What Happens To My Pension If The Company Goes Bankrupt?
Given the downward spiral that GE has been in over the past year, we have received the same question over and over again from a number of GE employees and retirees: “If GE goes bankrupt, what happens to my pension?” While it's anyone’s guess what the future holds for GE, this is an important question that any employee with a pension should
Given the downward spiral that GE has been in over the past year, we have received the same question over and over again from a number of GE employees and retirees: “If GE goes bankrupt, what happens to my pension?” While it's anyone’s guess what the future holds for GE, this is an important question that any employee with a pension should know the answer to. While some employees are aware of the PBGC (Pension Benefit Guarantee Corporation) which is an organization that exists to step in and provide pension benefits to employees if the employer becomes insolvent, very few are aware that the PBGC itself may face insolvency within the next ten years. So if the company can’t make the pension payments and the PBGC is out of money, are employees left out in the cold?
Pension shortfall
When a company sponsors a pension plan, they are supposed to make contributions to the plan each year to properly fund the plan to meet the future pension payments that are due to the employees. However, if the company is unable to make those contributions or the underlying investments that the pension plan is invested in underperform, it can lead to shortfalls in the funding.
We have seen instances where a company files for bankruptcy and the total dollar amount owed to the pension plan is larger than the total assets of the company. When this happens, the bankruptcy courts may allow the company to terminate the plan and the PBGC is then forced to step in and continue the pension payments to the employees. While this seems like a great system since up until now that system has worked as an effective safety net for these failed pension plans, the PBGC in its most recent annual report is waiving a red flag that it faces insolvency if Congress does not make changes to the laws that govern the premium payments to the PBGC.
What is the PBGC?
The PBGC is a federal agency that was established in 1974 to protect the pension benefits of employees in the private sector should their employer become insolvent. The PBGC does not cover state or government sponsored pension plans. The number of employees that were plan participants in an insolvent pension plan that now receive their pension payments from the PBGC is daunting. According to the 2017 PBGC annual report, the PBGC “currently provides pension payments to 840,000 participants in 4,845 failed single-employer plans and an additional 63,000 participants across 72 multi-employer plans.”
Wait until you hear the dollar amounts associate with those numbers. The PBGC paid out $5.7 Billion dollars in pension payments to the 840,000 participants in the single-employer plans and $141 Million to the 63,000 participants in the multi-employer plans in 2017.
Where Does The PBGC Get The Money To Pay Benefits?
So where does the PBGC get all of the money needed to make billions of dollars in pension payments to these plan participants? You might have guessed “the taxpayers” but for once that’s incorrect. The PBGC’s operations are financed by premiums payments made by companies in the private sector that sponsor pension plans. The PBGC receive no taxpayer dollars. The corporations that sponsor these pension plans pay premiums to the PBGC each year and the premium amounts are set by Congress.
Single-Employer vs Multi-Employer Plans
The PBGC runs two separate insurance programs: “Single-Employer Program” and “Multi-Employer Program”. It’s important to understand the difference between the two. While both programs are designed to protect the pension benefits of the employees, they differ greatly in the level of benefits guaranteed. The assets of the two programs are also kept separate. If one programs starts to fail, the PBGC is not allowed to shift assets over from the other program to save it.
The single-employer program protects plans that are sponsored by single employers. The PBGC steps in when the employer goes bankrupt or can no longer afford to sponsor the plan. The Single-Employer Program is the larger of the two programs. About 75% of the annual pension payments from the PBGC come from this program. Some examples of single-employer companies that the PBGC has had to step into to make pension payments are United Airlines, Lehman Brothers, and Circuit City.
The Multi-Employer program covers pension plans created and funded through collective bargaining agreements between groups of employers, usually in related industries, and a union. These pension plans are most commonly found in construction, transportation, retail food, manufacturing, and services industries. When a plan runs out of money, the PBGC does not step in and takeover the plan like it does for single-employer plans. Instead, it provides “financial assistance” and the guaranteed amounts of that financial assistants are much lower than the guaranteed amounts offered under the single-employer program. For example, in 2017, the PBGC began providing financial assistance to the United Furniture Workers Pension Fund A (UFW Plan), which covers 10,000 participants.
Maximum Guaranteed Amounts
The million dollar question. What is the maximum monthly pension amount that the PBGC will guarantee if the company or organization goes bankrupt? There are maximum dollar amounts for both the single-employer and multi-employer program. The maximum amounts are indexed for inflation each year and are listed on the PBGC website. To illustrate the dramatic difference between the guarantees associated with the pension pensions in a single-employer plan versus a multi-employer plan; here is an example from the PBGC website based on the 2018 rates.
“PBGC’s guarantee for a 65-year-old in a failed single-employer plan can be up to $60,136 annually, while a participant with 30 years of service in a failed multi-employer plan caps out at $12,870 per year. The multi-employer program guarantee for a participant with only 10 years of service caps out at $4,290 per year.”
It’s a dramatic difference.
For the single-employer program the PBGC provides participants with a nice straight forward benefits table based on your age. Below is a sample of the 2018 chart. However, the full chart with all ages can be found on the PBGC website.
PBGC
Unfortunately, the lower guaranteed amounts for the multi-employer plans are not provided by the PBGC in a nice easy to read table. Instead they provide participant with a formula that is a headache for even a financial planner to sort through. Here is a link to the formula for 2018 on the PBGC website.
PBGC Facing Insolvency In 2025
If the organization guaranteeing your pension plan runs out of money, how much is that guarantee really worth? Not much. If you read the 138 page 2017 annual report issued by the PBGC (which was painful), at least 20 times throughout the report you will read the phase:
“The Multi-employer Program faces very serious challenges and is likely to run out of money by the end of fiscal year 2025.”
They have placed a 50% probability that the multi-employer program runs out of money by 2025 and a 99% probability that it runs out of money by 2036. Not good. The PBGC has urged Congress to take action to fix the problem by raising the premiums charged to sponsors of these multi-employer pension plans. While it seems like a logical move, it’s a double edged sword. While raising the premiums may fix some of the insolvency issues for the PBGC in the short term, the premium increase could push more of the companies that sponsor these plans into bankruptcy.
