Cheryl Chapman Henderson, LLC

Tying the Knot Finances

“What should be owned individually or owned jointly?

The average age of a couple getting married today is older: age 31 for a man and 29 for a woman. This often means merging two households. CBS Boston says that if you both own your own home, you may want to think about selling them and buying one jointly, according to its recent article “Couples & Money: Ours? His? Hers?”

If you go ahead and sell one home and move into the other, you need to decide ownership issues. Will you add your new spouse to the deed and add him or her to the mortgage as a responsible party?

Another thing to consider is that marriage doesn’t automatically combine your credit reports. If one spouse has a poor credit report and is getting out of debt, you may want to keep things separate. If you do want to purchase a house in the future, you’ll have one good credit report and one good credit score. If you bring credit card debt or school loans into your marriage, you’re responsible for paying that off yourself.

As far as banking, think about a joint checking account for household expenses and savings. However, you should keep your individual checking accounts if you’re both working, so then you’ll have your own money.

Keep your own credit card, but know that you’re responsible for the payments. You may want to have a joint card for the household purchases.

Any assets you bring into the marriage—like stocks, bonds, mutual funds, and savings—should be kept in your individual accounts. You can talk about using joint accounts for your future goals and tapping into your individual accounts to help you achieve those goals.

Make certain that you’re both taking advantage of retirement plans when available from your employer. Contribute the maximum you can afford.

As far as beneficiary designations, ensure that your spouse inherits your life insurance, IRAs, retirement plans, pensions, and annuities by updating the beneficiary designations. Review your health insurance policies to see who has the better insurance. And finally, you need to redo your estate planning now that you are married.

Reference: CBS Boston (June 8, 2016) “Couples & Money: Ours? His? Hers?”

Do You Have a Powerful Power of Attorney?

“If a financial institution won’t accept the document, don’t take no for an answer.”

In some circumstances, no legal document is more critical than a power of attorney, and it’s one that is full of potential pitfalls.

This form gives a designated person the authority to act on another’s behalf when making financial decisions. It is commonly employed by adult children whose aging parents can no longer act on their own. However, financial institutions frequently make it difficult to exercise that power. The Wall Street Journal article, “When the Power of Attorney Lacks Power,” lists some steps to avoid potential problems.

The most basic powers of attorney cover specific situations. Adult children may want a broader document, which is called a durable power of attorney. This allows them to take over a parent’s finances at any point, giving them the ability to help in the event the parent is no longer able to make important decisions independently. A health care power of attorney covers medical decisions.

Because the power of attorney can be abused, banks are concerned about liability for their customers’ losses and have become wary of accepting powers of attorney. As a result, a number of states have enacted laws requiring them to do so under certain circumstances.

If a parent has a power of attorney, the first step is to determine what kind of power it is. A standard durable power of attorney gives the child the authority to act on the parent’s behalf immediately after the document is signed, but a springing power of attorney doesn’t generally give the child that authority until the parent becomes incapacitated. While parents may prefer the springing POA, it can cause issues for adult children. To use a springing power of attorney, the form may require an adult child to obtain a statement from at least one physician that certifies that the parent is incapacitated, although medical privacy laws can make this hard to do.

Families can frequently avoid problems if parents introduce an adult child with a power of attorney to managers at their bank or financial firm prior to a time of crisis. Some financial institutions ask account owners to sign separate powers of attorney drafted by the firm’s own lawyers, making it simpler for them to administer a standardized form. But that form may require a person to waive his or her right to sue the firm, so read the fine print.

If rebuffed by a financial institution when trying to use a power of attorney on behalf of a parent who is unable to get involved, ask to speak to a supervisor or try another branch.

Some financial institutions may ask you to take actions to assure them that your power of attorney is legitimate—such as to verify the identity of the grantor by securing a so-called medallion signature guarantee from a bank with his or her signature on file. If an adult child tries to use a power of attorney without a parent being present, the bank may ask for a notarized affidavit stating that the document is valid.

