Category Archives: Estate planning

Strategies and tactics for efficient management of assets in your estate

Estate planning for the digital age

Posted on March 2, 2012 | Leave a comment

As people of all ages migrate to electronic interaction with their financial accounts (bank, investments, credit cards, insurance, etc.) a potentially large headache may be created for  estate executors.

Often, when someone dies, the executor expects to gather account statements and bills as they are delivered in the traditional mail. But with many people now choosing electronic delivery, the paper trail to identify the various accounts can be hidden in cyberspace.

As this article in the January 7 Seattle Times discusses, more and more people need to set up a process for managing username and passwords for access to secure accounts online. This needs to become a regular, proactive part of your estate plan since passwords often change and new online interactions develop frequently.

And it’s not just the secure online account information that needs to be tracked and stored.  You need to make sure that you have someone act as your digital power of attorney and allow him or her to get access to your list of login IDs and passwords. With this information, this person will be able to retrieve all of your electronically saved documents.

If you are unsure whether your parents or your kids – or anyone else you may be executor for – are managing accounts online or keeping track of their login information, ask them and make sure they update the information and store it in a safe place that you know about.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

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Will.I.Need

Posted on March 4, 2011 | Leave a comment

With apologies, to WILL.I.AM, the singer for the Black Eyed Peas, this article is about an issue that we often identify when we speak to folks about their personal financial situation: they usually don’t have an up-to-date will.

Everyone should have a will and basic estate planning documents (powers of attorney for health and financial matters, child care authorization, etc.). These are fundamental elements of a financial plan regardless of age or level of assets.

  • Without a will, the state will make the decisions about who takes care of your children and how your possessions are distributed to others. (Do you want the state to essentially write your will for you?)
  • Without a living will to manage your health care issues, if you are severely injured, and have no real prospect of getting better, you may be left on a respirator or other life-prolonging device even though it was not your intention to do so.
  • Without a health care power of attorney, you will not have a representative to help communicate health care decisions to your doctors if you are unable to do so.
  • Finally, without a financial power of attorney, a representative of the state could make decisions about your financial issues if you are unable to.

Having a will does not help you avoid probate. Probate is “the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person’s property under the valid will.” In states with high probate costs (like California), placing assets in a trust can help avoid the costs of probate. In Washington state, because probate costs are low, most attorneys don’t recommend that you set up a trust unless you have substantial assets or privacy concerns.

It is not difficult to have a will created. Most reputable estate planning lawyers in the area charge around $500 for a simple will and set of directives. Best of all, if you work with an attorney, he or she will see that your will is signed and witnessed so it is valid in Washington.

Do it yourselfers can buy a software program like Quicken Willmaker or Nolo templates and use it to create estate planning documents. Often we see that folks will complete these documents and print them out, but they won’t bother to get them witnessed by a third party. This makes them null and void in Washington.

So if you haven’t done so, make a resolution to create or update your will this month … so you can get past having to say “WILL.I.NEED”!

P.S., Keep in mind that assets that pass to designated beneficiaries (401k, 403b, IRA, life insurance death benefits, etc.) do not follow instructions in a will. They pass to whoever is listed as the beneficiary regardless of whether that designation conflicts with your will or your current preference.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

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Ten things to know about estate planning after the new federal tax bill

Posted on January 25, 2011 | Leave a comment

This post is provided by attorney Alan Macpherson and his colleagues of the Trusts & Estates Group at Gordon Thomas Honeywell LLP.

Alan Macpherson

After almost a full year of complete uncertainty about the estate tax, Congress abruptly adopted a bill in December. Here’s a quick recap:

1. The new law is good for just two years.
2. The Federal exemption is now $5 million per estate. The maximum estate tax rate is 35%.
3. We still have a Washington state estate tax, with an exemption of $2 million per estate. The maximum estate tax rate is 19%.
4. A surviving spouse inherits the unused exemption of the deceased spouse. So if our friend Lars leaves all his estate outright to wife Kyra and so uses none of his exemption, Kyra’s estate has Lars’s exemption as well as her own. You’ll hear this referred to as “portability” of the exemption.
5. Despite #4 just above, there are still a couple of good reasons to place Lars’s estate in trust for Kyra rather than giving it to her outright. It can preserve the Washington exemption of the first estate. And it can lessen the chance Kyra’s next beau will end up with the fruits of Lars’s labor. Hey, nothing sexist here—it works the other way around too, and it’s our observation that men are more vulnerable than women when left alone.
6. There is still a tax on generation-skipping transfers (GST), but only to the extent they exceed the $5 million GST exemption.
7. There is still an annual gift tax exclusion—$13,000 per giver per recipient is completely tax-free.
8. The lifetime gift tax exemption, for amounts given in excess of the annual exclusion, has been increased from $1 million to $5 million.
9. An estate and its heirs still get a full step-up in income tax basis, for all but a few selected assets like retirement accounts, installment contracts, and annuities.
10. There are other income tax benefits, mainly extension of the maximum 15% rate on capital gains, and of the maximum 35% income tax rate.