There is better news for the Single-Employer Program. As of 2017, even though the Single-Employer Program ran a cumulative deficit of $10.9 billion dollars, over the next 10 years, the PBGC is expected to erase that deficit and run a surplus. By comparison the multi-employer program had accumulated a deficit of $65.1 billion dollars by the end of 2017..
Difficult Decision For Employees
While participants in Single-Employer plans may be breathing a little easier after reading this article, if the next recession results in a number of large companies defaulting on their pension obligations, the financial health of the PBGC could change quickly without help from Congress. Employees are faced with a one-time difficult decision when they retire. Option one, take the pension payments and hope that the company and PBGC are still around long enough to honor the pension payments. Or option two, elect the lump sum, and rollover then present value of your pension benefit to your IRA while the company still has the money. The right answer will vary on a case by case basis but the projected insolvency of the PBGC’s Multi-employer Program makes that decision even more difficult for employees.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
College Students: The Top 2 Action Items To Get Ahead
The job market for college students is more competitive than it has ever been in the past. Why? Because companies continue to leverage technology to do more with less people. So what separates the college students that have multiple job offers prior to graduation from the college grads that struggle to find their first career?As an investment advisor,
The job market for college students is more competitive than it has ever been in the past. Why? Because companies continue to leverage technology to do more with less people. So what separates the college students that have multiple job offers prior to graduation from the college grads that struggle to find their first career?As an investment advisor, most of our clients are business owners or executives. They are the folks that hold the keys to the positions that are available at their respective companies. Throughout our daily interaction with these clients we receive continuous feedback about:
Their young rockstar employee that is rising quickly through the ranks
The troubles that they are having finding the right people
The skills and personality traits that they are looking for in their next round of hires
If your child is either in college or about to enter college, what advice can you give them to put them at the top of the most wanted list of these high growth companies?
Intern, Intern, Intern
The college degree gets you the interview. Your work experience is what lands you the job. If it comes down to two candidates for a position, both interview well, both have the right personality for the job, good GPA’s, etc, if one candidate has completed an internship and other has not, the candidate with the work experience is going to be highly favored. There are a number of reasons for this.
First, the goal of the company is to get you up and running as soon as possible. If you have real life work experience, the employer will most likely assume that you will be up and running more quickly than a new employee that has no work experience. You probably already know the lingo of the industry, you may be familiar with the software that the company uses, you know who the competitors are in the industry, etc.
Second, there is more to talk about in the interview. While it’s pleasant to talk about your personal interests, the research that you have completed on the company, general knowledge of the industry, and your college experience. Instead, if you are able to talk about a project that you worked on during a college internship that is relevant to the positon that you are applying for, the conversation and the lasting impression that you will have during your interview will be elevated to a level that is head and shoulders above most of the other job candidates that will follow the typically question and answer session.
College students should get involved with as many internships and work studies as they can while they are attending college. Also, don’t’ wait until your senior year in college to obtain an internship. Internships serve another purpose besides giving you the advantage in a job interview. They can also tell you what you don’t want to do. You put yourself in a tough spot if you spend four years in college to obtain an accounting degree, only to find out after obtaining your first job that you don’t like being an accountant. It happens more often than you would think. We all have to do all we can in order to reach our career goal. It’s better to find that out in your freshman or sophomore year of college so you have the opportunity to change majors if needed.
Internships also help to narrow down your options. You may be interested in obtaining a degree in business but business is a very broad industry with a lot of different paths. Are you interested in marketing, finance, sales, accounting, management, operations, data analytics, manufacturing, or investment banking? Even if you are not 100% certain which path is the right one for you, make a choice. It will either reinforce your decision or it will allow you to scratch it off the list. Both are equally important.
Read These Books
There is common trait among business owners and executives. They typically have a thirst for knowledge which usually means that they are avid readers. One of the greatest challenges that young employees have is being able to relate to how the owner of the business thinks, what motivates them, and how they view the world. In general, business owners tend to admire or at least acknowledge the risk taking behaviors and achievements of some of the standout CEO’s of their time. Steve Jobs, Elon Musk, Bill Gates, Warren Buffet, Jeff Bezos, and the list goes on.
It’s not uncommon for a business owner to borrow personality traits or business strategies from some of these highly regarded CEO’s and incorporated them into their own business. If during an interview you happen to bring up that you admire how Elon Musk has the ability to identify solutions to problems in industries where it was previously deemed impossible like PayPal and SpaceX. There is a good chance that the business owner or executive that is interviewing you has either read Elon’s book or is aware of his achievements and it brings that conversation to next level.
In addition, the person interviewing you will most likely assume that if you are interested in reading those types of books than you probably have that entrepreneur mindset which is rare and valuable. It’s very difficult to teach someone how to think like an entrepreneur. Showing that you possess that trait can easily excite a potential employer.
Here are the top three books that I would recommend reading:
Delivering Happiness by Tony Hsieh (CEO of Zappos)
Elon Musk by Ashlee Vance (CEO of Tesla)
The Virgin Way by Richard Branson (CEO of Virgin Group)
Each of these CEO's have different leadership styles, come from different industries, have different backgrounds, and provide different takeaways for the reader. There is a tremendous amount of knowledge to be gain from reading these books and all of these books are written in a way that makes it difficult to put them down once you have started reading them.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Are Trustee Commissions Calculated & Taxed?
If you are the trustee of a trust, in most cases, you are allowed to be paid a commission from the trust assets. States have different rules with regard to the trustee commission calculation. This article will assist you in understanding how the commission is calculated, how the payments are taxed, the rules for commissions not taken in past years, and how
If you are the trustee of a trust, in most cases, you are allowed to be paid a commission from the trust assets. States have different rules with regard to the trustee commission calculation. This article will assist you in understanding how the commission is calculated, how the payments are taxed, the rules for commissions not taken in past years, and how the trust commissions are split between multiple trustees.
Trust Document
The trust document usually has a special section that addresses commissions paid to the trustee. It’s common for the trust document to include language that states that “the trustee shall receive annual commissions in the same manner and at the same rates as prescribed for testamentary trustees under the laws of the State of (Name of State)”.
For New York the formula is as follows:
1.05% of the first $400,000
0.45% of the next $600,000
0.30% of the rest
For example, a trust has $500,000 in assets as of December 31st, the calculation would be as follows:
$400,000 x 1.05% = $4,200
$100,000 x 0.45% = $ 450
Total Commission: $4,650
The trustee would be eligible to receive $4,650 from the trustee assets as their commission for the year.
