News

Divorce is one of those life-events that can have significant effect on your near-term and long-range finances. Not only is the separation of income and assets, creating two new households and the variety of adjustments and transfers trouble enough for most people, but the pitfalls involved could be significant if you’re not careful.

One trap could exist with the family residence. If one spouse, (say the husband), quit-claims the deed on the house over to his ex-wife, but she is unable or not required to refinance the mortgage and get the husband’s name off the loan, he is still liable for the debt against it. Any problems or default on the loan could legitimately affect his credit. Similarly, the spouse remaining in the marital home may be wholly unable to afford the expenses of remaining there, even with mandated child support and (temporary) alimony. Later, there could be a nasty capital gains tax if the gain over cost basis is more than $250,000, even as a primary residence. Similarly, divorcing couples who need to sell investment property as part of the divorce agreement may run into even nastier depreciation recapture taxes.

Liquidity and cash flow are another frequent problem. Does either spouse have enough liquid assets to cover income shortfalls? What if they overspend their income just to pay the bills? Invading retirement assets could not only create more and unnecessary) federal and state income taxes, but if withdrawal is before age 59 ½, there are additional penalties to pay as well.

Mistakes are often made by not updating beneficiary designations after the divorce is final. With one situation we encountered, a divorced woman had failed to change the beneficiary on a substantial medical lawsuit annuity from her ex-husband to her siblings. When she died unexpectedly, guess who got the remaining money? Not the sibilings. They were extremely unhappy about the situation but there was nothing they could do. Similar problems occur in life insurance policies. Do you really want your ex getting a big payout if you don’t come home one day?

All of these point to the need for a full understanding of the financial aspects of your divorce. The money saved in avoiding critical mistakes in the long-run could make the difference in whether your final settlement works – or it doesn’t. If you don’t know the financials, consider adding a financial professional to your divorce team.

Within the recently-approved RI budget were key changes to the State estate tax and Medicaid qualification rules. These changes could significantly impact retirement and estate planning for those nearing or in retirement.

The first change is to the estate tax exemption. Back in 2001, Congress passed tax legislation to attempt to phase-out the Federal estate tax for the vast majority of US citizens. Rhode Island quickly passed its own estate tax bill, effectively decoupling from the Federal law, because the RI General Assembly foresaw a potential decrease in state tax revenue, therefore instituting an exemption of $675,000. In addition, unlike the Federal law, (where just the overage above the exemption is assessed a tax levy), the entire estate value would be subject to the RI estate tax. (This is often referred to as a “cliff-tax”). Until the recent change, Rhode Island was one of the worst states in which to leave an estate subject to tax. Over the past decade, the limit had gradually increased to $921,655, but was still significantly below the Federal exemption of $5 million.

Presumably in response to the exodus of RI retirees to other states that were more “tax-friendly”, the General Assembly significantly raised the estate tax exemption limit to $1.5 million; about the middle of the pack nationwide. In addition, the Assembly dropped the “cliff-tax” provision, so only the estate value exceeding the exemption will be taxed, not the entire estate.

Another important change involves the so-called “Lady Bird” life-estate deed in Medicaid planning. Prior to this change, a person could transfer ownership of their home to another person but retain the right to use the property for the rest of their lifetime. In addition, the (former) owner retained all rights to sell, mortgage or dispose of the property. This technique had been an effective Medicaid planning tool to protect the house from future liens if the homeowner were to apply for Medicaid benefits. Now, though the primary home is not counted as an assessable asset on a Medicaid application, (as long as the applicant intends to return home or has a dependent living there), this particular life-estate transfer can be reversed and the State can place a lien on the property that must be satisfied before the property passes to heirs. All is not lost however; there could be other planning strategies available.

These recent changes demonstrate the importance of periodic estate planning reviews. If you are unsure how these changes may affect your estate and future financial planning, give us a call.

With high school commencements right around the corner, the reality of paying for college costs this coming September may be front of mind for college-bound seniors and their parents. Interestingly, a couple of significant announcements in the college loan arena have recently surfaced.

First are the new interest rates for loans. Last August, the President signed the Bipartisan Student Loan Certainty Act of 2013, which set new policy on college loan interest rates. The purpose of this legislation was to peg the interest charged on Federal Direct Stafford and PLUS loans more closely to prevailing Treasury rates at loan initiation and thereby a hopefully more-affordable payment requirement for the life of the loan. Recently, on May 7th, the US Treasury held a 10-year note auction that resulted in a high yield of 2.612%, therefore the corresponding rates for the upcoming year on college loans could be 4.66% for Stafford loans, 6.21% on graduate loans and 7.21% on PLUS loans. Under the Certainty Act, borrowers from July 1, 2014 thru July 1, 2015 would see these rates fixed for the life of the loan; a critical benefit.

