Author Archives: Edi

Always have a valid WILL

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What is a will? Your will is a legal document in which you describe instructions to be carried out after your death. You can direct the distribution of your assets (money & property), and give your choice of guardians for your dependents.  It becomes irrevocable (unchangeable) when you die.

In your will, you can name:
1. Your beneficiaries –
2. A guardian for your minor children – a person responsible for your child’s personal care if you and your spouse die before the child turns 18. You may name your guardian, who may or may not be the same person, to be responsible for managing any assets given to the child, until he or she is 18 years of age.
3. An executor – an institution or person to collect and manage your assets, pay any debts, expenses and taxes due (on court approval) and distributed to beneficiaries according to the instructions on the will.  Role has significant responsibilities and is time-consuming – choose the executor wisely.

Does a will cover everything I own? No. Your will affects only those assets that are titled in your name at your death.  The following may not be affected by your will.

Life insurance
Retirement plans
Assets owned as joint tenant with rights of survivorship
“Transfer on death” or “pay on death.”
“Community property with right of survivorship” – Married couples or registered domestic partners may hold title to their community property assets in their names as “community property with right of survivorship”.  When the first spouse or domestic partner dies, the assets pass directly to the surviving spouse or partner without being affected by the will.

What happens if you don’t have a will? If you die without a will (you die intestate), California law will determine the beneficiaries of your estate.

Contrary to popular myth, if you die intestate everything is not kept by the state but the state may inherit your estate under certain situations.  In California, those married or in a registered domestic partnership will have their community property assets passed to their spouse/registered domestic partner.  They may also receive part of your separate property assets, with the rest going to your children, grandchildren, parents, sisters, brothers, nieces, nephews and other legal relatives.

If you are not married or in a legal partnership, your assets will be distributed to your closest relatives and if your partner dies before you, their relatives may also be entitled to some or all of your estate.  Friends, a non-registered partner or your favorite charity will receive nothing unless you name them in a will.

If you die intestate and your deceased spouse/registered partner have no living relatives then your estate does go to the State of California.

What if my assets pass to a trust after my death? A will can provide that all assets be distributed to trust on your death.  When trusts are created under a will, they are testamentary trusts.  If you have a living trust (a trust established during your life) then your will is referred to as a pour over will.  The purpose of such a will is to make sure that any assets not already in the name of your trust are transferred to your trust upon your death.

How is a will carried out? A will is managed by a court-supervised process called probate.  The executor of a will needs to start the probate process by filing a petition in court seeking official appointment as executor.  The executor can take charge of your assets, pay debts and, with court approval, distribute your estate to your beneficiaries.

Advantages of probate:  Rules that are followed on dispute are defined and quickly executed.
The court reviews the executor’s handling of the estate protecting the beneficiaries’ interest

Disadvantages of probate: It is public – your words and the value of your assets are on public record.
Fees are usually higher because they are based on a statutory fee schedule which can be more than under a trust. It takes longer – usually 6 weeks for each court request

Who should know about your will? You will need to decide who should know about your will – the exact content will be (at minimum) known by your attorney and yourself.  Your executor and close family should know how to access your documents but don’t need to know the details.  Your original signed will, should be kept in a safe place (lawyer’s safe or a fireproof box).

*** THIS INFORMATION IS PROVIDED ONLY AS EDUCATION AND NOT AS LEGAL ADVICE ***

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Financial Planning if you don’t have children

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Financial Planning & Retirement Planning for Singles & Couples

Financial planning is often addressed by couples when they plan or have their first child.  In our society this is part of becoming responsible parents.  In turn this process brings parents closer together and forces them to review short and long term goals like cash flow & retirement planning.  In many cases, the process can help parents deal with their own emotions about money and bring about personal growth and a greater maturity that strengthens their relationship.

I’ve addressed financial and retirement planning for parents through presentations and workshops and would like to share some highlights for non-parent couples and singles.