How Are Commissions Taxed?
Commissions paid by the trust to the trustee are reported as income by the trustee on their personal tax return. The trust deducts the commission paid as an expense. We frequently receive the question, “does the trust have to issue a 1099-MISC tax form for the commission that was paid to the trustee?” Many tax professionals take the position that a 1099-MISC is not required to be issued because serving as trustee does not meet the definition of a “trade or business” which is the prerequisite for issuing a 1099-MISC tax form.
More Than 1 Trustee
What happens where there is more than 1 trustee? Do the trustees have to split the commission equally? The answer is “it depends”. It depends on the size of the trust and the number of trustees.
Again, I’m referencing New York State law her. The rules will vary for by state. For trusts with under $100,000 in assets, each trustee gets the full commission. If a trust has $80,000 in assets and there are 3 trustees, each trustee would receive $840 ($80,000 x 1.05%).
For trusts with assets between $100,000 – $400,000, if there are one or two trustees, each trustee is entitled to a full commission. If there are 3 or more trustees within this asset range, the single trustee commission is divided equally between the trustees. I don’t necessary understand the logic behind if there are two trustees the commission is doubled but if there are 3 trustees, a single commission payment is split between the trustees. But that’s how the law is written.
For trusts with more than $400,000 in assets, if there are 1 – 3 trustees, each trustee is entitled to the full commission amount. If there are more than 3 trustees, again, the commission is split equally amongst the trustees.
Can You Waive The Commission Payment?
As the trustee, you can voluntarily waive the commission payment. The money simply remains in the trust. Why would a trustee do this? Some trustees just don’t need the income. In some situations, the parents will setup a trust, they have more than one child, but only one of the children serves as trustee. The child that serves as trustee may decide to waive the commission payment to avoid conflict with their siblings about “taking money from mom and dad’s trust”.
Another reason for waiving the commission payment is the trustee may purposefully want to realize that income at a later date. Whatever the reason, I just wanted you to know that waiving the commission payment is an option.
Back Payments
We will frequently get the following question:
“I have been the trustee of this trust for the past 10 year but I have never taken a commission. Am I still entitled to the trustee commissions for past 10 years even though I did not take them?”
The answer is “yes”. The trustee is still entitled to receive those commissions for past years even though they did not take them in the year that they were due. The trustee would just need to be able to produce the records necessary to calculation the trustee commission for all of the past years.
In these cases, remember, commission payments to the trustees are taxed at ordinary income tax rates to the trustee. If you decide to “catch-up” on past commissions that are due to you and you receive $30,000 in trustee commissions in a single tax year that could bump you up into a higher tax bracket. It may make more sense from a tax standpoint to spread those past commission payments over the course of the next few years to reduce the tax hit.
Disclosure: This article is for educational purposes only. For legal advice, please consult an attorney.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
No Deduction For Entertainment Expenses In 2019. Ouch!!
There is a little known change that was included in tax reform that will potentially have a big impact on business owners. The new tax laws that went into effect on January 1, 2018 placed stricter limits on the ability to deduct expenses associated with entertainment and business meals. Many of the entertainment expenses that businesses
There is a little known change that was included in tax reform that will potentially have a big impact on business owners. The new tax laws that went into effect on January 1, 2018 placed stricter limits on the ability to deduct expenses associated with entertainment and business meals. Many of the entertainment expenses that businesses were able to deduct in 2017 will no longer we allowed in 2018 and beyond. A big ouch for business owners that spend a lot of money entertaining clients and prospects.
A Quick Breakdown Of The Changes
new tax rules for entertainment expenses
No Deduction in 2019
Prior to 2018, if the business spent money to take a client out to a baseball game, meet a client for 18 holes of golf, or to host a client event, the business would be able to take a deduction equal to 50% of the total cost associated with the entertainment expense. Starting in 2018, you get ZERO. There is no deduction for those expenses.
The new law specifically states that there is no deduction for:
Any activity generally considered to be entertainment, amusement, or recreation
Membership dues to any club organization for recreation or social purpose
A facility, or portion thereof, used in connection with the above items
This will inevitably cause business owners to ask their accountant: “If I spend the same amount on entertainment expenses in 2018 as I did in 2017, how much are the new tax rules going to cost me tax wise?”
Impact On Sales Professionals
If you are in sales and big part of your job is entertaining prospects in hopes of winning their business, if your company can no longer deduct those expenses, are you going to find out at some point this year that the company is going to dramatic limit the resources available to entertain clients? If they end up limiting these resources, how are you supposed to hit your sales numbers and how does that change the landscape of how you solicit clients?
Impact On The Entertainment Industry
This has to be bad news for golf courses, casinos, theaters, and sports arena. As the business owner, if you were paying $15,000 per year for your membership to the local country club and you justified spending that amount because you knew that you could take a tax deduction for $7,500, now what? Now that you can’t deduct any of it, you may decide to cancel your membership or seek out a cheaper alternative.
Impact On Charitable Organizations
How do most charities raise money? Events. As you may have noticed in the chart, in 2017 tickets to a qualified charitable event were 100% deductible. In 2018, it goes from 100% deductible to Zero!! It’s bad enough that the regular entertainment expenses went from 50% to zero but going from 100% to zero hurts so much more. Also charitable events usually have high price tags because they have to cover the cost of event and raise money for the charity. In 2018, it will be interesting to see how charitable organizations get over this hurdle. It may have to disclose right on the registration form for the event that the ticket cost is $500 but $200 of that amount is the cost of the event (non-deductible) and $300 is the charitable contribution.
Exceptions To The New Rules
There are some unique exceptions to the new rules. Many business owners will not find any help within these exceptions but here they are:
Entertainment, amusement, and recreation expenses you treat as compensation to your employees in their wages (In other words, the cost ends up in your employee’s W2)
Expenses for recreation, social, or similar activities, including facilities, primarily for employees, and it can’t be highly compensation employees (“HCE”). In 2018 an HCE employee is an employee that makes more than $120,000 or is a 5%+ owners of the company.
Expenses for entertainment goods, services, and facilities that you sell to customers
What’s The Deal With Meals?
Prior to 2018, employers could deduct 50% of expenses for business-related meals while traveling. Also meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.