Of course, while this legislation is welcomed by new college students and their parents, it doesn’t do much for those already in debt and who have loans from past years on their personal ledgers. For these folks, Senator Elizabeth Warren (D-MA) is beating the Congressional drum for further legislation. This past month, she introduced a new bill entitled; Bank on Students Emergency Loan Refinancing Act, due to be considered by Congress this coming month. The chief benefit of the proposal would be to let all federal borrowers of college loans refinance their college-related debt into new, lower rates to make repayment more affordable. Warren feels that allowing past borrowers to refinance their loans into better rates and terms could help ease the repayment burden and allow such consumers to again participate in national economic growth through spending, and purchasing homes. Without such help, Warren maintains, a critical element of our economy may be an anchor on our national growth.

Current college students, graduating high-school seniors and their parents may want to keep an eye on the progress of this legislation. If you have a college-bound high school student or know someone who’s concerned about college costs and how to pay for college without going broke, give our office a call.

This week, we received an email from a client who was concerned about whether a market collapse was imminent. Her concern arose from commentary and articles she had read from “market experts” who were predicting large declines in the coming year, including suspect commentary by the famous Warren Buffett (although Buffett has always stated he can’t and doesn’t predict what the market will do).

If you pay any attention at all to the financial media (something we don’t recommend you spend much time on) you have no doubt noticed a great deal of discussion about whether the financial markets are overvalued, whether bonds are ripe for decline and if a correction of some sort is just around the corner. We see these commentaries too (after all, this our job to keep an eye on things) but we keep in mind that this sort of discourse is part and parcel for Wall Street and the financial media, every day-week-month-year for as long as there has been financial news.

It would be nice if we could somehow see into the future and anticipate what the market might or might not do. History has clearly shown two important facts for everyone to keep in mind; 1) Forecasters are usually wrong and when they’re right, it’s luck, not forecasting skill, and 2) There will always be someone predicting bad news is imminent and bad news often sells well to a worried public. There’s always something to worry about! Too much of such worry could derail you from your financial plan and meeting your objectives.

It is certainly possible that the market could swoon over the next 12 months, however we have no way of predicting when or how or how much, or even when would be a good time to “get back in” (the other question to ask in these discussions). And while we can’t predict such things, neither can anyone else in a reliable, credible way. As a sign in our conference room clear states (and to which we adhere); “We cannot direct the wind, (but) we can adjust the sails.” This is a good reminder to all of us to not pay too much attention to market action and forecasts, but to keep our eyes on the horizon and our focus on our goals and what we can control. Proper asset allocation aligned with your goals and risk tolerance and a focus on the long-term are good antidotes to market anxiety.

In the world of personal financial planning, there are often generalizations that are discussed on financial talk shows, whether on radio, television or website blogs and articles. Reading these for informational purposes could be a good idea, but consumers need to be careful about implementing such ideas and strategies. Sometimes matters may not turn out as expected.

As an example, we’ve been working with an elderly client in his late 80’s. Since he doesn’t have any children, this client (whose assets are significant) is choosing to leave his estate to an elderly sibling and thereafter to a middle-aged nephew. Any remaining assets after the nephew passes are to go to a charity. In this situation, the elderly sibling and nephew are disabled and receiving government benefits, so the client’s assets will remain in a trust to prevent losing those benefits.

The issue here is the client has a large Traditional IRA which will likely still hold significant value when he passes away. Normally, the sibling and nephew might be beneficiaries on this IRA account and therefore would take annual Required Minimum Distributions based on their lifetimes. Future problems might occur, though, because taking possession of the inherited IRA might disrupt their government disability benefits, something no one wants.

The alternative solution is to make the Trust as the beneficiary of the IRA. The advantage here is Trust still protects the remaining value of the account (as an inherited IRA owned by the trust) from affecting disability benefits. The downside is that the Required Distributions now have to be accelerated to just 5 years instead of the life expectancy of a living-person beneficiary and those distributions will be taxed at the much higher Trust marginal tax rate, not the potentially lower rate of the beneficiary and over a longer period of time. Solving these conflicting solutions will require careful analysis to attempt to minimize the taxes paid in this situation.

