5 Ways to Put Your Tax Refund to Good Use This Year.

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Expecting a big, fat refund from the government this year? Rather than spending it on something frivolous, put it to a good long term use. Here are 5 effective ways to use your tax refund to improve your financial health:

1. Pay off a credit card. A tax refund can jump-start a debt repayment plan. If you carry a balance on a high interest (or any) credit card, use the refund to pay it off! And then use the money freed up every month to pay off another card balance. If you have no other credit card debt, then start paying yourself by banking the monthly savings.

2. Start an emergency fund. Many people live paycheck-to-paycheck with no financial cushion in case of an emergency. If you are one of them, it’s time to create an emergency fund – your own stash – for “just in case.” Who knows when the transmission on your car will need repair, or if you’ll have a medical emergency. These things happen when we least expect, or can afford them. An emergency fund will give you peace of mind and protect you should the unexpected occur.

3. Save for retirement. It’s never too late to start saving for your retirement. Use your refund to open an IRA (traditional or Roth), or consider upping your contribution to your 401(k) or other employer provided plan. Your refund can help make up the difference in your take home pay.

4. Start a college fund. If you have a child, consider starting a college savings account through a state-sponsored 529 college education savings plan. The money grows tax free, and when your child starts college, withdrawals used for qualifying education expenses are tax free. (Bonus – Michigan allows its residents a tax deduction for contributions to accounts under its program.)

5. Make a long neglected home repair. Roof worn out, furnace on its last leg, windows leaking or drafty?   Use the refund to make necessary home repairs.  Repairs can save you money in the long run in lower energy costs, improve your home’s livability, and even boost its market value.

The End of Life Talk Is One of Estate Planning’s Necessary Evils

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Estate planning is a difficult process no matter the circumstances. And end-of-life conversations with loved ones are probably the most uncomfortable aspect of that process. They require you and your loved ones to take a sober look at your life circumstances and mortality. Yet as difficult as such conversations can be, they can help avoid stress and heartache later on. Clearly conveying your wishes concerning medical treatment, your funeral, and disposition of your assets will help loved ones avoid the stress and burden of putting your affairs in order after you’ve become incapacitated or die. Topics should include who should be notified of your death, wishes concerning funeral and burial, where your important documents are kept, accessing passwords and usernames, and how you want your remaining assets distributed after your death.

For great insights and tips on end-of-life conversations, please see Barbara Bates Sedoric, The Critical Importance of End-Of-Life Conversations, Wealthcare, October 13, 2015

Don’t Overlook Beneficiary Designations In Your Estate Planning

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I’ve written previously about the importance of making sure that you have beneficiaries designated for assets such as life insurance and retirement accounts. Proper beneficiary designations are a key component of estate planning. Naming beneficiaries of certain assets, like life insurance or retirement accounts, is the most effective way to make sure assets pass to the intended parties upon your death in the most efficient way possible.

Unfortunately, many people make the mistake of overlooking this important aspect of estate planning. Failing to designate beneficiaries, or not keeping beneficiary designations up to date can result in assets being subject to the expense and delay of probate.

WealthManagement.com has a short, but very good article on the importance of beneficiary designations in your estate planning. Please take a few minutes to read the article here.

Critical Estate Planning Steps for College Students

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College students are getting ready to head back to school. Whether your child goes away to school or commutes from home, don’t let them start the school year without taking these critical estate planning steps:

Have your student sign a medical power of attorney. If your child has an accident or becomes seriously ill, unless your child is under age 18, medical personnel will not discuss your child’s medical condition or treatment with you without authorization. Commonly referred to as a “patient advocate designation,” your child can appoint you to speak with doctors and make medical treatment decisions for them in the event they cannot do so themselves. It’s a good idea for the school’s medical clinic to have a copy on file, too.

Have your child sign a separate HIPAA authorization. Even with a valid medical power of attorney, medical providers may refuse to release your child’s medical information or speak to you regarding their medical condition. Doctors, hospitals, and other medical facilities fear the legal repercussions of unauthorized disclosures of one’s medical information. Even though you are the parent, they will not speak or release information to you without your child’s prior consent. I have handled cases where family members were forced to petition the courts to gain access to their student’s medical information in an emergency.

