What Everyone Should Know About Protecting Themselves in a Recession

Six Steps You Can Take to Minimize Your Risk in Uncertain Times

1 – Control What you Can Control

The tremendous turmoil in financial markets and financial institutions has caused a great deal of concern for many of us. It’s important to realize that, while we cannot control what happens in the stock market, we can control what we do with respect to our estate planning. Now, more than ever, it is vital to have a plan in place that will protect your assets, provide for your family and spare them the burden and expense of probate. These are things over which you have control. By taking control over the things in your life that you can control, you will be left with a wonderful sense of empowerment that will make the uncertainties of the world seem less scary.

2 – Turn Off the Television

This piece of advice goes along with number one. What is happening on Wall Street as the markets correct themselves is something which is out of your control. Other than doing your civic duty and voting when it comes time to, neither you nor I can do much to affect what happens in the global economy. So, why worry about it. Stressing out over whether Congress passes a bailout bill and what happens in the stock market is not going to help you make any decisions about what you need to do and adds stress unnecessarily. So do yourself a favor and turn off the TV.

3 – Insurance

Based on your age, your income and your asset level, make sure you have enough insurance in place to protect you and your family in the event of death, disability, or a long term medical condition. This is one of the most important things you can do to protect your family. This also falls under the heading of things WE CAN CONTROL. By having an appropriate amount of insurance in place, you can make sure that your family will be taken care of if something unexpected happens to you. And oh, by the way, it’s far more likely that you will suffer a disability than death anytime soon, so make sure that you have adequate disability insurance in place to maintain your lifestyle if you can’t work any longer. Almost as important for those over fifty is to make sure you have long term care insurance in place. As time goes by rates for long term care insurance will rise and now is the time when you can lock in a premium.

4 – Business Succession

If you own your own business, now is the time to make sure that there are plans in place to transition your business to the next generation. Seventy per cent (70%) of family businesses in the United States do not survive past one generation and only three per cent (3%) make it to the fourth generation. Having the right plans in place and establishing the right relationship between your family and your business are keys to long term success.

5 – Savings

Now is the time to focus on frugal living. If you do not work with a financial advisor currently, sit down with one today. The real value you can get from working with a financial planner it to take a serious look at what you are spending money on and what you can cut to increase your savings. Also, if you have any lingering differences with your spouse over money, this is the best way to get those issues out in the open and discuss them with an unbiased and neutral third party.

6 – Living Trust – FDIC Protection

Because of the increased protection your assets can have from the FDIC in a Living Trust, now may be the perfect time to set up a Living Trust for the protection of yourself and your family. Under new FDIC rules, accounts held within a Living Trust have FDIC protection of $100,000 for each beneficiary of the trust. This can greatly increase your level of protection. For more info on this here’s a link to an article on Bloomberg.

A Reverse Mortgage Might Not be the Best Idea

This New York Times article points out some of the drawbacks to reverse mortgages.  These include high fees and pressure from salesmen to invest in high risk investments.  Not all reverse mortgage salesmen are charlatans, but it is important to fully understand what you are getting yourself into with a reverse mortgage.  The things to consider are what are the fees the mortgage company will charge, what is the interest rate and how much money are you going to be able to take out of your home.  Also important to consider is whether you want to leave the home to your heirs or beneficiaries.  If you do, a reverse mortgage can create a situation where the payoff is greater than the value of the property upon your death.  If you are considering a reverse mortgage transaction, talk with your estate planning attorney and your financial advisor first to see if the mortgage you are considering is a good deal and what your other options might be.

Here’s the link:

Tapping Into Homes Can Be Pitfall for the Elderly – New York Times

Decisions . . . Decisions . . . Decisions . . .

When asked how people want their assets divided after they are gone, some people have definite opinions, while others are less certain. Not only do people differ in the level of their uncertainty concerning how to divvy up their assets, they even differ in what factors are important in making the decision.

