Saturday, August 29, 2015

Key Considerations When Preparing Your Will

The will to succeed is for naught without the will to prepare. Sounds like a message of exhortation on one of those "success" posters.
Speaking of the will to prepare, have you prepared your will? Take the dog for a walk with a fresh, empty Walmart bag in hand ... or prepare your will? Which would you rather do right now? Hands down (get it?), taking Fido to take care of his business! I get that. In fact, almost anything will win out (I was going to use "trump" instead of the more cumbersome "win out," but did not want to stray into politics), over taking care of your own (legal) business here.  Granted, while it may be an unpleasant task to think about your own mortality, writing a will is one of the smartest financial planning activities you can do. In that spirit, Fox Business solicited some of its contributors regarding important things everyone should know before writing a will. 
Here is an overview of the pooled wisdom from the resulting article titled “3 Things You Should Know Before Writing Your Will.” 
1. A will doesn't actually cover all of your assets. That is correct. Did you know that any assets that have beneficiary designations (e.g., IRAs, 401k’s, and life insurance policies) pass automatically "outside" your will to the designated beneficiaries? In addition, any assets you own in joint tenancy with rights of survivorship with one or more other folks pass to the surviving joint owners at your death. Likewise, pay-on-death bank (POD) and transfer-on-death (TOD) accounts pass to the designated beneficiary when you pass away. Finally, any assets held in trust are handled outside of probate. Teaching point: Make sure your beneficiary designations are consistent with your will. Period. Consequently, if you make changes to your will, then you should review those beneficiary designations to see if similar changes are needed "outside" of it. If you fail to do this, then your well-intended efforts to update your estate planning could create major gaps nosediving your plans for the distribution of your assets after your death into the dirt.
2. Naming your will's executor takes some thought. The executor is the individual in charge of taking care of your affairs and ensuring that your will is carried out as you directed. Selecting the executor is a big deal. Who comes to mind as a potential candidate, as you review the bullet points of executor responsibilities below? Distributing assets as directed by the will. Paying bills and taxes on behalf of the estate. Appearing at legal proceedings for the estate. Maintaining property until the estate settles. Without belaboring the point, you need to choose the right person for this important assignment. Many people select their spouse, an adult child, or a trusted friend. But you can also name an attorney as executor. You also can name joint executors and alternates in case the executor you choose cannot serve or he passes away before you do.  The original article suggests the following considerations when selecting an executor. First, he or she should be someone you trust to make the right decisions, and a person who is smart enough to ask for help from an experienced estate planning attorney when they need it. Second, naming several of your children as co-executors might be hazardous, as this could lead to arguments. However, I think doing so is just dandy, and practical, if the children get along swimmingly.  Your executor need not be a financial guru, but should be a person you trust with good business and common sense.
3. Take extra care in writing your will if you have young children.   In many instances, children cannot deal with the responsibility of inheriting property. Also, if your son or daughter inherits property outright when he or she is still a minor, then the probate court will appoint an individual to be a property guardian if you fail to do so. That on the table, it makes total sense to carefully consider whom you want managing your assets for your child after you pass. This is especially vital because a court-appointed guardian will hand over all the inherited property to your child on the day he or she turns 18. Not good.  Take some time and think about how you want to address these issues. Your estate planning attorney provide help you avoid any additional hidden gotchas and even offer some creative alternatives.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

Friday, August 28, 2015

Young People Need Estate Planning Too


Over the last few months, I have been reading stories of tragic deaths of young people. Most recently the sad passing of Bobbi Kristina Brown (Whitney Houston’s daughter) and the 2 women with wonderful bright futures killed by a gunman at a movie theater in July, Jillian Johnson and Mayci Breaux. Tragedies like these make me think of how precious life is and to consider each day as a gift.

