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Demography, Destiny, and Your Family’s Estate Plan

August ComteIt’s unclear whether Auguste Comte really said that “demography is destiny,” but you can and should use demographic data to make better estate and financial planning decisions.

As we’ve noted, an estate plan often represents a set of predictions about a family’s future, predictions that will be improved when the plan considers the family’s Longevity Distribution. Your family has one, it’s unique, and your planning should reflect it.

Demographers and actuaries at the Social Security Administration collect and summarize data on lifespan probabilities. The SSA data assumes a cohort of 100,000 people, and tracks how the cohort will grow smaller over time. By the time male cohort members are about age 80, half of them are projected to be living. For the female cohort, the halfway mark is around age 84. Those male and female halfway marks are the government’s best life expectancy estimates.

I think the distribution of lifespan reflected in the cohorts is much more useful for planning by clients and advisors than a single life expectancy point estimate.

If a financial and estate plan relies on point life expectancy estimates, those estimates are almost certain to be wrong, because half of the cohort members will live less, and half will live longer, than their life expectancy. A robust plan should work well across a wide range of longevity spans for various family members.

I used the SSA cohort data to make sample Longevity Distributions for two different families.

Mid Career Family Longevity Distribution continue reading

The Life Cycle Estate and Financial Planning Quadrant

People live their lives as a unitary whole, but often analyze them in segments. It’s valuable to keep in mind how these segments relate.  Consider the diagram below:

Life Cycle Estate and Financial Planning QuadrantThe Life Cycle Estate and Financial Planning Quadrant has four domains: Facts, Forecasts, Life Stages, and Unexpected Events.

Facts are empirically observable data, things you can measure.

Examples of personal Facts include your age, current health, balance sheet, and income statement. Other Facts can be impersonal, including sovereign credit ratings, the tax code, and geopolitical issues.

Personal Facts are susceptible to change and improvement; impersonal Facts generally aren’t.

Measuring Facts accurately and tracking them consistently improves the quality of planning results.

Forecasts are predictions. Although in retrospect they will prove to be more or less accurate, when made, forecasts are necessarily subject to uncertainty.

Some Forecasts are personal, such as your life expectancy, or whether a career choice will make you happy.

Others, such as those about economic growth and future asset class returns, are impersonal.

Forecasts can be a hybrid – your assessment of how impersonal forces will affect you, personally. Hybrid Forecasts include those for your income growth, how long you will work, and the asset allocation that will best balance your need for return against aversion to risk.

Life Stages often follow a predictable path. (Shakespeare said this far more eloquently in As You Like It.) continue reading

It’s not uncommon for an old irrevocable trust to no longer fit a family’s circumstances, for the simple reason that Yogi Berra was right when he noted that “It’s hard to make predictions, especially about the future.”

Trusts provide advantages, including protection from creditors, divorce, or spendthrift behavior. To obtain these advantages, trusts place restrictions on a beneficiary’s access to and use of trust property.

A trust’s terms represent a forecast by the settlor about future tax, financial, and family circumstances. This forecast balances restrictions and flexibility in a way that makes sense at the time, but sometimes a trust agreement’s implied predictions turn out to be wrong.

For instance:

  • Descendants may have turned out to be much richer (or poorer) than predicted.
  • In-laws may have turned out to be more agreeable than expected.
  • Beneficiaries may have special needs, or heightened asset protection concerns of their own.
  • Tax laws may have changed.

In instances like these, “decanting” the old trust into a newer, updated trust can be an effective response to the new circumstances facing a family. Since 2012, a Kentucky statute (KRS 386.175) has made decanting more cost-effective, and thereby available to address a wider range of trust situations. It’s worthwhile to take a quick look at how Kentucky’s decanting statute works. continue reading

Homestead Issues With Your Florida Beachfront Bargain

floridabeachIt’s wintertime, when one can’t help but think about Florida’s many advantages as a retirement haven compared to northern states. In addition to no state income taxes and better weather, a lesser-known but important Florida feature is its homestead laws.

“Homestead” presents deceptively complex issues in snowbirds’ estate and tax planning when they finally become Florida residents, including asset protection, property tax savings, and restrictions on the estate plan.

Florida’s asset protection for homesteads is anchored in the state’s constitution (Article X, Section 4). Homestead property owned by a natural person is protected from forced sale under process of any court or judgment lien (except for obligations relating to the real estate itself, such as property taxes, mortgage principal and interest, and contractors’ liens).

The asset protection for homestead includes land and improvements on the land, with an acreage limit of up to 160 contiguous acres outside a municipality, and one-half acre inside a municipality.

Florida also offers two sorts of property tax savings for homestead property: (1) the “$50,000 exemption” and (2) the “Save Our Homes” limit on annual property tax increases.

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In 2010, KYEstates provided coverage here, here, and here regarding creditor protection for inherited IRAs. At that time there was no clear consensus on the degree of protection these accounts enjoyed. Earlier this year, in Clark v. Rameker, 573 U.S. ___ (2014), the Supreme Court resolved a circuit split and delivered bad news for debtors, finding that a debtor’s inherited IRA was includible in her bankruptcy estate.

Clark is an important decision because it clarifies that IRA assets inherited by adult children or other beneficiaries are exposed to creditor claims.

Because qualified retirement plans such as 401(k) accounts rolled into IRAs are a growing fraction of the wealth many families hold (including, particularly, those of high-earning professionals), Clark presents a non-tax reason for many families to consider using trusts for adult children in their estate planning.

It was fun to read the “Cliffs Notes” Clark provided on the subtleties of how various types of IRAs are treated. If that overview was good enough for “the Supremes”, it’s probably worthwhile sharing in summary form here.

  • Qualified contributions to traditional IRAs are tax-deductible.
  • Contributions to Roth IRAs are not tax deductible, but qualified distributions from Roth IRAs are tax-free.
  • An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. When the heir is the owner’s spouse, the spouse may either “roll over” the IRA funds to his or her own IRA, or keep the IRA as an inherited IRA. When anyone other than the owner’s spouse (such as an adult child) inherits the IRA, the heir may not roll over the funds; the only option is to hold the IRA as an inherited account.
  • An individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. Further, the owner must either withdraw the entire balance in the account within five years of the original owner’s death, or take minimum distributions on an annual basis. Additionally, in contrast to a traditional or Roth IRA, the owner of an inherited IRA may never make contributions to the account.

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