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The 10 Basic Questions of Estate Planning

November 28, 2018
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It’s not easy to contemplate your own mortality, but a good estate plan can provide for your heirs, protect your assets, and promote family harmony once you’re gone. Estate planning is complex and because it involves facing your own mortality, it can be difficult subject to address. While you most likely have a will, this simple document may not be sufficient to manage your estate and efficiently pass on assets to your heirs. Even if you have an estate plan that you’re confident in, it’s a good idea to review that plan in light of changes resulting from the Tax Cuts and Jobs Act of 2018.

Here are 10 simple questions that address the basic issues of estate planning:

1. What size is your estate?
Although some details have changed as part of tax reform, in general the rules regarding estate taxes has stayed the same. In 2018, estates larger than $11.18 million—or $22.36 million for a couple—are subject to federal estate tax. That amount is nearly twice as high as it was in 2017, and will continue until 2025, when exemption amounts will return to pre-2018 levels. In addition, depending on where you live, state inheritance taxes may impact your estate or your heirs.

This means it’s more important than ever to establish a current valuation on the items in your estate so you’ll know whether your estate is likely to be subject to those taxes. Consult with an experienced financial advisor and an estate planning attorney who may recommend legal and financial strategies that can serve to reduce or eliminate estate taxes, depending on your situation. Some of these options include charitable gifts (both during life and at death), annual gifts to family members, and different kinds of trusts.

2. What assets pass outside the will or probate?
If you’re married and have assets that are owned jointly with the right of survivorship, those assets will pass directly to the surviving spouse and fall outside of the will. For many couples, this will include the family home, life insurance policies, and qualified retirement plans. This is good news for the surviving spouse, because those assets are not subject to any delays associated with probate.

Although many states have reduced the costs involved and simplified the probate process, it can be time consuming and difficult. Along with assessing how probate potentially affects your estate, it is a good idea to regularly review and update all your beneficiary designations to ensure that assets pass to the beneficiaries you desire. With divorces and changes in family structure, you don’t want any assets passing by accident to a former spouse, for example.

3. Who should be executor?
The role of executor is a complex one that includes a wide variety of responsibilities. These include identifying the assets and managing them responsibly in terms of filing taxes and the final disposition of the estate. Because the probate process can be time consuming and involved, it is important that the executor you choose has the time and energy to undertake these tasks. They should also have some familiarity with the financial issues involved. Although accountants and attorneys can assist with the task, any executor you appoint has the ultimate responsibility of managing the estate and seeing the task through from start to finish.

4. Are the intended heirs minors or disabled?
If your heirs include minor children or disabled children or adults, you will need to appoint a guardian. The decision surrounding who will raise a child or care for a disabled adult in your absence is one of the most important estate planning decisions you’ll make.

For some parents, a sibling or grandparent is the most appropriate choice. For others a close family friend may work best. For complex estates or in a situation where a significant amount of money will be distributed through the estate, it may make sense to name two guardians, one with the responsibility for disbursing the money and the other who will be responsible for caring for the child or children.

In the case of a mentally or physically disabled person, a special needs trust can protect the heir while providing funds to supplement government benefits. Such trusts can be set up to ensure that the child will continue to be qualified for government benefits while providing for other needs that aren’t covered by Medicare, Medicaid, or Social Security disability. The trust can be funded in a variety of ways, potentially with money from parents or with the beneficiary’s own assets, perhaps from an accident settlement or lawsuit. Regardless of how the trust is funded, engaging an estate planning attorney with expertise in such vehicles is critical to protecting the needs of the child or adult.

5. Who should be a trustee?
If your estate involves one or more trusts, the appointment of a trustee or multiple trustees is a big decision. While executors have significant responsibilities, their tenure is limited. A trustee’s responsibilities can be more involved and last longer, perhaps even a lifetime. Attorney Stephan R. Leimberg says, “The selection of a trustee is one of the most important decisions a grantor makes. A trustee who chooses poor advisors, is careless about tax issues, makes poor investment decisions, or is not sensitive to the needs of the trust beneficiaries” can lead to multiple problems, including infighting amid beneficiaries, tax problems, and potential investment losses.

When deciding who to appoint as a trustee, look for an individual or professional who is competent, has the ability to act in the best interests of the beneficiaries, has no conflicts of interest and who has the availability and interest in assuming this role. If your estate is complicated or large, it may make sense to appoint an institutional trustee along with an individual trustee. An institutional trustee can provide important expertise in tax and investment matters.

6. Should you gift during your lifetime?
Gifting is a powerful tool to reduce a taxable estate. Couples can give $30,000 in 2018— $15,000 per individual—to an unlimited number of people per year, avoiding the gift tax. With ATRA, this provision will be adjusted for inflation annually.