Starting in 2018, meal expenses incurred while traveling on business remain 50% deductible to the business. However, meals provided via an on-premises cafeteria or otherwise on the employers premise for the convenience of the employer will now be limited to a 50% deduction.
There is also a large debate going on between tax professional as to which meals or drinks may fall into the “entertainment” category and will lose their deduction entirely.
Impact On Business
This is just one of the many “small changes” that was made to the new tax laws that will have a big impact on many businesses. It may very well change the way that businesses spend money to attract new clients. This in turn will most likely lead to unintended negative consequences for organizations that operate in the entertainment, catering, and charitable sectors of the U.S. economy.
Disclosure: For education purposes only. Please seek tax advice from your tax professional
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Business Owners: Strategies To Reduce Your Taxable Income To Qualify For The New 20% Qualified Business Income Deduction
Now that small business owners have the 20% deduction available for their pass-through income in 2018, as a business owner, you will need to begin to position your business to take full advantage of the new tax deduction. However, the Qualified Business Income ("QBI") deduction has taxable income thresholds. Once the owner's personal taxable
Now that small business owners have the 20% deduction available for their pass-through income in 2018, as a business owner, you will need to begin to position your business to take full advantage of the new tax deduction. However, the Qualified Business Income ("QBI") deduction has taxable income thresholds. Once the owner's personal taxable income begins to exceed specific dollar amounts, the 20% deduction with either phase out or it will trigger an alternative calculation that could lower the deduction.
First: Understand The 20% Deduction
If you are not already familiar with how the new 20% deduction works, I encourage you to read our article:"How Pass-Through Income Will Be Taxes In 2018 For Small Business Owners"If you are already familiar with how the Qualified Business Income deduction works, please continue reading.
The Taxable Income Thresholds
Regardless of whether you are considered a “services business” or “non-services business” under the new tax law, you will need to be aware of the following income thresholds:
Individual: $157,500
Married: $315,000
These threshold amounts are based on the “total taxable income” listed on the tax return of the business owner. Not “AGI” and not just the pass-through income from the business. Total taxable income. For example, if I make $100,000 in net profit from my business and my wife makes $400,000 in W-2 income, our total taxable income on our married filing joint tax return is going to be way over the $315,000 threshold. So do we completely lose the 20% deduction on the $100,000 in pass-through income from the business? Maybe not!!
The Safe Zone
For many business owners, to maximize the new 20% deduction, they will do everything that they can to keep their total taxable income below the thresholds. This is what I call the “safe zone”. If you keep your total taxable income below these thresholds, you will be allowed to take your total qualified business income, multiply it by 20%, and you’re done. Once you get above these thresholds, the 20% deduction will either begin to phase out or it will trigger the alternative 50% of W-2 income calculation which may reduce the deduction. The phase out ranges are listed below:
Inidividuals: $157,500 to $207,500
Married: $315,000 to $415,000
As you get closer to the top of the range the deduction begins to completely phase out for “services businesses” and for “non-services business” the “lesser of 20% of QBI or 50% of wages paid to employees” is fully phased in.
What Reduces "Total Taxable Income"?
There are four main tools that business owners can use to reduce their total taxable income:
Standard Deduction or Itemized Deductions
Self-Employment Tax
Retirement Plan Contributions
Timing Expenses
Standard & Itemized Deductions
Since tax reform eliminated many of the popular tax deductions that business owners have traditionally used to reduce their taxable income, for the first time in 2018, a larger percentage of business owners will elect taking the standard deduction instead of itemizing. You do not need to itemize to capture the 20% deduction for your qualified business income. This will allow business owners to take the higher standard deduction and still capture the 20% deduction on their pass-through income. Whether you take the standard deduction or continue to itemize, those deductions will reduce your taxable income for purposes of the QBI income thresholds.
Example: You are a business owner, you are married, and your only source of income is $335,000 from your single member LLC. At first look, it would seem that your total income is above the $315,000 threshold and you are subject to the phase out calculation. However, if you elect the standard deduction for a married couple filing joint, that will reduce your $335,000 in gross income by the $24,000 standard deduction which brings your total taxable income down to $311,000. Landing you below the threshold and making you eligible for the full 20% deduction on your qualified business income.
The point of this exercise is for business owners to understand that if your gross income is close to the beginning of the phase out threshold, somewhere within the phase out range, or even above the phase out range, there may be some relief in the form of the standard deduction or your itemized deductions.
Self-Employment Tax
Depending on how your business is incorporated, you may be able to deduct half of the self-employment tax that you pay on your pass-through income. Sole proprietors, LLCs, and partnership would be eligible for this deduction. Owners of S-corps receive W2 wages to satisfy the reasonable compensation requirement and receive pass-through income that is not subject to self-employment tax. So this deduction is not available for S-corps.
The self-employment tax deduction is an “above the line” deduction which means that you do not need to itemize to capture the deduction. The deduction is listed on the first page of your 1040 and it reduces your AGI.
Example: You are a partner at a law firm, not married, the entity is taxed as a partnership, and your gross income is $200,000. Like the previous example, it looks like your income is way over the $157,500 threshold for a single tax filer. But you have yet to factor in your tax deductions. For simplicity, let’s assume you take the standard deduction:
Total Pass-Through Income: $200,000
Less Standard Deduction: ($12,000)
Less 50% Self-Employ Tax: ($15,000) $200,000 x 7.5% = $15,000
Total Taxable Income: $173,000
While you total taxable income did not get you below the $157,500 threshold, you are now only mid-way through the phase out range so you will capture a portion of the 20% deduction on your pass-through income.
Retirement Plans – "The Golden Goose"
Retirement plans will be the undisputed Golden Goose for purposes of reducing your taxable income for purposes of the qualified business income deduction. Take the example that we just went through with the attorney in the previous section. Now, let’s assume that same attorney maxes out their pre-tax employee deferrals in the company’s 401(k) plan. The limit in 2018 for employees under the age of 50 is $18,500.
Total Pass-Through Income: $200,000
Less Standard Deduction: ($12,000)
Less 50% Self-Employ Tax: ($15,000)
Pre-Tax 401(k) Contribution: ($18,500)
Total Taxable Income: $154,500
Jackpot!! That attorney has now reduced their taxable income below the $157,500 QBI threshold and they will be eligible to take the full 20% deduction against their pass-through income.
