What Happens When a Person Dies Without a Will

Thu, 20 Nov 2008 01:43:01 GMT

If you want to make sure that your property is distributed according to your personal wishes at the time of your death, then it is important to have a properly drafted and executed will. However, the law recognizes that there will be some cases when a valid will is not in place at the time of a person’s death and that a decedent’s property will need to be distributed according to the state’s default laws of distribution, known as intestacy laws.

There are many circumstances under which a person would not have a valid will at the time of his or her death. A person may die young and unexpectedly or the person may simply have procrastinated and never got around to the unpleasant, yet important, task of drafting a will. Or, the person may have drafted a will that is later found to be invalid and unenforceable.

In those situations where a person does not have a valid will at the time of his or her death, his or her property will be distributed according to state intestacy laws. Each state has its own intestacy laws. While all of the states have the primary objective of trying to distribute a decedent’s estate to his or her next of kin, the states interpret that objective differently and distribute property to different relatives in different percentages.

The distribution of property in an intestate estate depends both on the state in which the estate is probated and the relatives that have survived the decedent. Most, if not all, states will provide a surviving spouse with a percentage of the estate. If the decedent had living children then they are also likely to receive a percentage of the estate. That percentage may be higher if the children are the issue of the decedent but not the surviving spouse. Some states also allow surviving parents to receive a portion of the estate.

If the decedent dies without a spouse or children then the estate often goes to the decedent’s parents if they are still living. If they are not living then the property goes to the siblings of the decedent, if any. If there are no siblings then the property could go to surviving grandparents or to the issue of the grandparents (usually the aunts, uncles or cousins of the decedent.)

If there are no living relatives who can be located to inherit the estate then the proceeds of the estate usually revert to the state in which the decedent’s estate was probated.

It is important to note that the laws of intestacy only apply to probate property that is part of the decedent’s estate. Any property that was held jointly such as property, bank accounts or brokerage accounts is not part of the probate estate. Likewise, life insurance proceeds are not part of the estate and instead go to the stated beneficiary.

Intestacy laws are not perfect. They may not distribute your property according to your wishes. However, they do their best to distribute property fairly and in accordance with the priority of family relationships in the absence of valid written directives from the decedent.

Establishing a Trust for Your Kids

Sat, 01 Aug 2009 15:49:56 GMT

Many parents want to provide for their children financially but may be reluctant to allow a teenager or young adult unfiltered access to the money. They may be concerned that a child or young adult may lack the maturity to make sound financial decisions. At the same time, the parents may want the money to be available for the child for things like education and healthcare.

In these situations, a trust may be the best way to provide money to the children. The many benefits of a trust include tax benefits for the person who creates the trust, management of the funds on behalf of the beneficiary and, financial security for the beneficiary.

In order to take advantage of these benefits, a trust must be set up according to the requirements set forth in state law. A local attorney can help you establish your trust according to the state requirements. The first thing that you, as the creator of the trust, must decide is what type of trust you want to create for your children.

Generally, one of the following three types of trusts can be created:

A Living Trust: as the name implies, a living trust is one that you establish while you are living. You may maintain control over the assets for the benefit of the beneficiary. A living trust may have probate and tax advantages depending on how the trust is set up.
A Testamentary Trust: a testamentary trust is part of a person’s will. The trust does not exist until the creator of the trust dies and his will is probated at which time, if everything has been executed correctly, the trust will be funded for the beneficiaries. It is common to use this type of trust if you have minor children whom you wish to provide for when you die. The money that you want to leave for your children, who may be too young to manage the money, will be held in trust for them until the reach the age specified in your testamentary trust.
A Special Needs Trust: a special needs trust may be created to leave money to a person with disabilities. It is especially important that this type of trust be drafted correctly so that the trust assets do not threaten the disabled person’s ability to collect social security or Medicaid assistance.
A Uniform Transfers to Minors Act Trust: this type of trust typically consists of securities and is set up at the time that the assets are purchased.

For many families, a trust is part of a comprehensive estate plan that is created with the help of an estate planning attorney. An estate planning attorney can advise you on how to legally avoid estate and gift taxes and provide assets to your children in the most appropriate way for your family.

If you are interested in establishing a trust then you should be prepared to provide your attorney with an inventory of your assets and your personal goals and expectations regarding the trust so that your attorney can advise you on the most appropriate way to meet your family’s short term and long term financial goals.

Estate Planning Tools for Wealth Transfer

Mon, 26 Oct 2009 18:06:32 GMT

Proper estate planning does not leave all the transfer of all of your money and assets until the time of your death. Many people, particularly those who have enough assets to be subject to estate tax, must consider wealth transfers while they are living. Wealth transfers should be part of a systemic and organized estate plan that you develop with an estate planning attorney. Many types of wealth transfers allow you to continue to benefit from your assets while transferring ownership to others so that the assets are not included in your estate when you die.

Common Types of Wealth Transfers

Some common ways to transfer wealth include:

· Gifts: gifts of money may be made by a grantor at any time. However, gifts over a certain amount of money are taxed (in 2009, the amount was $13,000 per gift recipient per year).