In June 2007, Money magazine released a reader poll concerning various financial issues. The following percentages of respondents ranked each factor as very important:

• Dividing the estate equally among your children: 69%
• How responsible each child is about money: 37%
• How helpful each child has been to you: 29%
• How close you are to each child: 22%
• How much money each child has: 22%
• How many children of their own each child has: 19%
• How much you like each child’s spouse: 10%
• 37% said it can be reasonable to disinherit a child.

Another item of indecision for many people is the choice of decision makers: Trustee, Personal Representative, Guardian, and Agents under powers of attorney. For each of these positions, it is important to name people whose decision-making ability you trust. You may be tempted to name all your children or siblings to avoid hurting anyone’s feelings. However, naming a large number of people to serve together in the same role invites family disharmony and chaos. For example, if property in the Trust is to be sold and you have seven Trustees, many of whom may be out of town, it would be a logistical nightmare to route paperwork all around the country. Typically, things work more smoothly if you limit the number of people in any given role. Besides, having a job thrust upon them may be something many would just as soon avoid.

Regardless of what factors are important to you, a qualified estate planning attorney can help you achieve your goals. For example, if you are concerned about your child’s ability to manage finances, the money can be left in a Trust which will prevent him or her from accessing the funds without the permission of a person whom you designate, the Trustee. If you do not like your child’s spouse and are concerned he or she might divorce your child and take some of the inheritance you leave your child, you can leave your assets in a “Divorce Protection Trust.” Such a Trust keeps the assets separate from marital assets. Therefore, it minimizes the risk of the assets ending up in the hands of the child’s future ex-spouse.

A qualified estate planning attorney can help you achieve your goals while paving the way for your family’s continued success and harmony after you are gone.

Help for Our Armed Forces

American military personnel serving in combat zones have enough to worry about. They put their lives at risk every day, in hostile territory, while doing what they are called to do.

The compensation they earn while stationed in the combat zone is excludible from gross income. In other words, it’s tax-free. This applies to all enlisted personnel and warrant officers for any month they served (even in part) in the combat zone. In addition, it covers any month during which they were hospitalized as a result of wounds, disease, or injury incurred in a combat zone (up until two years after the cessation of combat). Even officers’ pay in a combat zone is tax-free, up to the maximum amount of pay for enlisted personnel.

This seems like a great deal, but there are a few caveats. Even though you do not pay tax on the combat-zone pay, you must include it in calculating your qualification for the earned income tax credit and the refundable portion of the child tax credit.

Until recently, if you only had tax-free combat-zone pay, you could not fund an Individual Retirement Account, otherwise known as an IRA, because all your pay would have been excluded from gross income. You must have income from work, or “earned income” in order to make an IRA contribution. Since all the combat-zone pay was excluded from gross income, it did not count as earned income either. A rule that had been meant to benefit our military personnel had inadvertently hurt them.

A new law was passed and signed on May 26, 2006, which provided that, for purposes of figuring eligibility for contributing to an IRA (or Roth IRA), the combat-zone pay can be considered part of earned income. The Heroes Earned Retirement Opportunities (“HEROs”) Act is effective retroactively for 2004 and 2005. You have until May 28, 2009 to make contributions for those years. Also, if you decide to make a contribution for those years, you can still claim a tax refund resulting from that contribution for up to another year. For tax years 2006 and later, military personnel with combat-zone pay are under the normal rules and deadlines.

Now, our men and women in uniform can save for retirement even while fighting for us in a combat zone. Finally, Congress has passed something for which we can all cheer! If you or a loved one is in a combat zone, such as Iraq or Afghanistan, contact a qualified estate planning attorney to discuss how to plan for retirement and the future in general.

A qualified estate planning attorney can help you make sure you get the full benefit of your combat pay. (www.smithbarid.com).

Government Helps Fighting Men and Women to Secure Retirement

Service members receiving combat pay now have a rare opportunity to put away money for retirement and, in some cases, to get tax refunds for years that have already passed. The Heroes Earned Retirement Opportunities Act (HERO Act) was signed by President Bush on May 29, 2006. Prior to the HERO Act, service members with little or no earned income other than combat pay could contribute very little or no money to an IRA.