Retirement plan contributions are going to be looked at in a new light starting in 2018. Not only are you reducing your tax liability by shelter your income from taxation but now, under the new rules, you are simultaneously increasing your QBI deduction amount.
When tax reform was in the making there were rumors that Congress may drastically reduce the contribution limits to retirement plans. Thankfully this did not happen. Long live the goose!!
Start Planning Now
Knowing that this Golden Goose exists, business owners will need to ask themselves the following questions:
How much should I plan on contributing to my retirement accounts this year?
Is the company sponsoring the right type of retirement plan?
Should we be making changes to the plan design of our 401(k) plan?
How much will the employer contribution amount to the employees increase if we try to max out the pre-tax contributions for the owners?
Business owners are going to need to engage investment firms and TPA firms that specialize in employer sponsored retirement plan. Up until now, sponsoring a Simple IRA, SEP IRA, or 401(K), as a way to defer some income from taxation has worked but tax reform will require a deeper dive into your retirement plan. The golden question:
“Is the type of retirement plan that I’m currently sponsoring through my company the right plan that will allow me to maximize my tax deductions under the new tax laws taking into account contribution limits, admin fees, and employer contributions to the employees.”
If you are not familiar with all of the different retirement plans that are available for small businesses, please read our article “Comparing Different Types Of Employer Sponsored Plans”.
DB / DC Combo Plans Take Center Stage
While DB/DC Combo plans have been around for a number of years, you will start to hear more about them beginning in 2018. A DB/DC Combo plan is a combination of a Defined Benefit Plan (Pension Plan) and a Defined Contribution Plan (401k Plan). While pension plans are usually only associated with state and government employers or large companies, small companies are eligible to sponsor pension plans as well. Why is this important? These plans will allow small business owners that have total taxable income well over the QBI thresholds to still qualify for the 20% deduction.
While defined contribution plans limit an owner’s aggregate pre-tax contribution to $55,000 per year in 2018 ($61,000 for owners age 50+), DB/DC Combo plans allow business owners to make annual pre-tax contributions ranging from $60,000 – $300,000 per year. Yes, per year!!
Example: A married business owner makes $600,000 per year and has less than 5 full time employees. Depending on their age, that business owner may be able to implement a DB/DC Combo plan prior to December 31, 2018, make a pre-tax contribution to the plan of $300,000, and reduce their total taxable income below the $315,000 QBI threshold.
Key items to make these plans work:
You need to have the cash to make the larger contributions each year
These DB/DC plan needs to stay in existence for at least 3 years
This plan design usually works for smaller employers (less than 10 employees)
Shelter Your Spouse's W-2 Income
It's not uncommon for a business owner to have a spouse that earns W-2 wages from employment outside of the family business. Remember, the QBI thresholds are based on total taxable income on the joint tax return. If you think you are going to be close to the phase out threshold, you may want to encourage your spouse to start putting as much as they possibly can pre-tax into their employer's retirement plan. Unlike self-employment income, W-2 income is what it is. Whatever the number is on the W-2 form at the end of the year is what you have to report as income. By contrast, business owners can increase expenses in a given year, delay bonuses into the next tax year, and deploy other income/expense maneuvers to play with the amount of taxable income that they are showing for a given tax year.
Timing Expenses
One of the last tools that small business owners can use to reduce their taxable income is escalating expense. Now, it would be foolish for businesses to just start spending money for the sole purpose of reducing income. However, if you are a dental practice and you were planning on purchasing some new equipment in 2018 and purchasing a software system in 2019, depending on where your total taxable income falls, you may have a tax incentive to purchase both the equipment and the software system all in 2018. As you get toward the end of the tax year, it might be worth making that extra call to your accountant, before spending money on those big ticket items. The timing of those purchases could have big impact on your QBI deduction amount.
Disclosure: The information in this article is for educational purposes. For tax advice, please consult your tax advisor.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Rental Income Will Be Taxed In Years 2019+
Tax reform will change the way rental income is taxed to landlords beginning in 2018. Under current law, rental income is classified as "passive income" and that income simply passes through to the owner's personal tax return and they pay ordinary income tax on it. Beginning in 2018, rental income will be eligible to receive the same preferential tax
Tax reform will change the way rental income is taxed to landlords beginning in 2018. Under current law, rental income is classified as "passive income" and that income simply passes through to the owner's personal tax return and they pay ordinary income tax on it. Beginning in 2018, rental income will be eligible to receive the same preferential tax treatment as the "qualified business income" (QBI) for small business owners.
20% Deduction
Starting in 2018, taxpayers with qualified business income (including rental income), may be eligible to take a tax deduction up to 20% of their QBI. Determining whether or not you will be eligible to capture the full 20% deduction on your rental income will be based on your total taxable income for year. The taxable income thresholds are as follows:Single filers: $157,500Married filing joint: $315,000"Total taxable income" is not your AGI (adjusted gross income) and it's not just income from your real estate business or self-employment activities. It's your total taxable income less some deductions. The IRS has yet to provide us with full guidance on the definition of "total taxable income". For example, let's assume you have three rental properties owned by an LLC and you net $50,000 in income from the LLC each year. But your wife is a lawyer that makes $350,000 per year. Your total taxable income for the year would be $400,000 landing you above the $315,000 threshold.
Below The Income Threshold
If your total taxable income is below the income thresholds listed above, the calculation is very easy. Take your total QBI and multiply it by 20% and that's your tax deduction.
