Monday, May 25, 2015

Estate Planning: Get it Right

Estate Planning is an organized process of transferring a person’s wealth or assets to beneficiaries, after his/her death. Estate Planning goes beyond creating a will or a trust. There are various Federal and State taxes that have a direct implication on Estate Planning, both during a person’s lifetime, and thereafter upon his/her death. If these are not accounted for, beneficiaries may have to pay large sums as Estate Tax, and these diminish the value of the inheritance.

Further, Estate Planning is closely tied to Retirement Planning. To ensure fewer compromises on your lifestyle, you must plan your investment in Life Insurance and other instruments in such a way that they reduce your tax burden after Retirement and the taxable value of your Estate after your death. An Insurance Agent or Investment Advisor who has adequate knowledge of these implications is best suited to advise you on Estate Planning. 

Most implications center on:        
   a. How your Life Insurance product is configured? 
b. How Gift Tax can be used to reduce Estate Tax?
a. Planning your Life Insurance 
Life Insurance policies are some of the assets that beneficiaries can inherit after a person’s death. Beneficiaries do not have to pay Income tax on the proceeds of Insurance Policies they inherit. However, these proceeds are added to the Net value of the Estate and are eligible for Estate Tax. Gifting the Insurance Policy to beneficiaries during your lifetime is also not an option. In case a person dies within three years of gifting the policy, Federal Estate Taxes still apply. 
A better option is to place your policy in an Irrevocable Life Insurance Trust (ILIT). This ensures premiums on the policy are paid on time,as long as you are alive. One of the beneficiaries can be a trustee, and monitor the functioning of the trust. 
b. Leveraging the relation between Gift Tax and Estate Tax  
Not all assets need be inherited by the beneficiaries after your death. Some of them may be gifted to beneficiaries during your lifetime, as long as the gift value does not exceed the gift tax exclusion limit for that year. This reduces the overall taxable value of the estate, and is beneficial to both parties.

The Gift Tax exclusion limit can be used to pay medical and educational expenses of beneficiaries on their behalf. You can gift up to USD 14000 per year towards such expenses, without incurring gift taxand additionally, up to USD 5.43 million across your lifetime without incurring Federal Estate Tax. This means, between you and your spouse, you can gift as much as USD 10.86 million across your lifetimes, without incurring Federal Estate Tax.

Land as an Asset: If the person or his/her beneficiaries do not wish to develop land owned by him/her, it could be donated to a non-for-profit organization. This reduces the income and estate taxes that must be paid by the beneficiaries.

Estate Planning is complex, time-consuming, and must be reviewed periodically. This is required due to changes in one’s health or financial situation. Further, Federal and State Taxes change with time, and not being aware of them can expose beneficiaries to unnecessary hassle or expenses.

To plan for a hassle free bequeathing of your estate, consult an insurance agent or broker, who with their foreknowledge and expertise, can work closely with you and your beneficiaries to understand your desires, and resolve any conflicts that may arise. They will also prepare, and maintain all legal documentation required for a smooth and hassle-free ‘probate’ process (execution of the will). All these go a long way in ensuring peace of mind during your lifetime, and goodwill thereafter.

Thursday, May 21, 2015

Retirement Planning: Sooner the Better

Retirement Planning is a crucial aspect of everyone’s financial security. As you age, your financial commitments towards the family, employability, and healthcare needs change, with time. On retirement,this can impose a financial burden on you and your family members. To prevent such a situation, investing in a retirement scheme now, would be a prudent decision. Retirement Planning creates adequate security that helpsyou stay financially independent with the ability to sustain your lifestyle.

Despite the necessity for retirement planning,it is not given adequate importance. According to the National Institute of Retirement Security (NIRS), the average working household in the US has negligible or no savings. The median Retirement Account balance is USD 3000 for younger, working-age households and USD 12000 for near-retirement, working-age households (source: This can expose a person to severe financial risk after retirement. 

There are several employer-sponsored and Social Security-based Retirement Plans that you can subscribe to and mitigate the risk. 

Types of Retirement Plans
  • Defined contribution plans
  • Defined benefit plans
  • Hybrid and cash balance plans
  • Qualified retirement plans
  • Individual Retirement Account
  • HR10 Plans
  • Nonqualified Plans
Factors to consider while choosing a Retirement Plan
  • Age and Income profile: Working individuals in the 20-40 years age-group can afford to choose retirement plans or financial instruments that present a higher investment risk but offer more returns. However, those in the 40-60 years age-group would be better off, to follow more conservative plans that are low-risk, low-return.
  • Allocating Assets: Younger individuals and those with higher incomes tend to allocate a portion of their investment towards retirement plans that are low-risk, low-return and the balance towards high-risk, high-return instruments that generate wealth. However, older individuals and those with modest incomes must ensure that a larger portion of their savings is invested in the first category, and a much smaller portion in the second category.
  • Asset Types: There are several options available for investment, with Bonds, Mutual Funds, and stocks, being the most popular. Apportioning the right amount into each of these investment portfolios, depends on other factors as listed below.
  • Risk appetite: An individual’s appetite for risk depends on his/her age, income, ability to find part/full-time employment post retirement, fixed and liquid assets, and ability to raise capital from friends and family in times of need. Individuals with a higher risk appetite have more flexibility while considering the right retirement plan for them.
  • Debt Management: Loans availed at lower interest rates may not have much impact on the choice of retirement plans. However, all high-rate loans and debts must be cleared at the earliest in order to choose the right retirement plan. This may require more financial discipline and compromises to your lifestyle.
  • Mortgage Payments: Mortgages occupy a significant portion of monthly payouts. It’s best to clear all mortgages when one is still a few years away from retirement. This will free up a large part of the monthly income that can be invested in retirement plans.
  • Retirement Benefits: Most employees of government agencies and private companies receive several benefits upon retirement. This amount can also be invested in retirement plans to ensure higher returns over time.
  • Lifestyle related expenses: Depending on your social standing and hobbies, your expenses after retirement can be significant, and these must be factored in, while choosing the right retirement plan.
  • Taxation: In the years,soon after retirement, one must withdraw more from taxable instruments and less from tax-free instruments to ensure a longer life for theretirement plan.
Retirement Planning is intricate and involves several categories of plans, instruments for investment, and terms and conditions that apply on each transaction. You must also factor in inflation, the flexibility to contribute/withdraw funds at random, andfines or penalties that are applicable on deviations. 

Seek the assistance of Insurance Companies or Investment Consultants, who will be able to guide you, in choosing the right retirement plan, that is best suited to your needs, pre and post retirement.