Strategic Plans for Retirement, Wills, & Estates with Living Trusts
One reason that retirement planning can seem so challenging is that it is very difficult to gauge just how much we will need. Actually, this poses three questions:
How much it will cost to live for one year in retirement?
How long will the retirement be?
What affect will inflation have?
The Role of Annual Retirement Expenses
For most people, expenses fall once they retire. A general rule of thumb is that typical individuals can maintain their pre-retirement standard of living on only 60% to 80% of their pre-retirement gross income – and sometimes even less. Most retirees find that their budget for clothing, transportation, and dining declines once they no longer head to the office every day. Insurance bills might decline as well, since life and disability coverage often can be cut way back or skipped entirely in retirement. One should also save on taxes, since Social Security taxes are removed only from earned income, not from investment profits or pension plan income. The Social Security payments one receives should be at least partially tax free. Saving for retirement won’t be a major part of one’s budget once he is retired.
The Role of Social Security and Retirement
The words “Social Security” do not generate quite as much security as they once did. There was a time when Social Security income was considered the primary source of income for retirees. Even among today’s retirees, it plays a crucial role. Social Security currently provides less than half of total annual income for the majority of all Americans over age 65. And since the Social Security program is run by the U.S. government, it once seemed more ironclad than any individual investments or company-sponsored pension plans ever could.
But among many of today’s retirement savers that perception is changing. Social Security is widely viewed today as the most uncertain ingredient of a retirement plan. Many of today’s younger retirement savers do not believe that the program will provide them with much or anything in the way of benefits when their turn to retire comes around.
According to one recent survey, only 5% of Generation X believes that Social Security will be their most important source of retirement income. Unless significant changes are made, there is no way that the Social Security Administration will be able to continue paying benefits at their current schedule.
The Role of Company Pension Plans and Retirement
About one-half of all American workers are eligible to participate in an employer-sponsored retirement plan. According to the Employee Benefit Research Institute, company pension plans make up 19% of the typical retiree’s annual income. For some retirees, the company pension is even the primary form of income. But not all pension plans are the same, and not everyone qualifies for one.
There are two basic types of company pension plans:
the defined-benefit pension plan;
the defined-contribution pension plan.
Defined-contribution plans are considerably different from defined-benefit plans. The defined-benefit plan is what many people think of when they hear the word “pension.” With these plans, the employer -or perhaps a union-guarantees a certain amount of money to the former employee each year during his or her retirement. The defined-contribution plan leaves much more responsibility in the hands of the employee, who must decide where and how much to invest. Rather than guarantee a specific annual payout during each year of retirement, the eventual benefits from a defined-contribution plan are based largely on the amount that the employee has invested and the success of the investments that he or she has selected. The best-known defined-contribution plans are called 401(k)plans.
The Role of Defined-Contribution Plans
From a participant’s perspective, perhaps the greatest difference is that the eventual benefits are not guaranteed, but rather are determined by the performance of the investments selected. With most defined-contribution plans, it is up to the employee to select these investments, and to decide how much to contribute to the plans, within certain limits. Much more responsibility falls to the employee.
Under defined benefit plans the state owns and invest funds and pays people based on a formula. In the early 1990s, a number of state pension funds were seriously under funded – with the average fund containing only 80% of the amount needed to pay their obligations. Since then, some states have moved to replace their traditional defined benefit plans with defined contribution plans.
Defined contribution plans allow workers to direct their own 401(k)-style plans. So far ten states have set up defined-contribution plans or added components of them for state workers. In addition, six states have defined-contribution bills pending.
Employers have become less generous than they had been in the past with pension benefits. Corporate restructurings have left many people working for smaller businesses which usually do not offer generous pensions. Many big established companies have changed from, or rely less on, the more costly defined-benefit plans.
The Role of Small Business Plans and Retirement Accounts
While employees of most large companies have access to 401(k) plans or traditional pension plans, those employed by small firms often are not offered company retirement plans of any sort. According to a recent survey sponsored by the American Savings Education Council, of firms with fewer than 100 employees, only 29% of these employees are covered by an employer retirement plan-versus 83% of employees at larger companies.
Not all employees of small firms are left out in the cold. There is an entirely different set of retirement plan options that might be available through these companies. These plans also can be used by the self-employed to set up their own tax-deferred retirement plans.
Simple IRAs
Simple IRAs, the Savings Incentive Match Plan for Employees (SIMPLE), came into existence on January 1 1997, specifically for companies with 100 or fewer employees. This retirement plan is tailor-made for small companies and the self-employed, because, as its acronym implies, it is considerably cheaper and easier to administer than a conventional 401(k) or pension plan.
For an employee’s perspective, a SIMPLE IRA or SIMPLE 401(k) works much like traditional 401(k) plan, although not without a few wrinkles. With these accounts, employees can contribute up to $6,000, or up to 100% of their total compensation each year, whichever is lower. The money is removed from the paycheck on a pretax basis, as is done with a conventional 401 (k) plan. But while with 401(k) plans matching employer contributions are entirely optional, here employers are required to provide matching under one of two different approved methods.