· Irrevocable Gift Trusts or “Crummey Trusts”: a gift tax is imposed on gifts over the annual allowable amount. However, in order to be taxed the beneficiary of the gift must have a present interest in the gift. If the gift is placed into a trust to be distributed to the beneficiary at a later time then the beneficiary does not have a present interest in the gift and is not responsible for the tax. The beneficiary of a Crummey Trust must have the right to withdraw a contribution made by the grantor within thirty days. If that right is exercised then the gift may be taxed.

· Qualified Personal Residence Trust (QPRT): in order to create a QPRT, a grantor must place a personal residence into a trust and name a beneficiary such as a spouse, child or charity. The trust documents allow the grantor to continue living in the home rent free for a specific number of years. After that time has expired, the grantor must pay a fair market rent to continue to live in the home.

· Grantor Retained Annuity Trust (GRAT): a grantor sets up a GRAT by making donations into a trust. The trust documents provide that the grantor receives an annual payment, or annuity, from the trust for a certain amount of time. After that time period has expired, the remainder of the trust assets passes to the beneficiary who must be a family member of the grantor. This type of wealth transfer avoids gift taxes being imposed on the transfer.

· Family Limited Partnership (FLP): family members can contribute assets (typically income producing assets) to a family limited partnership. The partnership can have general partners and limited partners. Usually the older generations or people making the most significant contributions are the general partners and they maintain discretion over the partnership’s assets. The limited partners are typically the beneficiaries of this kind of wealth transfer tool.

· Charitable Lead Annuity Trust (CLAT): a donor puts assets into an irrevocable charitable lead annuity trust that pays a set amount of money to a charity annually for the term set in the trust. That term may be a set number of years or for the lifetime of the donor. At the end of the term, the donor, or his named beneficiary, is entitled to the assets remaining in the trust.

There are many ways to transfer wealth. Each individual has different needs with regard to transferring wealth that are dependent on the value of his or her assets and family needs. Therefore, it is important to consult an experienced estate planning attorney to develop a strategic wealth transfer plan to meet your individual needs.

Estate Taxes: How to Legally Minimize Your Obligation

Tue, 21 Oct 2008 19:00:05 GMT

People often say that there two things that unavoidable in life: death and taxes. So, to some it seems unfair when the two coincide and estate taxes are required to be paid on the assets that remain at the time of their death. The estate tax rate is 45%, or almost one half of the assets left in your estate. Accordingly, many people are interested in learning how to minimize their estate taxes and maximize the amount of money that is left to the beneficiaries that they designate in their wills.

What is Not Included When Calculating Estate Taxes

The first thing to understand when you begin your financial planning is that certain assets are not included when calculating estate taxes. Under current federal laws, $2,000,000 of your estate is automatically exempt from tax if you die in 2008. For those who pass away in 2009 the exemption amount is $3,500,000 and pursuant to current law there is no death tax if you die in 2010. However, in 2011 the exempt amount drops back down to $1,000,000 unless Congress takes action to change that. While California has eliminated the estate tax, other states continue to impose an estate tax. The monetary amount in the estate that is exempt from taxation varies from state to state.

Property that passes from you to others via a trust is also not included in your assets for estate tax purposes if the trust is properly constructed.

How to Minimize Estate Taxes

There are a variety of legal strategies that you can use to minimize your estate tax obligations including:

Marital Deduction: Money that passes from a deceased spouse to a living spouse is usually not subject to estate tax. However, married couples need to be mindful of how the inheritance to the living spouse will effect his or her estate when the second spouse dies. The money could make the surviving spouse’s estate large enough to be subject to estate tax.

Charitable Deductions: bequests that are left to qualifying charities are also exempt from federal estate tax.

Debt and Expenses: before specific bequests are distributed according to your will, all of your debts and expenses need to be satisfied. That includes any loans or mortgages that you hold, your funeral expenses and any other expenses or losses related to the administration of your estate.

Gifts: Currently, you can give any individual a $12,000 gift annually without incurring any taxes. A married couple can give individuals $24,000 annually. Many families find this to be an effective way of decreasing the value of their estate because, for example, parents can give their child and her spouse $48,000 annually plus another $24,000 for each child. You can also pay someone’s tuition or medical expenses directly to the institution without any tax implications.

Trusts: Certain types of trusts can be legally drafted to pass assets to certain individuals or groups without estate tax being imposed.

The estate tax is high and can take a lot of money away from the people to whom you intend to leave your assets. Therefore, if you have assets valuing approximately $2,000,000 or more it is important to seek the counsel of a qualified estate planning attorney in your state.

For more information on estate taxes, contact an estate planning attorney today.

Family Limited Partnerships

Sat, 01 Aug 2009 15:52:51 GMT

While the financial operations of a family are certainly different than the financial operations of a business, there are many similarities. Both have the common goal of increasing wealth. Therefore, some business models provide important benefits for families. One such model is a limited partnership. A family limited partnership can be used to save families significant money in estate and gift taxes and may be used to legitimately provide protection from creditors.

What is a Family Limited Partnership and what are its advantages?

As the name implies, a Family Limited Partnership or FLP is a limited partnership for the benefit of a family. It is created by and run by family members. An FLP may have general partners and limited partners. General partners maintain all of the responsibility and liability exposure for the partnership. They make all of the investment decisions and are responsible for all of the liability. In FLPs it is typically the parents, grandparents or other creators of the FLP who are the general partners and it is the children or grandchildren whom the FLP is created to benefit who are typically the limited partners.