For many high net worth individuals, this is an opportunity to remove money from a taxable estate and help grandchildren, children, nieces, nephews, and other deserving individuals. In addition, when the gifts consist of appreciating property, significant sums can be removed from a potentially taxable estate.  Besides gifting to relatives, charitable gifts, both during life and in the form of bequests, can also reduce your taxable estate. In addition to gifts of cash, you may want to consider such special charitable vehicles as charitable gift annuities and charitable remainder trusts. Both combine a charitable gift with a lifetime stream of income to the donor.

7. Are there unique circumstances requiring specialized advice?
There is no one-size-fits-all solution for estate planning and many situations need specialized expertise. For example, if you own a family business, there may be issues involving equalizing inheritance for children who are actively involved in the business versus those who are not.  Multiple marriages can also complicate estate planning by creating issues between a surviving spouse and children of an earlier marriage. In the case of a large estate, there can be infighting over any trusts in terms of whether assets should be invested to yield maximum income for the survivor or the largest possible remainder for the children. An experienced attorney can help you sort out these issues to reach a solution that is appropriate for you and your family.

8. Have you planned for disability or incapacity?
No one likes to consider the potential for disability and/ or incapacity, but these situations can occur. To cover all the contingencies, it’s a good idea to consider a living trust and/or a durable power of attorney so your affairs can be managed if you or your spouse becomes incapacitated. In such a case, you can serve as the trustee of your own living trust, with backup trustees named to take over when if necessary. Similarly, a durable power of attorney—it must be durable to remain in effect during incapacity—can be structured so that it only takes effect when two or more physicians attest to incapacity. The alternative to having these documents in place is that your family would have to seek guardianship over you to take charge of your financial affairs, a potentially an unpleasant and emotionally draining task.

9. Are advanced directives in place?
Although end-of-life issues are not technically part of estate planning, they are a vital part of your overall plan. Consider drafting a living will that spells out specific measures to take in the event of a terminal illness or incapacity, along with a health care proxy designating someone to speak on your behalf if you can’t do so yourself. Putting your wishes in writing can’t eliminate the anguish your family might face in making end-of-life decisions, but your instructions can go a long way toward reducing their emotional burden.

10. Have you discussed your estate plan with your family?
According to a study by U.S. Trust, less than one-third of parents have shared their estate plans with their adult children. This lack of open communication can exacerbate conflicts within the family and result in expensive and protracted litigation, draining the estate of the very resources you want your family to enjoy in future years.

When communication is open, the potential for conflict is greatly reduced. Attorney Leimberg notes that of those families reporting no conflicts, more than 20% knew what to expect out of the estate and more than 80% believed that they were fairly treated. It’s also important to remember that despite the potential hassles and expense involved in creating a comprehensive estate plan, such a plan can ensure financial stability for your surviving spouse, preserve assets for your children and grandchildren, minimize potential taxes and other expenses, and ensure that your wishes are carried out.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.

 

 

Why Life Insurance Can Matter in Estate Planning


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With or without the estate tax, it addresses several key priorities. 

Every few years, predictions emerge that the estate tax will sunset. Even if it does, that will not remove the need for life insurance in estate planning. Why? The reasons are numerous.

You can use life insurance proceeds to equalize inheritances.
If sizable, illiquid assets make it difficult to leave the same amount of wealth to each heir, then the cash from a life insurance death benefit may financially compensate.

You can plan for a life insurance payout to replace assets gifted to charity.
You often see this move in the planning of charitable remainder trusts (CRTs).

People use CRTs to accomplish three objectives. One, they can remove an asset from their taxable estate by placing it into the CRT. Two, they can derive a retirement income stream from the trust’s invested assets. Three, upon their death, they can donate a percentage of the assets left in the CRT to charities or non-profit organizations.

When a CRT is fashioned, an irrevocable life insurance trust (ILIT) is often created to complement it. The life insurance trust can be funded with income from the invested assets in the CRT and tax savings realized at the CRT’s creation. (The trustor can take an immediate charitable income tax deduction in the year that an appreciated asset is transferred into the CRT.) Basically, the value of the life insurance death benefit makes up for the loss of the CRT assets bound for charity.

Life insurance can help business owners with succession.
It can fund buy-sell agreements to help facilitate a transfer of ownership, regardless of how an owner or co-owner leaves a company. It can also insure key employees – the policy can help the business attract and retain first-rate managers and creatives, and its death benefit could help lessen financial hardship if the employee unexpectedly passes away.

Life insurance products can also figure into executive benefits.
Indeed, corporate-owned life insurance is integral to supplemental executive retirement plans (SERPs), the varieties of which include bonus plans and non-qualified deferred compensation arrangements.