Finally, have your student sign a durable power of attorney. Parents of college students have all heard the speech from school administrators – “Due to federal privacy regulations, we cannot discuss anything regarding your student without prior written authorization” – and they mean it. To discuss a tuition or dorm bill, dispute a lab fee, or discuss any of your child’s financial affairs with any third party, you need written authorization. That’s where the durable power of attorney comes in to play.

Under a durable power of attorney, you child can appoint you as their agent to handle their personal and financial affairs if they can’t themselves. Everything from banking and bill paying to tuition or room and board issues can be handled by you as your child’s agent. If your child becomes ill or has an accident while away at school, as your child’s agent you will be able to access bank accounts, make sure their bills are paid, and keep their affairs in order until they regain the ability to do so.

This is a very exciting time for college students and parents. Make sure your student is fully prepared by making sure they give you their medical power of attorney, HIPAA authorization, and durable power of attorney.

3 Popular Retirement Planning Loopholes That May Be Closed

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Advisers have plenty of tricks and techniques to help clients maximize retirement savings and income, and minimize taxes. Many are considered “loopholes” in existing laws that advisers and their clients exploit to great advantage. Unfortunately, when use of these loopholes becomes too widespread, the government steps in to close them. This may happen soon to 3 popular retirement planning techniques according to a recent Reuter’s article.

The “stretch” IRA. Beneficiaries of an IRA or other retirement accounts have the option of taking distributions from the inherited account over their remaining life expectancies. And in the case of Roth IRAs, this means a lifetime of tax free distributions. Lawmakers on both sides of the political isle don’t like this. They believe that retirement accounts should be for retirement – not a tax windfall for heirs.

Law changes have been proposed in Washington that would require the balance of an inherited retirement account to be paid out to beneficiaries within 5 years of the account owner’s death. In the case of a traditional IRA, the acceleration of distributions will increase the income taxes that beneficiaries will pay on the distributions.  People contemplating Roth conversions for the benefit of children or other heirs may need to rethink this strategy if the beneficiaries have to withdraw the funds within 5 years.

Back-door Roth IRA conversions. The law creating Roth IRAs contains restrictions that prohibit certain high-income individuals from contributing to a Roth IRA. However, the law contains a loophole that allows these high-income earners to make a non-deductible contribution to a traditional IRA, and then convert the funds to a Roth IRA. In a typical transaction of this type, zero income tax has to be paid on the conversion. Once converted, the funds grow income-tax free and no tax is due on distributions from the account, which lawmakers believe hands beneficiaries an unintended tax-free windfall.

Aggressive Social Security benefit claiming strategies. One of these likely to be ended is known as “file and suspend.” Married couples can claim benefits based on their own work record or on the work record of their spouse. A person who reaches full retirement age (currently 66) can apply for their own retirement benefit and then immediately “suspend” the application so that their monthly benefit continues to grow until they reach age 70, when they must begin collecting. If their spouse is also at full retirement age and hasn’t claimed their own retirement benefit yet, the spouse can apply for a spousal benefit, which can be as much as ½ of their partner’s monthly retirement benefit. He or she can collect the spousal benefit until age 70 and then switch to their own monthly retirement benefit.

Experts opine that people who are already receiving Social Security benefits or those close to retirement age probably don’t have to worry. The government isn’t likely to take back something that has already been given. Changes will likely have to be phased in to avoid political backlash. Government gridlock may also prevent anything from happening soon.

See Liz Weston, Three retirement loopholes seen likely to close, Reuters, June 29, 2015.

Is MyDirectives The Next Big Thing In Medical Directive Planning?

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“MyDirectives,” a service of ADVault, Inc., is touted as the first entirely online advance medical care planning service available to consumers to voice record and store advance directives for medical care so that medical professionals can not only read, but also hear your instructions and wishes concerning medical care and treatment in your own voice when you can’t express them yourself.

Through digital directives that include written documents, audio and even video messages, MyDirectives is giving people confidence that their voices will be heard in a medical emergency.