SEP-IRAs
SEP-IRAs, or Simplified Employee Pension plans, are retirement plans specifically designed for small companies or the self-employed. To qualify, a company must have fewer than 25 eligible employees. Like SIMPLE plans, SEP-IRAs require minimal paperwork, and offer tax-deferred investing. They are appealing to small employers. However, the rules for SEP-IRAs are different from the rules for SIMPLEs.
Considering The Strategy for the Estate
Estate planning is a lifelong process in which an individual evaluates his situation and plans for the future. The estate planning process requires that he consider a wide range of legal, financial, emotional, and logistical issues. Estate planning can be a positive experience, since it involves reviewing ones situation and planning for his or her future. Although most people also find it unpleasant to think about the possibility of disability or death, advance planning is also a way to show one’s love and to reduce potential distress later. Proper estate planning also includes financial planning.
When a family member or friend dies, there is a natural process of grieving, which can interfere with the ability to make decisions. In addition, grief can sometimes impact already-strained family relationships. A person’s death often terminates or changes relationships, especially if the deceased person was the only common link between other people. For example, a surviving spouse may have less contact with the deceased spouse’s children from a prior marriage. Some emotional problems could be reduced or eliminated by advance planning.
Death is not the only event one should plan for. Due to illness or accident, many people become incapacitated, either for brief periods or permanently, and cannot make their own decisions. If one is disabled, his family and friends will be emotionally distraught and yet may need to make very important decisions for him or her. Making decisions for an incapacitated person is always difficult. The person making the decisions will feel more comfortable if the incapacitated person has left advance instructions and has selected a specific person to make decisions.
The Role of Guardians for Children
All parents worry about what would happen to their children if both parents died. This concern draws many people to lawyers’ offices to start the estate planning process. If one parent dies or becomes incapacitated, then usually the surviving parent will retain sole custody of any children, unless special circumstances exist. If both parents die, then usually there must be a court action to appoint a legal guardian for the children.
The court is required to appoint a nominated person as guardian unless this would not be in the best interests of the child. Of course, it is very important to carefully consider who would be the appropriate guardian of ones children. That person should be asked if they would agree to care for the children if something happened to both parents. One should also nominate alternate choices for guardian, in case the first nominee is later unable to take the children.
Caregiver’s Authorization Affidavit
A non-parent caregiver can complete the new “Caregiver’s Authorization Affidavit” to enroll children in school and to obtain medical treatment for the children. This form can avoid the need for formal guardianship proceedings where a parent is temporarily unable to care for children. Formal guardianship is still preferable if the parents have substance abuse or mental health problems, or if custody or visitation disputes are anticipated.
The Role of the Trust Parties In The Administration of The Truth
A trust is a legal document which, in effect, creates a new fictional legal entity – the trust itself. A trust involves three parties.
Grantor or grantors:
A grantor is a person who creates a trust and places property and/or money in the trust. More than one person can be a grantor of a trust. For example, it is common for a husband and wife to join as grantors in creating a family trust.
Beneficiary or beneficiaries:
The two types of beneficiaries are income and remainder beneficiaries. The beneficiary is the one who is to benefit from the trust. In the estate-planning context, the initial beneficiary is usually the grantor during his or her lifetime, with provisions being made for the trustee to distribute the trust’s property and money to other specified beneficiaries after the grantor’s death.
Trustee:
The trustee is the person appointed by the trust document to hold the property and money placed into the trust and to administer the trust. The trustee is the party who is responsible for the management of the trust property is accordance with the provisions of the trust agreement.
The Provisions in A Trust Administration
Trust administration and the complexity of the administration depends on the number and type of assets, their total value, and whether the trust includes tax-planning provisions is when the trustor of a trust dies, certain steps must be taken to comply with state law and to change title to assets.
The decedent’s will must be filed with the county clerk, and a statement must be filed with the county assessor stating whether the decedent owned real property. Major assets must be appraised and an inventory must be prepared. When the estate is more than $675,000, a federal estate tax return must be filed. Income tax returns also will be filed for the estate and for the decedent. If the trust became all or partially irrevocable as a result of the death, the decedent’s heirs and trust beneficiaries must be notified of that fact.
If the surviving spouse does nothing to administer the trust after the death of the first spouse, the exemption trust will not exist and will therefore provide no benefit to the estate. As a result, the couple’s estate will pay higher estate taxes. The exemption trust must be properly funded, and other procedures must be followed, such as filing income tax returns, or the trust will be included in the surviving spouse’s estate for federal estate tax purposes, raising the federal estate taxes for the estate.
The Role of Ancillary Administration in The Administration of the Living Trust
A probate proceeding in a state other than the decedent’s home state is called ancillary administration. Because many people purchase retirement homes, vacation residences, or other investments in real estate such as oil and gas that are located outside their home state, the significant estate planning problems of out-of-state real property on the death of the owner are not uncommon. Almost invariable, ownership of real property in another state by a decedent means that an ancillary probate will be required.
Ancillary proceedings also may be required if the decedent owns personal property in another state. Ordinarily, an executor can move out-of-state personal property back to the decedent’s home state without court action; however, out-of state creditors or heirs may ask the local court for ancillary probate for personal property so that they do not have to travel to the decedent’s home state to settle their claims.