Check on your state’s laws. Some states require financial institutions to accept a power of attorney unless they report suspected abuse to authorities or are aware that someone else made such a report. Also, state law may authorize penalties against banks that put up barriers. Financial institutions may have to pay the fees incurred by a family that is forced to hire an attorney to enforce the power of attorney.

Having an experiences estate planning attorney create your powers of attorney will be beneficial in these situations.

Reference: Wall Street Journal (June 12, 2016) “When the Power of Attorney Lacks Power”

Best Places to Retire…Are You There Yet?

“Where to retire is a deeply personal decision that no one else can make for you.”

Kiplinger rated all 50 states based on quantifiable factors that are important to many retirees in “10 Best States for Retirement.” The rankings favored states that are affordable, especially those with lower taxes on retirees and lower health care costs. Then health was considered—both the economic health of each state and the overall health of the population. Finally, the rankings rewarded states with relatively prosperous populations of residents age 65 and up. These ten states are at the top of the rankings of retirement destinations

10.Idaho. The Gem State is rich in natural resources and scenic areas like Shoshone Falls in Twin Falls and Hells Canyon in Riggins. The state's affordability, especially regarding health care costs, makes it easy to stretch retirement savings. There's a statewide sales tax of 6% and a state income tax that goes as high as 7.4%, but Social Security benefits are not subject to state taxes. Also, Idaho doesn’t have an inheritance or estate tax.

9.Arizona. The Grand Canyon State is home to Prescott, 100 miles north of Phoenix. It has an abundant population of 65-and-older residents. While the state has slightly above-average living costs, Prescott is one of the cheapest places where you'll want to retire. In addition, Arizona is one of Kiplinger's 10 most tax-friendly states for retirees. The state's income tax is modest, Social Security benefits and a portion of some other types of retirement income are exempt, and there's no inheritance or estate tax.

8.Florida. “More than 3.5 million older residents can't be wrong.” The Sunshine State doesn't tax Social Security or other retirement income. Also, Florida ranks fifth in the country for fiscal soundness, according to a recent report from George Mason University.

7.Washington. The Evergreen State gets an average of 36 inches of rain per year (the U.S. average is 37 inches), but Spokane sees just half that amount of rainfall.

6.South Carolina. In addition to well-below-average living costs, the tax situation is easy on a fixed income. South Carolina doesn't tax Social Security benefits, offers generous exemptions on other types of retirement income and has no inheritance or estate tax. Plus, property taxes tend to be very low.

5.Alabama. Retirees will love the warm weather, nice beaches, and lots of golf—all at a lower price than neighboring Florida. Health care is 4.5% less there for the average retired American couple. Income tax rates range from just 2% to 5%, and Social Security benefits are exempt.

4.Tennessee. The Volunteer State is a good choice considering every major metro area offers below-average living costs in almost every category of expenses—including health care and taxes. Plus, there's no state income tax. Tennessee ranks eighth of all states for fiscal soundness, according to the George Mason report.

3.Georgia. Warm weather and low living costs make Georgia a peachy retirement destination. Health care expenses are particularly affordable for retirees, ranking in the top 10 states for a retired couple. Plus, Georgia's favorable tax situation makes it one of the 10 best states for taxes on retirees.

2.Utah. The Beehive State has low living costs to offset some unfriendly state tax laws: Utah taxes Social Security benefits. But Utah ranks fifth in the U.S. for the overall health of its 65-plus population, according to the United Health Foundation.

Drum roll please…

1. South Dakota is Number One. Affordability is the main factor for its high placement on the list. In addition to low living expenses and health care costs, it’s one the 10 best states for taxes on retirees. The state ranks third in the country for fiscal soundness, according to George Mason, and Sioux Falls (2) and Rapid City (5) rank among the five best small metro areas for successful aging, according to the Milken Institute.

Wherever you choose to retire, be sure your family and friends are easily accessible.

Reference: Kiplinger (June 2016) “10 Best States for Retirement”

The Big Job of Being an Executor

“Failing to hire and bring in experts as quickly as possible also can become a major headache for executors.”

During the estate planning process, you need to select an executor to carry out your wishes. Insurance News provides some things you should know about the executor’s duties in its recent article, “The Wrong Executor Can Destroy Even the Best Estate Planning.”