An FLP may be beneficial to both general and limited partners. General partners can significantly reduce their tax liability by transferring assets into an FLP. General partners also retain control of the assets and continue to manage the assets. Limited partners also benefit from FLPs. They have an ownership interest in the FLP and that interest may be protected from creditors and others such as ex-spouses during divorce proceedings. There is also an element of fairness in FLPs. Instead of maintaining separate trusts or brokerage accounts for each child or grandchild, the family can share in the same profits and losses by combining the assets into an FLP.

How Is a Family Limited Partnership Created?

A Family Limited Partnership must be created carefully and according to the terms set forth in state law. If it is not created correctly then the family members who make up the general and limited partners will not reap the benefits of the FLP. It is important to contact an attorney with experience in this area or to use reliable documents and information to do it yourself. The FLP must be properly created, properly funded and properly used. All formalities associated with the FLP must be carefully followed, the partners must act within the scope of the partnership agreement and the FLP must be funded with the correct type of assets.

An FLP is comparable to a limited partnership that is created by unrelated people for business purposes. All limited partnerships are required to maintain appropriate business records and an FLP is no exception. An FLP should be treated as a business and should be part of a person’s estate plan. It is a sound way to transfer assets to other family members while maintaining control over those assets and a certain percentage of ownership.

How to Decide if You Need a Trust and Estates Attorney

Thu, 06 Nov 2008 21:00:18 GMT

Do it yourself wills and estate planning documents are available on the internet and in your local office supply store. However, before you decide to purchase these resources it is important that you understand whether your interests would be better served by hiring an attorney to draft the documents for you.

Factors to Consider

Before you make the decision about whether or not to hire an attorney, you should consider the following factors:

How large is your estate likely to be? If your estate is likely to be worth one million dollars or more than it might be subject to federal estate tax. Currently, the gross value of the estate that is subject to federal estate tax varies depending on the year that you die. However, the tax rates are significant and range from 45%-55%. Many people underestimate the value of their estate. An estate includes not only bank accounts but also all real estate, including a home, personal property, including jewelry and other valuables, life insurance, 401ks, pensions and, other investments. Many do it yourself estate packages and wills are not designed to help an individual legally avoid the estate tax. However, a qualified estate planning attorney can discuss different ways in which you can decrease your estate by setting up trusts, making annual gifts to family members or other individuals or making charitable contributions.
Are you establishing any trusts? A properly formed trust can allow your assets to pass to your beneficiaries without incurring the cost of going through probate or being subject to estate taxes. These benefits only apply to trusts that meet certain requirements and it is, therefore, important for an attorney experienced in trust and estates law to draft the documents.
Do you have any special family circumstances?Special family circumstances may make it important for you to consult an attorney. For example, if you have a child with special needs and you want to make sure that the child will benefit from your estate even though the child may not be able to manage the inherited money then you should consult an attorney. Likewise, if you have had multiple marriages or if you are looking to disinherit a child then you should seek the advice of counsel.
Do you understand the legal requirements for wills and can you comply with them? Each state has its own requirements for the proper execution of wills. Some states allow holographic wills that are written in your own handwriting and that do not need to be witnessed. If you type your will, follow a do it yourself legal kit or have a friend draft the document for you then you will need to make sure the will is properly executed according to state law.
How Comfortable Are You? Finally, you should consider your own personal tolerance for mistakes. You will not be able to change things once you have passed away and your heirs will not be able to change things either. Therefore, if it is important for you to make sure that your estate is distributed according to your intended wishes then you should consult an attorney.

While not every will requires an attorney, you should carefully consider all of the factors described above when determining whether it is a good idea to hire an attorney for your own estate planning purposes.

How to Make Medical Decisions When You are Unconscious

Tue, 21 Oct 2008 17:08:25 GMT

Most of us worry about what would happen to us if we got sick or hurt and we were not able to make our own medical decisions. We worry about losing control and not being able to communicate our consent to various medical interventions. We worry that our children will not be able to agree on the best course of treatment for us.

A living will is designed to help you plan for just such a medical emergency. A living will, as the name implies, describes what your wishes are while you are still alive. It directs your health care providers as to the treatment that you would consent to if you were able to do so. Some states call living wills Advance Health Care Directives.

Specifically, a living will is a written document which details your directives for your own medical care should you become unable to communicate your wishes at the time that medical care is needed. A living will only takes effect when you have been medically determined to be in a permanent vegetative state or terminally ill.

What Can Be Included in a Living Will?

A living will can be as general or as specific as you wish to make it. You can put in directions such as do not resuscitate, you can request that only comfort measures be taken to ensure that you are not in pain or you can request that all available medical treatment be provided.

What Is a Durable Power of Attorney and Do I Need One if I Have a Living Will?

A durable power of attorney allows you to appoint someone to make medical decisions for you in the event that you cannot make them yourselves. It is advisable to have both a durable power of attorney and a living will. A durable power of attorney can direct the person that you appoint to follow all of the directives in your living will and also allow that person to make any medical treatment decisions that need to be made that are not covered in the living will. For example, you might be unconscious and unable to make medical decisions for yourself after an automobile accident. However, you might not be terminally ill nor in a vegetative state. Therefore, your living will directives would not apply to your medical treatment and your durable power of attorney would make the necessary decisions. Without the durable power of attorney, the decision making responsibility would fall to your next of kin and that could lead to familial fighting.

