Estate | Financial Planner | Retirement Planning | Korving & Company Suffolk & Virginia Beach

401k Distribution after Death

People who leave an employer frequently leave their 401(k) behind. Usually, the wise thing to do is to roll that 401(k) into a rollover IRA. But with so many other things to do when changing jobs, deciding what to do with the old 401(k) is often low on the list of priorities.

But there is another way of leaving an employer other than changing jobs. Some people die while still employed. And here is where the issue can get tricky.

When funds are left in a 401k after death, those must be distributed to the benefactor chosen by the participant. The way they are distributed depends on the choices of the company administering the 401k along with personal choices of the benefactor.
There are two rules that apply to an after-death distribution. One of the two must be used in all cases. The first allows for payments to be made within 5 years of the death of the participant. The second option allows a benefactor to received payments through his or her lifetime on a regular basis. The company administering the 401k may limit the option it will provide. Or, the benefactor may choose the preferred option. In any case, the election must be made by December 31 in the year of the death of the participant.

If the surviving spouse is not aware of this rule and decides to leave the 401(k) with the employer, it’s entirely possible that he or she will receive a check for the entire amount of the 401(k) five years after death, minus 20% federal tax withholding. If the amount in the 401(k) is substantial the entire amount may be taxed. It is possible to roll the proceeds into an IRA if it’s done in time, but to avoid paying an income tax on the federal tax that was withheld, the amount of the tax has to be added to the rollover. This creates a very unpleasant surprise for the surviving spouse.

Remedying a Common Estate Planning Error: Improper Titling of Assets

The Hook Law Center has written an important essay on the issue of titling of assets. It’s a common misconception that wills and trusts determine who gets a decadent’s assets. This is not necessarily true.

Your will or trust generally does not govern disposition of the following:

Any real property or accounts that may be owned jointly by you and another with the right of survivorship;

Any real property with a transfer on death designation;

Any account that may have a payable on death or transfer on death designation;

Retirement accounts, 401(k) plans, 403(b) plans, and IRAs;

Survivor benefit plans; and

Life insurance policies.

The assets in these accounts, plans and policies will usually pass to the surviving co-owner or the designated beneficiary of these accounts, plans, and policies. Beneficiary designations usually override the disposition of your assets as provided in your will or trust, as any accounts, plans, and policies that designate a specific beneficiary will be payable to that beneficiary.

Read the whole thing. And get a copy of my book BEFORE I GOto help you plan better.

Three things you must do as you get older.

There’s a famous saying that I have come to appreciate: “Old age isn’t for sissies.” There are lots of things that begin to bother us as we age that never did when we were young. Aches and pains are the most obvious of them. A lot of us become much too familiar with our doctor’s waiting room.

After a lifetime of storing memories we find that too many things have gotten lost in the pile of “stuff” that we keep in mind. No one really wants to admit that we’re not as strong or “sharp” as we once were. So instead of taking care of our own yard or doing our taxes, we hire someone else to do it.

Aging is a sensitive topic. It can be awkward to tell people that they may want to look for help doing things they have always done on their own. But it is something that has to be done because it’s just the right thing to do.

I have had this conversation with a number of clients as they age. Sometimes they even bring up the subject. One of my best clients, let’s call him Bill, was diagnosed with cancer a year ago. He went through a series of treatments, but he finally came to the realization that the end was probably near. I met with Bill and his wife and we had a long, heartfelt conversation. He and I had worked together for years to manage his portfolio and he made me promise to take care of the family finances after he was gone. I had already given them a copy of my book “Before I Go” and the workbook that goes along with it. As a result, after he passed away we did not have to wonder about the family’s assets or what his wife’s income was going to be.

But for many people, the end doesn’t give us as much time as Bill had. It may be an accident, a sudden heart attack or a stroke. That’s why it is best to prepare while both husband and wife are still healthy and able to make informed decisions. What should those preparations include?

Make sure your will is up to date. Check with an estate planning attorney to make sure it is current with your current family situation and the tax laws.
Prepare an Advance Medical Directive that will tell your family and physicians what you want done if you become incapacitated.
Find someone who can provide quality financial guidance to the surviving widow or children if that is not something that they have the knowledge, time or interest in taking on.