Tax and estate laws are continually changing and may even affect those who believe their estates are modest. Even one or two small strategy changes could mean thousands of dollars in taxes saved; more money that could pass to your heirs and intended bequests. Take the time and invest a little in reviewing your estate plan with an experienced estate planning attorney or financial professional. Call us if you would like a review of your financial plan or investment asset allocation.

With interest rates at ultra-low levels today, clients often ask us how they can get their cash, in checking or savings accounts, or bank certificates of deposit, to “work harder for them”. In fact, we were recently speaking with a new client about how to arrange her finances after her divorce settlement. One of the items discussed was how much cash to keep as a liquid emergency fund. Since she had a stable job and modest expenses, we suggested 3-4 months worth of expenses as a contingency fund. If something came up, she wouldn’t have to dip into her longer-term investments accounts. She frowned at this idea, sniffing that, checking accounts “weren’t paying anything” and she was “losing” by keeping too much in cash.

Having ready cash is a core for short-term goals and liquidity, (as well as a measure of risk-management) is a key concept in effective financial planning. The client above may have opted to commit all but a small amount of cash to something less liquid in the name of squeezing out a percentage more in earned interest. All well and good, but for the relatively insignificant amount of interest earned, there could be a greater penalty in the form of illiquidity and the absence of ready cash if something unseen and unexpected occurs.

We see this all the time in our daily lives. The car breaks down and needs an expensive repair (just when we’ve committed to paying down the credit card(s)), the old washer gives up the ghost and needs to be replaced, or how about a heavy rainstorm that unexpectedly causes rivers to flood and your basement is now a swimming pool? Certainly would be a good time to have some cash to fix any of these issues.

Job loss and outsourcing is all too common today. Your employment may be secure for the moment, but corporations and small businesses alike have discovered that “lean and mean” is the way to go today to keep profits growing, so many formerly secure jobs are in jeopardy or whole divisions are being consolidated. With the job market still tenuous, having several months of cash to pay the bills and buy groceries could be the difference in your family’s financial life.

Low interest rates are tough on savers, but remember that a main purpose of ready-cash is to provide security and keep your financial ship afloat and sailing forward during rough seas.

In today’s difficult employment market, many people in their 50’s suddenly find themselves outsourced and out of a job, perhaps when they were hitting their so-called “peak earning years” or when facing multi-whammy obligations of mortgages, college expenses and adult-children weddings . Of course, this is also prime-time for ramping up savings for retirement, which may be less than 10-15 years away. What does one do when faced with suddenly having no working income, maybe some severance pay, and the daunting prospect of keeping your financial plan on course? Here are some ideas:

• Circle the wagons with your family. Discuss the new financial realities and how everyone can help keep household expenses down.
• Take stock of available resources and make a new budget. Determine unemployment benefits and how long your severance pay (if available) might last. Prioritized expenses, separate “needs” from “wants” and put off major purchases, if possible.
• Make “Job Hunting” your new full-time job. If out of the job market for awhile, consider hiring a consultant to help you with polishing your resume and job-search activities, (a lot has changed over recent years).
• If you have children in college, know that financial aid is an “every-year” process. Inform the college financial aid office of your new circumstances. Chances are your student might qualify (more) aid in the following year(s), if not this year, if income matters haven’t improved.
• Remember to take your employer retirement account with you via a qualified rollover to an IRA. Consider adjusting your asset allocation to a more conservative stance to avoid worry over market set-backs.
• Revisit your financial plan and consider alternative goals and objectives if your job prospects and new saving realities don’t improve.

Wealth Management Resources can be helpful to those in this kind of difficult situation. If you’ve been outsourced suddenly, give us a call for a free consultation to see how you can stay on-track toward your retirement and other near/long term goals.