Executors sometimes are under the impression that it’s a quick and easy job. This might be the fault of the testator or the person who has executed the will. They select an executor and believe that he or she possesses the ability, acumen, time, and desire to carry out the duties of the position. Many don’t inquire as to whether the executor is interested in and capable of serving, or the chosen executor may be hesitant to say no.

Prior to designating an executor, the testator should understand the role and consider whether the potential executor has the qualities to handle the job. In addition, the testator should discuss the decision thoroughly with the chosen executor so everyone understands the expectations and what is needed to do the job.

A big mistake is an executor’s failure to communicate adequately with the decedent’s family, friends, heirs, and loved ones. People like to be kept updated and to understand why some things have been done or not done. This can help keep peace and family harmony at a very emotional time.

On such example involves family heirlooms. The executor can distribute the assets as he or she wants as long as his or her actions comply with the will, but beneficiaries may have particular interests in specific assets like heirlooms and collectibles. There can be headaches and heartaches if the executor unwittingly distributes an item to another heir who’s not as emotionally tied to the item. It’s best to talk to the heirs and determine their preferences.

Another problem can arise when the heirs aren’t satisfied with the time needed to finalize the estate—particularly if one of the heirs is also the executor. Conduct regular update meetings with all parties who have an interest in the estate.

An executor’s job isn’t simply to distribute wealth—it’s to make certain that all debts and liabilities are discovered and resolved and to handle and finalize the decedent’s day-to-day affairs. The list of the executor’s duties is quite long and includes the following:

• Dealing with the court to probate the will and distribute the assets;
• Collecting all of the assets, which means combing through the decedent’s belongings and records and also dealing with banks, brokerage houses, insurance companies, and the decedent’s employer;
• Valuing assets;
• Keeping the assets safe;
• Handling the decedent’s creditors;
• Maintaining businesses while the estate process is proceeding;
• Winding up the decedent’s last affairs; and
• Filing tax returns and investigating estate taxes.

In many instances, no one is thanking the executor. Rather, they may find fault with his or her actions. Because of this, it’s critical to have a thorough understanding of the job. Also, the person must have the capabilities and the wherewithal to undertake this major responsibility.

Reference: Insurance News (June 2016) “The Wrong Executor Can Destroy Even the Best Estate Planning”

Where's My Pension?

"Think you're owed a pension, but no check is in the mail? Here's how to track down your benefits."

Those lucky enough to have earned a defined-benefit pension are in a great position. This allows them to retire with a steady income stream for life. However, it's no dream when the promised benefits don't appear. And an investigation by the U.S. Department of Labor says that many retirees aren't getting the benefits they've earned. The plans the government has looked at thus far owe more than $500 million to retirees.

Kiplinger's article, "Missing Pensions Costly to Retirees," reports that since last summer the Labor Department has investigated more than four dozen large pension plans and has found staggering results: some of them are not doing a very good job of monitoring retired participants and paying benefits when they're owed. Some plans don't even have the names or ages of many of their participants.

In addition to poor recordkeeping, corporate mergers, spinoffs, and bankruptcies make it difficult for retirees to track down and claim pensions from employers they left years ago. In light of this unfortunate reality, plan members must maintain employment records, plan documents, tax returns, and other paperwork that show they're eligible for a pension. Plus, they must be proactive in claiming their benefits when the time arrives. These plans don't have much motivation to pay benefits when they're due.

If you've earned a pension, hang on to your individual benefit statements and the summary plan description that outlines the requirements for earning benefits. Also, keep your records of employment—including W-2 forms and pay stubs—as well as all of your old tax returns. When you claim your benefits, the plan might say that it's already paid you a distribution, so you'll need your old tax returns to show if that's accurate.

In the event you leave a job before the plan's retirement age, make certain that you have a vested benefit and get the plan's most recent summary plan description. This will tell you the benefits you get in retirement. Update the plan for any changes in your contact info and marital status. If your plan is terminating, make sure you know who's going to be administering the plan. If the plan is sufficiently funded, an insurance company will take over payment of the benefits. If not, the plan will likely be turned over to the Pension Benefit Guaranty Corp.