Above The Income Threshold
If your total taxable income is above the thresholds, the calculation gets more complex. If you exceed the income thresholds, your deduction is the LESSER of:
20% of QBI
The GREATER OF:
50% of W-2 wages paid to employees
25% of W-2 wages paid to employees PLUS 2.5% of the unadjusted asset basis
The best way to explain the calculation is by using an example. Assume the following:
I bought a commercial building 3 years ago for $1,000,000
I have already captured $100,000 in depreciation on the building
After expenses, I net $150,000 in income each year
The LLC that owns the property has no employees
I'm married
I own a separate small business that makes $400,000 in income
Since I'm over the $315,000 total taxable income threshold for a married couple filing joint, I will calculate my deduction as follows:The LESSER of:
20% of QBI = $30,000 ($150,000 x 20%)
The GREATER of:
50% of W-2 wage paid to employees = $0 (no employees)
25% of W-2 wages page to employees plus 2.5% of unadjusted basis
(25% of wages = $0) + (2.5% of unadjusted basis = $25,000) = $25KIn this example, my deduction would be limited to $25,000. Here are a few special notes about the calculation listed above. In the 11th hour, Congress added the "2.5% of unadjusted basis" to the calculation. Without it, it would have left most landlords with a $0 deduction. Why? Real estate owners typically do not have W-2 employees, so 50% of W-2 wages would equal $0. Some larger real estate investors have "property management companies" but they are usually set up as a separate entity. In which case, the W-2 income of the property management company would not be included in the calculation for the QBI deduction. If you are someone who owns a property or properties and is need of a Property management company to help you with organizing and operating your property, then doing research in your general area to find a real estate company that can help you with that is important.Another special note, 2.5% is based on an unadjusted basis and it's not reduced by depreciation. However, the tangible property has to be subject to depreciation on the last day of the year to be eligible for the deduction. Meaning, even though the 2.5% is not reduced for the amount of depreciation already taken on the property, the property must still be in the "depreciation period" on the last day of the year to be eligible for the QBI deduction.Tony Nitti, a writer for Forbes, also makes the following key points:
The depreciable period starts on the date the property is placed in service and ends on the LATER of:
- 10 years, or- The last day of the last full year in the asset's "regular" (not ADS) depreciation periodMeaning, if you purchase a non-residential rental building that is depreciated over 39 years, the owner can continue to capture the depreciation on the building but that will not impact the 2.5% unadjusted basis number for the full 39 years of the depreciation period.
Any asset that was fully depreciated prior to 2018, unless it was placed in service after 2008, will not count toward the basis.
Shareholders or partners may only take into consideration for purposes of applying the limitation 2.5% his or her allocable share of the basis of the property. So if the total basis of commercial property is $1,000,000 and you are a 20% owner, you basis limitation is $1,000,000 x 20% x 2.5% = $5,000
Phase-In Of The Threshold
The questions I usually get next is: "If I'm married and our total taxable income is $320,000 which is only $5,000 over the threshold, do I automatically have to use the more complex calculation?" The special calculation "phases in" over the following total taxable income thresholds:Single filers: $157,500 - $207,500Married filing joint: $315,000 - $415,000I won't get into the special phase-in calculation because it's more complex than the special "above the income threshold" calculation that we already walked through but just know that it will be a blend of the straight 20% deduction and the W-2 & 2.5% adjusted basis calculation.
Qualified Trade or Business Requirement
In August 2018, the IRS came out with further clarification of how the QBI deduction would apply to real estate. In order to qualify for the QBI deduction for real estate income, your real estate holdings have to qualify as a "trade or business". The definition of a trade or business for QBI purposes deviates slightly from the traditional IRS definition. There is a safe harbor that states if you spend more than 250 hours a year working on that business it will qualify for the deduction.There are a few items to consider in the 250 hour calculation. So called "drive bys" where the owner is spending time driving by their properties to check on them does not count toward the 250 hours. If you have a property management company, the hours that they spend managing your propoerty can be credited toward your 250 hour requirement. However, the property management company has to provide you with proper documentation to qualify for those credited hours.
Consult Your Accountant
I'm a Certified Financial Planner®, not an accountant. I wrote this article to give real estate investors a broad view of what tax reform may have instore for them in 2018. If you own rental property, you should be actively consulting with our accountant through the year. As the IRS continues to release guidance regarding the QBI deduction throughout 2018, you will want to make sure that your real estate holdings are positioned properly to take full advantage of the new tax rules.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Tax Reform: Changes To 529 Accounts & Coverdell IRA's
Included in the new tab bill were some changes to the tax treatment of 529 accounts and Coverdell IRA's. Traditionally, if you used the balance in the 529 account to pay for a "qualified expense", the earnings portion of the account was tax and penalty free which is the largest benefit to using a 529 account as a savings vehicle for college.So what's the
Included in the new tab bill were some changes to the tax treatment of 529 accounts and Coverdell IRA's. Traditionally, if you used the balance in the 529 account to pay for a "qualified expense", the earnings portion of the account was tax and penalty free which is the largest benefit to using a 529 account as a savings vehicle for college.So what's the change? Prior to the Tax Cuts and Jobs Act (tax reform), qualified distributions were only allowed for certain expenses associated with the account beneficiary's college education. Starting in 2018, 529 plans can also be used to pay for qualified expenses for elementary, middle school, and high school.
Kindergarten – 12th Grade Expenses
Tax reform included a provision that will allow owners of 529 account to take tax-free distributions from 529 accounts for K – 12 expenses for the beneficiary named on the account. This is new for 529 accounts. Prior to this provision, 529 accounts could only be used for college expenses. Now 529 account holders can distribute up to $10,000 per student per year for K – 12 qualified expenses. Another important note, this is not limited to expenses associated with private schools. K – 12 qualified expense will be allowed for:
Private School
Public School
Religious Schools
Homeschooling
529 Accounts Will Largely Replace Coverdell IRA's
Prior to this rule change, the only option that parents had to save and accumulate money tax-free to K – 12 expenses for their children were Coverdell IRA's. But Coverdell IRA's had a lot of hang ups
Contributions were limited to $2,000 per year
You could only contribute to a Coverdell IRA if your income was below certain limits
You could not contribution to the Coverdell IRA after your child turned 18
Account balance had to be spend by the time the student was age 30
By contrast, 529 accounts offer a lot more flexibility and higher contributions limits. For example, 529 accounts have no contribution limits. The only limits that account owners need to be aware of are the "gifting limits" since contributions to 529 accounts are considered a "gift" to the beneficiary listed on the account. In 2018, the annual gift exclusion will be $15,000. However, 529 accounts have a provision that allow account owners to make a "5 year election". This election allows account owners to make an upfront contribution of up to 5 times the annual gift exclusion for each beneficiary without trigger the need to file a gift tax return. In 2018, a married couple could contribution up to $150,000 for each child to a 529 account without trigger a gift tax return.If I have a child in private school, they are in 6th grade, and I'm paying $20,000 in tuition each year, that means I have $140,000 that I'm going to spend in tuition between 6th grade – 12th grade and then I have college tuition to pile on top of that amount. Instead of saving that money in an after-tax investment account which is not tax sheltered and I pay capital gains tax when I liquidate the account to pay those expenses, why not setup a 529 account and shelter that huge dollar amount from income tax? It will probably saves me thousands, if not tens of thousands of dollars in taxes, in taxes over the long run. Plus, if I live in a state that allows tax deductions for 529 contributions, I get that benefit as well.
