Retirement accounts play an important role in estate planning, one of the main benefits being that retirement accounts avoid probate, as they pass to a named beneficiary using a beneficiary form that you complete when you open your account. IRAs, Individual Retirement Accounts, are not only powerful estate planning tools, but they, of course, are great vehicles for saving for retirement with tax benefits.

In fact, the income tax on an IRA is payable only when funds are withdrawn from the plan, normally in later retirement years when income is lower and you are assumed to be in a lower tax bracket.

While IRAs and other retirement plans are great for retirement savings; you need proper estate planning to pass the account on to your beneficiaries, since the assets in the plan are subject to federal estate and there may be other tax issues if you do not plan properly.

Without proper estate planning, in the hands of the beneficiary, the IRA or retirement plan may be worth less than one half of what it was to the original account owner. Since the IRA beneficiary can make withdrawals over his or her life expectancy, naming a young person or a minor child as beneficiaries is tempting, and it is allowed. But if it is not done properly, naming a minor can have disadvantages and result in fees that reduce the benefit of the accumulated IRA.

In general, when it comes to IRA’s, taxes and estate planning, your spouse has the greatest flexibility as the beneficiary to your retirement account, and they are able to roll over the IRA to their own IRA or decide to treat your IRA as their own IRA. This can provide more tax and planning options, but also may increase the size of the surviving spouse’s estate.

An estate planning attorney can help you determine how your retirement plan fits into your overall estate plan, and offer guidance on the best way to pass your retirement account with the least amount of tax and legal implications.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

For many seniors the equity in their home is their largest asset, but it is unavailable for their needs unless they take out a home-equity loan – but that is money that must be paid back with interest.

Reverse mortgages have been touted as a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments to a lender, the cash flow is reversed and the homeowner, who must be aged 62 or older, receives payments from the bank.

Many seniors are finding they can use a reverse mortgage to pay off debt, buy a second home or just supplement their income – and seniors are still discovering new uses for another income stream. In fact, over the last five years the number of reverse mortgages nationwide has tripled.

But a reverse mortgage is not just for the wealthy, it may serve a purpose for the senior citizen who owns a home, but has limited income, as it can allow them to remain in the home by providing money for home modifications or even home health services that may not otherwise be covered.

It’s important to realize that there are drawbacks to reverse mortgages, as the fees can be pricey and, unlike a regular mortgage that pays down your debt, a reverse mortgage is actually building debt. If you plan on only taking out a small portion of money or plan on living in your home for only a short time, then the associated fees and costs can push the effective rate of the loan considerably higher. There are also scams and misinformation that can surround reverse mortgages, so it is important to do your homework.

It is also crucial to realize that in terms of estate planning, you are reducing the size of the estate that will be left to your heirs. You should also speak with your estate planning attorney to see if this income will impact any other aspects of your estate plan.

A reverse mortgage may be useful to some senior homeowners in specific circumstances, but it needs to fit within your estate plan, and you should speak with a trusted advisor before taking this on, as it not only impacts your future, but the future of your heirs as well.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Whether you are single, have children, own a home, are sending a child to college or retired — you buy insurance for peace of mind. It is a safety net for you and your loved ones, but life insurance is not only a safety net, it plays an important role in estate planning, and it is important to choose a policy that meets your specific needs. While an estate planning attorney can help you put together a comprehensive estate plan to include life insurance, it helps to know the basics so you can make an informed decision.

The simplest type is life insurance policy is term life. It provides coverage for a specific period of time, the term, which can be one year or more. For the lowest initial cost, annual renewable term life insurance usually fits the bill. Premiums are particularly low for young people, but they increase each year as you grow older. Level term life insurance policies, on the other hand, offer premiums that are guaranteed not to increase for a set period of time, such as 10, 20 or 30 years.

When is a life insurance policy not just a life insurance policy? When it also offers a method for savings, such as permanent life insurance. This type of life insurance is intended to remain in force for your entire life. Policies offer insurance coverage as well as the potential to accumulate cash value.

As you might expect, permanent life insurance premiums are more expensive than term premiums because some of the money is put into a savings program. The longer the policy has been in force, the higher the cash value, since more money has been paid in and the cash value has earned interest, dividends or both. If you buy a policy today, your first annual premium is likely to be much higher for a permanent life policy than for term.

The premiums for permanent life insurance policies normally stay the same over the years. That extra premium paid in the early years of the permanent policy gets invested and grows, minus the amount your agent takes as a sales commission. The gain is tax-deferred if the policy is cashed in during your life. When you die, the proceeds are usually tax-free to your beneficiary, but are normally included in the value of your estate.

Life insurance plays a critical role in estate planning, and it is important to have the policy coordinated to the other elements within your estate plan. An estate planning attorney can work with you to build a comprehensive estate plan that meets the specific needs of your family.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

In the US, a Uniform Act is an act proposed by the Uniform Law Commission to standardize state laws in the United States. Since Congress lacks the authority under the Constitution to legislate many issues, and the power is left to state governments, there is a need to have some consistency within laws across the states.

