Time to Update your Estate Plan?

Now that we have started a new year, it’s a good time for many of us to stop putting off getting an estate plan created or updated.

Under current tax law, most people do not have a concern with estate tax.  The current Federal estate tax exemption is $5.49 million per person. If properly elected, any unused exemption is portable between spouses.  Therefore, a married couple with an estate of $10.98 million or below could pass their entire estate to heirs without any Federal estate tax liability.

While much attention is focused on the tax aspects, estate planning is more a matter of organizing and simplifying your affairs so that your heirs are not burdened with additional stress at the same time they are grieving for the loss of a loved one. We recommend that you engage the services of a qualified attorney to guide you and create the appropriate documents.

Your estate plan should include a will and possibly living or revocable trusts. Advanced directives and incapacity planning are other items that are typically addressed as part of your estate plan. This includes having documents prepared such as a durable power of attorney, health care power of attorney and living will.

As part of your estate plan, you should review your beneficiary designations. By filling out a beneficiary designation form, individuals can bypass the probate process and pass specific assets upon their death directly to their heirs. Many types of assets such as IRAs, qualified retirement plans, life insurance policies and commercial annuities pass via beneficiary designation rather than through your will. In addition, beneficiary designations can be added to taxable investment accounts (known as Transfer on Death or “TOD”) and bank accounts (known as Payable on Death or “POD”). Note that while the assets passing by beneficiary designation bypass the probate process, they are still included as part of the decedent’s estate for calculating any potential estate tax liability.

There is talk that the estate tax may be changed or even eliminated this year. For most people that shouldn’t be a deterrent to getting their estate plan done, since few are affected by the estate tax in the first place. Having an updated estate plan gives you peace of mind and helps prevent additional stress on your heirs. Once you have a plan in place, it can always be modified as tax laws and your personal circumstances change.

William S. Hansen, CFA
President
Chief Investment Officer

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Land Trust

Individuals who are large landowners often face challenges in planning their estates. The land may have a value that causes the estate to exceed the federal estate tax exclusion limit. Currently the limit is $5,450,000 per person. In many cases, the landowner may not want the land to be sold to cover estate taxes, but would rather see the land continue to be used as a farm, ranch, or preserved for its natural beauty. The landowner may want to consider a conservation easement.

A conservation easement is a voluntary legal agreement that benefits landowners and the public, as it protects land while leaving it in private ownership. The uses of the property are then limited to those uses that are consistent with the landowner’s and the conservation easement holder’s objectives. Conservation easements are individually tailored, but in general they benefit landowners by protecting the features of the property they wish to preserve. They potentially receive significant tax relief, and they maintain ownership of the land. The land provides public benefits by conserving open lands, farms, forests, and other natural resources.

The tax benefit to the landowner is realized at the time the conservation easement is placed on the land. The landowner basically sells the right to develop the land to a land trust. The value of the land for property tax purposes becomes the much lower highest and best use in conservation value. The conservation easement rides with the deed of the land, therefore the intent of the original owner for the use of the land is protected in perpetuity.

For our clients in southeastern North Carolina, the offices of Sandhills Area Land Trust (SALT) are located on Southwest Broad Street in Southern Pines, next door to Parsec’s Southern Pines office. They are a community-based, 501(c)(3) non-profit organization that works to preserve and protect land and its environs in Moore, Richmond, Scotland, Hoke, Cumberland, and Harnett counties.

SALT was founded in 1991. Since that time, it has worked with private landowners to negotiate conservation easements on their property, and more than 13,000 acres of working farms, water supplies, endangered ecosystems, and urban-space have been permanently protected. The North Carolina Sandhills is a region of rolling hills with sandy soil located between the Piedmont and the Coastal Plain. This area is home to the largest contiguous stands of long leaf pine forest in North Carolina, and many wetlands and dozens of rare plants and animals, which all need to be protected. With this goal in mind, SALT cultivates partnerships among landowners, local businesses and government agencies.

If you have any questions pertaining to the use of land conservation easements in your estate planning process, please contact your Parsec Financial Advisor.

Wendy S. Beaver, AAMS®

 

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IRA Beneficiaries: Per Stirpes vs. Per Capita

Did you know that your IRA beneficiary supersedes your will? No matter how carefully you’ve crafted your last intentions in your will, an outdated IRA beneficiary that was never updated after your divorce can unwittingly bestow your former spouse with all of your IRA inheritance, while also disinheriting your new spouse and children. That’s why it’s important to update your beneficiaries after major life changes such as marriage, divorce, births, illness, domestic issues and deaths.