These tragedies also make people in the financial planning industry re-confirm long held beliefs about the need for an estate plan for someone young and single. An estate plan is simply giving you a voice as to what you want done in the event you are not around to speak. An estate plan gives direction to those who are left behind as to how to handle things in the way you would want them to be handled such as:

Do you want a say in how you are medically treated if you are unable to make a decision? I tell my younger nieces and nephews that their mantra is “doing life on my terms.” If that is their mantra, and they do not clearly state what they want done if they cannot make a medical decision, they are literally leaving their lives in the hands of other people. There were reported disagreements as to the medical care of Bobbi Christina Brown. if she had a healthcare directive, she could have stated her own decision and perhaps saved her loved ones a lot of grief and turmoil. If you want to prepare for such an event in your life, you can create a healthcare directive for free at My

Who handles your social media accounts when you are unable to or can’t? I had a dear friend that recently passed away from cancer. One nephew gained access to her Facebook account and started posting information about my friend that I knew she never would have wanted posted. As well intentioned as he was, his posts hurt her family as well as those of us who loved her. Have a list of your social media accounts, user id, passwords and domains and put in writing the person you want to handle your accounts if you passed away. This person should have some experience with computers and dealing with social media.

Who pays for your burial expenses? It is estimated that over 95 million adults in the US do not have life insurance. When you are gone, there are going to be costs associated with burial expenses, time away from work to handle your estate in court, better known as probate, as well as possible costs in removing items from your home. Many will say that if you have no one that is depending on your income then life insurance is not necessary. Consider the people left behind and ensure that there is enough money to at least cover your burial expenses.

What happens to your “Sweet 16” pictures or that trophy you won in junior high? In an ideal world your parents will come together to take care of your things. In reality, there are parents that are not together or are so hostile toward each other that they may fight over your things if you are gone. What may have no monetary value to you may have significant sentimental value to those who love you. Decide who will get the things you own and put it in writing. This is most often done through a will. Many companies offer free estate planning benefits to include will preparation, so start there. If your company does not offer estate planning services you can either pay to have a will done or create a will online using websites like,, or A hybrid approach is to do your will online and then have the will evaluated by an attorney.

What happens to your savings and investments? You probably have at least a bank account and a retirement plan at your job. Make sure you have up-to-date beneficiaries on the latter. You can add beneficiaries to your bank account too by asking the bank for a POD (payable on death) form. A will can take a while for the court to process but with beneficiaries, your heirs just need to show up with a death certificate and some form of ID and they can get immediate access to your accounts.

A tragedy can happen to anyone at any time. Planning for such a moment is admittedly not very fun. But if you really want to live life on your terms, then take action today to make sure that you do that, all the way to the end.