The new law recognizes that combat pay (which is not subject to income tax under the Internal Revenue Code) does count as compensation for IRA contribution purposes. This means that many thousands of fighting men and women can now contribute their hard-earned combat pay (and other earnings) to an IRA (an individual retirement account).

The Act gives service members who received non-taxable combat pay in 2004 and/or 2005 until May 29, 2009 to make IRA contributions for those years. Service members will also be able to make IRA contributions for 2006 and subsequent years. The time limit for IRA contributions for tax year 2006 is April 15, 2007.

Total annual IRA contributions are limited by law. The contribution limit for 2004 is $3,000 (or $3,500 for those age 50 and older). The contribution limit for 2005 is $4,000 (or $4,500 for those age 50 and older). The contribution limit for 2006 also $4,000 (or $5,000 for those age 50 and older).

Due to extensions of income tax return filing deadlines for those in combat zones, some service members have not yet filed 2004 and 2005 tax returns. Military combatants in this category can simply report their IRA contributions when the returns are filed. Service members who contribute to 2004 and/or 2005 IRAs, and have already filed returns for those years, should seek the help of a tax professional to amend their 2004 and 2005 returns. In many cases, such amended returns will result in additional refunds for the service members and their families.

Whether it means thousands of dollars in additional refunds, or just the important chance to sock away tax-free dollars toward retirement, the HERO Act creates an excellent opportunity for all service members whose earnings are primarily tax-free combat pay. A full-service estate planning firm can help you to make the right decision for your retirement and your family (www.smithbarid.com).

Whether your money is earned in combat for your country or not, it is critical to know the importance of saving for retirement. In fact, if you put $1,000 away for someone graduating from college today, it would be worth over $72,000 by the time they start collecting social security. (This assumes graduation at age 22, social security at age 67, and a 10% rate of return.) Albert Einstein called the power of compounding the eighth wonder of the world.

Today’s workers can accomplish this retirement savings with pre-tax dollars in their 401k or IRA. But, what happens when the time comes and you withdraw the money? The entire withdrawal is subject to income tax. If you die and leave your 401k or IRA to your children or other beneficiaries, it is taxable upon withdrawal by them. Further, if you die with more than $2 million, including your retirement assets, the balance of the retirement plan before the impact of income tax will be included in determining the tax on your estate.

The combined effect of estate and income taxation could result in the majority of the assets going to pay taxes. For example, assets over $2 million are estate taxed at 45%. In addition, if some of the assets are withdrawn to pay the estate tax, the withdrawal would incur federal and state income tax of as much as 35% or 40%. So, you could easily have 2/3 of your retirement assets lost to taxes.

There are some strategies to help soften the blow of the tax bite on retirement plans. First, you can defer the income taxes as long as possible. After you reach age 70 ½, you must start taking distributions based on the “Uniform Lifetime Table.” Based on this table, you would take approximately 1/27th the first year, and slowly increasing percentages each subsequent year. For example, at age 85, your required withdrawal will be approximately 1/15th.

After your death, you can achieve the maximum stretch for the income taxation deferral by naming younger beneficiaries who can stretch the required distributions over their longer life expectancies. However, you often want to keep younger beneficiaries from having control of assets. In that situation, you can use a Family Retirement Preservation Trust™ to get the maximum stretch for distributions after your death. This trust allows you to keep the assets in trust and still use the ages of the individual beneficiaries do determine the required withdrawals.

You can also start taking withdrawals from your retirement plan and use those distributions to pay for premiums on a life insurance policy. While you need not take withdrawals until after you reach 70 ½, you may start taking withdrawals from retirement plans beginning at age 59 ½ without penalty. The life insurance policy can be owned by an irrevocable trust you set up. If done properly, the life insurance can be outside your taxable estate. This can help avoid estate taxation and converts an asset that is subject to income and estate taxation into an asset that is subject to neither.

Saving for retirement is important, as is planning for your family’s protection if something should happen to you. However, it is also important to consider how to avoid the unexpected tax trap into which retirement assets can put you. That is why intelligent retirement planning is a critical part of any effective estate plan. A qualified estate and retirement planning attorney can help you enjoy the trappings of retirement without the tax traps (www.smithbarid.com).