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Estate Plan

How Does My Annuity Fit Into My Estate Plan?

Selecting the right type of annuity for yourself is no small feat.  Of course, you’ve put in the research and planned with your financial advisors.  But you might still be wondering what happens to those annuity payments upon your death.

In addition to their benefits as a financial tool for your goals, annuities can have a positive impact on your beneficiaries after you’re gone — but only if you take smart estate planning steps to make sure your wealth ends up in the right hands.

Types of annuities

Your annuity type affects how things pan out after your death.  In some cases, annuities end with the death of the annuitant.  In other cases, the annuity payments continue to be distributed to a named beneficiary.  If you haven’t already named your beneficiaries, you mustn’t wait any longer.  Make sure to work with your estate planning attorney when naming your beneficiaries because you’ll want them to be coordinated with your will or trust.

Annuity
  • Immediate vs deferred: You may have chosen an immediate annuity, which begins paying out as soon as your initial investment is made.  This is a common choice for those nearing retirement or those looking to secure long-term income after a windfall like an inheritance or the sale of a business.  However, many people opt for a deferred annuity and don’t begin receiving payments for some time.  Deferred simply means that it begins paying out at some point after the initial investment.
  • Fixed-period or lifetime: A fixed-period annuity only lasts for a predetermined amount of time (such as 20 years).  A lifetime annuity pays out during the annuitant’s life, and these are commonly purchased for the lives of both spouses.
  • Fixed-sum or variable: Within both immediate and deferred annuities, you’ve likely selected either a fixed-sum payment schedule or fluctuating payments depending on the performance of your investments in the market.

Why you need to name your beneficiaries explicitly

It’s easy to think that including your loved ones in your will or trust is enough to cover your annuities as well.  But if you want your children, spouse, or other individuals to receive your annuities when you’re gone, you need to fill out paperwork (in consultation with your estate planning attorney) that names those people as beneficiaries.  Otherwise, your annuity sums could end up going to people you don’t want to leave your legacy to.

Annuity death benefits

There are a few different ways you can build death benefits into your annuity plan so that your wealth is passed on to your beneficiaries once you’re gone.

  • Standard death benefit: The value of the annuity at the time of your death is passed to your beneficiary.
  • Return of premium death benefit: Either the current value or the amount of the initial premium (whichever is greater) is distributed to your beneficiary.
  • Stepped-up death benefit: The highest anniversary value is distributed to your beneficiary.

In each of these cases, your beneficiary can decide if they’d like to receive this payment as a lump sum or over some time.  With so many options, it’s a good idea to discuss an annuity with your estate planning attorney before you sign up for one.  Your financial advisor works with you to make sure the annuity fits your financial goals, and we can work with you to make sure it works with your estate planning goals.  If you already have an annuity, it’s important to work with us as your estate planner to make sure it’s taken into account with the rest of your estate plan.

Annuity taxation

It’s rarely uplifting to consider how much of your annuity value will be lost to taxation before being handed over to your beneficiary, but taxes are a fact of life (and estate planning).  Your annuity will either be taxed as part of your estate (as an estate tax if you have a large enough estate) or as a disbursement to your beneficiary upon your death (as an income tax).  However, in most cases, your spouse can continue to receive annuity benefits or inherit your annuity with little to no tax burdens.

How your estate planning attorney can help

As with many estate planning and financial issues, choices you make about your annuity can make a big difference for your loved ones.  You want to make sure you’re setting your beneficiaries up with the right kind of death benefits with as little loss to taxation as possible.  Give us a call today!  Call our office at 832.408.0505 or schedule your appointment right now so we can review your current annuities and explore ways to get more out of them for you and your family in the long run.

Cryptocurrency and Estate Planning: What You Need to Know

Cryptocurrencies have been making headlines as of late, with more and more investors wanting in on this digital currency.  Cryptocurrencies are attractive because they are unregulated, decentralized, and anonymous.  While secrecy is useful in some areas of life, when it comes to estate planning it can lead to disaster.  Indeed, your entire cryptocurrency investment can essentially disappear into thin air the moment you pass away or become incapacitated.  If you have not taken the proper steps to plan and protect these assets, your loved ones left behind have no way of accessing or recovering them.