Thursday, August 27, 2015

Inheritance 101: How to Leave Your Home to Your Kids

For many of you, your home is probably your most valuable asset and it's likely that you are very clear about whom you want to end up with it when you die. For example, if you are a parent you probably want your children to inherit your home. However, ensuring that your wishes become reality takes planning --estate planning, specifically. For example, you may:
  • Include your home in your will
  • Transfer your home to a living trust
  • Include the right "magic words" in the deed to your home
There are pros and cons to each of these options, so it's advisable to meet with an estate planning attorney. That way you'll be sure that you choose the option that is best for you based on your finances, your estate planning goals, and other considerations.
1. Include your home in your will
A will is a legal written document in which you specify whom you want to inherit your assets when you die. You may name one person or multiple persons. Each of them is referred to as a beneficiary.
After you die, all of the assets you've included in your will go through a court-supervised process called probate. Among other things, this process ensures that the assets are legally transferred to your beneficiaries according to the terms of your will. Before that can happen, however, any debts you may owe at the time of your death must be paid.
If you designate more than one person to inherit your home, each individual will inherit an undivided interest in it. Therefore, they must decide what to do with the house -- keep it or sell it. And it's possible that they may not see eye to eye. For example, let's assume you left your home to your daughter and son, and that your daughter wants to hold on to it for sentimental reasons, perhaps, but your son has a lot of debt and wants to sell the house so he can use his share of the sale proceeds to pay off his creditors. Unless they can reach an amicable agreement about what to do, inheriting your home could create a rift between them, especially if your son decides to go to court in an effort to force a sale.
2. Set up a living trust
A living trust is a type of trust that you create while you are still alive. You also transfer to the trust the assets that you want controlled by the trust; this is called "funding the trust."
While you are alive, you can manage and benefit from those assets, just like you do now; but when you die, the assets get transferred to the beneficiaries you designated in your trust document.
Using a living trust rather than a will to transfer your home upon your death offers a number of advantages. One of them is that the home will pass to your designated beneficiary without having to go through probate, thus avoiding the delays and expenses associated with that process. As a result, your home can get transferred to that individual much more quickly. It's important to note, however, that any outstanding debts you may owe must still be paid before the transfer can happen.
A note of caution: If you set up a living trust, but do not transfer your house to it before you die, then the house will have to go through the probate before it can be transferred.
If you name more than one beneficiary for your home in your living trust document, you can avoid the potential for conflict among them about what to do with the house by stating in the document that the trustee of your trust -- a person or institution named to oversee the distribution of your assets and the payment of your debts after your death -- can decide who will get the house and who will receive other assets of equal value in your estate.
3. Include the right words in the deed to your home
Those words can be either "Transfer on Death" or "Joint Tenant with Right of Survivorship." ("Tenants by the Entireties" is another option between spouses in some states.) Either option lets you give your home to your loved one(s) at your death without the delays associated with probate or the cost of setting up a trust.
If you don't have a spouse, it's usually best to include the words "Transfer on Death" in the deed to your home, assuming a Transfer on Death deed is legal in your state. (Currently, about half of the states plus the District of Columbia recognize this kind of deed, but other states are considering it.) With a TOD, you own your home 100% while you are alive, and you're free to do whatever you want with it -- borrow against it or get a reverse mortgage, for example. When you die, the home automatically and immediately transfers to the person(s) you named as beneficiary in the deed.
If you include the words "Joint Tenant with Right of Survivorship" in your deed, you and whoever else is on the deed are co-owners of your home. When you die, assuming you die first, the house automatically transfers to your co-owner(s).
One of the drawbacks to this form of ownership is that you won't have full control over your home. For example, if you want to borrow against the house or refinance it, your co-owner might object and might even take you to court to stop you from doing what you want. Another drawback is that your home is subject to the debts of your co-owner. This means, for example, that if your co-owner is sued by a creditor for a past-due debt, the creditor might get the right to put a lien on the house.
Finally, Medicaid eligibility is something else you should take into account if you think you may need to apply for this federal government program at some point. If you do, including your home in your will rather than transferring it to a living trust is best. Again, consult with an estate planning attorney if Medicaid eligibility is a concern for you.
Making that decision yourself could be problematic, so it bears repeating: A qualified attorney can help you determine the best way to ensure that your home will go to your intended heir(s) when you die.

Wednesday, August 26, 2015

Tax and spin: Most families in Wisconsin, it turns out, would save on taxes by moving to Minnesota


On Tuesday, Scott Walker will bring his presidential campaign to Minnesota, where he’ll give a speech on the Affordable Care Act and attend a fundraiser. At those events, Walker will no doubt boast about his conservative record as governor of Wisconsin: an ambitious if sometimes polarizing set of public policies that have reduced government spending, curtailed collective bargaining rights and — as he is sure to remind people — reduced the state’s taxes by more than $2 billion.

Just as predictably, Walker is likely to be asked more than a few questions about the state where he’ll be holding forth, a place where his counterpart, Democratic Gov. Mark Dayton, has pursued the sort of agenda that might cause Walker to break out in hives: expanding union membership, increasing school funding and  — most notably — implementing a tax hike on the wealthiest Minnesotans.

Comparing the two states under the two men over the last few years has become something of a national sport, after all, a favorite pastime among journalists, academics and politicians alike. Even President Barack Obama has gotten in on the act. Before an audience in La Crosse last month, he paraphrased the local paper by saying that Minnesota was “winning this border battle” when it came to the states’ respective economic fortunes.