In most states, minors do not have the right to enter into a contractual agreement, and would not be able to own stocks, bonds, mutual funds, annuities or life insurance policies. In particular, that meant parents were not able to transfer assets to their minor children, but instead must transfer the assets to a trust.

In addition, the IRS allows persons to give up to $13,000 annually to another person without any tax burden. If this recipient person is a minor, the Uniform Gift Act to Minors allows the minor to own the assets without establishing a special trust fund. In essence, a custodial account is established, which functions much like a trust, but is less expensive and less complicated to set up.

Additional legislation, The Uniform Transfer to Minors Act (UTMA), also allows minors to own other types of property, such as real estate, fine art and royalties, and for the transfers to occur through inheritance. It basically extended the definition of gifts beyond cash and securities to include real estate, paintings, royalties, and patents.

The Uniform Gift to Minors Act prohibits the minor from taking control of the gifted assets until age 18, 21, or 25 depending on the state. In Colorado, the age is 21.

A gift transferred to an UTMA account is considered irrevocable, meaning it cannot be taken back. A custodian cannot use UTMA assets for the benefit of anyone other than the minor for whom the account was created. While the funds do not need to remain in the original UTMA account, the custodian must keep these assets separate from all other property and keep records of all transactions related to the assets. A custodian of an account is entitled to be paid for their services.

So which is better, a custodial account or an actual trust? It depends, often custodial accounts are better for transferring small sums, while trusts can handle larger transfers. An estate planning attorney can advise you of the various gifting and tax reduction options available to suit your particular needs.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Life insurance is a powerful estate planning tool. There are several roles it can play in easing the burden of your passing on your loved ones. While many consider life insurance to simply be an income replacement when a loved one passes, there are other ways it fits into an estate plan:

1. To pay expenses while an estate is in probate.

Since life insurance pays benefits to a named beneficiary, it avoids probate, and therefore the funds can be accessed more quickly than property that must be probated. Probate is the legal process that ‘settles’ an estate, and it can tie up property for months, but life insurance proceeds pass outside of this process.

2. To pay funeral costs, debt and estate administration costs.

Life insurance policies can be used to pay the costs of funerals, as well as probate fees and other debt of the deceased when an estate may have assets that are not liquid, such as real estate.

3. To create a life insurance trust.

An ILIT is an irrevocable life insurance trust, and it can be a powerful estate planning tool. An ILIT is a holding device that owns your life insurance policy for you, removing it from your estate. As its name suggests, the ILIT is irrevocable, which means once you have created this trust and funded it with an insurance policy, you may not take the policy back in your own name. But you can closely control many other aspects, such as naming the beneficiaries, the terms of the payment of benefits as well as choosing the trustee to manage the trust.

While a life insurance policy can have many advantages within an estate plan, it is important to work with an estate planning attorney to ensure that it properly coordinates to other aspects of your plan.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Many aspects of estate planning focus on reducing death taxes. One such tax is known as the generation skipping transfer (GST) tax. While many are familiar with the standard Federal estate taxes, the GST is an additional tax that is imposed on property left or gifted from a grandparent to a grandchild whether it is transferred as a gift, by will or by creating a Trust. The GST tax is also relevant if property is passed or gifted to any individual that is more than 37.5 years younger than the individual.

Like the estate tax, in 2010, this tax was technically repealed, meaning there were no generation skipping transfer taxes for this year, but in 2011 they will return with a vengeance, with only a $1,000,000 exemption beginning January 1, 2011. The tax rate is to be set at a hefty 55% for property exceeding the exemption amount.

The GST tax was originally approved to close an estate tax loophole. Normally, grandparents would bequeath their estates to their children, and incur estate taxes. Then the children would pass on the estates to their children, the grandchildren, incurring another set of estate taxes.

Then people realized they could skip a generation and leave their estates directly to their grandchildren and avoid one set of these estate taxes. Specifically, wealthier families were leaving property in trust funds for their grandchildren, and avoiding plenty of taxes while doing so. The GST tax was imposed to prevent this by taxing transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger.

With the changes in estate taxes and generation skipping transfer taxes that went into effect on January 1, 2011, now is the time for estate planning that can reduce estate taxes while meeting the goals of your family.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Whether your retirement account is a 401K or an IRA, it’s probably going to be one of your larger assets upon your retirement. In fact, a retirement account is an important component of a comprehensive estate plan, but what happens to the balance of your account upon your passing?

Beneficiaries

When your retirement account was set up, you were required to fill out a beneficiary form. The person named as the beneficiary is entitled to the remaining balance of the funds within your account. It’s important to make sure this information is kept up to date, as you are bound to go through some major life changes over the decades this account may have been in existence.