Child-free couples and individuals should consider that often children serve as an important support for a parent’s retirement plan.  Their children and grandchildren often serve as a social and sometimes financial support network that is not available to those without children.  I propose that without children growing older requires more, not less, financial planning to ensure that a plan and a support network are created.

Think about your current network.  Do you have individual(s) that could be your advocate(s) and help you or make for you medical and financial decisions?  You’ll need to identify and empower advocate(s) that will care for you if you are hurt and unable to communicate your wishes.  Your advocate may need to answer questions regarding your quality of life and make critical financial decisions in your stead.  For example: Who will file your taxes or sign your insurance claims?  Who will pay your bills? Who will decide if it is time for you to sell your home and move to a more appropriate care facility?  Who will decide the level of care you want and can afford?

Couples can often depend on each other but sometimes you may want to choose a medical advocate whose beliefs are the same as yours – that may or may not be your current partner.

Planning the financial support network is particularly important for those without children.  Saving maximally for retirement is critical since you’ll likely need more financial income to retain your independence during retirement.  Singles need to plan earlier since they may have even more expenses.

Finally, once you are gone your loved ones will need clear direction on how you want your assets distributed. Don’t leave the courts to decide or your hard earned assets may go to a cause (or individual) you would not want supported.

A financial and retirement plan should help you understand yourself and your behavior around money – through understanding you can better work with your loved ones and make lasting joint retirement decisions.

Seek independent advice and explore the actions that you need to implement today to have your finances support your future wishes.  The time is now.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Retirement Planning for Business Owners

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Retirement Planning for Business Owners: Compare 401K, SEP-IRA and Pension plans.

For self employed and small business owners to be personally successful they must contribute to their retirement savings at some point during their business development.  Some will do it a bit at a time while others will wait until they generate large profits.  Regardless, you should ensure that you minimize your tax liability while contributing towards your ideal retirement.

How do most self-employed select between available retirement savings plan?  Sometimes this is a decision based on ease of use, other times on a lack of understanding or incomplete or misleading information.  Here is a tiny overview of the major retirement plans available: SEP-IRA, 401K, Pension plans.

The most popular retirement saving vehicle for the self-employed is the SEP-IRA.

In many cases, the 401K should be considered since it exceeds the SEP-IRA limits and provides other benefits.  On the surface, 2011 limits for both SEP-IRA and 401K appear the same (at $49K), so what is the difference?  The way the contribution is calculated provides the key to why you can defer more with a properly designed 401K plan.

On a $100,000 W-2 earned income in 2011 a business (Corporation) owner (less than 50 years of age) can contribute $41.5K to a 401K or $25K to a SEP-IRA.  Yet so many self-employed use the SEP-IRA.  The lower contribution maximum of a SEP-IRA guarantees higher taxes and lower chance of attaining a reasonable retirement living standard. In many situations the 401K is a planning vehicle that not only provides more tax-deferred contributions but can be a resource in an emergency.

Even so, a 401K is not the best retirement saving tool for all self-employed.

For some, a better tool is a self-employed pension plan.  Although a pension plan does require a great deal more planning it is by far one of the best tools available to small business owners with high company earnings.

Make informed decisions about your tax and retirement options.  These decisions should be product neutral and planned to meet your specific situation.

If you have questions – let me know.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

 

What Legacy Will You Leave?

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What Legacy Will You Leave?

Aviva Shiff Boedecker, J.D.
www.asbcharitableplanning.com

 Retirement plans are the most heavily taxed assets in most people’s estates because when heirs withdraw the funds, they must pay income tax, in addition to any estate tax that may have already been paid. By designating a charity, school, religious organization or other nonprofit as a beneficiary of your retirement plan, you can reduce or eliminate taxes, retain complete flexibility and control over all your assets, and leave a legacy that will have a lasting impact.

You and your heirs can avoid both income and estate tax on your retirement account when you give the remainder of the plan to one or more tax-exempt organizations and leave your heirs other, less-taxed property.

With a simple designation of beneficiary form, which is available from your plan administrator, and without impacting your own or your family’s security, you can make the gift of a lifetime.