MyDirectives is aiming to transform the doctor-patient relationship by helping you create, store, update, and share medical directives to and from anywhere in the world. You can create them from the comfort and privacy of your own home with input from your family before you have an emergency. Your directives are stored electronically with MyDirectives and can be shared with doctors, health plans, and hospitals 24/7. Hospitals that link to MyDirectives can access your directives at the time of your admission.

MyDirectives makes it easy to create an emergency medical directive. The site takes you through a series of questions covering topics such as your values and treatment goals, types of treatment you want and don’t want, and who you want to represent you if you cannot make medical decision for yourself. You can choose from a selection of the most common answers or answer questions in your own words, with as much detail as you wish. You can even add your own video responses. You can edit them and access them at any time from anywhere. Your medical providers can only access the most recent version of your directives.

To learn more, or create your own digital directives, go to the MyDirectives website here.

Estate Planning Isn’t Just For Married People

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The majority of my estate planning clients are married couples. For them, it just seems the natural thing to do. However, estate planning for singles is just as important. While a single person may have to do some things differently, they still need to have an estate plan to avoid problems that will naturally arise during times of incapacity or after death.

Most single people do not own assets jointly with another person. By contrast, married people will naturally add their spouse to financial accounts and real estate to ensure continued access to accounts upon the disability of one of them, and the efficient succession of ownership upon the death of one of them. For singles, adding another person’s name to a financial account or real estate may have unintended consequences that can be disastrous.

When a single becomes incapacitated, access to, and control of their assets become matters for the courts to determine in the absence of documents that will allow for someone to step into their shoes with legal authority to manage their assets and affairs.

Without a will or trust, the laws of the state of his or her residence will determine how their assets are divided and distributed after death. This will necessarily require the involvement of the courts along the way.

To avoid these pitfalls, it is important for singles to put together a estate plan, just like married people do. A comprehensive estate plan will consist of 5 key elements: a will; durable power of attorney; medical power of attorney; trust; and beneficiary designations.

The will is the cornerstone of any estate plan. It allows you to name the person who will guide the administration of your estate after your death; to specify how your assets will be distributed; and to name a guardian for your minor children.

A durable power of attorney lets you appoint someone (your “agent”) to manage your day-to-day affairs if you cannot do so for yourself. Whether this person is a parent, sibling, or close friend, it must be someone you trust implicitly.

A medical power of attorney lets you appoint someone to make medical treatment decisions for you if you cannot do so for yourself. This authority can extend to end-of-life decision making. Again, the person you appoint should be someone you trust to follow your wishes concerning medical care and to be a strong advocate for you.

A trust will allow for long term management and control of assets during your lifetime and simplify the distribution of your assets upon your death. Trusts are typically used to maintain privacy, avoid the probate courts, and minimize the effect of taxes on asset distribution after death.

Finally, beneficiary designations control the distribution of assets such as life insurance proceeds and retirement accounts. If you don’t have beneficiaries named, those assets are typically paid to your estate. In the case of retirement accounts, not naming a beneficiary can result in significant income taxes being levied. If the beneficiaries are out of date, those assets are still going to go to the people named, even if you no longer want them to receive those assets.

If you are single and don’t have an estate plan in place, it’s not too late to put one together. Work with an estate planning attorney who can develop an estate plan tailored to your individual circumstances.  Give me a call, I can help.

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We Did Our Trusts When Estate Taxes Were an Issue, Do We Still Need Separate Trusts?

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New clients came in to review and update an estate plan they had set up several years ago. The estate plan included separate trusts for each spouse, which contained provisions to lessen the potential impact of federal estate taxes on their estates after their deaths. The trusts were drafted at a time when the federal estate tax exemption limit was much lower than it is today. In light of this they wondered if they still needed to keep the separate trusts or could they shift to a joint trust, combining all of their assets into one trust that they would both manage as co-trustees.

As with most legal questions, it depends. Most married couples assume the sole reason to use separate trusts in their estate plan is to reduce or eliminate estate tax liability after they die. But taxes are just one of many reasons for married couples to use separate trusts. Let’s look at a few of them:

These assets are mine, not ours. Let’s consider property intended to “stay in the family.” In other words, is meant to be passed down to lineal descendants, or it’s inherited cash or other property that you just want to keep separate from your spouse. This is often the case with family hunting land that has been passed down from generation to generation. Clients may want to keep these assets separate so they don’t end up in the hands of a new spouse should the survivor remarry. Separate trusts can be handy to ensure that property stays within a bloodline.