The last one is often over looked, but it is critically important to those you love and would leave behind. You need to find a person or team who puts your survivors’ interests first. Someone who knows how to generate the income that retirees need. Someone who is experienced in retirement planning and estate management. Someone who you can trust to manage your assets now, and do the same for those you leave behind.

It’s a challenge, and one that you should take care of now because you never know when it will be needed.

Arie Korving is the author of the book “Before I Go” and the “Before I Go Workbook” and Chairman of Korving & Company, a Registered Investment Advisor in Suffolk, VA. For help with this and other subjects on estate planning, he can be contacted at 757-638-5490. To get a copy of his book and workbook, visit Amazon.com or call Korving & Company, 757-638-5490.

Dynasty Trusts

“Dynasty trusts,” are designed to avoid the federal estate tax. It’s a never-ending trust that pays each generation of heirs only what they spend, while the rest of the money grows. In most states that is not possible because of an ancient rule limiting the duration of trusts to the lifetime of a living heir, plus 21 years. South Dakota repealed that rule in 1983, and in addition it has no income tax. As a result, a large number of very wealthy people opened offices in South Dakota to create a trust that can shield a big fortune from taxes for centuries, escaping tax bills as it hands out cash to great-great-great-grandchildren and beyond.

There is a long an informative article about the way South Dakota has used this as a way of attracting big money by literally renting out rooms in a former five-and-dime store in Sioux Falls.

As we head into the New Year, we hope that some of our readers are in the same league as the Pritzker family, the Carlson Family Trust Co., serving the Minnesota family behind Radisson and the TGI Friday’s restaurant chain, and the heirs of hedge fund pioneer Jack Nash. If not, we hope you get there soon.

Death and Taxes

The old saying about death and taxes being the only things that are certain is only partly true. Taxes change. Death is certain. The end of our lives is something that we face only reluctantly, if at all. When someone close to us dies, the effect is always sadness. When a spouse or parent dies, the effect is traumatic.

Because death is an unpleasant subject, most people prefer to spend their time thinking of more pleasant subjects. They believe that they have done their planning if they meet with an attorney to have a will or trust document prepared. Once this is done the feeling is that the planning process is complete. Unfortunately that’s rarely true. This traditional view of estate planning gives your heirs the view from thirty thousand feet but often fails to provide the guidance that surviving spouses or children really need. Here is an example from real life.

Sue Smith (not her real name) became a widow after her husband, Sam’s, brief illness. Sam had a small account with me but the bulk of his portfolio was distributed among a number of different investment firms and mutual fund custodians. Only Sam had a complete picture of the family’s finances and he rebuffed suggestions to consolidate his assets and do planning beyond reviewing his will on a regular basis. Sam retired after a career as an executive at a large corporation. He had been a take-charge guy all his life, both at work and at home. He had been the sole income earner, made the investment decisions and paid the bills, while Sue was in charge of the home and children. They were a very typical couple. Both were healthy, until Sam had a sudden stroke that left him incapacitated and led to his death a few weeks later. Sue was suddenly alone.

In a matter of hours Sue had to make a number of decisions. Some required immediate action, such as the selection of a funeral home and the arrangement of the funeral service. Shortly after the funeral Sue realized she needed help and asked me to be her “financial advisor” and I agreed. We met at her home to gather basic information. I began by asking her basic questions. What was her income now that she was single? What level of income would she need to maintain her lifestyle? Did she have any debts? What were her regular bills and how were they paid? What were her financial assets and where were they? Did her husband have a life insurance policy or annuity?

The answer to all of these questions was “I don’t know.”

The psychological result of being left alone and unsure of herself was severe. Sue was overwhelmed. This was a crushing burden to fall on someone who had never been required to take care of financial issues. It was as if a child had been dropped in the middle of dark woods with wild animals prowling around. The result was not only deep sadness but also fear and paranoia. Since her husband had always taken care of the family finances, she felt unprepared to handle major decisions and was terrified of being victimized. And because Sam had not left an instruction manual for her, Sue went through a long period of grief combined with anger and confusion.

Since Sue did not have a the information that we needed, we had to go through Sam’s files, make phone calls and watch the mail and as bills and statements came in to get an true picture of her assets, income and expenses. It took several months before we had a good handle on her finances.