For more information about making a flexible and tax-wise legacy gift to the organization(s) of your choice, contact Edi or Aviva.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Introduction to Living Revocable Trust

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Introduction to a Living (Revocable) Trust

(information summarized from the State Bar of California)

Living trust is a legal document that you use to control your assets during your life and that your trustee can use to direct your assets when you are incapacitated or at death.  Your assets (bank accounts, brokerage accounts) are put in the name of a trust (instead of your own) and administered by the trust.

You manage the trust during your life and your successor trustee (an institution or person) will direct it when you are unable or unwilling to do it yourself.  This type of trust is called a revocable living trust or revocable inter vivos trust or grantor trust.  Your trust can be amended or revoked while you are competent.

  • A living trust agreement gives the trustee the legal right to manage and control the assets held in your trust.
  • Instructs the trustee to manage the trust’s assets for your benefit during your lifetime
  • Names the beneficiaries (person and charitable organizations) who are to receive your trust’s assets when you die
  • Finally, it gives guidance and certain powers and authority to the trustee to manage and distribute your trust’s assets – the trustee is a fiduciary.

What can a living trust do for me? It can allow someone of your selection to make financial decisions and act on your behalf if you’re unable to manage them yourself.  In setting up your living trust, you may serve as its trustee initially or you may choose someone else to do so.  You can name a trustee to take over the trust’s management for your benefit if you ever become unable or unwilling to manage it yourself.  At death or if disabled your trustee like a will’s executor and would then gather your assets, pay any debts, claims and taxes, and distribute your assets according to your instructions.  Unlike a will, this can only be done without court supervision or approval.

Should everyone have a living trust? No.

What are the disadvantages of a living trust?  No court supervision.
Cost of trust can be higher than creating a will.
Creates additional paperwork since lenders don’t usually lend to a trust and you may need to take it out of the trust (by deed) before you can take the loan on any real property.

If I have a living trust, do I still need a will? Yes.  Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship.

Will a living trust help reduce the estate taxes? No.

Will I have to file an income tax return for my living trust? During your lifetime the trust is identified by your social security number and all income and deductions related to the trust’s assets are reportable on your individual income tax returns.

How do you find an attorney to work with you?
Ask us for a referral or ask a trusted friend. You can also call the California State Bar – certified referral service.  www.calbar.ca.gov/lrs or 1-866-442-2529.  You may want one who is ‘certified specialist in estate planning, trust and probate law’ although some good estate attorneys do not have this certification.  You could also check a list at www.californiaspecialist.org and click Specialist Search. Some attorneys charge hourly and others have a fixed/flat fee.  Always be wary of insurance an annuity sales companies giving estate planning advice.  You may want the pamphlet “How Can I Find and Hire the Right Lawyer?” from the state bar: www.calbar.ca.gov

** The information provided is NOT legal advice it is only provided for informational purposes to guide you through this process **

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Durable Power of Attorney (DPOA)

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Durable Power of Attorney (DPOA)
(source: The State Bar of California information)

DPOA documents are meant to provide a trusted person to act in your stead.  There are two types of DPOAs that you need to include to care of your needs when you are unable or unwilling to do so.

The Health Care Directive should include the name of an agent or attorney-in-fact who you know will advocate for your health care needs.  This individual needs to be an advocate to ensure that your wishes (not theirs) will be respected and followed.

The DPOA for property (or finances) will handle day-to-day financial transactions that you normally handle; such as, paying bills or signing your taxes if you’re not able.  In addition, if you have a Revocable Trust it is the attorney-in-fact that will transfer non-trust assets to your trust if appropriate.

Know that your DPOAs are only valid while you’re alive.

If you don’t have a DPOA and you are unable to make decisions a court will appoint a professional conservator for you and pay them from your estate.  The court does supervise your conservator but it is often more expensive and cumbersome if your conservator does not know or follow your wishes.

