees?

If you are 60 or older, there’s no restriction on the amount of income you can earn while receiving disability retirement.

However, if you’re under age 60, you can earn income from work while also receiving disability retirement benefits. Note that your disability annuity will cease, if the United States Office of Personnel Management determines that you’re able to earn an income that’s near to what your earnings would be if you’d continued working.

Fed Week’s recent article entitled “The Limits on Earnings for Disability Retirees” says that the retirement law has set an earnings limit of 80% for you to still keep getting your disability retirement. You reach the 80% earnings limit (or are “restored to earning capacity”) if, in any calendar year, your income from wages and self-employment is at least 80% of the current rate of basic pay for the position from which you retired.

All income from wages and self-employment that you actually get plus deferred income that you actually earned in the calendar year is considered “earnings.” Any money received before your retirement isn’t considered “earnings.”

The government says that income from wages includes any salary received while working for someone else (including overtime, vacation pay, etc.). Income from self-employment is any net profit you made from working or managing your own business—whether at home or elsewhere. Net profit is the amount that’s left after deducting business expenses and before the deduction of any personal expenses or exemptions as allowed by the IRS. Deferred income is any income you earned but didn’t receive in the calendar year for which you’re claiming income below the 80% earnings limitation.

If you’re reemployed in federal service, and your salary is reduced by the gross amount of your annuity, the gross amount of your salary before the reduction is considered “earnings” during the calendar year.

The following aren’t considered earnings:

  • Gifts
  • Pensions and annuities
  • Social Security benefits
  • Insurance proceeds
  • Unemployment compensation
  • Rents and royalties not involving or resulting from personal services
  • Interest and dividends not resulting from your own trade or business
  • Money earned prior to retirement
  • Inheritances
  • Capital gains
  • Prizes and awards
  • Fellowships and scholarships; and
  • Net business losses.

If you’re under age 60 and reemployed in a position equivalent to the position you held at retirement, the Office of Personnel Management will find you recovered from your disability and will cut off your annuity payments.

Reference: Fed Week (Nov. 4, 2021) “The Limits on Earnings for Disability Retirees”

What’s the VA Doing about the Backlog in Claims?

The VA says that it’s planning to hire more people and use mandatory overtime for thousands of already-working claims staff and emergency coronavirus pandemic funding to help stem the problem.

Military Times’s recent article entitled “VA to hire 2,000 new processors to help with looming spike in claims backlog says that despite that, Veterans Benefits Administration officials expect it to take two and a half years to bring the backlog back down to pre-pandemic levels. Moreover, they’re asking veterans to wait for their claims to be processed and not to panic.

“We don’t want people to worry when they see that number,” said Mike Frueh, VA’s Principal Deputy Under Secretary for Benefits. “We want veterans to keep filing their claims.”

As of the end of September, the claims backlog (the number of cases that have been pending for more than four months) was 208,000—nearly three times the typical monthly backlog total from before the start of the coronavirus pandemic in early 2020. The VA says that office closures caused by the pandemic steadily drove up the backlog total for much of last year. In addition, the issue grew due to several court decisions and new laws mandating additional benefits for troops exposed to Agent Orange during the Vietnam War. It’s also why VA officials know another backlog spike is coming.

About 70,000 claims related to new benefits rules for Parkinsonism, bladder cancer and hypothyroidism linked to poisoning from the chemical defoliant are due to hit the four-month mark at the end of October. Frueh said officials think the backlog will reach more than 260,000 by then. However, he said officials are processing cases at a record rate, and don’t expect the backlog to reach the same challenges as in 2013, when an influx of new benefits swelled the total to more than 600,000. Thousands of those cases lingered in the VA system for years without resolution.

“We are the front door to VA benefits and services,” he said. “This is a natural consequence of people filing more claims.”

The VA processed more than 1.5 million claims in fiscal 2021, the most ever. However, they also received about 1.7 million claims and expect the number to rise even higher with the recent benefits changes. The short-term hiring of new workers will provide long-term relief to the claims processing problems. However, it will take months before those staff are fully trained and able to handle standard workload amounts.

Since May, the benefits administration required 20 hours of mandatory overtime a month to deal with the backlog spikes. Those requirements will continue for the foreseeable future, Frueh said.

In a statement, VA Secretary Denis McDonough said the department remains “committed to ensuring timely access to benefits and services for all veterans.”

Reference: Military Times (Oct. 13, 2021) “VA to hire 2,000 new processors to help with looming spike in claims backlog