Personal Wealth Law News

Met Life has issued a report on the state of retirement by Baby Boomers, the first of whom reached age 65 in 2011. Here are some of their findings:

About 45% of Boomers are now retired, and another 14% are retired but working occasionally.

Of those not retired, 61% plan to retire at the same time they planned to do a year ago. Those not yet retired plan to retire on average at 68 1/2.

37% retired earlier than planned for health reasons and another 16% mentioned loss of a job or job opportunities.

63% of Baby Boomers age 65 have begun receiving Social Security benefits.

Half of Baby Boomers believe they have reached their retirement savings goals.

About 1/4 of Baby Boomers received an inheritance from their parents, on average $110,000.

85% report excellent, very good or good health.

There is more being written these days about protecting and passing on digital assets, including passwords an online information. As more companies get involved in the business of managing online information, it becomes more important to understand who controls and can have access to digital information. A recent article in Probate & Property gives a classic example. The composer Leonard Bernstein prepared a draft of his memoir Blue Ink and left it online ptotected by a password. Unfortunately, he told no one the password, and the memoir remains unavailable, 22 years after Bernstein’s death.

I watched an interesting webinar recently, presented by the Pension Research Council at the Wharton School. The speaker was Dr. Olivia Mitchell, director of the Council. She discussed in detail the reasons for problems in the private and public pension systems. For individuals, there are three problems: they save too little, they don’t diversify their investments, and they live too long. I’m not sure the third is actually a problem; it’s more of a circumstance, the result of improvements in health and health care.

Another concern expressed by Dr. Mitchell was a misinterpretation of life expectancies. If a man aged 65 has a life expectancy of 16.4 years, that doesn’t mean he needs to plan his wealth to last just those 16.4 years. In fact, half of men will live longer than those 16.4 years, some percentage to age 90. Planning must take that into account.

It will be necessary to reinvent retirement, according to Dr. Mitchell, and for many people retirement will be much different than it is or was for their parents. People will need to work longer. They will also need more financial literacy: they must save more, invest smarter and diversify. They need to insure against longevity, such as through the purchase of annuities. They might find it worthwhile to tap the equity in their homes through reverse mortgages. And it will be necessary to restructure public and private pensions so they are viable in the long term.

For more information on this topic, I recommend reviewing the website www.pensionresearchcouncil.org.

A recent article from Reuters reminds us again of the several reasons why this is the ideal time to think of transferring wealth:

• the $5,000,000 gift tax exemption remains in effect this year. Who knows what next year will bring?
• asset values, although rising, are still lower than their peaks, in many cases, which is a good time to give them away
• closely held assets can be given away using discounted values that create very favorable gift and estate tax results. Again, this might disappear next year.

Those who do planning this year can be assured of receiving favorable tax treatment. Those who wait are taking a chance.

There has been much in thne news about the top 1% of income earners in the country, emphasizing their fortunate status. But a recent article in the Wall Street Journal indicates that things aren’t so rosy for this group. From 2007 to 2009, the income of the top 1% fell by about 30%. By contrast, the income of the bottom 90% fell by only 3%. The article identifies five reasons for this significant decline: overconcentration in a single asset or business; leverage-using debt to try to achieve financial goals; too much spending; the combination of the first three; and family issues- divorce, family business disputes, etc.

A recent article in Smart Money reminds us of ways in which the $250,000 limit on FDIC insurance coverage can be expanded. Take as an example a husband and wife. Each can have an account with $250,000 protection. A joint account gives tham another $250,000. If each of them sets up a revocable trust for the other, that’s an additional $500,000. Suppose they jointly set up a trust to benefit their three children. That’s six more exemptions, an additional $1,500,000 in FDIC coverage. Beyond that, they can open similar accounts at other banks to add more coverage.  

Much was written about the shabby treatment given to philanthropist Brooke Astor just before her death, and her son is now appealing his conviction for mishandling her assets. The IRS is apparently not satisfied with the tax returns filed by the Estate. The taxing authorities are claiming that the Estate owes far more in federal estate tax than was reported. Apparently, there are issues about gifts made to charities at Mrs. Astor’s death and in previous years. Gift tax returns were not filed despite very substantial transfers over the years to family members, including her son. The IRS is also denying charitable deductions because of the uncertain nature of the gifts to charity. Eventually, it will all be sorted out, but it could have been avoided entirely if Mrs. Astor’s advisors had been more careful in planning her estate.

The proposals recently issued by the Obama Administration include substantial changes in income, estate and gift tax law. They would, if enacted, make transfers of wealth more difficult and costly. Since this is an election year, there is much uncertainty about their future, but it’s important to know what they are, just in case. We will shortly issue an Alert on this subject, which will be posted on this site.

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.