Planning for Marriage: Financial Tips for Women

 Planning for marriage should involve more than just picking out invitations and deciding whether you should serve chicken or fish at the reception. More importantly, you’ll want to take a look at how marriage will impact your financial situation. And while there are a number of issues you’ll need to think about, careful planning can increase the likelihood that you’ll have financial success as you enter this new chapter in your life.

Consider a prenuptial agreement

If either you or your future spouse has or may inherit substantial assets, or if either of you has children from previous marriages, you may want to consider a prenuptial agreement. A prenuptial agreement is a binding contract between future spouses that defines the rights, duties, and obligations of the parties during marriage and in the event of legal separation, annulment, divorce, or death. A prenuptial agreement typically addresses the following areas:

  • Assets and liabilities–What assets will each of you bring into the marriage? What liabilities do each of you have (e.g., credit card/mortgage debt)?
  • Contributions of each partner–Will there be particular consideration given for special contributions that either of you make (e.g., one spouse limiting his or her career)?
  • Divorce–If you and your future spouse divorce, will there be alimony or a lump-sum payment? How will you divide assets purchased from joint funds?
  • Estate planning–Who gets what at the death of either spouse?

Discuss your financial history

Marriage is the union of two separate individuals … and their finances. While talking about money can be a stressful topic for many couples, you’ll want to sit down and discuss your financial history and your future spouse’s financial history before you merge your money.

Start out by taking stock of each of your respective financial situations. You should each make a list of your individual assets (e.g., investments, real estate) and any liabilities (e.g., student loans, credit card debt) you may have. This is also the time to address items such as how much each of you earns and if either of you has additional sources of income (e.g., interest, dividends).

Agree on a system for budgeting/maintaining bank accounts

Right now, you are probably accustomed to managing your finances in a way that is comfortable for you and you alone. Once you are married, you and your spouse will have to agree on a system for budgeting your money and paying your bills together as a couple.

Either of you can agree to be in charge of managing the budget, or you can take turns keeping records and paying the bills. If both of you are going to be involved in the budgeting process, make sure that you develop a record-keeping system that both of you understand and agree upon. In addition, you’ll want to keep your records in a joint filing system so that both of you can easily locate important documents.

Once you agree on a budgeting system, you’ll be able to establish a budget. Begin by listing all of your income and expenses over a certain time period (for example, monthly). Sources of income can include things such as salaries and wages, interest, and dividends. Expenses can be divided into two categories: fixed (e.g., housing, utilities, food) and discretionary (e.g., entertainment, vacations). Be sure to include occasional expenses (e.g., car maintenance) as well. To help you and your future spouse stay on track with your budget:

  • Try to make budgeting part of your daily routine
  • Build occasional rewards into your budget (e.g., going to the movies)
  • Examine your budget regularly and adjust/make changes as needed

This might also be a good time to decide whether you and your future spouse will combine your bank accounts or keep them separate. While maintaining a joint account does have its advantages (e.g., easier record keeping and lower maintenance fees), it is sometimes more difficult to keep track of the flow of money when two individuals have access to a single account.

If you do decide to combine your accounts, each spouse should be responsible for updating the checkbook ledger when he/she writes a check or withdraws funds. If you decide to keep separate accounts, consider opening a joint checking account to pay for household expenses.

Map out your financial future together

An important part of financial planning as a couple is to map out your financial future together. Where do you see yourself next year? What about five years from now? Do you want to buy a home together? If you decide to start a family, would one of you stay at home while the other focuses more on his or her career?

Together you should make a list of short-term financial goals (e.g., paying off wedding debt, saving for graduate school) and long-term financial goals (e.g., retirement). Once you have decided on your financial goals, you can prioritize them by determining which ones are most important to each of you. After you’ve identified which goals are a priority, you can set your sights on working to achieve them together.

Resolve any outstanding credit/debt issues

Since having good credit is an important part of any sound financial plan, you’ll want to identify any potential credit/debt problems either you or your future spouse may have and try to resolve them now rather than later. You should each order copies of your credit reports and review them together. You are entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months (go to www.annualcreditreport.com for more information).

For the most part, you are not responsible for your future spouse’s past credit problems, but they can prevent you from getting credit together as a couple after you are married. Even if you’ve always had spotless credit, you may be turned down for credit cards or loans that you apply for together if your future spouse has a bad track record with creditors. As a result, if you find that either one of you does have credit issues, you might want to consider keeping your credit separate until you or your future spouse’s credit record improves.

Consider integrating employee and retirement benefits

If you and your future spouse have separate health insurance coverage, you’ll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate. If your future spouse’s health plan has a higher deductible and/or co-payment or fewer benefits than those offered by your plan, he or she may want to join your health plan instead. You’ll also want to compare the premium for one family plan against the cost of two single plans.

In addition, if both you and your future spouse participate in an employer-sponsored retirement plan, you should be aware of each plan’s characteristics. Plans may differ as to matching contributions, investment options, and loan provisions. Review each plan together carefully and determine which plan provides the better benefits. If you can afford to, you should each participate to the maximum in your own plan.

Assess your insurance coverage needs

While you might not have felt the need for life and disability insurance when you were single, once you are married you may find that you and your future spouse are financially dependent on each other. If you don’t have life or disability insurance, you will want to have policies in place in order to make sure that your future spouse’s financial needs will be taken care of if you should die prematurely or become disabled. If you already have life and disability insurance, you should reevaluate the adequacy of your existing coverage and be sure to update any beneficiary designations as well.

You should also take a look at your auto insurance coverage. Check your policy limits and consider pooling your auto insurance policies with one company (your insurance company may give you a discount if you insure more than one car with them). As for renters/homeowners insurance, you’ll want to make sure your personal property and possessions are adequately covered.