And yet, despite all the ink spilled about both Walker and Dayton and their records, almost all of the assessments overlook a longstanding but seldom-discussed fact about life on either side of the St. Croix River: that a majority Minnesotans actually pay a smaller share of their household income toward taxes than Wisconsinites.

The primacy of property taxes
How can that be the case?

In 2013, Walker delivered on one of his big campaign promises when the Wisconsin Legislature passed a bill that compressed five income tax brackets into four and lowered all rates, reducing the average rate from 6.4 percent to 5.9 percent.

That same year, Minnesota went in the opposite direction, with the Legislature passing a Dayton-led initiative to add a fourth state income bracket for individuals earning over $150,000 or couples earning over $250,000. The rate, of 9.85 percent, was among the highest in the country, and it meant the state’s average income tax rate would go from 6.8 percent to 7.5 percent.

But those high-profile changes only affected the income tax, not sales tax or, importantly, property tax — the key factor in comparing the overall tax burden between Minnesota and Wisconsin.

For years, Wisconsin has had some of the highest residential property taxes in the country. The result is that across every income bracket, homeowners in Wisconsin pay a higher share of their income to property taxes than those in Minnesota, according to data compiled by the Institute on Taxation & Economic Policy, a nonpartisan think tank that studies tax policy. To take just one example, the taxes on Walker’s $360,000 home in suburban Milwaukee County were more than $8,000 in 2014.

In fact, for all but the top earners, Wisconsin homeowners who work in Minnesota would often fare better by staying on this side of the river, largely because property tax rates are low enough to make up for higher income tax rates. As a report from the National Center for Policy Analysis noted last year: “While a renter would fare worse in Minnesota thanks to the higher income tax, homeowners would fare better because of Minnesota’s lower property tax rate.”

Walker didn’t create the higher property taxes, but he also hasn’t been able to do much about them, either. The reason lies in Wisconsin’s state constitution. Unlike Minnesota and all but seven other states, Wisconsin is required to tax all property equally, be it commercial or residential. That means Wisconsin can’t shift any of the tax burden from homeowners to owners of other types of property, as many states do (including Minnesota).

As a result, Wisconsin’s high property tax essentially wipes out any savings most taxpayers would see due to the lower income, sales and excise taxes compared to Minnesota. In fact, the only group that faces a higher tax burden in Minnesota than in Wisconsin are families with household incomes over $200,000.

Small businesses benefit
Just as the Wisconsin’s tax-code restrictions hurt homeowners compared to those in Minnesota, they help business, because they bear a smaller share of all property taxes in the state.

Small business owners in Wisconsin have another advantage over their counterparts in Minnesota: Because many small businesses are known as “pass-through entities” whose owners pay their corporate tax on their personal income tax form, they benefit from Wisconsin’s lower income tax rate vs. Minnesota’s.

Given all that, one might expect business to be flocking to Wisconsin. But two years after the states’ biggest tax changes took effect, there’s little evidence to suggest any such migration is happening.

David Ross, president and CEO of the Duluth Area Chamber of Commerce, says he doesn’t see businesses moving across the border to Superior, despite Wisconsin’s efforts.

That’s partly because moving a business can be risky, Ross said, if for no other reason than political ideology can change with each election. Instead, what’s reliable is a quality work force — the main incentive for businesses to locate in an area, he said, as is quality of life.

“All of these wild incentives from these different states are often from a state that is the least attractive,” Ross said. “The cost of government is certainly, within a state, an important factor to keep in mind. (But) people want to live in a community where there’s a strong public school system, where it’s a safe place to raise a family, where there’s strong recreation. I think those states that are focusing on cost of government are in a bad place. We’re promoting much more lifestyle and a place to live, not just a place to work. ... So I am not impressed with the position of Walker. We have done nothing other than become stronger, our state as an economic entity, since his election.”