If you lose track of a pension, go to https://www.pensionhelp.org to find pension counseling projects funded by the U.S. Administration on Aging. Look at your old W-2 to find your former company's employer identification number (EIN)—that can help you find the company. Look for a "notice of potential private pension benefits." This is a reminder from the Social Security Administration to those who've earned a private pension. Plans turned over to the PBGC may be found at www.pbgc.gov/wr or click "find an unclaimed pension" at the site to find out if your name is on the PBGC's list of missing participants. If you've been omitted from your plan's records, you have to document your work history and eligibility for the benefit. If you lack W-2s and other employment documentation, you can get a Social Security earnings statement using Form SSA-7050 for $136.

Reference: Kiplinger's (June 2016) "Missing Pensions Costly to Retirees"

Are You Up for the Big Job of Being an Executor?

"From keys to debts, handling an estate is a detail-oriented responsibility."

Being named an executor of a will is a big responsibility. However, most individuals selected know nothing about what they need to do in the role, according to the recent US News article "4 Tips to Be a Better Executor."

An executor must deal with the estate of a deceased person—including identifying and valuing the assets, paying debts, and disbursing the assets according to the decedent's will. He or she also needs to ensure that the assets are protected during this period.

Here are a few things to know about the role of an executor of an estate.

You're a fiduciary. A fiduciary is the person who's liable if they don't do it right, which means that the person named as executor has to follow the wishes of the will. Any deviation requires approval from the probate court.

You may be required to get some help. In some states, the executor must have an attorney—except in some situations—because he or she is representing other heirs and has some duties to creditors. Wills need to be probated, and an attorney can help the executor with this the process. Executors need to have state-specific information because probate laws vary. In addition, having an attorney helps if there is any contention—like a person who says they have a newer version of a will or who argues that the person named executor is incapable of doing the job. Also, with a large estate, the executor may also want to engage other professionals—such as an accountant to complete the deceased's final tax return, a real estate broker to sell any property in the estate, or an individual who specializes in collectibles to help the process go smoothly. These professionals are paid from proceeds of the estate.

Secure the estate ASAP. Change the locks on the house and collect the keys to any vehicles. Inform heirs and creditors quickly. Executors need to create a legal notice to creditors through publication. The creditors of the deceased have a limited time to make a claim, or else they are barred. Don't pay claims until they've been properly authenticated. You can also negotiate claims with creditors—even after you've determined them to be valid—in order to retain more assets for the heirs.

Communicate with the beneficiaries. It's important to reach out to the beneficiaries to keep them in the loop throughout the process, which may take six months or more. Heirs will ask when they get their money or property. They get their distributions when the executor has made the determination that the proper debts have all been paid. However, partial distribution of the estate may satisfy heirs while the estate is being settled, which may include passing out small, tangible items that don't require a separate appraisal. These items can be distributed easily and quickly, but executors first need to make certain there are assets remaining to pay creditors. Document everything concerning the will, which helps with any disputes.

A fiduciary should be transparent and communicate with the beneficiaries, but it's not a democratic process: you're in charge.

Reference: US News (June 2, 2016) "4 Tips to Be a Better Executor"

Do Your Homework Before You Make Charitable Contributions

"The recent crackdown on four cancer charities is a good reminder to make sure your donations are put to good use."

Sometimes when you hear words like "childhood disease" or "natural disaster," it's difficult to say no to a donation request. But Kiplinger's recent article, "How to Check Out a Charity Before You Donate," notes that the Federal Trade Commission charged four cancer charities with swindling donors out of $187 million. The FTC announced that the Cancer Fund of America, Cancer Support Services, Children's Cancer Fund of America and The Breast Cancer Society allegedly used most of the funds raised to support cancer patients to instead benefit the charities' organizers and family members and friends. These donations were allegedly used for buying cars, cruises, concert tickets, and other things that didn't help patients.

How do you make sure that your donation doesn't end up with the unneedy? Consider the following tips.

