Posts in: September

Simple is Sexy: Maximize Retirement Contributions for Tax, Asset Protection, and Estate Planning Benefits

September 25, 2017 Asset Protection, Retirement Planning, Tax Planning Comments Off on Simple is Sexy: Maximize Retirement Contributions for Tax, Asset Protection, and Estate Planning Benefits

Many clients appreciate our ability to see the big picture.  For example, when it comes to asset protection, estate planning, and tax planning, none of these practice areas happen in a vacuum, meaning the methods and tools used for asset protection will almost always affect and impact your estate plan and/or tax plan, for good and for bad, and vice versa.  These areas should be coordinated together.  While a lot of clients appreciate that, they often times overlook or fail to maximize the full benefits that come with funding and investing with a retirement account because it just doesn’t seem, well, sexy.  Keep reading.

  • Asset Protection. Effective asset protection rarely involves a transfer of all of your assets into some foreign off-shore jurisdiction.  For many people, there are much less expensive and effective ways to protect your assets and one of those ways is to put your money into retirement accounts.  So before you take other, more expensive, efforts to protect your assets, make sure you’re fully contributing to your retirement accounts because the funds inside your retirement accounts are generally protected from your creditors, though it varies from state to state in terms of the extent of the protection and the type of retirement account(s) e.g. ERISA v. Non-ERISA, etc..  Our office can help you determine the extent of the creditor protection based on your state and the type of retirement account but generally speaking all retirement accounts are protected from creditors at least up to $1M.
  • Estate Planning. One of the primary purposes of setting up an estate plan is the ability to transfer assets upon your death without having to go through the probate court.  One of the features of a retirement account is that upon your death it will directly transfer to whomever you listed on the account’s beneficiary designation form without having to go through the probate court!  So at a minimum, make sure to keep your retirement account beneficiary forms updated.  I am not suggesting you don’t need an estate plan at all, but if you fail to set one up, at least your retirement account would transfer upon your death without going through probate court.
  • Tax Planning. It typically makes sense to sell an asset or receive income when you’re in a lower income tax bracket.  There are all sorts of financial vehicles and instruments to accomplish these objectives, but once again, the “low hanging fruit” is to acquire assets and receive income into a retirement account.  Presumably during your peak income earning years i.e., 30’s, 40’s, and 50’s, rather than paying tax on your income and then contributing in a taxable account where the income is taxable, you defer the income tax liability until your later years once you’ve retired, under the presumption that when you’re retired, you are in a lower income tax bracket, AND the contributions you made into the retirement account are tax deductible!!  Plus, the money you would have paid in taxes stays in your account fully invested allowing the account to grow more quickly. Further, the REAL power of using a retirement account for tax planning is to utilize a Roth account because even though the contributions are not deductible, any qualified distributions are tax-free, even after your death!  In other words, when that Roth account is inherited, no tax is paid on distributions to heirs, unlike with a traditional retirement account where in the hands of the heirs, distributions are taxed.

Here’s a fictional story to illustrate my point.  Mart Kohlersen is 57 years old.  He’s worked for 35 years and done very well for himself.  He has an investment account portfolio worth $1.8M and owns a lot of toys (boat, ATV’s, RV’s, etc.).  He owns his home outright which is worth $950,000 and has $10,000 in a retirement account because he figures he’ll live off his investment account and downsize his house when he retires if needed so he never bothered to put much funding into his retirement account.  One day, while driving his ATV, he seriously injures somebody.  His insurance is insufficient and he loses in the lawsuit.  The plaintiff obtains a $1.5M judgment against Mart.  His accounts are garnished and assets are sold, leaving him with a much smaller investment account and a much smaller house.  And no more toys.  To make matters worse, Mart died later that year without an estate plan, and for the next five years, his siblings and kids fought in probate court significantly and further depleting what assets were left/available.  It’s a sad story, and he definitely would have benefited from some much better asset protection, tax planning, and estate planning, BUT, EVEN if he did nothing else different except fully contribute to his retirement accounts, here’s a much happier ending:  If he would have fully contributed to a retirement account throughout his lifetime, a large portion of his net worth would be inside  retirement accounts and thus protected from the aforementioned creditor, and thus remain intact to receive the tax benefits discussed above, AND said account(s) would have directly passed to whomever he named as the beneficiary(ies) without having to go through probate court!

In sum, I’m not suggesting that the ONLY investment vehicle should be your retirement account.  There are annual contribution limits which make it impossible to put all of your funds in a retirement account.  However, I am suggesting that if you will take advantage of fully contributing to your retirement account as much as possible, the RESULT is you will have a large account that has built-in, automatic features that provide creditor protection, estate planning, and tax planning.  Our office is available to discuss your situation and make sure your estate plan, asset protection plan, and tax plan is well coordinated and includes taking advantage of this “low hanging fruit”.