Many attorneys include living wills as part of a package of estate planning documents that also include last wills and testaments, durable power of attorneys and health care proxies. Some states require that living wills be witnessed and notarized in order to be valid and other states do not have this requirement. It is important to contact an attorney in your state to discuss the specific requirements for making your living will valid in your jurisdiction.

For more information on living wills, contact an estate planning attorney today.

Naming Children as Life Insurance Beneficiaries

Sat, 01 Aug 2009 15:51:17 GMT

Many people purchase life insurance to provide for their children. As the term implies, life insurance is an insurance plan that allows a parent, or other policy holder, to continue to provide financially for the beneficiaries after the parent’s death. Life insurance can provide income for the day to day support of a child and it can provide funds for long term or larger purchases such as a college education. Since many parents buy the life insurance with the goal of providing for their children they name their children as the beneficiaries of the policy.

However, this can be problematic. If a minor child is named as a beneficiary of the policy, the child may not be able to access the money until he or she reaches the age of majority. Some states require the insurance company to hold the life insurance proceeds, with interest, until the child legally becomes an adult. Other states may allow the life insurance funds to be dispersed to a court appointed guardian until the child becomes an adult.

Yet, many children who have lost their parent(s) need the life insurance funds immediately. In order to make sure that your children are able to use the life insurance proceeds in the way that you intend them to use the money, it is important that you:

Create a Trust: a trust may be created that names your children as beneficiaries. As with any other type of trust, you may make provisions that allow the trustee to distribute funds on behalf of your minor children. The proceeds of the trust may be transferred to your children when they reach an age that you specify. As with all types of trusts, the decisions that you make when setting up the trust will have significant tax and financial implications for your heirs.
Include Unborn Children: it is important that you do not exclude any children yet to be born from your life insurance policy if you think that there is a possibility that you might have more children. Your life insurance company can instruct you on how to make this designation. For example, you may be able to name your children of your marriage to John Doe as a group beneficiary. By not naming the children individually, you will include children yet to be born at the time that you complete the forms. If you chose not to do this then you should be sure to amend your life insurance beneficiaries upon the birth of each child.

Another option is to name your spouse as the life insurance beneficiary if you trust your spouse and all of your children are shared with your spouse. In some states, you must name your spouse as your life insurance beneficiary unless your spouse provides written consent otherwise. So, if you intend to name your children, rather than your spouse, as the beneficiaries, then it is important that you do so in accordance with the requirements of state law.

Life insurance is a financial investment and a way for you to protect your family when you die. It is, therefore, important that you protect your children by naming them as beneficiaries in a way that complies with state law and meets the needs of your family.

Naming a Guardian for Your Children

Sat, 01 Aug 2009 15:49:15 GMT

Are you, like many parents, overwhelmed thinking about appointing a guardian for your children? Should something happen to you, your choice of a guardian will be the single most important decision that you make for your children. The guardian will take over the day to day aspects of parenting your children. It is the guardian who will accompany the children to doctor’s appointments, attend teacher conferences, cheer at sports games and advise the children about their future. While it is certainly best if you, as the children’s parent can be there to do all of that, it is important that you pick the very best person that you can to do all of those things if you are unable to do so.

How to Pick a Guardian for Your Children

There is no magic formula or single criterion that makes a person the best possible guardian for your children. Each parent will have different priorities and each potential guardian will have different attributes and, for each family, those priorities and attributes will combine and allow a parent to choose a guardian for his or her children. Some potential things to think about when naming a guardian include a person’s:

Lifestyle: consider whether the person’s career and other interests can easily accommodate a child or whether the person would be willing to make the necessary modifications
Willingness to Raise your Children: it is best to have a frank conversation with the person whom you want to be the guardian of your children to determine if the person wants that responsibility and would be willing to act as the guardian should the need arise.
Health and Other Responsibilities: think about whether the person is in good health and physically able to care for children. Also consider whether the person has other children for whom he or she is responsible and how your child will fit in with the group.
Religion: some people chose a guardian who is the same religion as the children so that holidays and milestones can be celebrated together and values can be shared.
Priorities: think about your priorities for your children. Some parents consider education a priority, for example. Does the guardian whom you are considering share your priorities?

How to Make Sure that Your Choice of Guardian is Legally Enforceable

Once you decide on a guardian it is important that you document that decision in a legally enforceable way. The best way to accomplish this goal is to include your choice of guardian in your will. Both parents should name the same guardian and an alternate guardian if your first choice guardian is unable or unwilling to take on the responsibility at the time of your death. This becomes particularly important if your first choice guardian is considerably older than you, ill or very close to you which would increase the odds of you being in an accident together.

If you name your guardian in your will then you will need to make sure that the will is properly executed according to the laws of your state. An attorney can help you make sure that your will is valid and that the person who want to become your children’s guardian will be legally able to do so.

Protect Your Children with Your Last Will and Testament

Sat, 01 Aug 2009 15:47:36 GMT

There’s a lot to think about when you are expecting a baby. Baby names, nursery décor and car seat installation probably come to mind quickly. However, there are also other important considerations to think about like making a last will and testament.