We frequently get phone calls at our office about Social Security planning, both from clients and other pre-retirees. Despite a vast amount of information at the Social Security Administration (SSA) website and other online resources, seniors and pre-retirees still seem confused by their options with this very valuable retirement income program. Here are some interesting items you may not know:

• Although many people want to file for benefits at age 62, most financial experts and the SSA itself state it is generally better to wait until your Full Retirement Age (FRA) normally 66-67 to file for benefits (except maybe for married couples, see below). The SSA reduces your benefits permanently if you file earlier than your FRA.
• You cannot “buy back” higher benefits anymore. Prior to 2010, if you filed early, then later changed your mind and wanted higher FRA benefits, you could pay back the income you’ve received and get a “do-over” for your Social Security income election. This little-known technique was disallowed in 2010.
• Prior to your FRA, if you file for benefits and continue to work, some of your benefits are withheld (roughly $1 for $2 earned). The withheld benefits are not lost, however. They will be credited back to you for future benefits once you’ve actually reached your FRA.
• Divorce may have significant impact on Social Security planning. If you’ve been married at least 10 years, you can claim your own benefit or 50% of your ex-spouse’s benefit, (whichever is higher). Whether or not your ex-spouse remarries has no effect on this option, though if you remarry, your spousal benefit with your former spouse is no longer available. In addition, if you are the second, third or even fourth spouse in line, as long as you’re married for 10 years to that one person, you still have this option. (If you are the fifth spouse though, you’re out of luck!)
• In general, a married couple might maximize their collective benefits by coordinating their benefits and timing of their individual filings. As an example, a younger wife may apply for her reduced benefit at 62, add on the spousal benefit at her FRA at 66 (as long as her husband files, even if he suspends to age 70) and then she can claim higher survivor benefits if he predeceases her. By using smart strategies, the couple may realize more aggregate benefits from Social Security over their combined lifetimes than if they filed for benefits individually and without planning.

Social Security benefits are significant assets to a retirees. If you’re unsure about how to strategize your retirement and Social Security income, give us a call and let us assist with our experience and specialized analysis tools.

In his recent State of the Union speech, President Obama introduced a new initiative called the “myRA”, designed to encourage Americans to save more, particularly for retirement. The premise behind the myRA is that many Americans work where traditional payroll-deduction retirement programs are not available. Even though such workers are able to save for retirement on their own through a Traditional IRA or a Roth IRA, many do not.

The myRA attempts to solve many of these issues. Under the proposal, these accounts would operate much like a Roth IRA and are established by businesses for their employees. Contributions are made via payroll deduction and contributions can be as little as $25 to start, and $5 thereafter. Account owners would be able to take their myRA with them if they change jobs, or roll over the account into a normal Roth IRA at any time. There would be only one investment choice; an ultra-conservative Fund modeled after the Federal Thrift Savings Plan’s G Fund.

The myRA program has some advantages, but also some drawbacks. The payroll-deduction feature is a strong plus. As a ‘starter’ retirement account, many workers who have little investing experience may be motivated to save in the myRA. And any kind of savings for retirement is better than none at all.

Some aspects are troubling. Access to contributions without penalty is not a good idea; raiding such accounts for short-term spending may be too tempting. The anticipated low returns may discourage those who feel their money isn’t growing enough. Finally, offering a new retirement savings vehicle isn’t going to solve the significant retirement income/Social Security problem in the US. Workers may need more incentive (or saving capacity above just meeting monthly bills) to put more away for the future, not another savings vehicle.

Right now, college-bound high school seniors and their parents are putting the finishing touches on their financial aid applications for the coming academic year 2014-2015. A significant concern, of course, is the cost of college, how much aid the family may qualify for, as well as how much in loans and savings will be needed to meet college expenses over the next four years (or more!).

One recently implement tool that could be useful to parents of college applicants as well as to those with high school juniors and sophomores, is the Net Price Calculator. The “Net Price Calculator” (NPC) is a Federal requirement on each college’s website, designed to provide families with an estimation of their out-of-pocket obligation for the student to attend that college, based on data entries of parental and student income and assets. Most NPC’s can be accessed via the college’s own website or through the College Board, www.collegeboard.org.

Intended to provide a general idea of what a family might have to pay, it’s important to remember that these are estimates only; each college has its own specific criteria and the results provided are not guaranteed. In addition, even if two families enter similar figures for income and asset values, differences such as the students’ GPA’s, SAT scores, class rank and other criteria may cause the results to differ between the families by many thousands of dollars.

Despite the Federal government’s attempt to make college aid more transparent, there is still a significant amount of secrecy about how colleges decide what the financial aid award letter may look like. Depending upon the college’s enrollment goals, the criteria used may also change periodically. The NPC is a helpful tool, but families may still have to wait until March or April to see the final award letter before making the firm decision.

For parents with high-school juniors and sophomores, a useful technique to uncover more information may be to pay a visit to each school’s financial aid office during campus visits and ask the Aid Officers directly what specific criteria is used. You still may not get more than a general answer and certainly not a firm commitment, but the interview may be more productive than the on-line calculator.