Income Limits and Tax Deductions
Unlike Coverdell IRA's, 529 accounts do not have income restrictions for making contributions. Plus, some states have a state tax deduction for contributions to 529 account. In New York, a married couple filing joint, receive a state tax deduction for up to $10,000 for contribution to 529 account. A quick note, that is $10,000 in aggregate, not $10,000 per child or per account.
Rollovers Count Toward State Tax Deductions
Here is a fun fact. If you live in New York and you have a 529 account established in another state for your child, if you rollover the balance into a NYS 529 account, the rollover balance counts toward your $10,000 annual NYS state tax deduction. Also, you can rollover balances in Coverdell IRA's into 529 accounts and my guess is many people will elect to do so now that 529 account can be used for K – 12 expenses.
Contributions Beyond Age 18
Unlike Coverdell IRA's which restrict contributions once the child reaches age 18, 529 accounts have no age restriction for contributions. We will often encourage clients to continue to contribute their child's 529 account while they are attending college for the sole purpose of continuing to capture the state tax deduction. If you receive the tuition bill in the mail today for $10,000, you can send in a $10,000 check to your 529 account provider as a current year contribution, as soon as the check clears the account you can turn around and request a qualified withdrawal from the account for the tuition bill, and pay the bill with the cash that was distributed from the 529 account. A little extra work but if you live in NYS and you are in a high tax bracket that $10,000 deduction could save you $600 - $700 in state taxes.
What Happens If There Is Money Left In The 529 Account?
If there is money left over in a 529 account after the child has graduated from college, there are a number of options available. For more on this, see our article "5 Options For Money Left Over In College 529 Plans"
Qualified Expenses
The most frequent question that I get is "what is considered a qualified expense for purposes of tax-free withdrawals from a 529 account?" Here is a list of the most common:
Tuition
Room & Board
Technology Items: Computers, Printers, Required Software
Supplies: Books, Notebooks, Pens, Etc.
Just as important, here are a list of expense that are NOT considered a "qualified expense" for purposes of tax free withdrawals from a 529 account:
Transportation & Travel: Expense of going back and forth from school / college
Student Loan Repayment
General Electronics and Cell Phone Plans
Sports and Fitness Club Memberships
Insurance
If there is ever a question as to where or not an expense is a qualified expense or not, I would recommend that you contact the provider of your 529 account before making the withdrawal form your 529 account. If you take a withdrawal for an expense that is not a "qualified expenses" you will pay income taxes and a 10% penalty on the earnings portion of the withdrawal.
Do I Have To Close My Coverdell IRA?
While 529 accounts have a number of advantages compared to Coverdell IRA's, current owners of Coverdell IRAs will not be required to close their accounts. They will continue to operate as they were intended. Like 529 accounts, Coverdell IRA withdrawals will also qualify for the tax-free distributions for K – 12 expenses including the provision for expenses associated with homeschooling.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Divorce: Make Sure You Address The College Savings Accounts
The most common types of college savings accounts are 529 accounts, UGMA, and UTMA accounts. When getting divorce it’s very important to understand who the actual owner is of these accounts and who has legal rights to access the money in those accounts. Not addressing these accounts in the divorce agreement can lead to dire consequences
The most common types of college savings accounts are 529 accounts, UGMA, and UTMA accounts. When getting divorce it’s very important to understand who the actual owner is of these accounts and who has legal rights to access the money in those accounts. Not addressing these accounts in the divorce agreement can lead to dire consequences for your children if your ex-spouse drains the college savings accounts for their own personal expenses.
UGMA or UTMA Accounts
The owner of these types of accounts is the child. However, since a child is a minor there is a custodian assigned to the account, typically a parent, that oversees the assets until the child reaches age 21. The custodian has control over when withdraws are made as long as it could be proven that the withdrawals being made a directly benefiting the child. This can include school clothes, buying them a car at age 16, or buying them a computer. It’s important to understand that withdraws can be made for purposes other than paying for college which might be what the account was intended for. You typically want to have your attorney include language in the divorce agreement that addresses what these account can and can not be used for. Once the child reaches the age of majority, age 21, the custodian is removed, and the child has full control over the account.
529 accounts
When it comes to divorce, pay close attention to 529 accounts. Unlike a UGMA or UTMA accounts that are required to be used for the benefit of the child, a 529 account does not have this requirement. The owner of the account has complete control over the 529 account even though the child is listed as the beneficiary. We have seen instances where a couple gets divorced and they wrongly assume that the 529 account owned by one of the spouses has to be used for college. As soon as the divorce is finalized, the ex-spouse that owns the account then drains the 529 account and uses the cash in the account to pay legal fees or other personal expenses. If the divorce agreement did not speak to the use of the 529 account, there’s very little you can do since it’s technically considered an asset of the parent.
Divorce agreements can address these college saving accounts in a number of way. For example, it could state that the full balance has to be used for college before out-of-pocket expenses are incurred by either parent. It could state a fixed dollar amount that has to be withdrawn out of the 529 account each year with any additional expenses being split between the parents. There is no single correct way to address the withdraw strategies for these college savings accounts. It is really dependent on the financial circumstances of you and your ex spouse and the plan for paying for college for your children.
With 529 accounts there is also the additional issue of “what if the child decides not to go to college?” The divorce agreement should address what happens to that 529 account. Is the account balance move to a younger sibling? Is the balance distributed to the child at a certain age? Or will the assets be distributed 50-50 between the two parents?
Is for these reason that you should make sure that your divorce agreement includes specific language that applies to the use of the college savings account for your children
For more information on college savings account, click on the hyperlink below:
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Fiduciary Rule: Exposing Your 401(K) Advisor’s Secrets
It’s here. On June 9, 2017, the long awaited Fiduciary Rule for 401(k) plans will arrive. What secrets does your 401(k) advisor have?