It might be difficult to think about making a will at such a joyful time for your family. Yet, part of being a parent is planning for your child’s future. While the vast majority of parents live long enough to provide for and raise their own children there are a small minority of parents who are not so lucky. They may become ill or be involved in a fatal accident. Either way, death can be unanticipated and come as a surprise and the best way to care for your child in the case of such a tragedy is to create and legally execute a valid will and testament.

Each parent should have his or her own will. If the parents are married or share custody of the children while they are living then the surviving parent will typically have custody of the children if one parent dies regardless of the arrangements in the will. However, if both parents die or the sole custodial parent dies then the guardian named in the will will become the legal custodian of the children.

As a parent, it is important to make sure that your will contains:

A Personal Guardian for Your Children: This is, perhaps, the most important part of a parent’s will. The guardian will take over the day to day aspects of parenting and become the person with legal responsibility for your child. Most parents choose a guardian whom they are close with and who shares their ideals.

A Financial Guardian for Your Children: This may be the same person as the personal guardian but it doesn’t have to be the same person. A financial guardian will be responsible for overseeing the assets and distributing them for the benefit of your child until your child becomes an adult.

A Clear Distribution of Your Assets: If you have specific assets such as jewelry, collectibles, letters or vacation properties that you want to leave to a specific child or another individual then you can do so in your will. If an asset is not individually identified as going to a specific recipient then it will be included with all of your assets and distributed according to the parameters that you have created.

In the absence of a validly executed will, the state will determine who has custody of your children and how your assets will be divided. State statutes called the “intestate laws” determine these matters. In many states your surviving spouse will only get a percentage of your estate if you have children, for example. And in some states your parents are entitled to a percentage of your estate if they survive you.

For all of these reasons, it is important that you protect your child by creating a will. It doesn’t matter if you have little property to leave or if the state would appoint the same guardian that you would appoint. Circumstances may change when you least expect them to and your will can protect your children the way that you want them to be protected.

The Uniform Transfers to Minors Act: An Overview

Sat, 01 Aug 2009 15:50:36 GMT

The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) provide a way for parents to maintain control over property that is owned by their children. The Uniform Transfers to Minors Act provide some unique advantages for families and should be considered by parents who are looking to transfer wealth to their minor children.

Some of the advantages of the Uniform Transfers to Minors Act include:

Automatic Designation of the Property in a Trust without Having to Incur the Expense or Effort to Establish a Separate Trust: trusts created pursuant to this Act are typically made up of securities or other holdings. When the securities are purchased they are purchased in such a way as to make the parent the custodian for the child who owns the interest. For example, you might see the account set up as Mother Jones as custodian for Boy Jones pursuant to the Uniform Transfers to Minors Act.
Tax Benefits for the Parent: the earnings on the investments are reported to the IRS and state taxing authority under the child’s social security number. Typically, the child has a much smaller income than the parent and is taxed at a much lower rate, if at all. Therefore, more of the earnings remain in the investment and less goes to the government.

While it is easy and often financially advantageous to purchase securities or other investments pursuant to the Uniform Transfers to Minors Act, families should be aware of the following limitations:

A college or university may consider the value of these accounts when deciding on financial aid for the child.
Once the child reaches the age of majority, the child has unrestricted rights to the account. That age may be 18 or 21 depending on how the term is defined in a particular state’s Uniform Transfer to Minors Act. Parents may be concerned about the child’s maturity and ability to responsibly handle the assets at that time but, unlike a traditional type of trust, there is nothing that a parent can do to raise the age limit for asset access.
The assets of an account established in this way are irrevocable. A parent may, for example, establish an UGMA or UTMA account with the intention that the child will use the money for college or to purchase his or her first home. While that may be the parents desire there is nothing that a parent can do under the law to enforce their wishes. If the child wishes to use the money to backpack through Europe or to donate every cent of the money to his or her charity of choice then the parent cannot legally stop the child from doing so even though those were not the intended purposes of the account.

For many families, the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act are worthwhile investment tools. However, it is important that parents seek the advice of their attorney prior to establishing such an account in order to determine if it is the best vehicle to accomplish the parents’ goals.

What are the advantages of purchasing an annuity for estate planning purposes?

Thu, 30 Jul 2009 02:45:36 GMT

There are several reasons that purchasing an annuity can be advantageous for estate planning purposes. Although annuities are typically invested by insurance companies in the stock market, they carry less risk because they provide periodic income for you to the rest of your life, and they provide a death benefit to your named beneficiary if you die before receiving payments from your annuity. Furthermore, annuities are also useful in that they allow your investment to grow tax-deferred.

If you simply invest your assets in the stock market, such as in the form of mutual funds, you risk losing your investment, which may result in you not having sufficient assets to live on for the rest of your life. Although annuities are usually are invested in the stock market, you are guaranteed a certain amount of income for the remainder of your life, regardless of stock market fluctuations. In this respect, then, you can be assured that you will not lose a large chunk of your investments due to the stock market, and that you will have a fixed amount of income in the form of your annuity payments for the rest of your life.

Next, annuities are an effective estate-planning tool in that you must name a beneficiary and/or beneficiaries who will directly receive all or a portion of your annuity investment, depending on the terms of your annuity, without the need for formal probate proceedings. Like a life insurance policy, an individual retirement account (IRA), or a 401(k) plan, you simply name the person or persons that you wish to receive the annuity proceeds upon your death, and they will receive it, without losing some of the proceeds to probate lawyers and estate taxes.

