Highlights of this Newsletter:
LVM's Year End Financial Planning Checklist
Estate Planning Is Lifetime Planning
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LVM's Year End Financial Planning Checklist
Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70 ½ if you reach 70 ½ before January 1, 2020). The RMD is calculated for each IRA or retirement plan account by dividing the prior December 31st balance by a life expectancy factor that the IRS publishes. LVM and most custodians encourage you to complete these distributions before December 1st to ensure distributions are made before year-end.
Qualified Charitable Distributions (QCDs)
IRA owners over the age 70 ½ are allowed to satisfy all or a portion (up to $100,000) of their RMD with a direct transfer to a qualified charity. Unlike regular IRA withdrawals, QCDs are excluded from your taxable income, which can lower overall taxes paid and may help you keep certain tax credits. Managing your tax bracket may also help reduce future Medicare premiums. The December 1st distribution timeline also applies for QCDs. If you are writing checks directly from the IRA, they must clear before year end.
Maximize Retirement Contributions
In 2022, you can contribute $20,500 to your 401k or other employer-sponsored retirement plan. An extra $6,500 in “catch-up” contributions are allowed if you’ll be at least age 50 this year.
Even if you do not have an employer-sponsored plan, you may still be able to contribute up to $6,000 ($7,000 if you’re 50 or older) to a traditional IRA. These rules also apply to Non-deductable IRA and Roth IRA contributions. “Backdoor” Roth contributions are also available for higher income earners if you are phased out from making direct contributions to a Roth IRA.
Self-employed plans allow higher contributions of up to $61,000 or 25% of your qualified income (whichever is less).
Tax-loss harvesting is a strategy used to reduce overall capital gains taxes paid by selling securities you hold at a loss. Tax losses can be used to offset gains you may have in the account or gains from selling real estate or a business. Annually, you can use $3,000 of capital losses to offset income and you can carryforward any losses above and beyond the $3,000 for future use. Tyler and Craig discussed this strategy and others in a June podcast (Advantages of Market Volatility (www.lvmcapital.com)).
Other Items to Discuss with your Financial Advisor
College education savings ($10,000 contributions to 529 plans), Health Savings Account (HSA) contributions ($3,650 per person plus $1,000 for 55 and older “catch-up” provision), making gift-tax exclusion gifts to non-charitable recipients (children, grandchildren, other family or friends) of up to $16,000/recipient ($32,000/recipient from a couple) , review life insurance coverage, review estate planning documents including Trusts, Wills, Health Care Proxy, and Financial Power of Attorney documents.
Estate Planning Is Lifetime Planning
“Estate planning” often conjures up thoughts of dying. But estate planning is actually a process that should be primarily lifetime-oriented. It deals with property ownership, retirement planning, finances, disability concerns, tax strategies, and the preservation and protection of assets.
An estate is everything you own, including your residence, cash, stocks, bonds, and other investments, a business you may own, plus retirement accounts such as IRAs, 401k’s and life insurance death benefits. Your estate also includes personal property such as cars, jewelry, collectibles and other items.
A proper estate plan is a means of preserving and controlling the wealth you have worked for and accumulated during your lifetime so that you may protect yourself and your loved ones either at your incapacity or demise. Your hopes, concerns, dreams, and values would be reflected in the plan. The National Network of Estate Planning Attorneys has defined estate planning this way:
I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.
From Esperti, Robert, Renno Peterson and Daniel Stuenzi. Legacy: Plan, Protect & Preserve Your Estate. Denver: The Institute Inc., 1996
Some common traps to avoid in estate planning include:
Not having a will or trust
Failing to name a guardian for your minor children
Failing to prepare a business succession plan
Not reviewing your estate documents at least every five years
Not funding your trust or re-titling assets
Not considering a lifetime gifting program
Having life insurance owned improperly
Estate law varies by state but a basic estate plan in most states typically involves four (4) documents:
Durable General Power of Attorney
Health Care Power of Attorney
A Last Will and Testament
Revocable Living Trust
These four documents allow you to know your assets are secure and that your family will be able to easily access those funds after you are gone. In addition, the Powers of Attorney allow your family to take care of you while you are living.
Durable powers of attorney are a form of disability planning. Quite simply, a Durable General Power of Attorney is a document that allows your Agent to sign their name to anything that you can sign your name to.
This Power of Attorney is necessary to assist an incapacitated individual with their finances or purchases. It can also be very useful for married individuals as a matter of convenience.
Health Care Power Of Attorney allows someone else to be able to make medical decisions for you when you are incapacitated and unable to do so for yourself. This Power of Attorney is frequently combined with a HIPAA release to allow your Health care advocate (“Agent”) to have access to your medical records.
Both the Durable Power of Attorney and the Health Care Power of Attorney cease upon the death of their maker.
A last will and testament is a legal document that states how a person wants his or her estate distributed at death. Unfortunately, a will does not control how or when all the will maker’s property is distributed. A will is not effective until the will maker’s death, so it does nothing with lifetime planning. When the will maker dies, the will is filed with the probate court where it becomes a public document and is available to anyone who wants to read it. A will does
not cross state lines easily.
Under the Michigan Estates and Protected Individuals Code, when a person dies, their Will is provided to the Court, their choice for a Personal Representative (Executor) is scrutinized by the Court and granted authority to proceed by the Judge. The Personal Representative then inventories the belongings for the Court, reports to all beneficiaries, and seeks permission to distribute the assets according to the Will.
This “Probate” process can take a couple of months if things go smoothly, or it can take years if there is internal fighting about the assets.
A revocable or living trust is designed to fix the problems of a will. Basically, your Revocable Trust allows you to avoid probate entirely if it is designed correctly. It can be changed at any time (and multiple times) during a person’s lifetime. It has the added benefit of allowing you to continue to exercise control over your assets long after you are gone. It is very common to require beneficiaries to attend college, graduate from college, get married, reach their 25th birthday, or have a job, before they are entitled to any proceeds from the Trust. None of this is possible with a will alone. However, even if you have a trust, you should still have a will for any assets the trust does not cover
(commonly referred to as a pour-over will).
Once you have drafted a Trust, it is important to “fund it” by retitling your assets in the name of your Trust.
Your IRA and retirement assets (401k, 403b, etc.) are typically not included in your Trust.
A beneficiary designation form for each of these accounts determines who receives these assets upon your death.