Cryptocurrencies Explained

Cryptocurrency is a form of internet currency.  Instead of a central bank regulating the funds, encryption techniques are used to regulate the amount or units of currency.  These techniques are also used to verify the transfer of funds.  In this manner, cryptocurrency can be transferred online without a third party.  Some cryptoassets have units that are all the same (called “fungible tokens”).  Bitcoin is an example of a fungible token since all bitcoins are the same as one another.  Other cryptoassets have unique attributes (called “non-fungible tokens”).  Cryptokitties is an example of a nonfungible token since each digital “cat” is unique.

Notably, if you lose the key (i.e., the encryption) to your cryptocurrency, you will be unable to access your digital assets.  Thus, making access to your key available to your loved ones upon your death or incapacity is vital to estate planning.  This is because if there is no access to the key, there is no access to the assets.  Unlike more “traditional” assets, there is no third party to control or compel assets nor reset the key for access to these digital funds.  The software or hardware device that holds the keys to your cryptocurrency and manages your transaction is referred to as a “wallet.”

Digital Asset Estate Planning

It is important to understand that cryptocurrencies are typically a non-listed, non-vetted asset category.  In other words – cryptocurrencies are not like publicly traded stocks, which have a vetting process, legal disclosures, and are subject to other requirements.  In short, buyer beware when it comes to digital currencies.  Therefore, if you own cryptocurrency — or are thinking about investing in digital currency — understand that you will need a technical access plan (a way to ensure your successors can access your digital wealth) in addition to a legal plan in order to effectively create an estate plan that incorporates these digital assets.  And because what is going on with digital currency is evolving all the time, and quickly, it is important to touch base with a knowledgeable estate planning attorney at least once a year to make sure you and your family’s needs are being met.

Keeping your money, family heirlooms, and other values hidden from everyone in a safe in an unknown location without giving anyone the combination to the safe is foolish.  The same is true if you own cryptocurrencies and do not take the appropriate steps to protect this asset through estate planning.  Do not let life’s surprises leave your family in the dark.  Contact us today to learn about your options and how to protect the loved ones you will leave behind.

Retirement Planning for Business Owners

For many employees, saving for retirement is usually a matter of simply participating in their employer’s 401(k) plan and perhaps opening an IRA for some extra savings.

But, when you’re the owner of a business, planning for retirement requires proactivity and strategy.  It’s not just the dizzying array of choices for retirement accounts, there’s also planning for the business itself.  Who will run the business after your retirement?  Additionally, your estate plan must integrate into your retirement and business transition strategy.

Owners of businesses (like employees and everyone else) want to make sure they will have enough money in retirement.  Business owners recognize the value of their businesses, so they are often tempted to reinvest everything into the enterprise, thinking that will be their “retirement plan.” However, this might be a mistake.

Retirement Accounts for Business Owners

Rather than placing all your eggs in one basket, it makes sense to have some “backup” strategies in place.  There are many retirement account options open to business owners.  Although the number of options can make things confusing, a tax and financial professional can often quickly make a recommendation for you.

For example, you may consider opening a 401(k), SEP-IRA, SIMPLE, or pension plan.  This can reduce your income taxes now, while simultaneously placing some of your wealth outside your business.  From a financial perspective, these account are tax-deferred, so the investment growth avoids taxation until you retire, which greatly boosts returns.  The “best” plan really depends on how much income your business earns, how stable your earnings are, how many employees you have, and how generous you want to be with those employees.  You must consider how generous you’ll be with employees because the law requires most tax-deferred plans to be “fair” to all employees.  For example, you can’t open a pension or 401(k) for yourself only and exclude all of your full-time employees.  When making this decision, consider that many employees value being able to save for their retirement and your generosity may be repaid with harder work and loyalty from the employees.

Depending on how many employees you have, you may even consider “self-directed” investment options, which can allow you to invest some or all of your retirement funds into “alternative” investments, such as precious metals, private lending arrangements, real estate, other closely held businesses, etc.  These self-directed accounts are not for everyone, but for the right person, they open up a wide world of investment opportunities.  The tax rules surrounding self-directed tax-deferred accounts are very complex and penalties can be incredibly high.  So, if you choose to do self-directed investments, always work with a qualified tax advisor.