Lastly, a life insurance policy death benefit transfers quickly to a beneficiary.
The funds are paid out within weeks, even days. A beneficiary form directs the process, rather than a will – so the asset distribution occurs apart from the public scrutiny of probate. Life insurance is also a backbone of trust planning, and assets held inside a trust can be distributed directly to heirs by a trustee according to trust terms, privately and away from predators and creditors.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

Estate Planning After a Second Marriage

November 14, 2018
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Special considerations for a complex situation.

Marrying again makes estate planning more involved. How do you provide for everyone you love? Should you provide for everyone you love? How do you arrange to transfer wealth in a way that won’t hurt the feelings of certain heirs?

If you have not planned your estate yet, take inventory. Spend a half-hour and jot down the assets you own, major and minor. Who should own these assets after you die? Your spouse should do this, too – and you should talk about your preferences. It may not turn out to be the easiest conversation, but agreement now may preclude family squabbles and legal challenges down the line. (If you have a prenuptial agreement in place, you may have already discussed some of these matters.) You should also consider two scenarios – what happens if you die first, and what happens if your spouse dies before you do.

If you and/or your spouse have children from prior marriages, there may be some dilemmas for each of you. If you die, there is a real possibility that your current husband or wife will not elect to provide for your children from past marriages. So what might you do to prepare for that possibility? You might make a child the primary beneficiary of a life insurance policy, or set up a trust for your kid(s), or place certain real property under joint ownership with a child.

If you have already written a will, it will probably need revisions. They could be considerable. You want to be extremely specific about which heir gets what; you need to state bequests convincingly, because the more convincing your bequest, the less ambiguity.

How up-to-date are your beneficiary designations? Out-of-date beneficiary decisions are an Achilles heel of estate planning. Be sure to review them; you may want to revise beneficiary forms for retirement plans, investment accounts, and insurance policies.

As you consider these revisions, pay particular attention if you have been divorced. Divorce may actually preclude you from changing beneficiaries in certain cases. Turn to a lawyer and show the lawyer a copy of your divorcee decree; ask if revising your beneficiary designations will violate it. Should you be unable to make beneficiary changes to your life insurance policy, you may want to buy another one in consideration of your new spouse.

Take a look at irrevocable trusts. They can be used to provide for your spouse as well as your kids. Some people establish a separate property trust to provide for their spouse after their death while directing most or all of their real property to their children.

Alternately, parents create irrevocable trusts to direct assets to particular children. They are attractive estate planning vehicles for a number of reasons. A trust agreement is a private mechanism for wealth transfer, while a will is a public document (and some parents who have remarried would rather their wills not be made public). Assets within irrevocable trusts are shielded from creditors, and also from inheritance claims of spouses of the adult children named as heirs. An irrevocable trust represents a “finalized” estate planning decision, one that ensures that particular assets transfer to a parent’s biological children. Irrevocable trusts are also rarely undone. It typically takes permission from beneficiaries (and a judge) to reverse them.

Those aforementioned pre-nups can play an estate planning role as well. They allow you to designate personal assets (such as assets within a college savings account) for existing rather than future children. Post-nuptial agreements (similar to pre-nups, but drafted after a marriage) can also accomplish this. Some states do not view pre-nup and post-nup agreements as legally valid, however – and sometimes carrying out the terms and conditions of these agreements is up to a judge.

Be sure to consult legal & financial professionals. When estates become this complex, collaboration with professionals having a thorough understanding of estate planning and tax issues is essential.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

A Widow’s Worst Nightmare


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What can be worse than losing a spouse—especially when there are still young children to raise? How about being forced to go through probate and losing needed assets to ex-spouses and estranged family members?  If only there had been a will.

When someone dies without a will, the law of the state they died in determines how assets will be dispersed. Distribution formulas vary according to state law, but they are usually some variation of the following:

  • Spouse gets everything if the deceased had no children, parents, siblings, nieces, nephews, or there are no children of a deceased child.
  • Spouse gets half if the deceased had one child or there are children of one deceased child.
  • Spouse gets one third if there are two or more children or one child and descendants of one or more deceased children.

Messy, complicated, and expensive
Widowed without a will can have serious consequences, as their outright shares of the assets are insufficient to maintain their lifestyle and support their children. Additionally, both face ongoing and cumbersome reporting requirements to their county commissioners, not to mention legal and bonding expenses as they manage assets belonging to their children under court supervision. In a case of a widow with minor stepchildren, it remains to be seen whether the court will appoint her or the ex-wife as conservator of that child’s account.

We often suggest to those who are widowed to try to wait several months before making large financial decisions. But if money is tight and the courts are involved, time is of the essence. The first hurdle is probate. The court determines how to divide the assets—what goes to which beneficiary. The costs can add up quickly and may include court fees, attorney fees, accounting fees, appraisal fees and business valuation fees.

