Personal Wealth Law News

An article in the New York Times of January 22,2012 offers some ideas on how to make the tax system simpler and maybe fairer:

 1. Broaden the base and lower rates. What this means is eliminating some deductions, like mortgage interest, and reducing tax rates on the larger base. No one in Congress has seriously tried to eliminate that particular deduction, nor most others.

2. Tax consumption rather than income. The author of the article thinks we’re close to that now, with extensive deductions available for retirement saving. He suggests that an income tax, as opposed to a consumption tax, discourages saving, investment and economic growth.

3. Tax bads rather than goods. This means we should have higher taxes on things we want to discourage. A higher gasoline tax, for example, discourages excessive driving and pushes people toward more efficient methods of transportation.

4. Keep it simple. A simpler tax system makes understanding and compliance easier and less expensive.

There isn’t any. Although spouses have protection when assets are held in qualified retirement plans, so that the plan participant can’t name a beneficiary other than the spouse to receive death benefits without the spouse’s approval, no such protection applies to assets held in individual retirement accounts. So a participant in a qualified retirement plan can retire, roll over his or her benefit balance to an IRA, and then name anyone he or she wishes as the beneficiary of death benefits. This loophole in the law has been known for many years, but no steps have been taken to correct it. With more than $4B now held in IRAs, this is a substantial issue in the protection of spouses’ financial well-being.

In the now-booming industry of determining what people think about retirement, another study reaches some conclusions that suggest a general attention to current financial issues and less confidence in the ability to achieve retirement goals:

1. more people are determined to retire without a home mortgage, and are focusing on paying down those debts.
2. there is little confidence in the ability of the stock market to increase wealth. Not a shocking view, I suppose, but Warren Buffett might say that’s when it’s a good time to buy.
3. paying monthly bills is more important than healthcare costs and saving for retirement, even among older people.
4. 401(k) plans are seen as a good vehicle to save for retirement, but people would like more guidance on investments and more automatic saving provisions.

And although we read about a massive transfer of wealth between generations, that will only occur in some cases; many people have decided to spend their assets on current experiences with family rather than saving for an inheritance.

An article in the on-line Wealth Counsel Quarterly asks why families fight over inheritances and offers several reasons:

• people are genetically inclined to competition and conflict
• receiving an inheritance is somehow a mark of approval, which many seek even from deceased parents
• people are inclined to look for evidence that they have been excluded, and don’t like it
• the loss of a family member triggers anxiety about one’s own death
• some family members may suffer from a personality disorder that escalates family rivalries into legal battles

Another explanation that I have seen: the death of the last parent means there is no longer a grownup in the room, so the kids can misbehave and get away with it. Many estate disputes reflect feelings that go back to childhood, that one child was favored over another. Or, as Tom Smothers would say to his brother- “Mom always liked you best!”

A recent Forbes article describes some unusual final planning by the rich and occasionally famous. Magician Harry Houdini stated in his will that he wanted a seance held on each anniversary of his death. Apparently he never made contact though. Gene Roddenberry, creator of Star Trek, asked that his ashes be sent into space, and this occurred in 1997. The will of Leona Helmsley gave a large sum to two grandsons, but on the condition that they visit her mausoleum each year.  A wealthy prune rancher left 29,000 shares in the local electric company to his two dogs, who attended shareholders’ meeting regularly thereafter.  Singer Dusty Springfield left detailed instructions in her will on the care and feeding of her cats. A comic book editor asked that his ashes be mixed with ink and used to print comic books. What’s the lesson to be learned from these examples? None whatsoever. It’s just nice to read that people do what they want in their final arrangements.

We hear and read frequently about baby boomers and the retirement years they are now entering. A recent article in the Wall Street Journal discusses a downside to that impending or occurring retirement. In an effort to make up losses from stock market uncertainties and the drop in home values, many baby boomers have been tempted to try less traditional investments, and this has led to an increase in investment fraud. The SEC is planning to issue some guidance about investment scams that older Americans should avoid. Some of the techniques used are promissory notes, private placements and unregistered securities, and they are often aimed at holders of self-directed IRAs. The article cites a study that apparently demonstrates that the ability to make effective financial decisions generally peaks at age 53.3, although there is obviously much variation depending on training and experience. Perhaps it’s advisable to remember the investment expert who suggested that the best course was to “get rich slowly.”

Retirement seems to be the word of the decade, now that baby boomers are beginning to experience the latest in their life adventures. Unfortunately, this event coincides with a high level of uncertainty in financial markets and in other aspects of the wealth equation. Here’s some further evidence: in a recent survey (and recent surveys, as we know, are a major industry), 47% of baby boomers (born between 1946 and 1964) say that they are confident of having a comfortable retirement, down from 55% in March of 2011. About a quarter of baby boomers say they never intend to retire. Of course, they might not have that option, due to health issues or the attitude of their employers. Finally, about 45% say they will rely heavily on Social Security benefits in retirement.

A number of articles appearing on the Internet concern the question of how much discussion there should be with a spouse and children about money. One article concludes that relationships are improved when a couple’s financial life is stable and both of them know what’s going on. Still, many spouses know little about family finances, which can be a problem when the less-informed spouse is the survivor. On many occasions, I have asked surviving spouses if they know how much money they need to live on, and the answer is usually no. This can lead to unneeded anxiety and sometimes to financial decisions that are wrong.