Outside of your business, you can likely contribute to an IRA or a Roth IRA.  This can allow you to add more money to your retirement basket, especially if you’ve maximized your 401(k), SEP, or SIMPLE plan.  Like the other tax-deferred accounts, self-directed IRAs are also an option, opening up a broad world of investment options.

As a business owner, you likely have a great deal of control over your health insurance decisions.  If you’re relatively young and healthy or otherwise an infrequent user of health care services, consider using a high deductible health plan (HDHP) and a health savings account (HSA) to add additional money to your savings.  These plans let you set aside money in the HSA which can be invested in a manner similar to IRAs.  At any time after you setup the account, you can withdraw your contributions and earnings, tax-free, to pay for qualified medical expenses.  And, after you turn 65, the money can be used for whatever purpose you want, although income tax will need to be paid on the distributions.

Selling or Transferring the Business

Many business owners dream of a financially lucrative “exit” when a business is sold, taken public, or otherwise transferred at a significant profit for the owner.  This does not happen by accident – a business owner must first create and sustain a profitable enterprise that can be sold.  Then, legal and tax strategies must be coordinated to minimize the burdensome hit of taxes and avoid the common legal risks that can happen when businesses are sold.  When a business is sold, the net proceeds can form a significant component of the owner’s retirement.  When supplemented by one or more of the retirement accounts discussed above, this can be a great outcome for a business owner.

On the other hand, other businesses are “family” businesses where children or grandchildren will one day become owners.  Like their counterparts who will sell their businesses, these business owners must also focus on creating and sustaining a profitable enterprise, but the source of retirement money is a little less clear.  In these cases, clearly thinking through the transition plan to the next generation is essential.  Although the business can be given to the next generation through a trust or outright, there are also transition options to allow for children, grandchildren, or even employees to gradually buy-out the owner, if the owner needs or wants to obtain a portion of the retirement nest egg from the business.

The Importance of Estate Planning

Regardless of which retirement accounts (401(k), SEP, SIMPLE, IRAs, HSAs) you select, it is wise to integrate them into your estate planning.  You’ve probably already considered who you want to take over your business after you retire (perhaps a son or daughter or a sale to a third party).  For your retirement accounts, an IRA trust is a special trust designed to maximize the financial benefit, minimize the income tax burden, and provide robust asset protection for your family.  These trusts integrate with the rest of your comprehensive estate plan to fully protect your family, provide privacy, all while minimizing taxes and costs.

Leverage the Team Approach

Let us work with you, your business advisors or consultants, your tax advisor, and your financial advisor to develop a comprehensive retirement, business transition, and estate planning strategy.  When we work collaboratively, we can focus on setting aside assets for retirement, saving as much tax possible, while freeing you to do what you do best – build your business!

Contact us or give us a call today so we can help you craft a retirement, business transition, and estate planning strategy.

Rewarding Your Employees by Giving Them the Business

Retiring from your business can a tough decision.  To ensure that what you have built continues on, there needs to be a plan for succession.  For some people, they have spent years grooming a child or other family member to take over, wanting the business to stay in the family.  Others look to sell to a third party for a quick way out that will also give them a nest egg for their next phase of life.  However, there is a third option–transferring the business to your employees.  If you like the idea of transferring your business to long-time faithful employees who have contributed greatly to the company’s success over the years, below are a couple of options for you to consider.

Management Buyout

This type of transfer is a process, not an event.  The management team comes together with the financing and arranges a deal with you to buy the assets and operations of the business.  A management buyout has the benefit of being quicker and more confidential than a third party transaction, and the structure of the deal can be more flexible.  There is also the added benefit that the legacy of the company will continue in the hands of those in management who have earned the opportunity to buy the business with his or her loyalty and hard work.

With this option, you may also be able to provide some continued service to the company as an officer and/or director.  In addition, you may even be able to continue in some part of the business that you enjoy.  And you may be able to keep some control over the company.

When considering this option, it is important that you consider the following:

  • How much cash, debt, and earn-out will be involved?
  • When will the transfer of control occur?
  • If management has little or no capital, where will they get the money for the buyout?