Fortunately, Sam left Sue with a sizeable estate and I was able to provide all the income she needed as well as leaving a sizeable inheritance for her heirs. However, Sue never overcame the issues that surfaced after her husband’s death, and it made her life as a “suddenly single” person very unhappy. Sam never provided her with the guidance she needed once he was gone and it affected her in a very profound way.

As a result of my experience with Sue and a number of other widows who came to me for help, I prepared a manual that became a book, Before I Go, which I provide to all of my clients. It provides the answers to the questions that are not addressed by the usual estate planning documents but are the questions that those who are left behind need to know. The view from thirty thousand feet is not enough when it comes to managing the family finances and too often the details are ignored unless couples are made aware of the need for detailed planning that goes beyond preparing the will or trust.

What Each Spouse Should Know About Finances

A recent Wall Street Journal article discusses the division of labor in families.

In the typical division of labor in many households, one spouse manages the bills and the assets. This is natural and healthy, financial planners say. But both spouses should have at least a baseline understanding of the family finances, the experts add—and this seldom seems to be the case.
Just 28{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of couples were “completely confident” that either spouse alone was prepared to steer their joint retirement finances, according to a recent study by Fidelity Investments.

Disability, divorce or death can thrust new responsibilities on spouses when they are ill-prepared. But talking about such “what ifs” can stir up uncomfortable questions and issues, so many couples avoid doing so.
“There’s a tendency to say, ‘Tomorrow, tomorrow, tomorrow,’ ” says Dorian Mintzer, a retirement-transition coach, speaker and author. Most couples “want to avoid confrontation and don’t want to think about their own mortality,” she says, even though “talking about it can free you up and help you try to plan what’s ahead.”

I was actually happy to see the article because I completely agree with this analysis. This is exactly the reason we published the book BEFORE I GO. Get a copy for yourself or someone you love. If you are a couple like the one described in the WSJ article, create a relationship with an RIA who can help the spouse who is less prepared and can help the survivor cope.

Heiress’ Estate Settlement Reached

We file this under “Estate Planning” and “Lifestyle.” It’s from the Hook Law Center which provides us with an interesting peek into the issues that wealth can create.

Perhaps you have been reading about the estate of Huguette Clark, a wealthy, eccentric who died in New York City in May 2011. A settlement has now been reached as of September 24, 2013. It was the story of a wealthy heiress (copper industry) who had drawn up 2 conflicting wills within 6 months of each other in 2005. When $300 million is involved, it was no surprise that this would be resolved in court. Not only individuals, but philanthropic institutions like the Corcoran Gallery of Art in Washington, DC were also parties to the legal challenge. There were some winners and some losers in the outcome. Sixteen law firms were involved in the settlement.
What happened was this. Huguette Clark was the only surviving child of a 2nd marriage of William Clark, copper financier and former US Senator. He died in 1925, but Huguette did not die until 2011 at the age of 104. Huguette had a brief marriage to the son of one of her father’s employees which ended in 1930. She had no offspring. Huguette gradually became more and more reclusive as the years passed, especially after her mother’s death in 1960. She occupied her time collecting dolls, and she spent the last 20 years of her life living at Beth Israel Hospital in New York, paying nearly $400,000 a year for care, despite being relatively healthy and owning residences in New York City and Santa Barbara, CA. The second will benefited one of the beneficiaries of the first will and a longtime nurse, Hadassah Peri, while somewhat distant relatives and children from her father’s first marriage were cut out.
After more than two years of legal battles, the resolution is as follows. 20 relatives connected to William Clark’s first marriage will receive a total of $34.5 million to be divided among them. Nurse Peri has to pay back $5 million of the $31 million she received over a 20-year period, in exchange for a pledge of no further legal proceedings on her part. A goddaughter and some other employees will receive more than $4 million. The Bellosguardo Foundation, incorporated in New York, will receive her seaside estate in Santa Barbara, CA valued at $85 million, her doll collection valued at more than $1 million, and $5 million in cash. Another Bellosguardo Foundation, incorporated in CA in 2011, will receive nothing. The Corcoran Gallery of Art will receive half of the value in excess of $25 million that the sale of Monet’s “Water Lillies” yields. They also may receive 25{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of any money recovered from other individuals who received monetary gifts from Huguette late in her life, to which they may not have been entitled. The Corcoran has received many millions over the years from the Clark family, including gifts from her father and Huguette herself. The timing couldn’t be better for the Corcoran. It has had recent financial trouble, and has even considered relocating from its prestigious DC location to meet its financial obligations.