While you’re at it, make sure to check how the beneficiary form reads too.  Most will default to either a “per stirpes” designation or a “per capita” designation. Knowing the difference in these two designations is important, as is making sure you understand what the form you’re signing defaults to, so you can override it if necessary.

Both of these designations refer to what happens if one of your beneficiaries is no longer living.  A per stirpes designation means that if one of your IRA beneficiaries is deceased, the deceased person’s children will receive his or her share.  Imagine you have two children – a son and a daughter – to whom you’ve split your IRA beneficiaries 50/50.  Your daughter has two daughters and your son has two sons.  At your death, if your son has not survived you, your two grandsons would receive his share of the IRA.  Your daughter would receive 50% of the IRA and your grandsons would each receive 25%. Keep in mind that if your son had no heirs, the entire balance would go to your daughter.

A per capita designation does not look along the lineal lines. Instead, if one of your beneficiaries is deceased, the proceeds are distributed to the other beneficiaries as if the deceased beneficiary was not to inherit any, regardless of whether or not he/she had children. Imagine you have three children, and each is to receive a third of your IRA.  If one child predeceases you, the IRA would go equally to the living two children.

What if none of your primary beneficiaries survive you (and either you selected per stirpes but your beneficiaries have no children, or you selected per capita)?  That’s when the contingent beneficiaries become important.  Your IRA money will go to your contingent beneficiaries only if no primary beneficiaries survive you. If you want to ensure that one of your heirs receives a portion of the IRA, you must name him/her as a primary beneficiary.

Why can’t you just avoid this whole beneficiary form and let the will name your beneficiaries?  You can, but your estate is not considered a person under the law, and therefore beneficiaries will have limitations to how long they can stretch out distributions from the IRA.  They will not be allowed to stretch the distributions out over their lifetimes, which will result in losing valuable tax-deferred growth. Review your beneficiaries with your financial advisor to ensure the are aligned with your intentions.

Harli Palme, CFA, CFP®
Chief Operating Officer
Chief Compliance Officer

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Shouldering the Burden of Financial Responsibility

“Atlas through hard constraint upholds the wide heaven with unwearying head and arms.” –Hesiod

My Wednesday morning started with five 400-meter runs, uphill, carrying a 35# sandbag. OK, maybe “run” is a bit of an exaggeration – it was more of a trudge, and there might have been some walking in there toward the top. I hated every second of it, but I kept going because, well, that’s just what you do. When I thought about it later, it struck me as an apt metaphor for the way life feels sometimes – an endless uphill struggle with the weight of responsibility resting heavily on your shoulders. This is particularly true for anyone who is the primary provider for their family. As my colleague Carrie pointed out in her recent blog post, more and more women (including me) are finding themselves in this position, whether by choice or necessity. Most of the time I am able to face each day as it comes and maintain an upbeat outlook on life, but sometimes the enormity of this responsibility is paralyzing and my mind races with worries – what if something happens to me? Have I prepared for the worst possible outcome? What more can I do to ensure that the people who depend on me to keep going will be OK if I can’t?

Since everyone loves a list, let’s break this down into 5 areas that you definitely want to address if you are the primary provider for your family:

  1. Life Insurance – This one is pretty obvious, and I hope most people have some amount of life insurance in order to provide for their dependents should the worst come to pass. But do you have enough? Many companies provide life insurance as an employee benefit, but the standard amount will probably not be enough to replace your salary for an extended time. As a starting point, consider your current salary and how old your children are, so you can estimate how much financial support they will need and for how long. Beyond that, you may want to provide your spouse with your lost income until retirement age. Take these factors into consideration when determining the length of the term and amount of coverage you need.
  2. Long Term Disability Insurance – This one is a little less common, but no less important than life insurance. Think of it this way – if you become disabled and cannot perform the job that supports your family, how will you replace your income? What if your disability adds to the household expenses in the form of ongoing medical care? Now you’ve not only lost your earning power, but you’ve also become a liability to the family you once supported. Don’t let that happen.
  3. Estate Planning/Will – Many times younger people who are still in the asset accumulation phase tend to put off drafting a will, despite its importance. It is especially imperative if you have young children, since it allows you to determine who will become their guardian if both you and your spouse are gone. Make sure your beneficiary designations are up-to-date for any IRAs, 401(k) plans, pension plans or life insurance policies. For more complex estate planning strategies you might want a trust – your financial advisor can help you figure out what you need to do to make sure your estate plan is sufficient.
  4. Retirement Savings – If the worst doesn’t happen and you live to a ripe, old age, you need to be sure that you are saving money to provide for your golden years. As the primary earner, the bulk of this responsibility falls to you to contribute to your company’s 401(k) or another retirement plan, but it is equally important to include your spouse in your retirement projections and contribute to a plan for him or her if you can. Again, your advisor can help you figure out how much you need to be putting aside and how to navigate the ever-complicated IRS rules and requirements for retirement savings.
  5. Education Savings – Though not as imperative as the first four points, saving for your children’s education expenses will relieve them of significant financial pressure when they are in school and will help them avoid taking on massive amounts of student loan debt. You can rest easier knowing that if you predecease your spouse and children, you won’t be leaving them with an insurmountable tuition bill. As with retirement plans, there are several investment vehicles available to you for education savings. Work with your advisor to determine the best plan for you and your family.