When minor children inherit, the red tape begins and costs can be excessive in comparison to the value of the assets that are being protected. It can be a constant struggle to access the children’s inheritance for their own upbringing. Interaction with the courts occurs in the following ways:

  • The court appoints a conservator to administer the assets in accordance with its rules. This conservator will not necessarily be the surviving parent.
  • Court supervision involves formal accountings, which can be costly and complicated.
  • The conservator may also require legal representation in court.
  • The court controls how funds are to be used and when they can be withdrawn.
  • The court’s interpretation of reasonable costs for health, education, maintenance, and support is        usually very conservative. A parent may be unsuccessful arguing that tutors, orthodontia, music   lessons, sports camp, or help paying a mortgage is a necessity. It may be hard to justify using a larger share of the assets for a child with special needs.

What happens when the children are no longer minors?
Children gain full control of their assets at the age of majority, and this can have tragic consequences. Few 18-year-olds are emotionally and financially responsible enough to handle a large inheritance. This sets the stage for a lifetime of regrets if the children spend through all the assets. They may even become injured by an excessive life style due the toxic combination of immaturity and sudden wealth. This is not a great legacy for any parent to leave their child.

At a minimum, parents need to establish wills to protect their spouses and their children. Physical guardians should be designated for any minor child, and any assets that might pass to a minor should be titled to a named custodian under the Uniform Trust for Minors Act (UTMA) or as a trustee for a minor’s trust. The guardian and trustee do not need to be the same person, and separating the guardian of the children from the “conservator” of the financial resources is often a very good idea.

Provisions can be made so that the guardian will receive sufficient funds to raise the children without creating an unreasonable burden on their own family and resources. A thoughtful will can also be structured to allow gradual distribution of assets at ages older than 18 or 21.

Our two widows would have been spared all these problems if their husbands had even simple “I love you” wills naming them as the beneficiary of all the separate property. And don’t forget, they each need to draft a will now to prevent this from happening all over again if they should experience a loss of capacity or a premature death.

Do it now!
Financial advisors and estate planning attorneys often work together to ensure their clients’ estates are financially and legally protected. And the next time you procrastinate on creating a will, remember the stories of the two young widows now struggling to support their children with far less in assets than they expected or their husbands intended. It can be a nightmare working through the courts for support and maintenance of the children. A proper will is a true act of love and generosity and is absolutely important.  Above all, remember that if you don’t create a will of your own, the state will write one for you. Knowing how probate really works work might be all the incentive you need to visit that nice lawyer and create a will that can enforce your last wishes and protect your family’s assets.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.

 

 

Minimizing Probate When Setting Up Your Estate


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What can you do to lessen its impact for your heirs?

Probate subtly reduces the value of many estates.
It can take more than a year in some cases, and attorney’s fees, appraiser’s fees, and court costs may eat up as much as 5% of a decedent’s assets. Probating a “routine” estate valued at $400,000 could cost as much as $20,000.

What do those fees pay for? In many instances, routine clerical work. Few estates require more than that. Heirs of small, five-figure estates may be allowed to claim property through affidavit, but this convenience isn’t extended for larger estates.

So, how can you exempt more of your assets from probate and its costs? Here are some ideas.

Joint accounts.
Married couples may hold property as a joint tenancy. Jointly titled property includes a right of survivorship and is not subject to probate. It simply goes to the surviving spouse when one spouse passes. Some states allow a variation called tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship (they need consent from the other spouse to transfer their ownership interest in the property). A few states allow community property with right of survivorship; assets titled in this way also skip the probate process.

Joint accounts can still face legal challenges. A potential heir to assets in a jointly held bank account may claim that it is not a “true” joint account, but a “convenience account” where a second accountholder was added just for financial expediency. Also, a joint account arrangement with right of survivorship may be found inconsistent with an estate plan.

POD & TOD accounts.
Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank accounts and securities (and even motor vehicles, in a few states). As long as the original owner lives, the named beneficiary has no rights to claim the account funds or the security. When the original owner passes away, all the named beneficiary has to do is bring his or her I.D. and valid proof of the original owner’s death to claim the assets or securities

Gifts.
For 2018, the I.R.S. allows you to give up to $15,000 each to as many different people as you like, tax free. By doing so, you reduce the size of your taxable estate. Gifts over $15,000 may be subject to federal gift tax (which tops out at 40%) and count against the lifetime gift tax exclusion. The lifetime individual gift tax exemption is currently set at $11.18 million. For a married couple, the lifetime exemption is now $22.36 million.