Hugette could have benefitted from our book “Before I Go.” It’s too late for her, but not too late for you.

Discussing the Inevitable With Retired Clients

The headline in a recent issue of Financial Planning addressed the issues that we face as we get older.
The typical 65 year-old will live another 19.2 years on average. During that time they may be faced with increased expenses that could include a nursing home. Which is why many people buy long-term-care insurance. But many of these policies were issued before the insurance companies had adequate data on the cost of care and the length of time people would live in nursing homes. Many companies have dropped out of the market and others are increasing their premiums. Consult with your investment advisor on whether and how you should insure.
But there is no question that whatever the journey our lives take, at some point it comes to an end. At that point, those left behind have to take care of things, and they often wish they better information. Which is why I strongly recommend that everyone should learn the most common things that are overlooked when planning for that moment. It’s all found in “Before I Go.”
Get a copy today.

Do retirees need life insurance?

People who have been paying life insurance premiums for many years are reluctant to stop. But often the need for a death benefit is gone once the kids are grown and there is enough money for the couple to live comfortably for the rest of their lives.

Keep in mind that the reason for purchasing life insurance in the first place is to protect the bread-winner and make it possible for the surviving spouse to put the kids through college. Since these factors are no longer in play once they retire, we have to ask out clients to reconsider whether the additional expense is still warranted. This is especially true if the insurance is a term policy which often gets more expensive a people age.

Canceling one’s coverage shouldn’t be a casual decision. In some instances, clients have already paid a great deal of money into these policies, and given their advanced years will never be able to obtain another one for the same rate. So before dropping the coverage, people should think long and hard about any possible implications.

In any case, if you have life insurance policies it’s wise to review them on a regular basis, make sure that the beneficiaries are the ones you want to receive the proceeds and check the tax implications of policies outside of irrevocable life insurance trusts.

If you have questions, ask your financial advisor.

10 Biggest Estate Planning Mistakes

From Financial Planning Magazine

1. Procrastination

While some of us would like to think to think we’re immortal, the time will come where all of us will have to eventually meet our maker. That’s why it’s important for advisors to push their clients to have their own estate plan, before it’s too late, and state laws intervene by creating one for them.

2. DIY Mentality

While a “do-it-yourself” mentality is admirable, it is often wise for clients to seek a professional advisor or lawyer when treading the murky waters of estate planning.

3. Failure to Think From all Angles

Sometimes clients get too invested in a particular planning approach, and forget to look at the big picture. While advisors should offer solutions to clients, they should also provide clients with “what-if” scenarios, so that they are fully prepared for what might go wrong.

4. Divorce

Often clients do not take into the account that they might get divorced. As a contingency, clients can place restrictions on the money in the trust being distributed outside of the family. Or they could use a discretionary distribution standard which gives discretion to the trustees.

5. Missing the Fine Print

As with any other legal document, the fine print in estate planning documents can be the difference between retirement in the Bahamas or in a trailer home. To avoid being manipulated by the fine print, make sure the client and estate planning attorney has dotted every “i” and crossed every “t.”

6. Forgetting Pets

Sometimes, clients forget to consider pets, and so when they die, their pets often have to follow them to their grave. Set up a pet trust to care for animals after the client dies.

7. Failure to Update ALL Documents

Failure to update or title clients’ other documents may prove to erase any benefits estate planning documents might have to offer. Make sure the client re-titles the assets in the name of the trust, not themselves, for clarity. And check regularly to ensure that beneficiary designations on all retirement documents are up-to-date. (You might not want that $1 million to go to your ex-wife anymore)

8. Underestimating Trusts

Some clients assume that trusts are only for minor children. In actuality, trusts are asset protection vehicles for the entire family, and can protect the assets from the claims of creditors.

9. Failure to Consider Digital Assets

When a client dies, their spouse/ heirs may not have access to the password for digital assets. As a result, there’s value that they can’t get to. To prevent this, make sure clients have a list of all their online user names/ passwords, and that the appropriate family member or trustee has access to the information.

10. No passing on of Digital Libraries & Music Collections (Yet)

As of the writing of this, clients cannot pass down to heirs their digital libraries and music collections, due to terms of service of the major sellers of digital content. While this may change in the future, clients will just have to accept this fact for now.

Tag: Estate