Shouldering the burden of financial responsibility can make you feel like Atlas, but it needn’t crush you. With a little planning and preparation, you can weather the uphills, savor the downhills, put down the sandbag every once in a while and live fully in the present.

Sarah DerGarabedian, CFA Financial Advisor

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7 Reasons to Consider a Prenup

This is the first in a series of six blog entries focused on topics that might be of interest to the Millennial generation. If you would like to see our attempt at making these subject matters entertaining, visit our YouTube page to see a video version of this article.

I believe Kanye West said it best when he said, “We want prenup!”

There is nothing that can kill the romance of upcoming nuptials more quickly than your partner asking you to sign a prenuptial agreement (aka prenup). But do you know what can really kill the romance? Divorce! Perhaps you are thinking, “our relationship is going to last… we’d never get a divorce.” Well let’s face it, I don’t think anyone goes into a marriage thinking that in 5-10 years they are going to split. Other people may think that the agreement is only for the rich… this is actually a misconception. While it’s true, a prenuptial agreement may not be right for everyone, the following are a few scenarios in which it will make a lot of sense:

1: One partner earns the majority of the income. If you know going into a marriage that one person will be the primary “bread winner,” a prenup can be used to determine the amount of alimony that will need to be paid upon a divorce.

2. What about the partner that doesn’t make a lot of money? The prenup can also be used to make sure that the partner who is less financially set is protected in the event of a divorce.

3. For the spouse with substantial assets. If you own a home or other substantial assets prior to a marriage, you can use a prenup toestablish that those assets that came with you, will leave with you.

4. For the stay-at-home parent: This will obviously affect your income. If it is decided prior to marriage that one parent will stay at home with the children, a prenup can be used to make sure that each parent shares in the responsibility of taking care of the children financially.

5. One partner has a significant amount of debt. A prenup can establish who will be responsible for paying off debt in the event of a divorce. This can prevent you from getting straddled with debt that the other spouse created prior to marriage.

6. Children from a previous marriage. When entering into another marriage you need to make sure that you kids are protected from another divorce. This can ensure that in the event of your death/divorce that assets that should be going to your children won’t go to your disgruntled spouse.

7. You own a business. It is possible that in the event of a divorce your spouse will end up owning part of the business. Your partner will then go from being an unwanted spouse, to an unwanted business partner. Establishing that the business is off limits in a prenup can prevent this from happening.

It’s understandable that many couples don’t even want to entertain the idea of a prenuptial agreement. The important thing to remember is that this is a document used to protect all parties. Communicate openly and listen to the concerns of your partner. Even if you do live “happily ever after,” there will always be a peace of mind involved with foresight and deliberate planning.

Ashley Woodring, CFP®

Financial Advisor

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Giving Away Your Cake (and eating it too), AKA Charitable Remainder Trusts

ImageOne of the first recorded instances of the age old phrase “a man can not have his cake and eat it too” was written from Thomas, Duke of Norfolk to Thomas Cromwell, speaking about how the construction of Kenninghall had cut deeply into his finances. Today, we use this phrase when considering saving something of value, or giving it up for consumption. When thinking about our own personal assets, we have many choices. We have the opportunity to hold on to them (having our cake), swap them out (trading for a different cake), or selling them and buying a consumable asset (eating the cake).

With responsible planning for the future, the size of your portfolio should grow through the years. At the point of retirement for someone, a combination of pension, social security, and portfolio income may be able to provide for all of their expenses. This is a fantastic place to be in as a retiree. A dependable cash flow can empower gifting to the extent that the cash flow remains intact.

A few months ago, I wrote about Charitable Remainder Trusts here. For a retiree that has an excess income stream from investments, a Charitable Remainder Trust (CRT) can provide a certain and continued stream of income from donated property.  As the name suggests, a charity will inherit the property held in the trust when the beneficiaries pass away, just as it would if you left the property to a charity in your will. However, the additional benefit of a CRT is the income tax deduction received for giving the property occurs immediately. As a beneficiary you retain an income interest.