Employee Stock Ownership Plans (ESOPs)

An ESOP is a qualified plan under the Employee Retirement Income Security Act of 1974 (ERISA).  Instead of selling directly to management, you are making the sale to the ESOP, which has been set up by the company.  The ESOP can either attempt to get bank financing to purchase the stock from you, or you can take a note for the value of your shares and have the repayment taken care of internally.  The employees become plan participants, similar to other employee incentive programs and are entitled to benefits at certain points as determined by the terms of the ESOP.

This option is similar to a management buyout, but with potentially valuable tax benefits.  With an ESOP, you are selling stock in the company, not the assets, so the taxes are capital gains, not ordinary income taxes.  Because of this distinction, there are planning techniques available that may help save on taxes with this transaction.

When reviewing this option, there are a few things to consider:

  • In order to repay the note, most (if not all) of the excess cash flow from the business may be needed, instead of using it to grow the company;
  • The company must set aside money to meet repurchase obligations on the ESOP when an employee retires, dies, becomes incapacitated or terminates his or her employment after vesting;
  • Stock in an ESOP is allocated based on payroll, so there are no extra management incentives.

Both management buyout and ESOPs are options that should be considered if you are looking to transfer your business to your employees.  However, we are here to help you.  Give us a call or contact us, we would be happy to discuss these options more and find a solution that best protects you and your legacy.

Should Your Child’s Guardian and Trustee be the Same Person?

If you have overheard any discussion about estate planning, you have likely heard the words “guardian” or “trustee” tossed around in the conversation.  When it comes to estate planning, who will be ultimately in charge of your minor child is an important decision that requires consideration of many factors.  Although there is no substitute for you as a parent, a guardian is essentially someone who steps in as a parent, assuming the parental role and raising the child through adulthood.  A trustee, on the other hand, is in charge of managing the financial legacy that has been left behind for the minor.  As a parent, you need to take into account the characteristics needed for each role.

Who Makes a Good Guardian?

When choosing a guardian, the top factor to consider is who is the best person that will love and raise your child in a manner that you would.  This would include religious beliefs, parenting style, interest in extracurricular activities, energy level, and whether or not he or she has children already.  Keep in mind that a guardian will provide day-to-day love, care, and support for your child.  While the guardian you choose may be great with your children, he or she may not be great with money.  For this reason, it may make sense to place the financial management of your minor child’s funds in the hands of someone else.

Who Makes a Good Trustee?

Not surprisingly, when choosing a trustee the most important characteristic is that he or she is great with finances.  Specifically, the trustee must be able to manage the funds in accordance with your intent and instructions that are left in your trust.  Consider whether he or she will honor your wishes.  Likewise, should you choose to grant your successor trustee discretion in making financial decisions regarding the management of funds left behind you should ensure the individual’s decisions will be aligned with your intent.  In short, you want to choose a successor trustee who will act in your minor child’s best interest within the limits you have set forth in your estate plan documents.  If you choose two different people for the role of guardian and trustee, make sure to consider how the two get along as they will likely have to work together throughout your minor’s childhood and possibly into adulthood.

Seek Help to Make Your Decision

While estate planning can be daunting, it does not have to be.  Contact a knowledgeable estate planning attorney to help guide you through this process.  We can explain your options and advise you on the best plan that will follow your wishes while at the same time meeting your family’s needs.

How to Pick a Trustee, Executor, and Agent Under a Power of Attorney

While the term fiduciary is a legal term with a rich history, it very generally means someone who is legally obligated to act in another person’s best interests.  Trustees, executors, and agents are all examples of fiduciaries.  When you pick trustees, executors, and agents in your estate plan, you’re picking one or more people to make decisions in your and your beneficiaries’ best interests and in accordance with the instructions you leave.  Luckily, understanding the basics of what each of these terms means and what to consider when making your choices can make your estate plan work far better.