New Legislation Makes Many Tax Provisions Permanent

Tax LawThe Protecting Americans from Tax Hikes (PATH) Act of 2015

In one of its final actions for calendar year 2015, Congress passed the Consolidated Appropriations Act, 2016, a massive spending bill that will keep the federal government funded for fiscal year 2016. Signed into law on December 18, 2015, the legislation includes the Protecting Americans from Tax Hikes (PATH) Act of 2015 (Division Q of the Consolidated Appropriations Act), which addresses a host of popular but temporary tax provisions–commonly referred to as “tax extenders”–that had expired at the end of 2014, making many of them permanent. Some of the major provisions addressed are listed below.

Individuals

American Opportunity Tax Credit The American Opportunity Tax Credit (a modified version of the original Hope Credit) and the credit rules–including maximum credit amount, number of years of education covered, income phaseout ranges, and refundability provisions–are made permanent.
Child tax credit The lower $3,000 earned income threshold for determining the refundable portion of the tax credit is made permanent (if the credit exceeds tax liability, an amount equal to 15% of earned income over $3,000 may be refunded).
Credit for nonbusiness energy property The credit is extended for two additional years (through 2016); lifetime cap of $500 remains.
Deduction for classroom expenses paid by educators The $250 above-the-line deduction is made permanent–the rules that applied in 2014 are retroactively extended for 2015; starting in 2016, the limit will be indexed for inflation, and qualifying professional development expenses will be considered eligible expenses for purposes of the deduction.
Deduction for qualified higher-education expenses The above-the-line deduction, worth up to $4,000, is reinstated for 2015 and extended through 2016.
Deduction for state and local general sales taxes Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes–this is made permanent.
Discharge of qualified personal residence debt The exclusion from gross income of the discharge of debt associated with a qualified principal residence is reinstated for 2015 and extended through 2016.
Earned income tax credit The increased credit percentage for families with three or more qualifying children and the increased threshold phaseout range for married couples filing joint returns are made permanent.
Employer-provided mass transit benefits The monthly exclusion for employer-provided transit pass and vanpool benefits will be permanently set to the same level as the exclusion for employer-provided parking (applies retroactively to 2015, increasing the exclusion from $130 to $250 monthly).
Mortgage insurance premiums The provision allowing premiums paid for qualified mortgage insurance to be treated as deductible qualified residence interest on Schedule A of IRS Form 1040 (subject to phaseout based on income) is extended for two additional years, through 2016.
Qualified charitable distributions (QCDs) The provision allowing individuals age 70½ or older to make qualified charitable distributions (QCDs) from their IRAs, and exclude the distribution from gross income (up to $100,000 in a year), is made permanent.
Qualified conservation contributions of capital gain real property Special rules for qualified conservation contributions of capital gain real property are made permanent; new rules for qualified contributions by certain Alaska Native Corporations are added for years after 2015.

Businesses

Bonus depreciation Additional 50% bonus depreciation is reinstated for 2015 and extended through 2019; the bonus percentage is reduced to 40% in 2018 and 30% in 2019 for most property types.
Exclusion of gain on qualified small business stock The 100% exclusion of capital gain from sale or exchange of qualified small business stock held for more than 5 years is made permanent; it applies to alternative minimum tax as well as regular income tax.
IRC Section 179 expensing Increased dollar amounts ($500,000/$2,000,000) associated with Section 179 expensing are made permanent and indexed for inflation after 2015; $250,000 limit on qualified real property eliminated after 2015.
Research credit The research tax credit is made permanent, with new provisions effective in tax years beginning after 2015 that will provide additional benefits to some small businesses.
Work Opportunity Tax Credit The tax credit is extended through 2019 and expanded (after 2015) to apply to employers who hire qualified long-term unemployment recipients.

Other changes

In addition to the tax extender provisions, the Consolidated Appropriations Act contains multiple other tax provisions, including:

  • The Act delays imposition of the excise tax on high-cost employer-sponsored health coverage (the so-called “Cadillac tax”) for two years; the tax, originally scheduled to take effect after 2017, will now be effective for tax years beginning after December 31, 2019.
  • The Act eliminates the requirement that ABLE accounts (tax-favored savings vehicles intended to benefit disabled individuals) be established only in the ABLE account owner’s state of residence.
  • Rules relating to 529 plans are modified for tax years after 2014, including expansion of the definition of qualified expenses to include the purchase of a computer, peripheral equipment, computer software, and Internet access if used primarily by the beneficiary while enrolled at an eligible education institution.

The Act permits funds to be rolled over to a SIMPLE IRA from employer-sponsored retirement plans and traditional IRAs once a participant has participated in the SIMPLE IRA for a two-year period (effective for rollover contributions made after December 18, 2015).

 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Investment Fundamentals – SEI September 2015

SEI fundemenatal sept

Stock Market Correction

  • A stock market correction is when the value of an index declines 10% or more from its most-recent high.
  • On average, a correction in the U.S. stock market occurs about every two years, and generally takes three months to recover.
  • Despite the panic they tend to cause, stock market corrections are necessary for the health of the overall market.

The word “correction” is defined by Merriam Webster as “the act of making something (such as an error or bad condition) accurate or better.” In the context of the stock market, a “correction” occurs when an index or individual stock drops 10% from its most-recent high. Essentially, corrections are price declines that stop an upward trend.

In August 2015, for example, the Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ Composite Index all fell over 10% from their respective highs in the wake of China’s slowing economy and concerns about the timing, speed and size of potential Federal Reserve interest rate hikes — qualifying as the first U.S. stock market correction since 2011. Investors watched in horror as their portfolios tumbled.