Hang up on telemarketers. The charities charged with fraud by the FTC used telemarketing calls, direct mail, and websites to ask for donations. A call from someone soliciting a donation puts you on the spot. You might feel pressured to make a donation, but don't rush to say yes. Decline any requests to give over the phone. Telemarketing companies that are enlisted to solicit donations on behalf of charitable organizations usually retain a significant portion of the funds that they raise. Eliminate the middleman and contact the charity directly to make a donation.

Don't wait for charities to come to you. Eliminate the pressure to give to an organization that contacts you and decide which causes are important to you. Identify charities that are addressing those causes. Create a giving plan to avoid making spur-of-the-moment donations.

Do you research prior to giving. Just because an organization says it's doing good works doesn't mean it actually is. You should find out what you can about how an organization will use your money before you make a donation by checking third-party evaluations and ratings sites like the Better Business Bureau's Wise Giving Alliance, Charity Navigator, and Charity Watch. These sites look at charities' finances, governance, and effectiveness. Be concerned if an organization is spending more than 25% on overhead.

Don't send cash. Ever! The FTC advises you to make your donations by check or credit card for security and tax purposes. Also, request a receipt that indicates the donation amount and states that it is tax-deductible.

Reference: Kiplinger's (June 2016) "How to Check Out a Charity Before You Donate"

Win-Win With Charitable Trusts

"If you lost 80% of your wealth due to a financial calamity, would you spend the other 20%, or would you protect it and invest it to provide your income?"

If you have several substantial bequests to charities in your will, this Kiplinger's article asks if it would be better to see the charity use the money during your lifetime—when you could get some personal gratification from it. Add to that a big income tax deduction!

The article "Are You Losing Big Tax Savings on Your Charitable Bequests?" says that you shouldn't be too concerned that this approach might leave you short on funds for living expenses now.

Transfer the money that you're planning to leave to charity at death to a charitable remainder trust now. With a charitable remainder trust, you'll retain an income from the trust and whatever principal that's left when you pass away would go to the charities designated in the trust. The income would be a fixed percentage of the initial contribution to the trust (a "charitable remainder annuity trust" or "CRAT") or a fixed percentage of the value of the trust as of the last day of the prior year (a "charitable remainder unitrust" or "CRUT").

The nice thing about using a CRAT is that you'll know the amount of the income each year. Contrast that with a CRUT, where you would have the opportunity for the income to grow if the assets of the trust experience growth in excess of the payment.

In addition, if the return on the assets isn't great enough, you could deplete the assets of the trust with a CRAT because your income isn't dependent on the amount of assets in the trust. You'd have that same issue if you didn't put the assets in the trust but continued to take the same income—an income amount not supported by the investment return.

A CRUT sets your income as a percentage of the value of the account each year. If the account decreases, your income the following year would be adjusted accordingly by the normal operation of the trust. As a result, the income wouldn't deplete the trust, but it might get pretty small at some point with continual investment underperformance.

Ok, now lets' talk about that income tax deduction for creating the trust. This deduction can be spread over six years if your income isn't high enough to use the deduction in one year. Cha-ching, that's extra money to enjoy today! What's more, you can also be the trustee of the trust, so you are still able to control how the money is invested.

Reference: Kiplinger's (June 2016) "Are You Losing Big Tax Savings on Your Charitable Bequests?"

Special Needs Trusts Available to Everyone Who Needs One

"Government benefits provide a safety net, but often parents of special-needs children want to provide a higher quality of life, and that's where special needs trusts come into play."

A child who suffers the onset of severe epilepsy and developmental regression may require lifelong special needs. This calls for a redrafting of a basic estate plan.

CNBC's article, "Special-needs trust is key part of some estate plans," says that many couples in this situation will revise their estate plan and create a special needs trust to benefit a disabled child. Special needs trusts, also called supplemental needs trusts, can be a very important estate planning tool for parents of children who are likely to need special care and financial support throughout their lives.

Special needs trusts answer the question of how to pass on assets to a disabled child without jeopardizing his or her eligibility for means-tested government benefits like Medicaid, Medicare and Supplemental Security Income. In fact, disabled individuals with as little as $2,000 in available assets may not be eligible for some public programs. However, assets held in special needs trusts don't count toward eligibility calculations for public benefits.