As noted above, annuities are also an attractive investment option in that they allow your investment to grow tax-deferred until you begin receiving the periodic income payments set forth in your annuity. Plus, when you begin receiving payments from your annuity, you are taxed at the lower capital gains rate, as opposed to the regular income tax rate. It is important to keep in mind, however, that annuities are only useful in this regard if your goal is to plan for your long-term future. Investing in an annuity for a period of less than ten years is likely to result in some loss of assets, rather than resulting in any sort of advantage. Moreover, if you must withdraw the value of your annuity investment prior to its payout period, you will be taxed at the regular income tax rate. It is also important to keep in mind that there are other types of investments, such as 401(k) plans and IRAs, which may provide similar or even better tax advantages than annuities. Thus, it is extremely important to consult a tax advisor and/or an estate planning lawyer in order to determine whether purchasing an annuity would best meet your needs.

What are the differences between annuities, IRAs, and 401(k) plans, and how do they fit into my estate plan?

Thu, 30 Jul 2009 02:49:55 GMT

Annuities, individual retirement accounts (IRAs) and 401(k) plans are all types of investments that can help you plan for retirement, as well as for the inheritance that you wish to leave your children. All of these investment options may provide tax-deferred growth and certain other tax advantages, depending on your situation. Furthermore, all of these options exclude your invested assets from costly probate proceedings, and provide a source of income for you during retirement that is taxed at a lower rate than regular income. However, there are important differences between these investment options, as well, which make it essential that you consult an investment advisor, an estate planning lawyer, and/or a tax advisor prior to deciding how to invest your money.

First, although all of these investment options provide for tax-deferred growth, the other tax advantages derived from these investment options varies according to your financial situation. For most investors, making the maximum contributions to a 401(k) through an employer and/or an IRA will be more advantageous than initially turning to an annuity as an investment option. For example, all contributions to a 401(k) plan through your employer are made on a pre-tax basis. This means that you not only get the benefit of your 401(k) contributions growing on a tax-deferred basis, but you simultaneously will reduce your taxable income for the year. Another tax advantage of 401(k) plans is that most employers offer some sort of matching funds up to a certain percentage of your 401(k) contributions. Since you are getting free money from your employer to contribute to your 401(k), and enjoying significant tax savings, contributing to a 401(k) plan, at least at a level designed to take full advantage of any matching fund by your employer, is typically the best option in terms of an investment that combines tax savings with the sheltering of your assets from probate.

Next, an IRA offers substantial tax advantages, as well. Based on your income level, a certain amount of contributions to an IRA are deductible on your income tax return. Depending on the type of IRA you choose, you may also enjoy tax-deferred growth of your assets. Therefore, it is generally advantageous for investors to reap the full tax benefits of an IRA before turning to an annuity for investment purposes. Furthermore, keep in mind that if you have invested your funds in a variable annuity through a 401(k) plan or IRA, you will not receive any additional tax advantage from the variable annuity. In this respect, then, choosing an annuity will not be helpful to you, unless you wish to take advantage of some other feature of an annuity, such as the death benefit, or the fact that you will be guaranteed a certain level of income for the remainder of your life.

As you can see, all of these investment options – annuities, 401(k) plans, and IRAs – offer distinct tax advantages and other attractive features, which are largely dependent on your particular financial situation. Therefore, before utilizing any of these investment options, you should consult professional advisors in order to create a retirement and estate plan that best meets your needs, as well as the needs of your family.

What are the potential pitfalls of annuities?

Sat, 01 Aug 2009 02:29:56 GMT

Although annuities have their advantages, in terms of tax-deferred growth and an unlimited contribution levels, annuities also have a number of pitfalls that you must be aware of before you opt to purchase an annuity. If you rely on annuities as an estate or retirement planning tool, you may encounter limited investment opportunities, high costs and fees, an uncertain death benefit, and unwanted tax implications.

Many insurance companies that offer annuities have only extremely limited investment opportunities. As a result, you may not have much choice in how your money is invested; furthermore, this fact may result in a decreased likelihood of growing your investment to the level that you need in order to plan for your future needs, as well as those of your family. However, there are larger financial planning companies that allow you to choose from a menu of mutual fund accounts, which are called “subaccounts”. If you are able to make such an investment through your annuity, then you may be more likely to see the rates of return similar to regular retirement accounts, such as 401(k) plans and individual retirement accounts (IRAs).

Unfortunately, the vast majority of annuities also come with rather high money management expenses and annual fees. The average annual expense of owning an annuity is 2.4.% of the amount of the assets held, which is very high compared to investments in IRAs or 401(k) plans, for example. Likewise, surrender fees for annuities are high, especially if you need to withdraw funds within the first five years after purchase, although the fees do tend to decrease as time goes on. For instance, if circumstances cause the need for you to withdraw funds prior to reaching age 59 ½, you can face not only surrender fees, as well as substantial tax penalties.

While annuities have certain advantageous tax implications, such as the ability of your investment to grow tax-deferred, annuities also have some tax implications that may not be so advantageous. Annuities, like mutual funds, are subject to federal estate tax laws, if they fall outside the $2 million estate tax exemption. Thus, if your beneficiaries inherit your annuity, they also inherit the income taxes owed on the amount of the annuity, in addition to any applicable estate taxes. Plus, as noted above, if you must withdraw money from your annuity early, or prior to age 59 ½, you can face a 10% tax penalty for your early withdrawal. In some situation, you can even be hit with a 25% tax penalty.