Given this, it’s understandable that a stock market correction would cause some panic among investors. But still, why would the word “correction” — which has such a positive connotation — be associated with something that causes investments to lose value?

The simple answer is that it’s because a bull market (one in which prices are generally rising) can result in stock prices rising faster than justified by underlying company earnings.

The banality and virtues of stock market corrections

Despite the alarm often triggered by stock market corrections, they aren’t typically tied to major economic crises and are actually quite common. On average, U.S. stock market corrections occur about every two years. It’s a good thing, too, because they are necessary for the health of the market.

Without the occasional pullback, stocks become overpriced or inflated, and a bull market swells to a bubble that eventually bursts — resulting in a sudden decline across broad sections of the market (known as a stock market crash). And a crash is far more likely than a correction to lead to a bear market (which is when equity prices decline 20% from a recent high).

The correction that occurred in August 2015 was unusual in that it had been four years since the last one

occurred — double the average timespan between corrections (Exhibit 1).

Exhibit 1: Stock Market Correction? It’s about time.

SEIFundementalsSept

Source: SEI, S&P 500 Index as of 8/24/15. Shaded areas represent corrections within the current bull market.

Despite the panic the recent pullback caused, it was actually just what the market needed — because a correction can be viewed as a defence against more- profound trouble. Plus, savvy investors can treat the relatively cheap stock prices caused by a correction as a buying opportunity.

What to do in a stock market correction

What should you do if markets contract by 10% from recent highs? Just wait. U.S. corrections generally last around three months and, despite their regularity, the average annual return for the S&P 500 Index over the

last 50 years has been 9.84% (as of 8/28/2015)1. So there’s a good chance investment losses suffered in a

correction will be recuperated in the long run. And if you overreact by selling your investments, you could miss out on gains when the market bounces back. Remember, a correction is just “the act of making something better.”

image

1Source: Professor Aswath Damoradan, NYU Stern School, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histr etSP.html

Index Definitions:

S&P 500 Index: The S&P 500 Index is an unmanaged, market-capitalization weighted index that consists of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and NASDAQ.

NASDAQ Composite Index: The NASDAQ Composite Index is an unmanaged, market-capitalization weighted index that consists of all securities listed on the NASDAQ exchange. It is often used to gauge performance of global technology stocks.

 

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There is no assurance as of the date of this material that the securities mentioned remain in or out of SEI Funds.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.

Key Estate Planning Documents You Need

estate planning doc

Benefits of a will:

  • Distributes property according to your wishes
  • Names an executor to settle your estate
  • Names a guardian for minor children

Other benefits of a living trust:

  • Gives someone the power to manage your property if you should become incapacitated
  • Lets a professional manage your property for you
  • May circumvent state laws that limit your ability to give to charity, or force you to leave a certain percentage of your property to your spouse

There are five estate planning documents you may need, regardless of your age, health, or wealth:

  1. Durable power of attorney
  2. Advanced medical directives
  3. Will
  4. Letter of instruction
  5. Living trust

The last document, a living trust, isn’t always necessary, but it’s included here because it’s a vital component of many estate plans.

Durable power of attorney

A durable power of attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. If no one is ready to look after your financial affairs when you can’t, your property may be wasted, abused, or lost.

A DPOA allows you to authorize someone else to act on your behalf, so he or she can do things like pay everyday expenses, collect benefits, watch over your investments, and file taxes.

There are two types of DPOAs: (1) an immediate DPOA, which is effective immediately (this may be appropriate, for example, if you face a serious operation or illness), and (2) a springing DPOA, which is not effective unless you have become incapacitated.

Caution:  A springing DPOA is not permitted in some states, so you’ll want to check with an attorney.

Advanced medical directives

Advanced medical directives let others know what medical treatment you would want, or allows someone to make medical decisions for you, in the event you can’t express your wishes yourself. If you don’t have an advanced medical directive, medical care providers must prolong your life using artificial means, if necessary. With today’s technology, physicians can sustain you for days and weeks (if not months or even years).

There are three types of advanced medical directives. Each state allows only a certain type (or types). You may find that one, two, or all three types are necessary to carry out all of your wishes for medical treatment. (Just make sure all documents are consistent.)

First, a living will allows you to approve or decline certain types of medical care, even if you will die as a result of that choice. In most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, one can be used only to decline medical treatment that “serves only to postpone the moment of death.” In those states that do not allow living wills, you may still want to have one to serve as evidence of your wishes.

Second, a durable power of attorney for health care (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will or won’t have.

Finally, a Do Not Resuscitate order (DNR) is a doctor’s order that tells medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is effective only while you are hospitalized. The other is used while you are outside the hospital.

Will

A will is often said to be the cornerstone of any estate plan. The main purpose of a will is to disburse property to heirs after your death. If you don’t leave a will, disbursements will be made according to state law, which might not be what you would want.

There are two other equally important aspects of a will:

  1. You can name the person (executor) who will manage and settle your estate. If you do not name someone, the court will appoint an administrator, who might not be someone you would choose.
  2. You can name a legal guardian for minor children or dependents with special needs. If you don’t appoint a guardian, the state will appoint one for you.

Keep in mind that a will is a legal document, and the courts are very reluctant to overturn any provisions within it. Therefore, it’s crucial that your will be well written and articulated, and properly executed under your state’s laws. It’s also important to keep your will up-to-date.

Letter of instruction

A letter of instruction (also called a testamentary letter or side letter) is an informal, nonlegal document that generally accompanies your will and is used to express your personal thoughts and directions regarding what is in the will (or about other things, such as your burial wishes or where to locate other documents). This can be the most helpful document you leave for your family members and your executor.

Unlike your will, a letter of instruction remains private. Therefore, it is an opportunity to say the things you would rather not make public.