Act now, you never know when you might need assistance to direct your financial or your health decisions.  You can get templates from the State of California or contact an Estate attorney or call us for an internal referral.

*** This blog is provided as information to encourage individuals to make available documents that are legally important in their lives ***

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

H.S.A. Limits from 2004 till 2012

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At the beginning of each year you should know those financial limits that are important in your financial planning life.  Here are the historical values for Health Savings Accounts for individuals and families – as of 01/11/2011:

This table shows all the changes in limits that have occurred since 2004 to 2012 (the house is currently reviewing 2013).

Year Single FAMILY Catch-up >55 yrs
2004 $2,600 $5,150 $500
2005 $2,650 $5,250 $600
2006 $2,700 $5,450 $700
2007 $2,850 $5,650 $800
2008 $2,900 $5,800 $900
2009 $3,000 $5,950 $1,000
2010 $3,050 $6,150 $1,000
2011 $3,050 $6,150  $1,000
2012 $3,100 $6,250 $1,000

Kaiser Permanente Physician Retirement

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Kaiser Permanente Physician Retirement Package

After a long career, retiring physicians employed at Kaiser are faced with a Retirement Package that presents excellent opportunities and multiple planning pitfalls. Giving yourself and your adviser sufficient time to plan each component will yield the greatest return for your situation. Make sure that your retirement plan supports your goals and addresses each phase in retirement while reducing your tax burden. Start early!

The first component of the Kaiser Retirement Package is based on the number of years of credited service and the average of your highest paid three consecutive annual earning (base+bonus) years. For most long-term Kaiser doctors, this is their largest retirement resource that can be in the range of $200,000/year (amount does depend on the specific situation). Although HR will calculate this value for you there are many critical decisions that you and your adviser will need to address. Some decisions such as your payout structure will need to be based on your goals, estate wishes and your tax situation. They will require that you make life-long decisions on how you will receive these retirement benefits. Will it be for Life, Joint & Survivor, Period Certain or Installment? – These are not generic or trivial questions.

The second component in Kaiser’s Retirement package for physicians is the Defined Contribution plan that will also be calculated for you but will require your input – particularly on how you wish it distributed. Do you want it as a lump sum, an installment or defer until you are 70.5? For tax reasons in particular, it is critical that this decision be made as early as possible (ideally 5 years before you plan to retire). Often this component of the Kaiser Retirement package generates about $30,000 per year (this amount does depend on your specific situation). Don’t forget that this amount will be further supplemented by social security.

The third component of Kaiser’s physician retirement package is a Salary Deferral employee funded or 401K plan. Your annual contributions, of tax deferred dollars ($16,500 limit in 2009), properly allocated and rebalanced will grow to supplement the first two components of the Kaiser Permanente Retirement Package. With these three components Kaiser physicians can retire at close to pre-retirement salary levels.

The final piece of the Kaiser Retirement Plan provides benefits such as health care, dental and insurance benefits. These should be reviewed carefully with your adviser to ensure that they match your lifestyle and will support all of your retirement needs.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2010 and the Year ahead

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Life Happens, so enjoy it! Regularly you should track your finances BUT do enjoy and appreciate the wonders of life in the moment. Do remain centered on your family and personal goals and don’t keep up with the Jones’s or act on water-cooler investment advice.

Always work on understanding & visualizing your goals.Try to live within your existing budget even as your income improves. Consider using software like mint.com or Quicken to track your spending. Always save for a rainy day because when those days arrive you need to be well prepared to ensure you don’t drown.

Negotiate everything from cable bills to credit card fees to rent. You never know until you ask. Many service providers will work with you. Always be polite and ask for a reduced rate but don’t divulge your finances.

Employee benefits. Many firms have begun offering Roth 401Ks and Health Savings Accounts (HSAs), and firm equity. Review these benefits within your entire financial plan. Are these benefits part of your wealth building plan?