For more information, please contact Alan Macpherson at amacpherson@gth-law.com, or 253-620-6468.

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Posted in Estate planning, Taxes

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Six Rules for Including Rental Real Estate in Your Investment Portfolio

Posted on September 28, 2010 | Leave a comment

For many people, investment real estate makes up a large percentage of their net worth. Rental property has been a more consistent part of the financial picture for our clients than we ever assumed would be the case.

From a financial planning perspective, investment real estate provides nice benefits:

  • If the mortgage is paid off, rental income becomes an important source of positive cash flow.
  • Cost of ownership can be partially offset by tax benefits.
  • Working on rental houses can be a rewarding task in its own right, as owners can see the relationship between their efforts and increases in either the rent or the value or sale price of the house.

There are downsides, however, to having too much real estate in your investment portfolio. Some of them include:

  • Lack of liquidity. One of our clients who owns a lot of rental homes always says “there is a time to buy and a time to sell.”  If you need to sell a house and you can’t find any buyers, or you can only sell it for less than you think that it is worth, the house may not have been a good investment.  If your net worth is large enough that you will owe estate tax, your executor may have to sell some of your houses to pay the taxes due nine months after the date of death. This could force sales at prices that are much lower than the market.
  • Unknown amounts of additional investment. Sometimes systems fail or renters damage the property in unexpected ways. This can force you to invest more in the house than you had expected.
  • Difficulty with maintenance. Landlords may not be able to keep up with, or enjoy, maintenance forever. If a professional property manager becomes necessary, cash flow from the property decreases.
  • Unknown exit strategies. When you tire of the burdens of ownership, or you die, do you have a plan for what to do with the property? Will you gift it to a son or daughter? Will you sell it?

Our recommendations

We believe owners of investment real estate should consider these guidelines.

1.       Keep real estate holdings under 50% of your investable assets. Having a combination of property and securities investments gives you the liquidity that you need to pay estate or other taxes that could become due if you die while still owning the rental real estate. It also allows you to sell when it is most advantageous.

2.       Make sure you have the time and skills to manage the property.  This helps reduce the risk of ownership and allows you to feel comfortable making decisions about upgrades.

3.       Know who can help you.  If you no longer want to climb on roofs or unclog toilets at 2 a.m., find a reputable property manager who can take over the day-to-day tasks of managing your investment.

4.       Have an exit timeline.  If you don’t want to work on your rental houses in retirement, then build a timeline with the steps that you will take to prepare it for sale and then give yourself a few years to sell it.  This will allow you to maximize the price that you will receive for the property.

5.       Know who’s next.  If you are planning to gift the real estate to a son or daughter, make sure that they want this gift and that they are able and willing to keep the house up.

6.       Pay yourself first. If you put significant time into the property, consider that an expense that needs to be compensated. What’s a reasonable wage for the work you do to maintain your rental properties? Only after including this consideration in your rent are you truly profiting from the experience. This is especially true when market appreciation is minimal. If you don’t receive an exceptional reward via price appreciation at the sale of the property, all your sweat equity may go uncompensated.

What is your exit strategy? Do you have a long-term plan for the role rentals play in your retirement income?

What challenges or rewards have rental properties brought to your financial picture?

~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP® — Tacoma, WA

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Posted in Commentary, Estate planning, Financial planning, Retirement, Taxes

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The Critical Role of Life Insurance in Financial Planning

Posted on September 3, 2010 | Leave a comment

As comprehensive wealth managers, we believe that protecting risks through insurance is a foundational element of a financial plan. Investments are important and draw most of our ongoing focus, but without insurance, savings and investments can be lost.

As author Nick Murray writes, “We insure against what can go wrong in order to acquire the luxury of investing for what can go right.”