The money in a special needs trust can go towards items not covered under government programs. This can include dental work, eyeglasses and caregiver charges. It can also be used to pay for enrichment—such as trips to visit family members and specialized educational programs.

An experienced estate planning and elder law attorney should draft the special needs trust. This should be an attorney who knows and works in special needs planning and government benefit programs for the disabled. A poorly drafted trust can lead to serious consequences for disabled beneficiaries.

These trusts are often created when a disabled child reaches the age of maturity. At this time, parents have a better idea of the type of support available to the child and whether he or she will be financially independent, have the mental capacity to make financial decisions, and have the ability to live independently.

Choosing a trustee (or co-trustees) to be in charge of a special needs trust is also a big decision. Trustees are required to act in the best interest of disabled beneficiaries. They also should be able to understand and comply with trust administration rules and guidelines. Parents should also select a trustee who knows the disabled child and is willing to comply with their wishes for that child. These can be detailed in a letter of intent that accompanies a special needs trust. Trustees are usually family members who care for a disabled relative after his or her guardian dies, but sometimes these trusts are managed by corporate trustees.

The care for a disabled child can create a significant impact on one's financial resources. Remember that special needs trusts are not just for the wealthy; anyone in this situation can create one. Be certain that family members are aware of the trust's existence and that their own financial plans are coordinated with the trust so that the child doesn't receive assets in his or her name that would make him or her ineligible for government benefits.

Reference: CNBC (June 1, 2016) "Special-needs trust is key part of some estate plans"

Make Certain Your Dynasty Succeeds After You're No Longer in Power

"People have long been fascinated by family dynasties. Whether it's the Romonovs or the Hiltons, the transfer of legacies from one generation to the next creates drama and intrigue."

The Yakima Herald article, "Passing the baton: 6 challenges for family business succession," says that maybe one reason family dynasties are of interest is that they're so tough to achieve. While 88% of family business owners believe the same family or families will control their business in the future, only about 30% make it into the second generation—and fewer than 5% make it to the fourth.

Whether it's a national chain of supermarkets or a mom and pop corner grocery, owners will face several obstacles when seeking to ensure that their business legacy continues with and through their children. Here are some common challenges to consider.

Conflict. Very few—fewer than 25%—of family businesses have done any succession planning. This fuels the potential for disharmony. One of the big reasons not to have a formal succession plan is that it'll cause family conflicts. There are tough decisions to be made—and it's often seems easier to avoid them.

Income. Revenue distribution and work compensation is a potential minefield. When you bring in someone from the next generation to the company, some folks try to combine that person's compensation with their anticipated inheritance. That's no good because it will provide more compensation than is right for the position, creating a family member's inflated sense of worth to the business and angry employees.

Interest and Involvement. An owner with several children may have some offspring who are just not interested in being a part of the family business. Nonetheless, they'll all expect an equal share, which might frustrate those siblings who worked years to make the business successful.

Technology. An owner may be reluctant to accept changes in methods and procedures, resisting new technology they don't understand. But the technological advances that a young generation brings can translate into efficiency and improved profit margins. It's a balance.

Uncertainty. Some business owners postpone succession planning because they think they'll be around for many more years. But illness and death can occur suddenly. With that in mind, the most successful succession plans are typically those that are in place the longest.

Regulation and Taxes. When a business is transferred to a new generation, there can be serious tax consequences. This needs to be part of the plan, especially as an onerous tax burden could force heirs to sell all or part of the business to raise capital to pay the tax bill. That's why business owners need up-to-date estate plans that leverage tax regulations on wealth transfer and gifting.

The most important part of any business ownership transition is to create a strategy well in advance. Review that plan periodically to be sure everything is on track. Regular communication can help avoid any surprises and confusion. Creating a well-thought-out plan gives your business the greatest opportunity to make a successful generational transition.

Reference: Yakima Herald (May 20, 2016) "Passing the baton: 6 challenges for family business succession"