Revocable living trusts.
In a sense, these estate planning vehicles allow people to do much of their own probate while living. The grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. (A pour-over will can be used to add subsequently accumulated assets to the trust at your death; yet, those assets “poured into” the trust at that time will still be probated.)

The trust owns assets that the grantor once did, yet the grantor can invest, spend, and manage these assets while living. When the grantor dies, the trust lives on – it becomes irrevocable, and its assets should be able to be distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate), and it can save heirs court costs and time.

Are there assets probate doesn’t touch?
Yes, there are all kinds of non-probate assets. The common denominator of a non-probate asset is a beneficiary designation, which allows these assets to pass either to a designated beneficiary or a joint tenant, regardless of what a will states. Examples: assets jointly owned with right of survivorship, trusts and assets held within trusts, TOD accounts, proceeds from life insurance policies, and IRA and 401(k) accounts.

Make sure to list/update retirement account beneficiaries.
When you open a retirement savings account (such as an IRA), you are asked to designate eventual beneficiaries of that account on a form. This beneficiary form stipulates where these assets will go when you die. A beneficiary form commonly takes precedence over a will.

Your beneficiary designations need to be reviewed, and they may need to be updated. You don’t want your IRA assets, for example, going to someone you no longer trust or love.

If you are married and have a workplace retirement plan account, your spouse is the default beneficiary of the account under federal law, unless he or she declines to be in writing. Your spouse is automatically entitled to receive 50% of the account assets should you die, even if you designate another person as the account’s primary beneficiary. In contrast, a married IRA owner may name anyone as a primary or secondary beneficiary, without spousal consent.

To learn more about strategies to avoid probate, consult an attorney or a financial professional with solid knowledge of estate planning.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

Getting It All Together for Retirement

October 24, 2018
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Where is everything? Time to organize and centralize your documents.

Before retirement begins, gather what you need. Put as much documentation as you can in one place, for you and those you love. It could be a password-protected online vault; it could be a file cabinet; it could be a file folder. Regardless of what it is, by centralizing the location of important papers you are saving yourself from disorganization and headaches in the future.

  • What should go in the vault, cabinet or folder(s)? Crucial financial information and more. You will want to include…
  • Those quarterly/annual statements. Recent performance paperwork for IRAs, 401(k)s, funds, brokerage accounts and so forth. Include the statements from the latest quarter and the statements from the end of the previous calendar year (that is, the last Q4 statement you received). You no longer get paper statements? Print out the equivalent, or if you really want to minimize clutter, just print out the links to the online statements. (Someone is going to need your passwords, of course.) These documents can also become handy in figuring out a retirement income distribution strategy.
  • Healthcare benefit info. Are you enrolled in Medicare or a Medicare Advantage plan? Are you in a group health plan? Do you pay for your own health coverage? Own a long term care policy? Gather the policies together in your new retirement command center, and include related literature so you can study their benefit summaries, coverage options, and rules and regulations. Contact info for insurers, HMOs, your doctor(s) and the insurance agent who sold you a particular policy should also go in here.
  • Life insurance info. Do you have a straight term insurance policy, no potential for cash value whatsoever? Keep a record of when the level premiums end. If you have a whole life policy, you need paperwork communicating the death benefit, the present cash value in the policy and the required monthly premiums.
  • Beneficiary designation forms. Few pre-retirees realize that beneficiary designations often take priority over requests made in a will when it comes to 401(k)s, 403(b)s and IRAs. Hopefully, you have retained copies of these forms. If not, you can request them from the account custodians and review the choices you have made. Are they choices you would still make today? By reviewing them in the company of a retirement planner or an attorney, you can gauge the tax efficiency of the eventual transfer of assets.
  • Social Security basics. If you have not claimed benefits yet, put your Social Security card, your W-2 form from last year, certified copies of your birth certificate, marriage license or divorce papers in one place, and military discharge paperwork and a copy of your W-2 form for last year (or Schedule SE and Schedule C plus 1040 form, if you work for yourself), and military discharge papers or proof of citizenship, if applicable. Take a look at your Social Security statement that tracks your accrued benefits (online or hard copy) and make a screengrab of it or print it out.
  • Pension matters. Will you receive a bona fide pension in retirement? If so, you want to collect any special letters or bulletins from your employer. You want your Individual Benefit Statement telling you about the benefits you have earned and for which you may become eligible; you also want the Summary Plan Description and contact info for someone at the employee benefits department where you worked.
  • Real estate documents. Gather up your deed, mortgage docs, property tax statements and homeowner insurance policy. Also, make a list of the contents of your home and their estimated value – you may be away from your home more in retirement, so those items may be more vulnerable as a consequence.
  • Estate planning paperwork. Put copies of your estate plan and any trust paperwork within the collection, and of course a will. In case of a crisis of mind or body, your loved ones may need to find a durable power of attorney or health care directive, so include those documents if you have them and let them know where to find them.
  • Tax returns. Should you only keep your 1040 and state return from the previous year? How about those for the past 7 years? Have you kept every one since 1982 or 1974? At the very least, you should have a copy of returns from the prior year in this collection.
  • A list of your digital assets. We all have them now, and they are far from trivial – the contents of a cloud, a photo library, or a Facebook page may be vital to your image or your business. Passwords must be compiled too, of course.