A letter of instruction is not a substitute for a will. Any directions you include in the letter are only suggestions and are not binding. The people to whom you address the letter may follow or disregard any instructions.

Living trust

A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The trust is called a living trust because it’s meant to function while you’re alive. You control the property in the trust, and, whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether.

Not everyone needs a living trust, but it can be used to accomplish various purposes. The primary function is typically to avoid probate. This is possible because property in a living trust is not included in the probate estate.

Depending on your situation and your state’s laws, the probate process can be simple, easy, and inexpensive, or it can be relatively complex, resulting in delay and expense. This may be the case, for instance, if you own property in more than one state or in a foreign country, or have heirs that live overseas.

Further, probate takes time, and your property generally won’t be distributed until the process is completed. A small family allowance is sometimes paid, but it may be insufficient to provide for a family’s ongoing needs. Transferring property through a living trust provides for a quicker, almost immediate transfer of property to those who need it.

Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your executor is responsible for managing the property until probate is completed, he or she may not have the expertise or authority to make significant management decisions, and the property may lose value. Transferring the property with a living trust can result in a smoother transition in management.

Finally, avoiding probate may be desirable if you’re concerned about privacy. Probated documents (e.g., will, inventory) become a matter of public record. Generally, a trust document does not.

Caution:  Although a living trust transfers property like a will, you should still also have a will because the trust will be unable to accomplish certain things that only a will can, such as naming an executor or a guardian for minor children.

Tip:  There are other ways to avoid the probate process besides creating a living trust, such as titling property jointly.

Caution:  Living trusts do not generally minimize estate taxes or protect property from future creditors or ex-spouses.

Closing a Retirement Income Gap

bridge-builders2bWhen you determine how much income you’ll need in retirement, you may base your projection on the type of lifestyle you plan to have and when you want to retire. However, as you grow closer to retirement, you may discover that your income won’t be enough to meet your needs. If you find yourself in this situation, you’ll need to adopt a plan to bridge this projected income gap.

  

Delay retirement: 65 is just a number

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. This will allow you to continue supporting yourself with a salary rather than dipping into your retirement savings. Depending on your income, this could also increase your Social Security retirement benefit. You’ll also be able to delay taking your Social Security benefit or distributions from retirement accounts.

At normal retirement age (which varies, depending on the year you were born), you will receive your full Social Security retirement benefit. You can elect to receive your Social Security retirement benefit as early as age 62, but if you begin receiving your benefit before your normal retirement age, your benefit will be reduced. Conversely, if you delay retirement, you can increase your Social Security benefit.

Remember, too, that income from a job may affect the amount of Social Security retirement benefit you receive if you are under normal retirement age. Your benefit will be reduced by $1 for every $2 you earn over a certain earnings limit ($15,720 in 2015, $15,480 in 2014). But once you reach normal retirement age, you can earn as much as you want without affecting your Social Security retirement benefit.

Another advantage of delaying retirement is that you can continue to build tax-deferred (or in the case of Roth accounts, tax-free) funds in your IRA or employer-sponsored retirement plan. Keep in mind, though, that you may be required to start taking minimum distributions from your qualified retirement plan or traditional IRA once you reach age 70½, if you want to avoid harsh penalties.

And if you’re covered by a pension plan at work, you could also consider retiring and then seeking employment elsewhere. This way you can receive a salary and your pension benefit at the same time. Some employers, to avoid losing talented employees this way, are beginning to offer “phased retirement” programs that allow you to receive all or part of your pension benefit while you’re still working. Make sure you understand your pension plan options.

 

 Spend less, save more

You may be able to deal with an income shortfall by adjusting your spending habits. If you’re still years away from retirement, you may be able to get by with a few minor changes. However, if retirement is just around the corner, you may need to drastically change your spending and saving habits. Saving even a little money can really add up if you do it consistently and earn a reasonable rate of return. Make permanent changes to your spending habits and you’ll find that your savings will last even longer. Start by preparing a budget to see where your money is going. Here are some suggested ways to stretch your retirement dollars:

 

  • Refinance your home mortgage if interest rates have dropped since you took the loan.
  • Reduce your housing expenses by moving to a less expensive home or apartment.
  • Sell one of your cars if you have two. When your remaining car needs to be replaced, consider buying a used one.
  • Access the equity in your home. Use the proceeds from a second mortgage or home equity line of credit to pay off higher-interest-rate debts.
  • Transfer credit card balances from higher-interest cards to a low- or no-interest card, and then cancel the old accounts.
  • Ask about insurance discounts and review your insurance needs (e.g., your need for life insurance may have lessened).
  • Reduce discretionary expenses such as lunches and dinners out.

Earmark the money you save for retirement and invest it immediately. If you can take advantage of an IRA, 401(k), or other tax-deferred retirement plan, you should do so. Funds invested in a tax-deferred account may grow more rapidly than funds invested in a non-tax-deferred account.

 

 Reallocate your assets: consider investing more aggressively

Some people make the mistake of investing too conservatively to achieve their retirement goals. That’s not surprising, because as you take on more risk, your potential for loss grows as well. But greater risk also generally entails potentially greater reward. And with life expectancies rising and people retiring earlier, retirement funds need to last a long time.

That’s why if you are facing a projected income shortfall, you should consider shifting some of your assets to investments that have the potential to substantially outpace inflation. The amount of investment dollars you should keep in growth-oriented investments depends on your time horizon (how long you have to save) and your tolerance for risk. In general, the longer you have until retirement, the more aggressive you can afford to be. Still, if you are at or near retirement, you may want to keep some of your funds in growth-oriented investments, even if you decide to keep the bulk of your funds in more conservative, fixed-income investments. Get advice from a financial professional if you need help deciding how your assets should be allocated.