Another much-advertised advantage of annuities is the death benefit feature. Unfortunately, the “guaranteed” death benefit is not always a sure thing, in that it typically expires when you reach a certain age, which is usually around 75 years of age. Once you reach that age, there is a no longer a guaranteed death benefit available to your beneficiaries. Furthermore, even if your death benefit is intact at the time of your death, the only guarantee of this death benefit is that your beneficiaries receive the amount that you invested originally into the annuity. Compared to a regular mutual fund account, which, on the average, earns about 12% interest annually, this is not an advantage for your family, unless you die very soon after purchasing the annuity

What are the tax advantages and/or implications of annuities?

Sat, 01 Aug 2009 02:17:53 GMT

One of the most attractive features of using annuities for retirement and/or estate planning may be the tax advantages that annuities provide. In some cases, however, depending on your tax situation, the tax advantages of annuities may not be sufficient to justify the purchase of annuities. As a result, it is extremely important to consult a tax advisor and/or an experienced financial planner before you purchase an annuity, in order to determine how the tax advantages and/or implications of annuities will affect you and your family.

If you purchase an immediate annuity with after-tax income, a portion of each periodic payment that you receive is from the principal sum that you originally invested in the annuity. Therefore, you are receiving a portion of your payments free of any taxes. The downside of this tax-free income, however, is that you have to use complex IRS annuity life expectancy tables in order to calculate the portion of your payments that is non-taxable, and that which is taxable. On the other hand, if you purchase an annuity through another retirement plan, such as an IRA or a 401(k) plan, the payments are fully taxable.

You’ll also need to keep in mind that annuity income is taxed at regular income tax rates, aside from the portion of the principal paid out in immediate annuity payments. This can be a rather high tax rate, depending on your income and assets, which can be up to 35%. Plus, income tax on annuity income can be much higher than the dividend tax rates that apply to mutual fund accounts. Furthermore, some states assess additional taxes on annuity income, which only add to the tax burden resulting from an annuity purchase, depending on your state’s laws.

Annuities can also result in an unexpected tax burden for your beneficiaries or surviving family members. Annuities are subject to federal estate taxes, as well as income taxes, which are responsibilities that carry over to your beneficiaries upon your death.

There are some other tax implications of annuities that can provide a significant tax advantage; when you purchase an annuity, all earnings on your investment are tax deferred. This means that you don’t pay any income taxes on the earnings, such as interest, dividends, and capital gains, until you withdraw them from the annuity. You must wait to begin receiving payments from your annuity until after you have reached 59 ½ years of age, or you may be assessed a 10% penalty, which would clearly undermine any tax savings from your investment in the annuity. Therefore, particularly when you allow your annuity investment to grow tax deferred for a lengthy period of time, such as for ten or fifteen years, you may experience significant earnings on your investment. Additionally, since you are able to control the rate at which you receive taxable income from the annuity, you will not be subject to a suddenly large tax liability.

Another tax-related downside to annuities, however, is the possibility that you will need to withdraw from your annuity investment earlier than you had planned. If you must withdraw funds from your annuity before you have reached 59 ½ years of age, you are subject not only to regular income taxes, but also to a substantial withdrawal tax penalty, which can be up to 10%, or even 25% in some selected situations.

What is a variable annuity, and how does it work for estate planning purposes?

Thu, 30 Jul 2009 02:38:54 GMT

Annuities are long-term investments that are designed to provide you with an income at some point in the future, such as upon your retirement. Since the goal of an annuity is to give you and/or your spouse a source of income each month for an extended period of time, purchasing an annuity can be an advantageous means of investing your money, planning for your long-term financial future, and avoiding probate.

Most annuities are either single premium annuities, which require a single premium payment, or multiple premium annuities, which require multiple premium payments over a period of time. Likewise, you can purchase immediate annuities, or deferred annuities. Immediate annuities provide you a periodic source of income as soon as you pay a single premium. On the other hand, deferred annuities postpone your receipt of any income for a specified period of time. Once your annuity reaches the date of maturity, you will begin receiving income from your annuity, which will continue for the duration of your payout period. So long as you do not withdraw the cash value from your annuity, you do not pay income taxes on your income until you begin receiving payments from it. As a result, a deferred annuity is an attractive option for allowing your assets to accrue interest tax-free, which can help preserve your hard-earned assets for your spouse and children. Furthermore, no matter what type of annuity you choose, it is an asset that will not go through probate; like a life insurance, you designate a beneficiary who can inherit your annuity investment without the need for opening an estate with the probate court.

The methods by which different annuities earn interest vary. For instance, a fixed annuity guarantees you a certain monthly payment, no matter how much or how little interest the money that you have invested in the annuity earns. An equity-indexed annuity, however, is linked to a standard equity index, such as Standard and Poor’s 500. In this case, the interest on the money that you have invested in the annuity will fluctuate depending on the stock market. Finally, interest earned on a variable annuity is tied directly to your chosen investments, and can fluctuate dramatically, depending on the market. Since you potentially lose your annuity investment altogether in a variable annuity, this type of annuity is definitely the most risky choice. Thus, you must take into account the amount of risk that you and your spouse are willing to bear for your annuity income.

