Category: Estate Planning

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The Secure Act and Your Early 2020 Financial To-do List

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What are your financial moves in year 2020? First, I think you need to start by checking out a legislation called the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019, which is effective on January 1, 2020. In this article, I will outline some of the key changes in the Act and how these changes may impact a person’s retirement, college and/or estate planning.

The following are some positive changes coming out of the Secure Act:

  • The Act allows families to pay for up to $10,000 in student loans tax free using the money in their 529 college savings plans.
  • The Act has pushed back the age that retirement plan participants need to take the required minimum distributions (RMD) from 701/2 to 72.
  • The Act encourages retirement plan sponsors to include annuity as an option in their plans by reducing plan sponsor’s liability if the insurer which sells annuity fails to meet its financial obligations.
  • The Act states that any employer who creates a 401(K) or SIMPLE IRA plan with automatic enrollment will get a maximum tax credit of $500 per year.
  • The Act also makes it easier for small businesses to set up 401(K) plans.

Now, on to some of the negative changes brought by the Secure Act:

  • The Act mandates that inherited IRAs for non-spouse beneficiaries must be distributed over 10 years.
  • The changes for the age that requires RMD from 701/2 to 72 creates confusions among individuals who attain age 701/2 in 2019 or 2020.

In order to minimize the confusion, the IRS issued Notice 2020-6 saying that the Secure Act did not change the required beginning date for IRA owners who attained age 701/2 prior to January 1, 2020. Given its significance, the first thing I suggest you to do is to learn more of this Secure Act and plan accordingly based on your individual situations.

Second, you need to know updated retirement and Health Savings Account contribution limits for 2020 and adjust your own contributions accordingly. According to the Internal Revenue Service the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500. The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500. The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020: 

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over remains at $1,000. The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $196,000 to $206,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly; $48,750 for heads of household; and $32,500 for singles and married individuals filing separately.

Annual HSA contributions for 2020 for individuals with family coverage are increased from $7000 to $7100. Account holders ages 55 or older can contribute an additional $1,000. However, in order to qualify for the contribution, a person must be enrolled in one of employer sponsored HSA-qualified high deductible high premium health insurance plans.

In 2020, the annual exclusion for gift tax is still the first $15,000 of gifts to any individual.

(Sources: IRS publications)

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Have you included pet(s) in your financial plan yet?

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One night in March this year, our nine-month-old puppy was enjoying his favorite treat-beef trachea. All of a sudden, he started licking his lips and pacing up and down, unsettled. It turned out that he swallowed a big piece of the trachea without chewing it sufficiently, and the piece blocked his esophagus. We took him to an animal clinic that can perform an endoscopic procedure to get the trachea out. With pet health insurance, the whole procedure would cost us only several hundred dollars. Without pet insurance, however, it would set us back several thousand dollars. The surgery was successful. Now, my puppy has fully recovered. He is sleeping sound and well as I am writing this article.

Americans are pet lovers. More than 80% of Americans regard pets as their family members. Sadly, sometimes pets suffer from their owners’ lack of forethought and planning. We see dogs and cats not getting proper care or medical treatments because of financial trade-offs. We see dogs become homeless after their owners’ deaths. Therefore, a little planning before hand can prevent heartbreaking situations for our pets.

Pet Insurances

Before adopting a pet, think about the time and money you can commit. Do you have to alter your current lifestyle a little bit or a lot? Are you willing to change? What about the financial consequences? Take, for example, the case of owning a dog. Some breeds of dog could incur a large amount of medical bills down the road. One way to mitigate the financial burden is to buy pet insurance. Do a cost/benefit analysis. Does it make sense to buy pet health insurance in your individual situation? Many pet insurances only cover cats and dogs, but a couple of insurers will also cover birds and reptiles. Before you purchase health insurance for your pet, be sure you understand what covered and excluded conditions are and how you file an insurance claim. Many pet insurance companies put their sample insurance policies on their websites. Locate these policies and read them carefully.

Setting Up Companion Animal (Pet) Trusts

Our pets bring us joys and companionship, but they also depend on us for continuous care. How to provide such care in case we are not able to? Pet trust can be a valuable tool for pet owners to do so. So far, all 50 states of the U.S have passed laws allowing pet owners to set up trusts for their companion pets. While considering setting up a trust for your pet, it is a good practice to designate different parties as caregiver of your pet and trustee that administer the funds in the trust for pet respectively.

Alternatively, pet owners can opt for a pet protection agreement, which is simpler than setting up pet trusts, to protect their pets. With a pet protection agreement, pet owners can name their pets’ guardians, leaving funds, and providing instructions for how to care for your pets when you are not around.

Talk to your advisor or lawyer about how to include pets in your financial plan. Don’t let our four-legged family members suffer from the consequences of our lack of planning.

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What role does your financial advisor play in estate planning process?

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What comes to your mind when the words “estate planning” are mentioned? I bet many would conjure up an image of an old, super wealthy man, pondering plans with his lawyers about who will get his enormous amount of fortune after he is gone. There are a couple of inaccuracies with this image. First of all, estate planning is not only about dealing with one’s monetary assets. Second, estate planning is critical and beneficial not just for older people.

So, what is estate planning? It involves using wills, trusts, insurance policies, and other legal documents to give instructions on what happens to your personal property, your tax, care of your young children and/or pets, if any, your health care arrangements and final arrangements upon your death, etc.

Then, what role does a financial advisor play in her client’s estate planning process?

  • A financial advisor can help clients create plans that truly reflect their values, goals, and wishes with consideration of their overall financial situations.

Experienced financial advisors know that having estate planning documents do not always mean that a person’s estate planning goals are accomplished. Does the plan achieve what one wants to leave behind? A financial advisor knows a client and his/her family well and will take consideration of client’s overall situation in clarifying and prioritizing client’s goals and objectives before going to estate law attorney.

  • A financial advisor helps ensure continued success of client’s estate plan.

Estate planning is a dynamic process. Estate planning does not end after a client sign the estate planning documents. A financial advisor helps clients identify proper assets to fund their estate plan, designate and update beneficiary, review their situations annually and work closely with attorneys to update any changes in client’s family situations in the estate planning documents.

  • A financial advisor can reduce client’s mistakes and save them costs by increasing the chance that client’s estate plan will be carried out successfully.

An estate plan is not successful if client’s estate plan is not carried out as intended. Working with attorneys, a financial advisor can help ensure client’s assets are transferred properly by avoiding mistakes and minimizing administrative costs at death. Also, in some cases an advisor can help client’s intended beneficiaries locate and account for the assets they previously might not know of.

It is probably true that nobody wants to talk about his or her own death. But, let’s be honest, by avoiding and delaying this important planning, one simply does disservice to their loved ones. So, stop delay and start planning.