And remember, no matter how you decide to allocate your money, rebalance your portfolio now and again. Your needs will change over time, and so should your investment strategy. Note: Rebalancing may carry tax consequences. No strategy assures success or protects against loss.

 

Accept reality: lower your standard of living

If your projected income shortfall is severe enough or if you’re already close to retirement, you may realize that no matter what measures you take, you will not be able to afford the retirement lifestyle you’ve dreamed of. In other words, you will have to lower your expectations and accept a lower standard of living.

Fortunately, this may be easier to do than when you were younger. Although some expenses, like health care, generally increase in retirement, other expenses, like housing costs and automobile expenses, tend to decrease. And it’s likely that your days of paying college bills and growing-family expenses are over.

Once you are within a few years of retirement, you can prepare a realistic budget that will help you manage your money in retirement. Think long term: Retirees frequently get into budget trouble in the early years of retirement, when they are adjusting to their new lifestyles. Remember that when you are retired, every day is Saturday, so it’s easy to start overspending.

 

Clifford Cadle is a Registered Representative with and, Securities are offered through LPL Financial, Member FINRA/SIPC

Wealth Due to Inheritance

estate planningWhat is it?

Introduction

If you’re the beneficiary of a large inheritance, you may find yourself suddenly wealthy. Even if you expected the inheritance, you may be surprised by the size of the bequest or the diverse assets you’ve inherited. You’ll need to evaluate your new financial position, learn to manage your sizable assets, and consider the tax consequences of your inheritance, among other issues.

Issues that arise in connection with an inheritance

If you’ve recently received a bequest, consider the possibility that the will may be contested if your inheritance was large in comparison with that received by other beneficiaries. Or, you may decide to contest the will if you feel slighted. If you’re the spouse of the decedent, you may elect to take against the will. Taking against the will means that you’re exercising your right under probate law (governed by the statutes of your state) to take a share of your spouse’s estate, rather than what your spouse left you in the will, because this is more beneficial to you. Another possibility is that you may disclaim the bequest if you’re in a high income or estate tax bracket, or don’t need or want the bequest.

Caution: Some states allow no-contest clauses to be included in wills. If a will has such a clause and someone contests the will and loses, he or she gets nothing.

Evaluating your new financial position

Introduction

It’s important to determine how wealthy you are once you receive your inheritance. Before you spend or give away any money or assets, decide to move, or leave your job, you should do a cash flow analysis and determine your net worth as a first step toward planning your financial strategy. Your strategy will partly depend on whether you have immediate access to, and total control over, the assets, or if they’re being held in trust for you. In addition, you need to know what types of assets you’ve inherited (e.g., cash, property, or a portfolio of stocks).

Inheriting assets through a trust vs. inheriting assets outright

When you inherit money and assets through a trust, you’ll receive distributions according to the terms of the trust. This means that you won’t have total control over your inheritance as you would if you inherited the assets outright. With a trust, a trustee will be in charge of the trust. A trustee is the person who manages the trust for the benefit of the beneficiary or beneficiaries. The initial trustee was named by the individual who set up the trust. The trustee will likely be your parent or other family member, a close family friend or advisor, an attorney, or a bank representative. The trust document may spell out how the trust assets will be managed and how and when trust income and assets will be paid to you, and it will outline the duties of the trustee.

Know the terms of the trust

If you’re the beneficiary of a trust, the following should be done to ensure that your interests are protected:

  • Read the trust document carefully. You have the right to see the document, so if you can’t get a copy, hire an attorney to get it. Go over the document yourself or with the help of a legal or financial professional, making sure you understand the language of the trust and how its income and principal will be distributed to you. You may be the beneficiary of an irrevocable trust (can’t be changed), or you may be the beneficiary of a revocable trust (can be changed). In addition, determine whether certain practices are allowed or prohibited. For example, one common trust provision prohibits a beneficiary from borrowing against the trust. Another can prevent the beneficiary from paying creditors with assets of the trust. An additional provision usually prohibits creditors from attaching a beneficiary’s share of the trust.
  • Determine if the trust income is sufficient to meet your needs. Is the trust heavily invested in long-term growth stocks or nonrental real estate? Or, is the trust invested in things that provide income to you now, such as rental real estate or money market funds? From your agent (e.g., attorney, accountant) or trustee, get the income statements used to calculate how much income will be distributed to you.
  • Get to know your trust officers (if any) and find out how much the trustee fees are. Then, compare the fee with the average in your state or county (you might ask your local bank for this information). You may be able to negotiate the fee if it is too high, especially if the estate is large.

Working with a trustee

In some trusts, the trustee must distribute all of the income to the beneficiary every year. This type of trust may be simple to administer and relatively conflict free. You may want to work with the trustee or other professionals to ensure that the annual trust distribution is adequate to meet your needs.

In other trusts, the trustee may decide when to distribute trust income and how much to distribute. If this is the case, open communication with the trustee is important. You’ll need to set up a sound budget or financial plan and carefully prepare your request for a trust distribution if it is out of the ordinary. It’s in your best interests to find a way to work with the trustee. In most states, trustees are difficult to replace, and although they’re not supposed to lose money on investments, they’re not usually penalized if the trust performs poorly. If you decide to sue the trustee for mismanaging the trust, his or her legal fees may be paid for from the trust.

Caution: No matter how trust funds are distributed, pay close attention to how the trustee handles the trust investments. Have your lawyer, accountant, or financial advisor look over the trustee’s investment strategy. If your advisor determines that the trustee’s investment strategy doesn’t meet your needs or, worse, is unsound, discuss this strategy with the trustee or possibly ask the trustee to change his or her strategy.