It’s here. On June 9, 2017, the long awaited Fiduciary Rule for 401(k) plans will arrive. The wirehouse and broker-dealer community within the investment industry has fought this new rule every step of the way. Why? Because their secrets are about to be exposed. Fee gouging in these 401(k) plans has spiraled out of control and it has gone on for way too long. While the Fiduciary Rule was designed to better protect plan participants within these employer sponsored retirement plans, the response from the broker-dealer community, in an effort to protect themselves, may actually drive the fees in 401(k) plans higher than they are now.
If your company sponsors an employer sponsored retirement plan and your investment advisor is a broker with one of the main stream wirehouse or broker dealers then they may be approaching you within the next few months regarding a “platform change” for your 401(k) plan. Best advice, start asking questions before you sign anything!! The brokerage community is going to try to gift wrap this change and present this as a value added service to their current 401(k) clients when the reality is this change is being forced onto the brokerage community and they are at great risk at losing their 401(k) clients to independent registered investment advisory firms that have served as co-fiduciaries to their plans along.
The Fiduciary Rule requires all investment advisors that handle 401(k) plans to act in the best interest of their clients. Up until now may brokers were not held to this standard. As long as they delivered the appropriate disclosure documents to the client, the regulations did not require them to act in their client’s best interest. Crazy right? Well that’s all about to change and the response of the brokerage community will shock you.
I will preface this article by stating that there have been a variety of responses by the broker-dealer community to this new regulation. While we cannot reasonably gather information on every broker-dealers response to the Fiduciary Rule, this article will provide information on how many of the brokerage firms are responding to the new legislation given our independent research.
SECRET #1:
Many of the brokerage dealers are restricting what 401(k) platforms their brokers can use. If the broker currently has 401(k) clients that maintain a plan with a 401(k) platform outside of their new “approved list”, they are forcing them to move the plan to a pre-approved platform or the broker will be required to resign as the advisor to the plan. Even though your current 401(k) platform may be better than the new proposed platform, the broker may attempt to move your plan so they can keep the plan assets. How is this remotely in your employee’s best interest? But it’s happening. We have been told that some of these 401(k) providers end up on the “pre-approve list” because they are willing to share fees with the broker dealer. If you don’t share fees, you don’t make the list. Really ugly stuff!!
SECRET #2:
Because these wirehouses and broker-dealers know that their brokers are not “experts” in 401(k) plans, many of the brokerage firms are requiring their 401(k) plans to add a third-party fiduciary service which usually results in higher plan fees. The question to ask is “if you were so concerned about our fiduciary liability why did you wait until now to present this third party fiduciary service?” They are doing this to protect themselves, not the client. Also, many of these third party fiduciary services could standardize the investment menu and take the control of the investment menu away from the broker. Which begs the question, what are you paying the broker for?
SECRET #3:
Some broker-dealers are responding to the Fiduciary Rule by forcing their brokers to move all their 401(k) plans to a “fee based platform” versus a commission based platform. The plan participants may have paid commissions on investments when they were purchased within their 401(k) account and now could be forced out of those investments and locked into a fee based fee structure after they already paid a commission on their balance. This situation will be common for 401(k) plans that are comprised primarily of self-directed brokerage accounts. Make sure you ask the advisor about the impact of the fee structure change and any deferred sales charges that may be imposed due to the platform change.
SECRET #4:
The plan fees are often times buried. The 401(k) industry has gotten very good at hiding fees. They talk in percentages and basis points but rarely talk in hard dollars. One percent does not sound like a lot but if you have a $2 million dollar 401(k) plan that equals $20,000 in fees coming out of the plans assets every year. Most of the fees are buried in the mutual fund expense ratios and you basically have to be an investment expert to figure out how much you are paying. This has continued to go on because very rarely do companies write a check for their 401(k) fees. Most plans debit plan assets for their plan fees but the fees are real.
With all of these changes taking place, now is the perfect time to take a good hard look at your company’s employer sponsored retirement plan. If your current investment advisor approaches you with a recommended “platform change” that is a red flag. Start asking a lot of questions and it may be a good time to put your plan out to bid to see if you can negotiate a better overall solution for you and your employees.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Should I Establish A Power of Attorney?
There are three key estate documents that everyone should have: Will, Health Proxy, Power of Attorney, If you have dependents, such as a spouse or children, the statement above graduates from “should have” to “need to
There are three key estate documents that everyone should have:
Will
Health Proxy
Power of Attorney
If you have dependents, such as a spouse or children, the statement above graduates from “should have” to “need to have in place.” The power of attorney document allows someone that you designate to act on your behalf if you are rendered incapacitated such as a car accident, illness, or as you become become more frail later in life.
What happens if I'm in a car accident?
If I have a wife and kids and one day I end up in a car accident and end up in a coma, without a power of attorney in place, not even my wife would be able to access accounts that are solely in my name such as bank accounts, retirement accounts, or creditors. It could put my family in a very difficult situation if my wife is unable to access certain accounts to pay bills or withdraw money to pay for my medical bills while I am recovering. If I establish a Power of Attorney with my wife listed as the POA (Power of Attorney), if I become incapacitated, she can use that document to access all of my accounts as if she were me.
Protecting Against Long Term Care Event
While this a valid example, the Power of Attorney document is more frequently used when elderly individuals experience a long term care event and they are no longer able to manage their finances. The POA gives the designated person the power to make gifts, setup trusts, or implement other wealth preservation strategies to prevent the total depletion of your assets due to the expenses associated with the long term care event.
What happens if you don’t have a power of attorney?
From working with individuals that have been in these situations, it’s ugly. Very ugly. Instead of a trusted person being able to step in and act on your behalf, without a POA your family or friends would need to initiate a guardianship proceeding, wherein the individual is declared incapacitated and a guardian is appointed by the court to manage their financial affairs. The largest drawback of a guardianship proceeding is time and money. It can often times cost more that $15,000 to complete a guardianship processing when taking into account court fees, attorney fees, court evaluations, and bonding fees. In addition and arguably more importantly, you have no control over who the court will decide to appoint as your guardian and that individual will have full control over your finances. You know your family and friends best. Ask yourself this, wouldn’t you prefer to appoint the individual that you trust to carry out your wishes? If the answer is “yes”, then you should strongly consider putting a power of attorney in place.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