This will take a little work, but you will be glad you did it someday. Consider this a Saturday morning or weekend project. It may lead to some discoveries and possibly prompt some alterations to your financial picture as you prepare for retirement.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Do Women Face Greater Retirement Challenges?


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If so, how can they plan to meet those challenges?

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings. There is also the gender wage gap that is narrowing, but still evident.

What can women do to respond to these financial challenges? Several steps are worth taking.

  • Invest early & consistently. Women should realize that, on average, they may need more years of retirement income than men. Social Security will not provide all the money they need, and, in the future, it may not even pay out as much as it does today. Accumulated retirement savings will need to be tapped as an income stream. Saving and investing regularly through IRA and workplace retirement accounts is vital and the earlier the better and so is getting the employer match, if one is offered. Catch-up contributions after 50 should also be a goal.
  • Consider Roth IRA & HSA. Imagine having a source of tax-free retirement income. Imagine having a healthcare fund that allows tax-free withdrawals. A Roth IRA can potentially provide the former; a Health Savings Account, the latter. An HSA is even funded with pre-tax dollars, as opposed to a Roth IRA, which is funded with after-tax dollars – so an HSA owner can potentially get tax-deductible contributions as well as tax-free growth and tax-free withdrawals.  IRS rules must be followed to get these tax perks, but they are not hard to abide by. A Roth IRA needs to be owned for only five tax years before tax-free withdrawals may be taken (the owner does need to be older than age 59½ at that time). Those who make too much money to contribute to a Roth IRA can still convert a traditional IRA to a Roth. HSA’s have to be used in conjunction with high-deductible health plans, and HSA savings must be withdrawn to pay for qualified health expenses in order to be tax-exempt. One intriguing HSA detail worth remembering: after attaining age 65 or Medicare eligibility, an HSA owner can withdraw HSA funds for non-medical expenses (these types of withdrawals are characterized as taxable income).
  • Work longer in pursuit of greater monthly Social Security benefits. Staying in the workforce even one or two years longer means one or two years less of retirement to fund, and for each year a woman refrains from filing for Social Security after age 62, her monthly Social Security benefit rises by about 8%. Social Security also pays the same monthly benefit to men and women at the same age – unlike the typical privately funded income contract, which may pay a woman of a certain age less than her male counterpart as the payments are calculated using gender-based actuarial tables.
  • Find a method to fund eldercare. Many women are going to outlive their spouses, perhaps by a decade or longer. Their deaths (and the deaths of their spouses) may not be sudden. While many women may not eventually need months of rehabilitation, in-home care, or hospice care, many other women will.

Today, financially aware women are planning to meet retirement challenges. They are conferring with financial advisors in recognition of those tests – and they are strategizing to take greater control over their financial futures.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

Underappreciated Options for Building Retirement Savings

October 10, 2018
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More people ought to know about them.

There are a number of well-known retirement savings vehicles, used by millions. Are there other, relatively obscure retirement savings accounts worthy of attention? Are there prospective benefits for retirement savers that remain under the radar?

The answer to both questions is yes. Consider these potential routes toward greater retirement savings.

Health Savings Accounts (HSA’s). People enrolled in high-deductible health plans (HDHP’s) commonly open HSA’s for their stated purpose: to create a pool of money that can be applied to health care expenses. One big perk: HSA contributions are tax deductible. Another, underappreciated perk deserves more publicity: the federal government permits the funds within HSA’s to grow tax free. Just ahead, you will see why that is important to remember.

While 96% of HSA owners hold their HSA funds in cash, others are investing a percentage of their HSA money. Tax-free growth is nothing to sneeze at: an HSA owner who directs 100% of the maximum $3,450 yearly account contribution into investments returning just 4% annually could have an HSA holding more than $200,000 in 30 years. Prior to age 65, withdrawals from HSA’s are tax free if they are used for qualified medical expenses. After that, withdrawals from HSA’s may be used for any purpose (i.e., for retirement income), although they do become fully taxable.  In 2018, an individual can direct $3,450 into an HSA; a family, $6,900. Additional catch-up contributions are allowed for HSA owners aged 55 and older.