Before you consider how much you need to save to retire comfortably or fund a child’s education, it’s important to make sure that your risks are protected in case something does go wrong. Unfortunately, we all know someone who has died well before their time. We’re not all as invincible as we like to pretend.

It’s not a pleasant scenario to think about, but not doing so can have serious consequences.

Roughly 70 million adult Americans have no life insurance coverage at all. Many others have employer provided coverage that provides a nominal death benefit—i.e. $50,000 or one or two times annual salary. In most cases, especially with people who are not near the end of their career, this is not enough to provide needed financial security to those left behind.

Consider your needs based on the following three scenarios:

You’re Married With Kids and a Mortgage. Having kids and debt are the most obvious reasons to own life insurance. If you and your income were suddenly gone, would your spouse and kids be okay financially? Life insurance replaces lost income to help make sure those who depend on you will be provided for, no matter what life throws your way. You don’t want to force your spouse to find someone else to help pay bills, save for retirement and put the kids through college. Inexpensive term life insurance can protect against this risk until your family is secure enough to get by without your income.

You’re a Small Business Owner. Life insurance can help protect your business in a number of ways in the event you, your partner, or a key employee dies prematurely. A buy-sell agreement funded with life insurance allows surviving business owners to buy the company interests of a deceased business owner at a previously agreed-on price. Again, relatively inexpensive term life insurance can protect against this risk.

You’re Likely to Owe Estate Tax. If you’ve built significant net worth, a little planning can save a lot of money in estate taxes. Especially if your net worth is relatively illiquid (i.e., lots of real estate or business value) paying the estate tax bill may be difficult. Estate tax payments are due nine months after death. In many situations, affluent individuals can benefit from the use of an Irrevocable Life Insurance Trust (ILIT) to create liquidity at the right time and save heirs and executors a lot of headaches. In this case, a permanent insurance policy may make a lot of sense.

CPA and IRA expert Ed Slott preaches that life insurance is the best leverage of the tax code: “A small amount of money can create huge benefit that is income tax and estate tax free as long as it is set up outside the estate.”

The amount of net worth excluded from estate tax could be as little as $1,000,000 per person in 2011 if Congress allows tax law to proceed as currently written. Anything above $1,000,000 could be exposed federal tax of 55% in addition to state tax.

To adequately address estate planning needs, it’s important to seek legal advice in the context of an overall financial plan.

How Much Insurance Do You Need?

Decisions about the amount and type of life insurance coverage should come after answering the following questions.

  • If I and/or my spouse dies, how much will be required to replace my/our earnings?
  • Do I need permanent or temporary coverage?
  • Who should be the beneficiary of my insurance policy?
  • Should this insurance be held inside our outside my estate?
  • What is the financial condition of the insurance carrier?

You can get a general sense of how well you are protected by using this life insurance needs calculator. Or, we are happy to review your situation to see how insurance fits into your overall financial plan.

P.S., After initially posting this article, we saw this interesting table:

The chances of premature death are greater than people realize.

Chance of a 25-year-old man not living another 15 years 1 in 42
. . . . . 35-year-old man 1 in 21
. . . . . 45-year-old man 1 in 10
. . . . . 25-year-old woman 1 in 83
. . . . . 35-year-old woman 1 in 36
. . . . . 45-year-old woman 1 in 17

Source: Human Mortality Database, which combines data from US Census and National Center for Health Statistics 2005

~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP® — Tacoma, WA

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Posted in Estate planning, Financial planning, Insurance, Small business

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Alaska Trusts, LLCs offer better risk protection

Posted on June 28, 2010 | Leave a comment

Alan Macpherson is a Tacoma estate planning attorney with Gordon Thomas Honeywell. We have enjoyed working with him on estate and business planning issues for a few mutual clients.

Macpherson recently shared with us a couple of opportunities to provide an extra layer of meaningful risk protection to investors and self-employed individuals (particularly those with above-average liability, like physicians).

One idea is to form and fund an Alaska self-settled trust.  Under the laws of most states (including Washington), a trust one establishes for one’s own benefit is not protected from claims.  Alaska is one of few states that does give protection to “self-settled” trusts; Delaware is another.  To be effective this must be done before large claims arise.

Another opportunity is to place assets in an Alaska limited liability company (LLC).  Alaska’s laws give greater protection that do Washington’s, to the holder of an LLC interest who has claims against him or her.

For more information about the asset protection benefits of Alaska trusts and LLCs, please contact Alan Macpherson at amacpherson@gth-law.com, or 253-620-6468.

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