Inheriting a lump sum of cash

When you inherit a large lump sum of cash, you’ll be responsible for managing the money yourself (or hiring professionals to do so). Even if you’re used to handling your own finances, becoming suddenly wealthy can turn even the most cautious individual into a spendthrift, at least in the short run. Carefully watch your spending. Although you may want to quit your job, move, gift assets to family members or to charity, or buy a car, a house, or luxury items, this may not be in your best interest. You must consider your future needs, as well, if you want your wealth to last. It’s a good idea to wait a few months or a year after inheriting money to formulate a financial plan. You’ll want to consider your current lifestyle, consider your future goals, formulate a financial strategy to meet those goals, and determine how taxes may reduce your estate.

Inheriting stock

You may inherit stock either through a trust or outright. The major question to consider is whether you should sell the stock. This depends on your overall investment strategy and what type of stock you’ve acquired. If you acquire stock in a company, for example, and you now own a controlling interest, you’ll need to look at how actively you want to be involved in the company or how much you know about the company. If you inherit stock and find that it doesn’t fit your portfolio, you may consider selling it, depending on the market conditions.

Inheriting real estate

If you inherit real estate, such as a house or land, you’ll probably have to decide whether to keep it or sell it. If you keep it, will you live there or rent it out? Do you hope that the house will appreciate in value, or are you keeping it for sentimental reasons? If you decide to sell or rent the house, you’ll need to consider the tax consequences, as well.

Tip: It’s possible that you may inherit real estate or other assets together with others, and sales may require the other owners’ assent or court action to sever the property.

Short-term and long-term needs and goals

Once you’ve done a cash flow analysis and determined what type of assets you’ve inherited, you need to evaluate your short-term and long-term needs and goals. For example, in the short term, you may want to pay off consumer debt such as high-interest loans or credit cards. Your long-term planning needs and goals may be more complex. You may want to fund your child’s college education, put more money into a retirement account, invest, plan to minimize taxes, or travel.

Use the following questions to begin evaluating your financial needs and goals, then seek advice on implementing your own financial strategy:

  • Do you have outstanding consumer debt that you would like to pay off?
  • Do you have children you need to put through college?
  • Do you need to bolster your retirement savings?
  • Do you want to buy a home?
  • Are there charities that are important to you and whom you wish to benefit?
  • Would you like to give money to your friends and family?
  • Do you need more income currently?
  • Do you need to find ways to minimize income and estate taxes?

Tax consequences of an inheritance

Income tax considerations

In general, you won’t directly owe income tax on assets you inherit. However, a large inheritance may mean that your income tax liability will eventually increase. Any income that is generated by those assets may be subject to income tax, and if the inherited assets produce a substantial amount of income, your tax bracket may increase. Once you increase your wealth, you should look at ways to minimize your overall tax liability, such as shifting income, giving money to individuals or charity, utilizing other income tax reduction strategies, and investing for growth rather than income. You may also need to re-evaluate your income tax withholding or begin paying estimated tax.

Transfer tax considerations

If you’re wealthy, you’ll need to consider not only your current income tax obligations but also the amount of potential transfer taxes that may be owed. You may need to consider ways to minimize these potential taxes. Four common ways to do so are to (1) set up a marital trust, (2) set up an irrevocable life insurance trust, (3) set up a charitable trust, or (4) make gifts to individuals and/or to charities.

Impact on investing

Inheriting an estate can completely change your investment strategy. You will need to figure out what to do with your new assets. In doing so, you’ll need to ask yourself several questions:

  • Is your cash flow OK? Do you have enough money to pay your bills and your taxes? If not, consider investments that can increase your cash flow.
  • Have you considered how the assets you’ve inherited may increase or decrease your taxes?
  • Do you have enough liquidity? If you need money in a hurry, do you have assets you could quickly sell? If not, you may want to consider having at least some short-term, rather than long-term, investments.
  • Are your investments growing enough to keep up with or beat inflation? Will you have enough money to meet your retirement needs and other long-term goals?
  • What is your tolerance for risk? All investments carry some risk, including the potential loss of principal, but some carry more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return?
  • How diversified are your investments? Because asset classes often perform differently from one another in a given market situation, spreading your assets across a variety of investments such as stocks, bonds, and cash alternatives, has the potential to help reduce your overall risk. Ideally, a decline in one type of asset will be at least partially offset by a gain in another, though diversification can’t guarantee a profit or eliminate the possibility of market loss.

Once you’ve considered these questions, you can formulate a new investment strategy. However, if you’ve just inherited money, remember that there’s no rush. If you want to let your head clear, put your funds in an accessible interest-bearing account such as a savings account, money market account, or a short-term certificate of deposit until you can make a wise decision with the help of advisors.

Impact on insurance

When you inherit wealth, you’ll need to re-evaluate your insurance coverage. Now, you may be able to self-insure against risk and potentially reduce your property/casualty, disability, and medical insurance coverage. (However, you might actually consider increasing your coverages to protect all that you’ve inherited.) You may want to keep your insurance policies in force, however, to protect yourself by sharing risk with the insurance company. In addition, your additional wealth results in your having more at risk in the event of a lawsuit, and you may want to purchase an umbrella liability policy that will protect you against actual loss, large judgments, and the cost of legal representation. If you purchase expensive items such as jewelry or artwork, you may need more property/casualty insurance to protect yourself in the event these items are stolen. You may also need to recalculate the amount of life insurance you need. You may need more life insurance to cover your estate tax liability, so your beneficiaries receive more of your estate after taxes.

Impact on estate planning

Re-evaluating your estate plan

When you increase your wealth, it’s probably time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your exposure to potential taxes and creating financial security for your family and other intended beneficiaries.