Avoiding Probate

One of the primary benefits of any estate planning tool that has a named beneficiary on a form is avoiding probate, the legal process that administers an estate. When probate is avoided, the funds are available more quickly, and can address the immediate needs of the beneficiary.

Spousal Rights

Many retirement plans require that a spouse be named as the primary beneficiary. Some plans may allow you to name another beneficiary as long as your spouse’s permission is given on the beneficiary form and it is signed and notarized. This is yet another reason to ensure that all beneficiary forms, whether for retirement accounts or life insurance policies, be reviewed and updated upon major life events, such as marriage, divorce, birth of a child or even the purchase of a home.

Consequences to a Beneficiary

Your named beneficiary will have choices in how they handle the account, and these choices will vary depending on whether or not the beneficiary is a surviving spouse. These choices normally include:

• Rolling the funds into their retirement plan (for surviving spouses);
• Cashing out the account in full; or
• Electing to continue to treat the account as the deceased spouse’s account.

An estate planning attorney can provide the best advice for ensuring that your retirement plan meshes with your estate plan, as well as your estate planning goals.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Whether your life insurance proceeds can be used to pay the debts of your estate depends on whether you’ve named a designated beneficiary.

What is a Designated Beneficiary?

If you complete a form for the purpose of specifying the name of a beneficiary for your life insurance policy then the beneficiary is known as a designated beneficiary in legal language.

If there is a designated beneficiary for an insurance policy then, at your death, the proceeds from that policy belong to the beneficiary. Unless you’ve named your estate as the beneficiary, your life insurance money cannot be used to pay your creditors or any of the bills of your estate. Also, the account would not pass through the probate process even if the rest of your estate is probated. However, if you don’t fill out a designated beneficiary form, or if your beneficiaries don’t survive you, then the insurance money would be included in your estate. This means it would go through the probate process and could be used to pay off the bills of your estate.

Part of establishing and maintaining a solid estate plan is making sure that your life insurance policy is up-to-date, and knowing where the money will go in the event of your death. An estate planning attorney can help you with these tasks.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Are you saving for your future? Investing is a great way to make your savings money work harder for you, but how do you know if now is the right time to begin investing?

You Have Your Debt under Control

Do you have a mountain of debt? If so, it is best to wait to invest until you have your finances under control, and here’s why: The more debt you have, the more interest you’re paying and the interest rate is probably much higher than what you’ll get in returns on your investments. Thus, the longer it takes you to pay off that high-interest debt, the more money you’re losing.

You Have Extra Money

You should wait to invest until you have a little extra money to do so. Surplus cash is money left over after you pay bills and contribute to your emergency fund. In case of emergencies, you should have enough money to cover all of your expense for at least three months, preferably six. A basic investment portfolio can begin with five hundred dollars. If you don’t have this, but you want to begin investing right away, some investments allow you to have small withdrawals taken from your account each month.

You Have Researched Your Options

Deciding what investments work best for you depends upon your personality, your investment goals and the current state of the economy. If you are a safety oriented person, you may prefer secure investments such as money market accounts and savings bonds. If, however, you don’t mind taking risks, stocks might be a better option for you.

Do you need to make money quickly or are you looking farther into the future? Investment goals are usually long term or short term and this will affect the type of investment vehicles you choose. You also want to make sure you keep your portfolio diversified so that your money isn’t tied up in one venue.

For more information on building a strong investment portfolio, consult with a qualified financial planner. If you’re looking for financial planners to interview, we’re happy to provide names of advisors we trust.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Calculating your net worth every year is a good way to help keep your estate plan up to date. Knowing the value of your estate if you were to die is an important part of the planning process.

Your net worth is the total amount you get after you subtract the total value of your liabilities from the total value of all of your countable assets upon death.

You’ll need some basic financial information to calculate your Net Worth and you can easily do it by yourself. Here is a step-by-step method to calculate your net worth:

1- List all your main assets like home, vehicles, antiques, etc. Total their value in dollars and be sure to calculate the value of each as accurately as possible.

2- Collect all the financial statements of your liquid assets like savings accounts, cash, other investments etc.

3- Add in the death benefit of all life insurance. This includes policies you have personally purchased, as well as those policies you may have through your employment. If you have the right to choose the beneficiary, you must count the death benefit as part of your estate.

4- Make a list of personal items of value that may be worth at least $500 or more.

5- Now, add the value of all the assets you have listed in the first three steps.

6- List the value of all major liabilities like mortgages, car loans etc.

7-Next list the value of all your personal liabilities like loans, credit card outstanding etc.

8. Now, add the value of all your liabilities.

9. Simply subtract the total value of your liabilities from your assets and you would get your Net Worth.

You can repeat this process every year to evaluate your financial progress. If you need any help then you can easily contact a good attorney.

When calculating your net worth, always make your estimates as accurate as possible and be sure to share your new estimates with your estate planning attorney when you review your estate plan.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.