Tuesday, August 25, 2015

Converting an IRA from a Tax Loser to a Tax Winner

We are all basically dealt the same cards in the tax game, but how we play them determines whether the IRS wins or we do. Sadly, most taxpayers play their IRA cards wrong, and the result is that their families lose. 
Almost all IRAs are “traditional” IRAs whereby the account holder receives a tax deduction for the funds he or she puts into them, and income taxes on profits and other gains are deferred until the funds are taken out of the account. All other qualified plans (401(k), profit-sharing and the like) can be rolled over into a traditional IRA.
As the owner of a traditional IRA, you must take required minimum distributions (RMDs) from your account every year, starting when you reach age 70½. These distributions are based on life expectancy tables, so the percentage of the account required to be withdrawn increases a bit each year. Because RMDs decrease as life expectancy increases—in other words, the younger the beneficiary, the lower the RMD—it is to your advantage to make someone younger than you the beneficiary of your IRA. Often, this person could be your spouse. But what if you make your children the beneficiaries of your IRA? Now the life expectancy tables make this minimum distribution amount so small that almost all of the IRA funds can grow—tax deferred—for another full generation. Make that for two generations if you leave all or some of your IRA to your grandchildren. Great tax planning! This is called a “stretch” IRA. (Do not make your estate or a trust the beneficiary of your IRA, as this eliminates the stretch-IRA option.) 
Commonly, IRA holders do make their spouses the primary beneficiary and, in case the spouse dies first, will make their children and/or grandchildren contingent beneficiaries. As the beneficiary:
1. The spouse can roll the IRA funds into his or her own IRA, pushing the RMD down the road to when he or she reaches age 70½ (assuming that the spouse is younger than the deceased).
2. The spouse can name new beneficiaries, most likely children or grandchildren.
3. The spouse may be able to convert the traditional IRA to a Roth IRA, which provides a huge tax advantage to the family’s younger generations. This conversion can take place all at once or over several years, if this option can help reduce income taxes. (There are key differences between traditional and Roth IRAs that any qualified tax advisor should be able to explain.)
The enemy of the traditional IRA is a possible double tax. There are always income taxes (both federal and state), and if the account holder’s overall estate is large enough, the estate-tax monster will get its bite as well. The average double-tax rate is a whopping 64 percent—$64,000 out of every $100,000 in the estate to the tax collector and only $36,000 to the family.
The typical reader of this column who calls me for tax help is a male owner or retired owner of a closely held business whose age may range from his late 40s to early 80s. Rarely does this person need the funds in his IRA to maintain his current lifestyle. What started out as a good idea early in his life—parking deductible contributions in a qualified plan—has turned into a lousy, tax-prone asset later in life.
What to do? The goal is simple: Turn the funds that are subject to double-tax in the investor’s IRA (or other qualified plans) into tax-fee dollars. This is easy to do if this person is insurable (and, if he is married, if his spouse is insurable as well). We typically use our trusty “Retirement Plan Rescue” (RPR). It’s a simple, four-step process:
Step 1. Purchase an annuity for the IRA. If the IRA already owns an annuity, this existing policy can be used in the following steps.
Step 2. Annuitize the annuity, converting it to a flow of guaranteed income into the IRA every year for as long as the investor or the spouse lives, depending on whether it is a single-life or second-to-die annuity.
Step 3. The IRA distributes an annuity amount annually, which is subject to income taxes. This distribution is often all or part of the RMD.
Step 4. Use this annuity distribution to pay the premiums on a new life insurance policy. This could be a single-life policy if the investor is not married or a second-to-die policy if he or she is.
The sooner the IRA owner implements this strategy the better, as premium costs rise each year and health issues that he encounters as he ages might lock him out of certain policies. 
In addition, insurance proceeds are income tax free, according to the Internal Revenue Code, and setting up an irrevocable life insurance trust will help avoid estate taxes as well.