“Backdoor” Roth IRA’s. Some people make too much money to open a Roth IRA. That does not mean they are barred from having one. Anyone can convert all or part of a traditional IRA to a Roth, and pre-retirees with high incomes and low retirement savings occasionally do. Why? A Roth IRA offers the potential for future tax-free withdrawals. Roth IRA owners also never have to take Required Minimum Distributions (RMD’s). A Roth conversion is typically a taxable event, and it cannot be undone. The IRA owner may enter a higher tax bracket in the year of the conversion, so anyone considering this should speak with a tax professional beforehand.

Cash value life insurance. Permanent life insurance policies often have the capability to build cash value over time, and high-income households sometimes purchase them with the goal of achieving more tax efficiency and using that cash value to supplement their retirement incomes. Cash value accounts within these policies are designed to earn interest and grow, tax deferred. Withdrawals lower the cash value of the policy, but are untaxed up to the total amount of premiums you have paid. Tax-free, low-interest loans may also be taken from these policies; unrepaid loans, though, lower a policy’s death benefit. The big risk here? If you have an outstanding policy loan, you could potentially face huge income taxes if you run into a situation where you must surrender the policy or are unable to pay the premiums.

Cash balance pension plans. Many small business owners need to accelerate the pace of their retirement saving. A cash balance plan, when wedded to a standard workplace retirement plan that features profit sharing, may enable a business owner to save much more for retirement annually than the low contribution limits of an IRA would ever allow. If contributions are very large, the yearly tax savings linked to the plan could even reach six figures. 

The Saver’s Credit. Lastly, the federal government provides a significant tax credit to encourage low-income and middle-income households to save for retirement. The Saver’s Credit can be as large as $2,000 each year. Joint filers with adjusted gross income (AGI) of $63,000 or less, heads of household with AGI of $47,250 or less, and other filers with AGI of $31,500 or less may be eligible for the credit, which equals either 50%, 20%, or 10% of their annual workplace retirement plan or IRA contribution, depending on their respective AGI level. Taxpayers contributing to ABLE accounts are also eligible to take the Saver’s Credit, so long as they are the designated beneficiary for that account.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

 

Retirement Questions That Have Nothing to Do With Money


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Think about these matters before you leave work for the last time.  

Retirement planning is not entirely financial. Your degree of happiness in your “second act” may depend on some factors you cannot quantify. Here are a few of those factors as well as the questions they may end up provoking in your mind.

Where will you live? This is a major factor in retirement happiness. If you can surround yourself with family members and friends whose company you enjoy, in a community where you can maintain old friendships and meet new people with similar interests or life experience that is a definite plus. If all this can occur in a walkable community with good mass transit and senior services, all the better. Moving away from the life you know to a spread-out, car-dependent suburb where anonymity seems more prevalent than community may be a bad idea. 

How will you get around in your eighties and nineties? The actuaries at Social Security project that a quarter of today’s 65-year-olds will live to age 90. Some will live longer. Say you find yourself in that group. What kind of car would you want to drive at 85 or 90? At what age would you cease driving? Lastly, if you do stop driving, who would you count on to help you go where you want to go and get out in the world?

What will you do with your time? Retirement is not about leaving your old life behind, it is about enhancing the life you have created. It is about writing a new chapter in your life, informed by wisdom and experience. What will that chapter look like? What narrative will unfold for you? Too many people retire without any idea of what their retirement will look like. They leave work, and they cannot figure out what to do with themselves, so they grow restless. Certainly, you do not want this to happen to you.

If your life, identity, and social circle revolves around your work, then maybe you should ignore any received wisdom that tells you to retire at a certain age and keep working. On the other hand, if you have goals and passions in mind that you need to pursue – dreams you need to fulfill away from your career or business – then you definitely have the “raw material” to write that next chapter in your life story and retire with purpose.

How will you keep up your home? At 45, you can tackle that bathroom remodel or backyard upgrade yourself. At 75, you will probably outsource projects of that sort, whether or not you stay in your current home. You may want to move out of a single-family home and into a townhome or condo for retirement. Regardless of the size of your retirement residence, you will probably need to fund minor or major repairs, and you may need to find reliable and affordable sources for gardening or landscaping.                     

Will your relationships with family and friends change? Should you move nearer to your children or other relatives? If you have grandchildren, what kind of role do you anticipate playing in their lives? Your significant other may spend more of each day with you than he or she has in years; that may be welcome, or it may take some adjustment.

These are the non-financial retirement questions that no pre-retiree should dismiss. Think about them as you plan and invest for the future.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

The Art of Managing Retirement Assumptions


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A retirement plan is built on a set of assumptions that can’t be validated until it’s too late. One key to successful retirement planning is carefully setting assumptions and revising them often.