Trustee

A revocable living trust is often the center of a well-designed estate plan because it is simply the best strategy for achieving most individuals’ goals.  In many revocable living trusts, you will serve as the initial trustee and will continue to manage the trust assets as you had in the past.  Your successor trustee will be responsible for making sure your wealth is passed on and managed in accordance with your wishes after your death or during your incapacity.  Like each of the following individuals involved in your estate planning, it’s best to have a trusted person or financial institution carry out this vitally important role.

It’s important to make the language in your trust as clear as possible so that your trustee knows exactly how to handle various situations that can arise is asset distribution.  Lastly, your trustee will only control the assets contained within the trust — not the rest of your estate, the reason why completely funding your living trust is crucial.

Powers of Attorney

Your power of attorney is the document in your estate plan that appoints individuals to make decisions on your behalf if you become unable to do so yourself.  There are a few different types of powers of attorney, each with their own specific provisions.  There is quite a wide range of situations covered by various powers of attorney, and we can help you decide which types you’ll need based on your current situation and future goals.  Here are two common types to cover in your estate plan:

Financial Powers of Attorney

Financial powers of attorney grant individuals the ability to take financial actions on your behalf such as purchasing life insurance or withdrawing money from your accounts to cover your expenses.  A person who acts under the authority given in a power of attorney is generally called an agent.  Regarding financial decisions, an institution like a trust company, can also be named.  Keep in mind that trust companies will charge a fee for this service.

Health Care Powers of Attorney

Health care powers of attorney cover a wide range of specific actions that can be taken regarding an individual’s medical needs such as making decisions about the types of care you receive or who will be providing the care.

Executor

Your executor is the person who will see your assets through probate, if necessary, and carry out your wishes based on your last will and testament.  Depending on your preferences, this may be the same person or institution as your trustee.  You might also see this position designated as personal representative, but it means the same thing.

Some individuals chose to go with a paid executor.  This is usually someone who doesn’t stand to gain anything from your will, and is often the best choice if your estate is large and will be divided among many beneficiaries.  Of course, family or friends can also serve, but it’s important to consider the amount of work involved before placing this burden on your family or friends.

Being an executor can be hard work and may have court-ordered deadlines, so it’s crucial to pick someone you know will be up for the job.  They will probably need to hire a CPA to help sort out your taxes and a lawyer to assist in the process.  Of course, if there’s a dispute, attorneys, appraisers, mediators, or other professionals will undoubtedly need to be involved.  Choosing a spouse or someone else intimately involved in your life can be convenient because they may already be familiar with your assets and have an easier time making sure your wishes are carried out.  However, because of the time involved and the nature of some assets, they may not be up to the task at the time.

Get in touch with us today

Let us help you make the process of picking your trustee, powers of attorney, and executor as smooth and headache-free as possible.  Once you have these choices in place, you’ll be able to rest easy knowing that your estate plan is in good hands no matter what life brings.  Call or contact us to make an appointment today.

Five Considerations When Selecting a Guardian for Your Children

There is no question that having children changes everything — and estate planning is no exception.  If you and your spouse pass away or become legally incapacitated, and arrangements were never made in the event of such an emergency, your minor child or children will have to be placed with a new family.  Not surprisingly, such a drastic change can be a disruptive process for minor children — even if they are placed with members of your family.  If you choose a guardian for your child in your will or other estate plan documents this difficult time can go much more smoothly.

Who Makes a Good Guardian?

A guardian for your minor child “steps into” your shoes in the event you can no longer care for him or her.  No one wants this to happen, but when a parent becomes incapacitated or dies, the minor child left behind will need care.  Because a guardian plays such an important role in your family’s life, there are several factors to consider when choosing someone to take on this role:

  1. Shared values. It is best to choose someone who has a common level of religious belief.  For example, if you are not the religious type you may have objections to someone who would expect your child to join and regularly attend church.
  2. Parenting style. Whether you run a tight ship at home or prefer a laissez-faire approach to raising children, choosing someone who will continue in your style is likely the best fit.
  3. Involvement. Someone who travels all the time will not be able to regularly show up to your kids’ soccer games, gymnastics meets, band concerts, and live theater performances — an important part of being a guardian to your children.
  4. Energy level. Having the stamina to be able to keep up with your child — especially during the younger years — is an important factor.
  5. Other children. While a potential guardian who already has children should not be a deal breaker, you should consider how adding more children into the family will affect the dynamic, particularly when it comes to the ages of the kids.