Monday, August 24, 2015

Long-Term Capital Gains Tax Rates in 2015

Long-term capital gains result from selling a winning investment that you've held for longer than a year. To encourage people to invest for the long haul rather than trading in and out of the market, the tax rates on long-term capital gains are lower than they are for investments you hold for a year or less. Below, you'll find out what the long-term capital gains tax rates are for 2015 and a couple ways you can cushion the blow of this much-debated tax.
How to figure out your long-term capital gainsThe first step in calculating the tax from selling an investment is figuring out how much you earned in capital gains. In general, this is pretty simple: take what you paid for the investment -- also known as your cost basis -- and then subtract that from the proceeds you received when you sold it. If the number is positive, then you have a capital gain; if it's negative, then you have a capital loss.
Occasionally, figuring your capital gain is more complicated. Sometimes, a company will pay money to you as a return of capital, which doesn't get taxed as a dividend or other type of income but which does change your cost basis. That has an impact on how much in gains you realize when you do sell. Moreover, different rules apply if you receive an investment as a gift or as an inheritance. The IRS has more details on cost basis rules and more complex situations at its website here.
Calculating the taxOnce you know the amount of the gain, you need to know the tax rates that apply. Three different rates exist on long-term capital gains, and which one is right for you depends onwhat tax bracket you're in:
  • If you're in the 10% or 15% tax bracket for ordinary income, then your long-term capital gains rate is 0%.
  • If you're in the 25%, 28%, 33%, or 35% tax bracket, then your long-term capital gains rate is 15%.
  • If you're in the 39.6% tax bracket, then your long-term capital gains rate is 20%.
Those rates apply to federal taxes, but if your state has an income tax, you'll probably have to add on an additional amount there. Some states, such as California, make no distinction between long-term capital gains and other types of income in imposing taxes. Others, such as Massachusetts, have much lower rates for long-term capital gains than for short-term gains. Your particular tax rate will depend on your income level and the specific brackets that your state imposes. For a good overview, check out this article on state capital gains taxes.
3 other things to keep in mindIn addition to the above, there are a few things you should remember about long-term capital gains and the taxes you have to pay on them.
First, for high-income taxpayers, long-term capital gains do count as qualifying income for purposes of the 3.8% surtax on net investment income. This means that for single taxpayers making more than $200,000 and joint filers earning more than $250,000, the effective long-term capital gains tax rate is 3.8 percentage points higher than otherwise indicated.
Second, be aware that you only have to pay tax on the net amount of capital gains you have. So if you sell one stock at a gain and another at a loss, those two figures can balance each other out, and you'll only pay tax on the total amount of overall profit from the combination of both positions.
Finally, if you hold your assets until your death, then your heirs get an automatic step-up in cost basis. That effectively eliminates any pent-up capital gains tax liability and gives your heirs a fresh start. They'll pay taxes on any gains after your death, but for long-held winning stocks, the step-up at death is a huge tax break.
Tax planning can seem complex, but in some cases, it is. But dealing with capital gains doesn't have to be hard. Keep these simple tactics in mind, and you'll go a long way toward reducing your 2015 capital gains tax bill.

Sunday, August 23, 2015

Tax obligations as a business owner

When you start a business, a key to your success is knowing about your tax obligations. You may not only need to know about income tax rules, but also about payroll tax rules. Here are five IRS tax tips that can help you get your business off to a good start.

1. Business structure. The most common types of business structure are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you will file.

2. Business taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. You can use IRS Direct Pay to pay them. It’s fast, easy and secure.

3. Employer identification number. You probably need to get an EIN for federal tax purposes. If you do, you can apply for it online.

4. Accounting method. An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you receive the income or pay the expense in a later year.

5. Employee health care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

The employer shared responsibility provisions of the Affordable Care Act affect employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees). These employers’ are called applicable large employers. ALEs must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full-time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS. The vast majority of employers will fall below the ALE threshold number of employees and, therefore, will not be subject to the employer shared responsibility provisions.

Employers also have information reporting responsibilities regarding minimum essential coverage they offer or provide to their full-time employees. Employers must send reports to employees and to the IRS on new forms the IRS created for this purpose.