Retirement calculators make it so easy. Pick a retirement date. Estimate your living expenses in retirement and choose an inflation rate. Figure out a rate of return for your investments. Guess how long you think you’ll live. Put these assumptions into the calculator, and it will tell you just how much you need to have at retirement in order to receive the income stream you desire.

The problem is your assumptions could be off. And if they’re off by just a little, they could skew the result by a significant amount over your remaining life. Consider this:

  • If a portfolio withdrawal rate is set to last to age 90 and you make it to your 91st birthday, the plan failed. You can’t do retirement projections without making some assumptions. But most of the self help tools out there make assumption-setting seem too easy. Some even have default settings, which imply that the metric in question — a 3% inflation rate, for example — is what any reasonable person would choose. To change it would be to go against the conventional wisdom, a scary proposition for anyone who isn’t even sure what the inflation rate is based on.

For example, people often:

  • Underestimate retirement spending. Most people have not tried to estimate how much money they will need for retirement. Those who have calculated this amount often underestimate what they will need to maintain their pre-retirement lifestyle in retirement.
  • Don’t plan for contingencies. Many workers will retire before they expect to because of disability, job loss, or the need to care for a spouse, parents, or other family members.
  • Underestimate health care. Many people underestimate their chances of needing long term care.
  • Take the cash. Although people find guaranteed lifetime income attractive, they usually choose to receive retirement plan benefits in a lump sum, failing to recognize the difficulty of self-insuring longevity.
  • Fail to explore investment options. Many workers misunderstand investment returns and how investment vehicles work.
  • Underestimate income. Workers misunderstand what their primary sources of income will be in retirement, and may be disappointed when trying to live on the income available to them.
  • Don’t seek help. A significant number of retirees and pre-retirees do not seek the help of an advisor, yet they indicate a strong desire to work with a qualified professional.

Here are some things you can do to get ready for retirement:

  • Establish initial assumptions that are as accurate as possible. This requires considerable knowledge and judgment — the opposite of “pick a number.” Get some help.
  • Revise the assumptions going forward to keep the plan on track. As new information comes in and the plan plays out, the original assumptions may need to be changed and the plan revised accordingly.
  • Get help. Advisors are experienced in setting assumptions and can help you set reasonable assumptions for your particular plan. Consider the following issues when discussing assumptions with your advisor.

Reasonableness of the assumption. This is one of the main challenges for people doing retirement planning on their own: they simply don’t know what is reasonable, especially when it comes to financial matters. Is it reasonable to expect a consistent annual 6% rate of return over the next 30 years? Is a 3% inflation rate realistic if the mortgage is paid off and the bulk of your spending in retirement is on food, energy, travel, and health care? Are tax rates likely to go up, down, or stay the same?

Potential consequences if you’re wrong. Some assumptions carry such drastic consequences if they are wrong that it influences how the assumption is set to begin with. Outliving one’s life expectancy is just about the worst, because by the time you find it out, it’s too late to do anything about it. This is why most advisors recommend a life expectancy of 90 to 100 years rather than the average life expectancy past which half of all people will live. Underestimating health care needs can be another disastrous assumption.

The interplay of multiple assumptions is that some assumptions impact one another. For example, retirement age and life expectancy determine how many years you have left to save and how long the portfolio must last in retirement. By extending one, you shorten the other, and vice versa. Two other assumptions that impact one another are estimated expenses and life expectancy: the longer the withdrawal period, the less annual income you may receive, and vice versa — unless you adjust something else, such as the expected rate of return. The permutations are endless and may be one reason people get bogged down with retirement planning.

At the same time, you have information that may influence the assumptions that should be used. For example, you may decide to shorten or extend the life expectancy assumption based on what you know about your particular family history, health status, and lifestyle. Another important factor is your willingness to revise your goals if one or more of the major retirement risks should threaten to play out. Ask yourself if you would be willing to work longer (or go back to work if already retired) or lower your standard of living in order to either save more now or reduce expenses in retirement.

When planning your retirement, visualize your life all the way through and establish appropriate assumptions for each phase, including a final phase that may require several years of living assistance or nursing care. Collaborate with your advisor. You and your advisor each have information and insights that can increase the accuracy of assumptions. Your advisor’s understanding of the markets and the economy, his experience with clients who are already retired, and his number crunching ability can give you a professional advantage over web-based retirement calculators designed for individuals to use on their own. The less willing you are to revise your goals, the more conservative the assumptions need to be.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

 

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Copyright © 2018. HFG Wealth Management, LLC. Investment advisory services offered through HFG Wealth Management, LLC – An independent Registered Investment Advisory firm registered with the SEC. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Therefore, any information presented here should only be relied upon when coordinated with individual professional advice. [ more disclosures ]