Getting Married? You’ll Need a Caterer, a Photographer, a DJ … and a Lawyer!

September 12, 2017 Asset Protection, Law Comments Off on Getting Married? You’ll Need a Caterer, a Photographer, a DJ … and a Lawyer!

The process of getting married can be one of the most wonderful, exciting … and stressful periods in a person’s life.  There’s so much to plan for and do (and so many people to impress) that it can be hard to focus on what’s really important – the fact that you are making a commitment to love, honor and cherish the person who is (hopefully) the love of your life.

In the midst of deciding what flavor of cake to have and who will make the cut in terms of getting an invitation, please don’t overlook the fact that marriage is a change in legal status for both of you.  While certainly not the most romantic of wedding preparations, you may want to think about meeting with your attorney well in advance of the blessed day, to make sure your legal ducks are in a row before you say “I do.”  If you ask nicely, your lawyer might even agree to spread rose petals on the floor of his or her office to mark the occasion (for a small fee of course)!

Anyway, here are five legal questions you will want to consider before you take the plunge:

1) What are your assets? 

In most states, assets acquired prior to marriage are considered the separate property of the spouse who acquired them.  However, under certain circumstances, separate property can become marital or community property.  What are your shared (or unshared) expectations regarding such assets?  Do you have a plan for how assets acquired after the wedding will be handled?  Also, make sure you discuss your business as part of this conversation.  Even if the business doesn’t have many assets, the business itself is an asset that needs to be dealt with.

2) How are you going to handle finances?

Are your separate checking accounts going away and everything will be in one joint account?  Are you going to continue living separate financial lives?  Maybe you’ll play it down the middle and have “his, hers and ours” type accounts.  Regardless of what you decide, I suggest that you make a decision – any decision – before the wedding.  I render no advice about which approach is best, but I know plenty of marital spats could be avoided if folks would make these decisions before the wedding day (instead of trying to make them when one of the newlyweds wants to spend $1,000 to go diving in a shark cage on the honeymoon).

3) What are your debts and obligations? 

Now, I’m not suggesting that you run a credit report or have a minimum credit score requirement for your spouse.  However, I know someone who decided to get married primarily because she liked her new husband’s choice in shoes – so you could use worse criteria.  My bride-to-be and I had this very discussion, and I had to disclose that in addition to my student loans, I had racked up quite a bit of credit card debt during law school.  She still made the mistake of marrying me, but at least she couldn’t say I didn’t warn her about the credit card debt.  Also, like the joint vs. separate checking account conversation, I think it’s better to have this discussion before the wedding day.  You need to know going in how much of the family income will be going to cover debt payments, and whether your spouse will be a help or a hindrance when it comes time to apply for mortgages and other loans.

4) Are we going to bite the bullet and get a prenup? 

“Darling, I love you more than anything.  I can’t imagine my life without you … Whaddya say we each get our own an attorney and hash out how our assets will be divided if we ever get a divorce?!”  Yes, that is what you’re doing when you decide to get a pre-nuptial agreement.  I absolutely understand why people don’t want to do them.  They can be painful and a bit awkward (and, I mean, you probably won’t ever get a divorce).  I also understand why people don’t want to get the vaccination for diphtheria, tetanus and acellular pertussis (DTaP).  The DTaP vaccination can be painful and a bit awkward (and, I mean, you probably won’t ever get diphtheria).  However, in return for the small amount of pain and awkwardness caused by the DTaP vaccine, you get the peace of mind of knowing you have almost no chance of contracting diphtheria.  Similarly, in return for the small amount of pain and awkwardness caused by a prenup, you get the peace of mind of knowing how your assets are going to be divided if you ever get a divorce (and that you won’t have to pay a divorce attorney thousands to fight about it).  At the end of the day, I think both the DTaP vaccine and the prenup are almost certainly worth it.

5) What about our estate plan? 

If neither of you have a will, a trust, a medical or financial power of attorney or a living will, then your impending nuptials are a perfect time to get this work done.  Opt for the cash bar instead of the open bar at the reception, and use the savings to pay for a comprehensive estate plan (I promise your guests won’t mind).  If one or both of you do have these documents, then your marriage likely means they need to be amended.  You want to make sure you don’t unwittingly disinherit your spouse, or allow your mom (instead of your spouse) to have the authority to make decisions regarding your medical care if/when you become incapacitated.

Be aware that asking these questions before marriage may necessitate speaking with an attorney (either separately or jointly with your spouse-to-be).  The thought of visiting an attorney may be frightening to you.  However, just think, if you take that step and consult with an attorney prior to getting married, you may just conquer that fear of lawyers (and your fear of commitment) at the same time!