A separate question is when and whether to tell children about the family wealth. Some feel that it’s none of their business, while others are concerned that the knowledge that a large inheritance is expected might sap the ambition and drive of children. Most people who write and speak about the subject believe that it’s better to be frank with children and let them know what they can expect, so they can get ready for the change in circumstances. This is sometimes called “preparing the heirs”. If it’s done right, it can avoid children making foolish financial decisions when they eventually inherit.

Writing a Will

What is a will? It is simply a statement of what you want done with whatever you own at the time of your death. It can be as simple as a letter of instructions. The important points are that it must clearly be a direction of what is to be done, and it must be signed and dated. In some states, there may be more required in the way of formalities, but generally this is what is needed to ensure that your assets go where you want them to go. It’s probably a better idea to have a formal will drawn up, and for this you should consult a lawyer. While there are sample form wills available on computer programs and in the local pharmacy, this is too important a project to have it done without expert advice. A will drawn up by a lawyer will add some more formal language, but it will cover issues that you might not have thought of on your own, such as who will be your executor, the person who carries out the terms of your will, and who will be the guardian of minor children.

Will Substitutes           

 Not everything you own will necessarily pass by will. Certain assets may contain their own provisions determining where they go upon your death. A good example of this is life insurance. The proceeds of life insurance will go the persons you name as your beneficiaries, on a document that is kept on file with the insurance company. Similarly, the beneficiary of any pension or profit-sharing plan benefits, or individual retirement account benefits, will be the persons you name on a beneficiary designation form filed with the plan administrator or financial institution holding the IRA.Many people own property in joint names. Typically, a home owned by two people will be owned jointly, and this also occurs quite often with bank accounts and brokerage accounts. For most joint accounts, except those called “tenancies in common”, the survivor will be entitled to the entire value of the asset when one of the owners dies.These will substitutes must be reviewed to determine where the assets covered by them will go. They must also be considered along with the will to obtain a picture of the entire estate plan, where all of your assets will end up. 

Death and Taxes

 Most people pay federal and state income taxes during their lives, generally every year, and the Form 1040 and the tax rates are well known. Less well known is the fact that both the federal government and, in many cases, the state government will impose taxes at death on the value of all that the decedent owned. That is, even if you have paid income taxes on what you have accumulated during life, it will be subject to tax again at death.Federal estate taxes have changed significantly in recent years.  In 2011, the federal estate tax will be imposed at a flat rate of 35%. There is an exemption of $5,000,000 before the tax is imposed, increased to $10,000,000 for married couples.  Assets up to that amount may be passed free of federal estate tax. This may seem like a sufficiently high number to avoid tax in almost every case, but the tax is imposed on the value of IRAs and other retirement accounts, the value of your home, and the proceeds of life insurance policies, in addition to stocks and bonds, bank accounts, and all other assets. The threshold may be exceeded when the these assets are totaled.Federal estate taxes have another very important offset: you may leave any amount to your spouse with no imposition of federal estate taxes on the transfer. Thus, it is possible to avoid all or nearly all tax on the death of the first spouse, simply by leaving everything to the survivor. This may not be the disposition you want of all of your assets, but it is a valuable deduction that can assist in planning to minimize taxes.The combination of the estate tax exemption and the marital deduction can produce very significant reductions, or the elimination, of federal estate tax. By using trusts set up under a will, it is possible to provide for the survivor and pass on to the next generation the maximum amount possible under the federal tax system.Many states still impose death taxes of their own. Pennsylvania imposes an inheritance tax on the assets owned at death, to the extent they do not pass to the surviving spouse. New Jersey exempts transfers to the surviving spouse and descendants. Florida imposes no inheritance tax, as do a few other states.  It’s important to review what your state death tax liability would be in your state of residence. By the way, what is your state of residence? Some people live most of the time in one state, but try to claim they are actually residents of another state, like Florida, to avoid inheritance taxes. This is a technique that must be carried out with careful planning, to avoid claims by two (or more) states that taxes are owed to it. Planning Techniques to Lower Tax Liability

There are a number of techniques that may be employed to reduce the burden of death taxes. First, you can give assets away during your lifetime to family members. In doing so, you should be aware of the possible imposition of federal gift tax. The gift tax is similar to the estate tax, with the same rates and threshold exemption. In addition, you may give up to $13,000 per year (in 2011) to any number of persons without incurring gift tax or using up any of the lifetime exemption. If your spouse joins in the gift, the $13,000 exemption is doubled. Gifts beyond these amounts use up part of your lifetime exemption and, if large enough, can result in the payment of gift tax currently.

In conclusion: Plan ahead

There is no substitute for thinking about the disposition of your assets, both during your life and afterward. The process of estate planning takes some time, but the reward is usually substantially reduced tax liability, and almost always a clearer idea of what one has and what will happen to it. The certainty and peace of mind this process can lead to justifies taking time and expending the effort to be prepared for the inevitable. You and your family and friends will benefit in many ways.

A poll taken by a group called LifeGoesStrong.com indicates that only 47% of baby boomers (born between 1946 and 1964) feel confident they will be able to afford a comfortable retirement. As recently as March, the percentage was 55. Because of this, many more plan to continue working after age 65, with a significant percentage saying they never plan to retire. An article in the New York Times of November 20, 2011 makes a similar point, placing a large part of the blame for this change on the financial shocks that began in 2000 and continue to the present.