If you are considering purchasing an annuity, you must take into account your financial goals, both short and long-term, your physical health, your need to support others, such as a spouse and/or children, as well as the role that an annuity would play in your overall financial worth. For instance, if you became terminally ill, and had no surviving spouse, would the annuity that you are considering allow you to remove your investment without harsh penalties and/or tax consequences? How would potentially losing your investment in a variable annuity affect your children’s inheritance? How would periodic annuity income fit into your existing retirement income framework? As you consider whether an annuity is right for you, you must bear in mind all of its potential consequences for you and your family.

What rights do I have in planning a funeral?

Thu, 15 Jan 2009 02:32:22 GMT

When a loved one passes away, you may find yourself confused by the many decisions to make in planning a funeral. In this situation, you should know your rights in terms of funeral planning, which will allow you to make the right decisions, even in a time of great emotional stress.

Under the Funeral Rule, you can choose only those goods and services that you want or need for the funeral, and you must pay for only those goods and services that you choose. While many funeral homes offer package deals that provide various goods and services for a fixed cost, the Rule gives you the right to pick and choose among the goods and services, so you aren’t stuck with more than what you really want or need.

The Rule also allows you to compare the costs of goods and services offered by various funeral homes, and to ultimately choose the home that you want to use, whether you are planning a funeral in advance, or if you are faced with the immediate decision of making arrangements for a loved one. Keep in mind, however, that the Rule does not apply to sellers of caskets or monuments, or to cemeteries that aren’t tied to a funeral home.

You also have a number of rights under the Rule to get information about the goods and services that funeral homes offer. A funeral director must give you pricing information over the phone, without first requiring that you provide identifying information about yourself. When you visit a funeral home, you are entitled to a detailed, itemized price list of all goods and services that a funeral home offers, including the prices of caskets and outer burial containers. Remember, you aren’t limited to the caskets that a funeral home has on display; rather, you may be able to choose a lower-cost casket from the price list, or even an alternate burial container, which a funeral home must offer you in the case of cremation. Plus, you can even purchase a casket or urn elsewhere, and use it at any funeral home; a funeral home cannot require that you purchase caskets or containers from it in order to use its services.

Furthermore, no states require that embalming occur. While some states may require embalming or refrigeration if the body is not cremated or buried within a certain period of time, others do not require it at all. Essentially, you have the right to determine if and when a body is embalmed, and may seek any practical low-cost alternatives such as immediate cremation or burial, or a private family viewing without embalming.

The bottom line is that the Funeral Rule entitles you to make the choices that are best suited to your wants and needs in this difficult and emotional situation. Once you have made those choices, then you have the right to see a written statement of the goods and services that you have chosen, as well as their prices, before you pay for them.

The Federal Trade Commission enforces the Funeral Rule. If you have a complaint about a funeral home or funeral services provider, you can contact the FTC at https://www.ftccomplaintassistant.gov.

When to Update Your Will

Mon, 26 Oct 2009 18:07:11 GMT

A will is an important estate planning document that describes how your property should be distributed after you pass away. Most people put a lot of thought into creating their will. They consider providing for their family, naming guardians for their children and supporting various charities, for example. They properly execute their wills and make sure that they are put in safe places where they will be easily accessible when they are needed. Once that is accomplished, it is easy to cross it off of the list of things to do and forget about it. However, a will is a document that should be periodically reviewed to make sure that it still meets your inheritance objectives.

Common Situations When a Will Should be Reviewed

A will should be periodically reviewed every few years to make sure that it still accurately reflects how you want your assets to be distributed when you die. It is particularly important to review your will when:

You get married: you likely want to add your spouse to your will when you get married. Some states require that a spouse inherit a percentage of your property regardless of a will but that may be less than you intend your spouse to inherit or, pursuant to state law, your spouse may not inherit anything.
You get divorced: in order to ensure that your ex-spouse does not inherit your property upon your death your will must be revised at the time of a divorce, assuming that your spouse was included in the will that you are revising.
You have children: when you have children you may wish to name a guardian and set up a financial trust for the economic well being of your children should you pass away before they reach the age of majority
Your children reach the age of majority: you may wish to change the amount that you provide for your children or change the way in which the money or property is provided to them when they become adults.
You have grandchildren: if you want to provide specific bequests of money or property to your grandchildren then your will needs to be revised to reflect the changes.
Your financial situation changes significantly: you may wish to provide for additional beneficiaries or add charitable beneficiaries to your will if your financial situation significantly improves. You may also need to revise your will to account for estate tax implications.
You move out of state: different states have different estate taxes and you may need to revise your will to account for the different tax structure. Therefore, it is important to have a local estate planning attorney review your will when you move to a new state.

How Can I Update My Will?

There are two ways to update your will. You can either legally revoke your previous will and execute a new will or you can execute a codicil to your existing will. Generally, if you are making small adjustments to your will then a codicil, or amendment, is a cost efficient and legally enforceable way to update your will. For example, if you now have a vacation home to bequeath then you may do so by executing a codicil to your existing will. A codicil must be executed in the same way that a will is executed in your state.

If you are making substantial changes to your will, such as including or excluding a person and significantly changing the allocations of your property then you may wish to revoke your will and execute a new will. An estate planning attorney can help you develop and execute a codicil or a new will based on what is appropriate for your individual situation.

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