It’s a second marriage. Each spouse has children from a previous union and they want to make sure that their children will not be disinherited upon their deaths. The concern is that when the first spouse dies, all of their assets end up in the hands of the surviving spouse and when the surviving spouse dies, all of the assets will go the children of the surviving spouse, leaving the children of the first spouse who died with nothing. This happens more often than one may think. Separate trusts can be a great way to provide financial support to a surviving spouse (especially where the bulk of the financial assets belong to the spouse likely to die first) during his or her remaining lifetime, while guarantying that any remaining assets will pass to the children of the first spouse upon the death of the survivor.

One spouse has trouble managing money. Separate trusts can be of benefit to ensure competent asset management, stable cash flow, and asset protection from the claims of the surviving spouse’s creditors should he or she have trouble managing money or credit.

Tax laws are complex and subject to change. If a joint trust is used, property of the trust may need to be allocated between the deceased spouse and the surviving spouse for various tax reasons.  Understanding the terms of the joint trust dealing with post death property allocations, and determining what assets go where, when, and with what tax consequence, can be very difficult.  Many times these provisions and issues are ignored, creating serious tax problems.  Presented as being simple and convenient, joint trusts can become anything but.  Most clients I see will escape federal estate taxes upon their deaths under current exemption limits. However, future tax law changes may reduce the exemption limit. And if the limits are reduced, it will be easier to address the problem if spouses have separate trusts than if they had a joint trust.

These are just a few of the factors to consider in determining whether joint or separate trusts should be used in an estate plan. Every situation is different, which is why you must carefully consider your own circumstances with your attorney to determine the best way to go.

5 Points to Consider When Naming a Beneficiary

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Who is a “beneficiary?” The word includes more than just the recipient of insurance funds or the inheritor of property. A beneficiary can be the recipient of funds or other property from a will, trust, retirement plan or life insurance. But there are differences with each beneficiary type. A recent article in the Chicago Tribune discusses 5 important considerations when naming a beneficiary.

1. A beneficiary of a will must wait until the will goes into probate before they receive any of their inheritance. Beneficiaries of a will can wait months or even years before receiving their inheritance, and court costs and fees can erode the amount they eventually receive. That’s why many people choose to incorporate a revocable living trust into their estate plan.

2. A beneficiaries of a life insurance policy or retirement plan account will receive the money directly. These assets do not (generally) go through probate. Rather, the proceeds are paid to the beneficiary usually upon proof of identity of the beneficiary and proof of death of the account owner.

3. Minors generally do not make good beneficiaries. While the beneficiary is under age 18, a conservator will manage money or property for them until they reach age 18, when they receive the money outright. Which means that there is no further direction or control over how the money is spent – goodby college fund, hello Corvette!

4. Chose beneficiaries with care. Naming the “correct” beneficiary of a retirement account could allow the account to grow tax deferred for many years.

5. Beneficiary designations have consequences and you need to consider them carefully. For instance, naming a disabled person as the beneficiary of a life insurance policy could render that person ineligible for valuable governmental benefits such as Social Security supplemental income and Medicaid.

Please take a few minutes and read the entire article here.

A Quick & Easy Guide to Basic Estate Planning

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So, you’re thinking about putting an estate plan together (good for you!), but not sure if the timing is right, what to do, or what you need.  To help you get going, here is my quick and easy estate planning guide. Don’t worry, nothing complicated here, just basic information.

Is the time right? Well, estate planning is planning for the future. Planning for when you are not able to take care of yourself, and planning for what will happen after you die. I tell clients that as long as they’re alive it’s not too late. But remember, “tempus fugit” – time flies – and we don’t know what tomorrow will bring, so the best time to plan is now!

