This week we’ll turn it over to the highly respected analysts at Morningstar. Their personal finance specialist, Christine Benz lists 75 important statistics surrounding Long Term Care. This is an important topic as America’s population continues to age. Many of us have seen the price paid for a long life in our parents or grandparents and wondered what can be done? Schedule a meeting with one of our advisers at Granite Financial Partners and we’ll walk you through your options and design the best possible solution for you and your family.
It is important for all of us to have some foresight and plan ahead for what will happen to any of our property or financial assets when we pass away. For business owners this is even more important, and for owners in a partnership or family business even more important still. If left to chance what we want to have happen to our assets when we die, is very different from what actually happens. It is not a fun exercise to complete, but estate planning is vitally important to the pieces and reminders of you that remain long after you are gone. A perfectly strong family business can be hurt severely in future generations due to the negligence of current or past generations. Once you pass away it is out of your hands, thus taking the correct steps now is extremely prudent. Read along to find out what impacts can be had and steps can be taken to ensure that your legacy is something you can be proud of.
Sole proprietor, owner dependent, private entrepreneur, whatever you’d like the call your business the point is you run the show. Focus is on earning as much income as possible through the business and applying it to personal savings. The personal savings and assets accumulated are then what is of most value in being passed to your heirs, while the business dissolves. There is nothing wrong with choosing this type of succession model, but make sure this is a conscious choice and not simply the only resort left to those inheriting the business. One of the biggest benefits of this business model is total autonomy over all decisions regarding the business, use it!
If you would prefer to pass your business on to your heirs, make sure you dictate all of the details in your estate plan. There are innumerable decisions to consider and because of this it is imperative that you get professional assistance with this plan. Are you passing your business to your wife or your children? Do you have any divorces or step children to consider? Will you be dividing ownership among multiple people? Do your successors have any experience or interest in running such a business themselves? These are just a few of the considerations that you will have to consider.
Death, Taxes & Death Taxes
You already know the two certainties in life, and estate planning deals heavily with both. Without an estate plan, your business’s new owner could be on the hook for an estate tax of anywhere from 35-50% of the company’s value. The heir taking over the business needs a way to pay that substantial tax bill, so you will want your estate plan to include a method of reducing that burden as much as possible without having to sacrifice assets of the business.
Contact us at GFP to get things started. We can walk you through this complicated and stressful process.
Chances are your employer offers you an array of benefits, one of them most likely being some version of a retirement plan (SEP, SIMPLE, 401(k), 403(b), etc). Business owners are beginning to put more and more importance on their suite of benefits, because they realize it is a major factor in not only recruiting new employees, but also retaining current ones. There’s also a good chance that the retirement plan they put in place for you has some holes.
This is not the fault of your employer, they can’t possibly design a retirement benefit that fits perfectly for every employee’s situation. That’s what Financial Advisers like GranitPath and Granite Financial Partners are here for. We can evaluate your benefits portfolio, as well as your personal situation and develop a comprehensive solution. Below we’ll review one of the more overlooked aspects of retirement planning.
Plan for Distribution as Well as Accumulation
One of the simpler, yet important, concepts in retirement saving is market participation. Even a conservatively allocated portfolio offers at least some protection against long term inflation. This is a great tool for accumulating assets, but what about when it comes time to retire and start using your portfolio as an income source? The same market volatility that helped you grow your nest egg could also damage it when you begin taking withdrawals. Because of this, some retirees can benefit from guaranteeing a portion of their retirement income. Only about half of Americans retirement plans involve any sort of income solution, and only about 20% of those income solutions are guaranteed. So, this is a key piece that many are missing out on.
Benefits of Guaranteed Income
Among the biggest fears both pre-retirees and retirees face is that of outliving their assets. Guaranteeing a portion of a retiree’s income for the remainder of their life can be an appealing solution for a number of reasons. It is much easier for a pre-retiree to exhale and finally retire when they know at least a portion of their income is guaranteed for as long as they live. Upon retirement, this guarantee can relieve a great deal of stress for not only the individual, but also their portfolio. Having an income source that is not tied to market performance allows an investor to be more flexible with their overall portfolio withdrawals.
Not Your Father’s Pension Income
If guaranteed income for life sounds like a familiar concept, that’s because it is. In the past many Americans would retire after years of hard work and live on the income from their company pension plan. In a time where Pension plans are becoming more and more rare, many individuals are using fixed indexed annuities to accomplish the same goals as a pension. With current interest rates on the rise and many analysts projecting continued rate hikes, we believe annuities can be a great way to supplement bond portfolios going forward.