Passing along your assets

If you have a will, it is the document that determines how your assets will be distributed after your death. You’ll want to make sure that your current will reflects your wishes. If your inheritance makes it necessary to significantly change your will, you should meet with your attorney. You may want to make a new will and destroy the old one instead of adding codicils. Some things you should consider are whom your estate will be distributed to, whether the beneficiary(ies) of your estate are capable of managing the inheritance on their own, and how you can best shield your estate from estate taxes. If you have minor children, you may want to protect them from asset mismanagement by nominating an appropriate guardian or setting up a trust for them.

Using trusts to ensure proper management of your estate and minimize taxes

If you feel that your beneficiaries will be unable to manage their inheritance, you may want to set up trusts for them. You can also use trusts for tax planning purposes. For example, setting up an irrevocable life insurance trust may minimize federal and state transfer taxes on the proceeds.

Impact on education planning

You may want to use part of your inheritance to pay off your student loans or to pay for the education of someone else (e.g., a child or grandchild). Before you do so, consider the following points:

  • Pay off outstanding consumer debt first if the interest rate on your consumer debt is higher than it is on your student loans (interest rates on student loans are often relatively low)
  • Paying part of the cost of someone else’s education may impact his or her ability to get financial aid
  • You can make gifts to pay for tuition expenses without having to pay federal transfer taxes if you pay the school directly

Giving all or part of your inheritance away

Giving money or property to individuals

Once you claim your inheritance, you may want to give gifts of cash or property to your children, friends, or other family members. Or, they may come to you asking for a loan or a cash gift. It’s a good idea to wait until you’ve come up with a financial plan before giving or lending money to anyone, even family members. If you decide to loan money, make sure that the loan agreement is in writing to protect your legal rights to seek repayment and to avoid hurt feelings down the road, even if this is uncomfortable. If you end up forgiving the debt, you may owe gift taxes on the transaction. Gift taxes may also affect you if you give someone a gift of money or property or a loan with a below-market interest rate. The general rule for federal gift tax purposes is that you can give a certain amount ($14,000 in 2014) each calendar year to an unlimited number of individuals without incurring any tax liability. If you’re married, you and your spouse can make a split gift, doubling the annual gift tax exclusion amount (to $28,000) per recipient per year without incurring tax liability, as long as all requirements are met. Giving gifts to individuals can also be a useful estate planning strategy.

Tip: The annual gift tax exclusion is indexed for inflation, so the amount may change in future years.

Caution: This is just a brief discussion of making gifts and gift taxes. There are many other things you will need to know, so be sure to consult an experienced estate planning attorney.

Giving money or property to charity

If you make a gift to charity during your lifetime, you may be able to deduct the amount of the charitable gift on your income tax return. Income tax deductions for gifts to charities are limited to 50 percent of your contribution base (generally equal to adjusted gross income) and may be further limited if the gift you make consists of certain appreciated property or if the gift is given to certain charities and private foundations. However, excess deductions can usually be carried over for five years, subject to the same limitations. For estate planning purposes, you may want to make a charitable gift that can minimize the amount of transfer taxes your estate may owe. There are many arrangements you can make to reach that goal. Be sure to consult an experienced estate planning attorney.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This communication is strictly intended for individuals residing in the state(s) of AZ, CO, FL, IL, IN, MI, OH and WI. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014.

Members of the Military: Personal Financial Planning

Service branches offer campaigns and educational programs to service members and their families. The Air Force, Navy, and Army each require that respective members receive financial education, training, and counseling. Also, the Department of Defense established MilitarySaves.org to help service members and their families plan for their financial futures.

Special Savings Program

If you’re deployed in a designated combat zone or in support of a contingency operation, you have a unique chance to earn a high interest rate by participating in the Defense Department’s Savings Deposit Program (SDP). The SDP pays 10% annual interest on account balances up to $10,000. Contact your local military office for more details.

Other survivor benefits

  • Death Gratuity pays a one-time lump sum to eligible beneficiaries of a service member who dies within 120 days of retirement, or as a result of non-hostile action, or as a result of hostile action in a designated combat zone or while training for combat or while performing hazardous duty
  • Survivors’ Pension, also referred to as a Death Pension, is a tax-free benefit payable to qualifying surviving spouses of a deceased Veteran with wartime service
  • Potential VA benefits include Dependency and Indemnity Compensation, and survivors’ education benefits through the Survivors’ and Dependents’ Educational Assistance Program

Financial planning is the process that can help you pursue your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources. Just as the success of a military mission is dependent upon proper planning, your financial success may be dependent upon creating a sound financial plan as well.

Why is financial planning important?

While being tasked with the burdens of protecting our country, members of the military also need to be aware of how their military service impacts their personal finances. In addition, service members have sources of income and savings options that aren’t available to civilians. Understanding these benefits and taking advantage of them could not only help you to work toward financial goals for you and your family, but you may be able to focus better on the demands of your service commitment.

The financial planning process

Developing a comprehensive financial plan and putting it in place generally involves the following steps:

  • Take account of your income, assets, taxes, regular monthly expenses, and liabilities; evaluate your insurance (life, health, property and casualty, etc.), your investments and savings, and your estate plan
  • Establish and prioritize your financial goals and set a time frame for each
  • Identify areas of financial concern and financial strengths
  • Familiarize yourself with specific financial products available to you and incorporate them into your financial plan where appropriate
  • Monitor your plan and make adjustments as your goals, time frames, and circumstances change
  • Use the services of financial professionals such as financial planners, accountants, and estate attorneys who have the expertise necessary to provide objective information and help you implement your plan results

Set and prioritize financial goals

Determining financial priorities and goals is ultimately the responsibility of you and your family. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., home purchase, child’s education, retirement). Then try to prioritize those goals. How important is each goal to you and your family? How much will you need to save in order to reach each goal? Once you have a clearer picture of your goals, you can work toward establishing a budget that can help you pursue them.