Other Factors to Consider

In the same manner that you can choose different individuals to manage the estate’s finances and your minor children’s day-to-day needs, you can also choose more than one guardian for your kids.  You may want to assign one guardian per child, depending on your family’s circumstances.  That being said, setting up guardianship this way may result in your children being separated from one another, which is usually not a good outcome.  Choosing someone who has the resources to care for your children — even if you have left money behind for their care — should also be a factor to consider.  Finally, choosing someone who is young enough to be able to care for your child through his or her adulthood, as well as someone who is in good enough health to withstand the challenges of raising a child, are important factors that should be taken into account.

Once you have made a decision on who will be your child’s guardian, contact an experienced estate planning attorney.  We can draft the documents you need in order to make this legally binding, as well as create an estate plan that suits your family’s needs and will protect your loved ones in the event you are no longer able to do so yourself.

Protecting Your Children’s Inheritance When You are Divorced

Consider this story.  Beth’s divorce from her husband was recently finalized.  Her most valuable assets are her retirement plan at work and her life insurance policy.  She updated the beneficiary designations on both to be her two minor children.  She did not want her ex-husband to receive the money.

sorry rose

Beth passes away one year after her divorce.  Her children are still minors, so the retirement plan and insurance company require an adult to be appointed to receive the inheritance Beth left behind.  Who does the court presumptively look to serve as the caretaker of this money?  Beth’s ex-husband who is now the only living parent of the children.  (In some states, this caretaker of the money is called a guardian, whereas in others it is the conservator.  The title does not matter as much as the role, which is to manage the funds on behalf of a minor, since the minor is not legally able to handle significant assets or money.)

Sadly, stories like Beth’s are all too familiar for the loved ones of divorced people who do not make effective use of the estate planning tools.  Naming a beneficiary for retirement benefits or life insurance, or having a will can be a good start.  However, the complexities of relationships, post-divorce, often render these basic tools inadequate.  Luckily, there is a way to protect and control your children’s inheritance fully.

Enter the Trust

A trust allows you to coordinate and control your estate in a way that no other tool can.  For those who are not yet familiar, a trust is a legal arrangement for managing your property while you are alive and quickly passing it at your death.  There are a few key players in the trust.  First, there is the person who created the trust, often called the Trustmaker, Grantor, or Settlor (this is you).  Second, there’s the Trustee who manages the assets owned by the trust (usually you during your life and then anyone you select when you are no longer able to manage the assets).  Finally, the Beneficiaries are the people who receive the benefit of the trust (usually you during your life, and then typically children or anyone else you choose).

How a Trust Protects Your Children’s Inheritance after a Divorce

A trust protects your children’s inheritance in a few distinct ways:

  1. Since you select the Trustee, you can choose someone other than your ex-spouse to manage the assets.  In fact, you can even state that the ex-spouse can never be a Trustee, if you wish.  If Beth had a trust, she could have named her brother to be Trustee after her death.  Her brother (rather than her ex-husband) would then be in charge of the children’s inheritance.
  2. Since you select the Beneficiaries, you can determine how the trust assets can be used for them.  You may have long-term goals for your beneficiaries, such as college, purchasing of a first home, or starting a business.  When you share your intent, your Trustee can invest the assets appropriately and ensure your legacy is used the way you want, rather than the assets being potentially wasted or used in a thoughtless way.  If Beth had a trust, she could have instructed how she wanted the inheritance used, rather than leaving it to the whims of a court and her ex-husband.
  3. A fully funded trust avoids probate, so your children do not have to deal with the cost, publicity, and delay that is all-too-common in probate cases.  Although “plain” beneficiary designations, like the one that Beth used, also avoid probate, they may still open the door for a guardianship or conservatorship court case, especially when your children are minors.  A fully funded trust avoids these guardianship and conservatorship cases.  This means more money for your intended beneficiaries and less for the lawyers and courts.

If you are divorced, it is essential to make sure your plan works precisely the way you want.  Every situation is unique, but we are here to help design a plan that achieves your goals and works for your family.  Give us a call today.