To further explore these and other options in your work benefits program ask your Human Resources Rep for statements detailing the plan’s offerings, then call us to set up a consultation. We can help you navigate the more complicated parts of you plan to identify specific strengths and weaknesses. From there it may be beneficial to have our team analyze your overall plan.
Among the most pressing questions when formulating a cohesive estate plan is what to do with an individual’s residence. For many, residential properties make up the largest or among the largest portion of one’s net worth. Believe it or not this can couple nicely with one of the most commonly used estate tax strategies as well, charitable giving.
At GFP, we feel strongly about the altruistic aspect of such donations, but the tax advantages can also be enticing if deployed properly. We’ve done a lot to support clients in creating Qualified Personal Residence Trusts as well as Donor Advised funds in the past. One should strongly consider both the philanthropic and tax advantages to incorporating these strategies in an estate plan. This week we will skim the surface of the Retained Life Estate conceptually and seek to explain where and why it can be a good fit. The core concept is that the donor gifts the property to a nonprofit organization of their choice, retains the right to live there for a term (such as the life of the donor and their spouse), and upon their death the property is given to this organization. In the meantime, the donor reaps the benefits of a charitable tax deduction. This is a complex strategy, but we will attempt to break it down for you in plain English.
Defining the Personal Residence
The Retained Life Estate is required to be a personal residence. The important distinction to make here is that the property need not be an individual’s full time home. As long as the property is a home, is not being lived in by anyone else, and is not producing revenue it can be defined as a personal residence. For example a lake house, vacation home, or condominium all qualify. You can even donate a farm if you choose. It is also important to point out the items and property within the home must be given separately, and won’t be factored into this calculation.
No tax deduction is allowed for donations of partial ownership in a property on federal income taxes except in the cases of a charitable remainder unit trust, pooled income fund, or a qualified charitable remainder annuity trust. These exceptions mean that you cannot claim this deduction based on the partial gift of a property, but you can claim a deduction based on the amount of your ownership in the asset, as long as the other owners contribute their ownership in the property as well.
Like all charitable donations, a retained life estate has a tax deduction limitation of up to 30 percent of the donor’s adjusted gross income. Additionally, any leftover portion of the remainder interest value can be carried over for up to 5 years.
Donors can receive a charitable deduction on federal taxes equal to the amount of the net present value of charitable remainder interest. If this calculation sounds complicated, that’s because it is. Factors include market values of the property, depreciable improvements, depleted resources, salvage value of these improvements at the end of their use and the Applicable Federal Midterm Rate among other things. This is why it is imperative that you call a professional like Granite Financial Partners to assist you in utilizing this strategy.
The final benefit of such a transaction is that the real estate is no longer included in your taxable estate upon death. If you don’t want to burden your family members with selling the property, this can be effective in avoiding that as well. In summary, the end the Retained Life Estate donation allows you to capture a sizeable income tax deduction while you are still alive, live in the property until you pass, then exclude the property’s value in your estate tax calculation, in exchange for forfeiting your family’s ownership of the property upon your death.
As the donor of a Retained Life Estate, you oversee how you reap the tax advantages as well. You can design the gift to be measured by a lifetime (how long you will live, passing the real estate to charity in full upon your death), by a term of years, or a combination of the two. If you decide upon a term of years there are no maximums or minimums required for tax purposes. Meaning that this term could be one year or 30. Combining the two would mean the donor can transfer a portion of the property over a specified period, then retain ownership of the rest until death.
You Design the Agreement
When you donate a property, you are doing a good thing for an organization that matters to you. As the donor and original owner of the property you are granted the opportunity to set the terms of engagement up front. It is prudent to employ legal help to craft a professional gift agreement that establishes the details on responsibilities like remodeling, repairs, utilities, insurance, and the many other considerations with property ownership. Additionally, it is wise to establish a clear dispute resolution process in case unforeseen issues arise.
Don’t Go Alone
A retained life estate is a complex blend of financial and legal strategy that is best left to the professionals. If you think this or a similar tactic could work for you start by setting some time aside to meet with us at Granite Financial Partners. Based on our conversation we can help you decide whether this is really the best fit for you, or if another option may be more advantageous. Implementing this strategy is a big undertaking but the altruistic and financial value is substantial, reach out to us to hear more.