Tuesday, August 17, 2010

Q&A Series - Week Two - A Special Series Devoted to Answering Your Burning Financial Questions

This week’s questions come from readers Bob and Gloria, a relatively healthy couple in their early eighties. They are concerned about some estate matters and how to organize their assets going forward.

Q. What's happening with the estate tax legislation?

Luckily for the Steinbrenner kids, there is currently no estate tax for 2010, otherwise they could have incurred a nearly $500 million estate tax bill on Steinbrenner's estimated $1.1 billion estate. His heirs would have almost certainly had to sell their stake in the Yankees in order to pay that bill. Congress could still act retroactively, although this seems unlikely as we move deeper into the year.

There are currently two estate tax bills that have been proposed: One actually passed the House late in 2009 that would have extended the rates of 2009 though 2010 (an estate tax rate of 45% over and above the exemption at $3.5 million per individual or $7 million per couple), but that bill was never considered by the Senate. The other bill is a bipartisan bill -- yes, it’s shocking that anything is bipartisan these days -- in the Senate that would adjust the estate tax rate down to 35%, while increasing the exemption to $5 million for an individual and $10 million for a couple.

The boundaries seem clear, and we’ll probably end up with something similar to the proposals offered. We don’t believe Congress will fail to act for 2011, considering the tax rates would return to pre-2001 levels of 55% on individual estates of over $1 million. But, most of us thought that it would have been extremely unlikely for Congress to not act for 2010, either.

Unfortunately, not having an estate tax law in place may actually negatively impact estates that would have qualified for the exemption.

Q. Considering the outlook on estate taxes, does it make sense to commingle our assets or hold them separately?

This is a good question and probably requires a more elaborate and specific answer than we can definitively provide for everyone here. However, as a rule of thumb, we usually suggest that couples keep their assets in joint name unless they are expecting to bequeath an estate that exceeds the exemption (i.e., joint assets above $7 million total).

We want to stress that each situation is different, and that there are additional considerations if you are fortunate enough to have an estate above the exemption level. If you have not considered alternative strategies yet, you may want to explore dividing some of your assets into individual names. This may allow your estate to pass to your heirs using the maximum exemption. Either way, this is a good reason to sit down with your Financial Advisor and/or your estate attorney.

Q. How should the investment accounts I plan on leaving my heirs be invested?

Generally, a retired couple would institute a more conservative strategy designed to provide consistent income throughout their retirement. However, we try to encourage those that plan on leaving their IRA’s or a portion of their assets to their heirs to think a bit differently.

The assets earmarked for heirs should be invested with the beneficiary’s time horizon in mind, not the account owner. For instance, should your children or grandchildren be the ultimate beneficiaries, you can afford to invest with a more growth oriented philosophy, as their life expectancies are significantly longer. Yes, there will be more volatility with these more aggressive portfolios, but the assumption is that these folks will not need or have access to these funds for a significant period of time. Some added short-term volatility is well worth the likely outcome of higher returns over a longer time horizon.

Q. Who should be the beneficiary on my old 401k or IRA?

We almost always suggest having individuals listed as beneficiaries on your retirement accounts. If there are no beneficiaries listed, Uncle Sam jumps to the head of the line and will benefit quite handsomely. Taxes will be due on the IRA in full during the year you die, but individuals can defer tax payments for decades. We would suggest family members, and even friends, before leaving retirement assets to be passed through your estate. Named individuals can always roll over your IRA assets into Inherited IRA’s of their own. The beneficiaries can then take distributions from these inherited IRA’s as needed. But the main benefit is that the new account owner can enjoy tax-deferred earnings throughout their lives.

Thanks for your questions, Bob and Gloria. I hope you and our other readers found my answers to be useful. As always, we hope you will keep Rollins Financial in mind when seeking professional investing and financial planning advice.

Next Tuesday is the final week of this special Q&A series. If you have enjoyed this series and would like to see it become a regular feature on the Rollins Financial Blog, please let us know.

Best regards,
Eddie Wilcox

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