Tax rates. Capital gains and dividend tax rates are low in 2010, but are expected to rise in 2011. This may be a time to sell investments you are planning to sell in the next few years. Consider a Roth, it will likely benefit you to put some of your IRA money into it as long as you can handle the tax consequences all in 2010. Since we don’t know the tax rates in 2011 consider carefully any suggestions to defer Roth tax payments to 2011 and 2012.

Cash. Always evaluate your cash needs and only leave enough in cash that is not earmarked for shortterm uses or emergency savings. You might want to keep your cash in the best earning conservative vehicle and the remainder should be in bond or may even be better used to pay down mortgage – you’ll need to check your overall plan and do the numbers to make sure which is the best choice for you.

Rebalance regularly. The market continues to show us that we can’t predict when it will have sudden changes so don’t attempt to time the market, but do time your rebalancing to your portfolio allocation. This should give you opportunities to remove excess earnings from a winning security and buy those that are inexpensive.

Each year manage your credit report. If you have not already, implement a regular schedule of requesting your free annual credit report from www.annualcreditreport.com. When making this request make sure that you are NOT paying a fee. Carefully navigate the website and get one free report each year from each of the three main credit reporting agencies, make sure to request a different agency every four months. Always check the report for errors.

Keep an eye on fees and expenses. Pay attention to commissions, fund management and other expenses incurred on your investments, banking and other services/products. Make sure that the fees are appropriate with the service/results experienced. Watch for hidden fees that are not providing you with value.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

 

Itemized or standard Deductions? – that is the question.

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The ultimate test for when it is worthwhile to forget the no-questions-asked standard deduction and do the record keeping required to itemize is when the total itemized deductions surpass the standard deduction – an amount that is based on variables, such as filing status and age, and is adjusted upward each year to reflect inflation. So read on … do the numbers and decide! 2009 Tax time is here.

The Standard Deduction

The standard deduction for 2009 is $11,400 for joint filers and surviving spouse, $5,700 for singles or filing separately and $8,350 for heads of households. If a couple files separately they must BOTH file deductions the same way.

At age 65 and over you can add another $1,100 for married person and $1,400 for those filing single or head of household. You can also add another $1,100 for each blind person.

The standard deduction decreases for those who can be claimed as dependents on the returns of other people – can be as little as $950.

There is an inconsequential break that is in the books for 2008-09 that will benefit two types of clients – those who purchased homes late in the year and have NOT paid enough mortgage interest and taxes to make itemizing worthwhile OR those who have already paid their home mortgage. These home owners will not need to itemize but can claim extra deductions of up to another $1,000 for joint filers or $500 for other returns. The actual amount will be the same as the amount of the real estate taxes on Schedule A.

Another 2008-09 authorized addition to standard deduction (in place of Schedule A itemizing deductions) for those whose properties were damaged or destroyed in places declared federal disasters. The standard deductions is increased by the uninsured losses attributable to natural disasters like hurricanes, fires, floods, earthquakes and landslides without the requirement that it exceed 10% of AGI or exceed $500.

There is also an add-on for the standard deduction for those who bought a new motor vehicles between Feb 17 and Dec 31. The total of state and local sales and excise taxes will be added to the standard deduction up to $49,500 car purchase. The motor vehicle must be a new car, sport-utility, light trucks, motorcycles (at least 8,500 lbs) and mobile homes BUT NOT used cars or leases.

Many standard deduction extras are not available for those with AGI higher than $13K for individuals and $260K for joint filers.

On the other hand, itemizers will be able to have full deductions in charitable contributions, state and income tax or sales tax (not both), real estate taxes and interest on most home mortgages but only a limited write-off for medical expenses, casualty & theft losses and miscellaneous expenses.

AMT and Itemized/Standard Deductions

Whether using itemized or standard deductions all filers may have to deal with additional tax from the alternative minimum tax (AMT). AMT disallows standard deduction amounts and restricts several itemized deductions. It allows medical expenses only for the portion above 10% of AGI (not 7.5%). AMT also disallows deductions for interest on home equity loans (not used to purchase or improve home), state and local property and sales taxes, and most miscellaneous deductions.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com