Establish a budget

Creating and maintaining a budget may not only help you target your financial goals, but regularly reviewing and updating your budget can help keep you on track, particularly when your circumstances change. To develop a budget that is appropriate for your lifestyle, you’ll need to identify your current monthly income and expenses. Start by adding up all your income. A service member’s income can come in several forms of monetary and non-monetary compensation. In addition, some forms of income are taxable while other types of income are nontaxable.

Understanding whether income is taxed is very important because disposable income, or income that’s left after paying taxes, is what you have available to pay bills and save for future goals. Taxable basic pay varies with rank and time of service, so changes in base pay should be factored into your budget. Several forms of military compensation are nontaxable, such as Basic Allowance for Subsistence, Basic Allowance for Housing, uniform and clothing allowance, hostile fire pay, basic pay and occupational incentive pay during periods of deployment to a hostile theater, and family separation allowance.

In addition to your military income, be sure to include other types of income, such as dividends, interest, a spouse’s civilian pay, and child support. Next, add up all your expenses. It helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, and transportation) and discretionary expenses (e.g., entertainment, vacations, and hobbies). You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, and home repair.

Once you’ve added up all your income and expenses, compare the two totals. If you find yourself spending more than you earn, you’ll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending.

Saving starts with an emergency fund

A sound financial plan could help ensure that you are protected when financial emergencies arise. Having a cash reserve or emergency fund may help you avoid taking on additional debt when you don’t want to. The amount of your reserve depends on your own personal situation, but it’s generally suggested that your cash reserve should equal three to six months of ordinary living expenses.

Choosing your savings vehicles

The savings vehicles you use should depend on two factors: your time horizon and risk tolerance. Generally, the longer the time horizon, the more risk you may be able to assume. Bank savings options include savings accounts, money market accounts, and certificates of deposit. These are typically more stable choices with the lower risk; other alternatives include investments that can go up or down in value and may or may not pay interest or dividends.

Note:  All investing involves risk including the loss of principal. Before investing, carefully consider its investment objectives, risks, charges, and fees, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.

Saving for retirement

One of the most important financial goals is saving for retirement. Even if you expect to qualify for a military pension, it probably won’t provide all of the retirement income you’ll need. A retirement savings option available to members of the military is the government’s Thrift Savings Plan (TSP).

The TSP is like the government’s version of the private-sector 401(k) plan. Your contributions are deducted directly from your paycheck before taxes (which can lower your current taxable income), and your contributions and earnings accumulate tax deferred until withdrawn, at which time you’ll generally pay income taxes on the amount you take out of the TSP. There are limits on how much you can contribute each year. You can also contribute after-tax dollars to a Roth TSP account, from which qualified withdrawals are generally received tax free.

Safeguard with insurance

Insurance programs are often a vital part of a sound financial plan. Auto insurance, homeowners or renters insurance, health insurance, and life insurance should be investigated, with the cost of each type of coverage factored into your budget.

Life insurance provides financial protection for your family and loved ones. Service members’ Group Life Insurance (SGLI) is part of a service member’s benefit package. Basic SGLI coverage is provided automatically when you join the military (although you can opt out or elect lesser coverage amounts), and premium costs are deducted from your pay.

Active-duty service members, retired service members, their qualified family members and certain survivors may receive health-care coverage through TRICARE, the medical program for the U.S. military. Depending on your status, the availability of medical care at military facilities, and the TRICARE option you choose, you may receive care either through military or civilian providers.

Tips to help you stay on track

  • Stay disciplined: Make budgeting a part of your daily routine
  • Distinguish between expenses that are “wants” (e.g., new golf clubs) and expenses that are “needs” (e.g., groceries)
  • Avoid using credit cards to pay for everyday expenses: It may seem as though you’re spending less, but your credit-card debt may continue to increase.

Year-End Charitable Giving

As the holiday season approaches, with the end of one year and the start of another, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. Charitable giving can be enhanced using income tax deductions, and so it can be much more effective when it is included as part of year-end tax planning.

Assume you are considering making a charitable gift equal to the sum of $1,000 plus the income taxes you save with the charitable deduction. With a 28% tax rate, you might be able to give $1,389 to charity ($1,389 x 28% = $389 taxes saved). On the other hand, with a 35% tax rate, you might be able to give $1,538 to charity ($1,538 x 35% = $538 taxes saved).

A word of caution

Be sure to deal with recognized charities, and be wary of charities with similar sounding names. It is common for scam artists to impersonate charities using bogus websites, and through contact involving e-mails, telephone, social media, and in-person solicitations. Check out the charity on the IRS website, www.irs.gov, using the Exempt Organizations Select Check search tool. And don’t give or send cash; contribute by check or credit card.

Tax deduction for charitable gifts

If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 50 percent of your AGI for the year, and other gifts to charity may be limited to 30 percent or 20 percent of your AGI. Disallowed charitable deductions may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. And be sure to retain proper substantiation of your deduction for a charitable contribution.

Year-end tax planning

When considering making charitable gifts at the end of a year, it is generally useful to include them as part of your year-end tax planning. In general, taxpayers have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at a lower rate, and time your deductible expenses so that they can be claimed in years when you are in a higher tax bracket.

For example, if you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction in the next year when the deduction produces a greater tax benefit. Or you might push the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction. And, if the income percentage limits above are a concern in one year, you might move income into that year or move deductions out of that year, so that a larger charitable deduction is available for that year. A financial or tax professional can help you evaluate how to make charitable gifts in a way that is beneficial to you.