Do you need an estate plan? Estate planning isn’t just for the wealthy. You need an estate plan if you want to designate the person who will make financial and medical decisions for you if you can’t do so yourself (if you don’t a probate court judge will), or if you want to name a guardian for your minor children (if you don’t a probate judge will), or if you want to designate who will receive your property after you die (if you don’t, Michigan law will dictate who gets what). So forget those notions that estate planning is something only rich people need to do.

Do you need a lawyer? YES! Work with a competent lawyer.  It will cost more than you’d pay for a DIY kit, but it’s worth the additional expense and trust me, way cheaper in the long run.  Despite what you may have heard on the radio or seen on television, estate planning is not a “one size fits all” endeavor. Sure, those DIY documents may be legal in all 50 states, but will those cookie cutter documents be sufficient to carry out your wishes when the time comes? A lawyer can help you examine the big picture, give you guidance and recommendations, and most importantly draft custom, tailored documents to help you achieve your particular planning goals and objectives.

So what should be in your estate plan? There are five elements that form the basis of an effective estate plan.

Last will and testament. A last will and testament does primarily three things: Direct who will take care of minor children; Appoint someone to tie up all of your loose ends and file/pay taxes; Specify how your property gets distributed after you die. You can make a will as long as you meet certain legal standards. In Michigan, that means one has to be at least 18 years old and have sufficient “testamentary capacity” – basically the ability to understand the nature and gravity of what one is doing. As people age their mental capacity can become an issue. However, even if a person has diminished mental capacity due to mild dementia or other condition he or she may still have the capacity to make a will.

A last will and testament takes effect after you die, so it’s important to have planned in some way to ensure that someone will look after your affairs and make decisions for you if you become incapacitated during your lifetime. For that you need a power of attorney and a medical power of attorney (patient advocate designation).

Power of attorney. With a power of attorney, you appoint an agent to handle your financial affairs and other transactions if you become incapacitated. Everything from banking and bill paying to preparing and filing tax returns on your behalf can be handled by your agent. Your agent will be able to keep your affairs in order until you regain the ability to do so. A durable power of attorney can be designed to take effect the moment you sign it, or at some point in the future if and when you become incapacitated. The agent can be a spouse, family member, or trusted friend or adviser.

Medical power of attorney. In Michigan, the medical power of attorney, or patient advocate designation, is authorized by law. It allows you to appoint someone (your “patient advocate”) to make medical treatment decisions for you in the event you cannot make them for yourself. Your patient advocate can access medical records, talk to your doctors and make treatment decisions for you as long as you can’t make them for yourself. It may contain expressions of your desires concerning medical treatment at the point where your condition is such that there is no longer any prospect of a recovery, such as at the end-stage of a terminal illness. These instructions will ensure that you live your last days in dignity and peace.

Revocable, or living trust. Do you need one? It depends. What are your goals and objectives; what types of assets do you own; do you desire to avoid probate or minimize taxes; do you desire to maintain control of your assets even after you die? These are some of the issues to address in determining whether a trust will be a beneficial element of your estate plan. While you’re alive, a trust can be beneficial during times of incapacity. Assets that are held in trust can continue to be managed and controlled by someone you’ve designated as your trustee until you’ve regained the ability to resume managing them for yourself, without having to involve the courts.  After you die, a trust can help avoid probate on the transfer of assets, maintain privacy of your affairs, provide long term control and management of assets (especially helpful if you have younger children or other beneficiaries who may not be capable of managing an inheritance on their own), minimize the effect of taxes on the disposition of assets, and even take care of a beloved pet.

Beneficiary designations. What do beneficiary designations have to do with estate planning?  Many common assets do not pass through a will or trust.  Among them are life insurance benefits and retirement plan assets. These assets pass to the person(s) designated as beneficiaries. Even if a will says who gets the life insurance, it won’t matter if the life insurance policy has a beneficiary designated. So, as part of your estate plan, it’s important to make sure that you’ve designated beneficiaries for assets such as life insurance, annuities, and retirement plan accounts, and to make sure those beneficiaries designations are up to date.

So there you have it. A quick and easy guide to basic estate planning.  (Nothing to it!)  Now that you’ve got some basic information, it’s time to get your plan in place.

If you’d like to get started, contact me, I can help.

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