Give thought to the idea of giving some of your cake away now. There are many great non-profits and charities that will thank you. Now, I know all this talk of cake has really gotten that sweet tooth going, so feel free to eat some cake now too!

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How much is that Doggie in the Window?

According to a recent announcement from the American Pet Products Association, Americans spent $55.7 billion last year on their pets. That’s billion, not million. An article at Time.com (http://time.com/#23451/pets-dogs-cats-spending-americans/) cleverly noted that the figure is $10 billion more than Germany spends on its defense budget.

I admit I am one of these people. My little rescue dog hit the lottery when she came to live with me. She has seven dog beds, if you include her car seat (yes, car seat). She owns more jackets than I do, although they are all for function, not fashion. She has multiple, color-coordinated harnesses, collars, and leashes so that she need never feel ashamed about how she looks. When we go on vacation, she has as much luggage as I do. Yes, she is spoiled rotten.

I am not alone. Bill Geist of the “CBS Sunday Morning” program tells a hilarious story about his “free” rescue dog: http://www.cbsnews.com/news/even-cat-people-fall-in-puppy-love/.  Sometimes, the unexpected costs can really add up.

In our industry, I see a number of fees that some people pay for investments: high commission rates for certain products, either on the front or back end of the transaction; frequent, unnecessary trade costs from a practice called “churning;” and expensive investment counsel fees. Before long, that simple purchase of 100 shares of ABC Widget Works has cost a fortune in added fees.

When you are evaluating an investment advisor, consider how the person earns his or her money. Does he receive a commission for his or her investment recommendations? Is he or she directly affiliated with a broker? Does he or she charge an additional investment counsel fee? While he or she may promise a great gross return on investment, the net return after all of those fees may be no better than what you would find with a simple savings account.

At Parsec, we do not receive commissions for any of the investment products we recommend – no commission from the trade, no commission for recommending a certain security, nothing. In addition, when we recommend mutual funds, we look for funds that do not carry significant internal fees.

We are not beholden to a particular broker. We have four brokers who we like to recommend, based upon client needs.

We do charge an investment counsel fee that we think is reasonable to industry standards. When you sign a service agreement, you see upfront what your fee schedule will be. On a quarterly basis, you receive a reports package that includes information about net-of-fee investment performance, current holdings, et cetera. We are also here to help with planning – everything from college savings to retirement to estate. We like to think service goes beyond placing a trade. Our clients pay us to act as a partner in planning their future.

Everything in life – from owning a home to adopting a rescue dog – has the potential for unexpected costs. How you invest your money, though, should be a little more straightforward. With a little research in advance, you can evaluate whether or not fees charged for service are reasonable and affordable.

Now, if you will excuse me, I need to order organic food for my doggie. And maybe I will pick up a bottle of shampoo. She told me she is tired of smelling like a bowl of oatmeal.

Cristy Freeman, AAMS
Senior Operations Associate

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Mise en Place: To Put in Place

Don’t hate me for this, but I am one very luck woman. My husband does 99.9% of the cooking in our house. And best of all, he enjoys it! That said, once every so often he has to work late, or he is out of town or he craves one of my few specialties and I have to put the apron on. Such was the case this past Tuesday when I decided to tackle a new recipe. Since I cook so infrequently, I can get rusty between stints, so I decided to put to practice the concept of mise en place (pronounced meez ahn plahs). Mise en place is literally translated as “to put in place.”

Mise en place is simple. Before you pre-heat the oven, you want to make sure you have all of the required ingredients and equipment needed to make the dish. Think of your kitchen as an operating room; prior to surgery, all of the surgical implements have been sterilized and the accompanying supplies (sutures, gauze, etc) are neatly lined up on a tray. Imagine if mid-procedure your surgeon cried out for gauze and the assistant had to run to the drug store to buy more. Things would not turn out so well.

So, back to my kitchen and my rusty cooking skills; as I began to dice the onions and mince the garlic, I realized there are other applications for the use of mise en place. Packing for a trip is one such example. Preparing your taxes is another. And then I thought how well this could work in estate planning. If you have all of your documents prepared, in one place and up to date (sort of like within the sell-by date), your passing will be that much easier on your survivors.

Preparing your estate doesn’t just mean you have prepared the necessary documents. You must also sit down with your heirs and explain your plans and your wishes. Tell them why you have made certain decisions pertaining to the distribution of your assets. In addition, share with them your wishes concerning your living will and health care power of attorney. This can greatly reduce conflicts over your desired medical treatment should you become terminally ill and alleviate any stress and guilt family members may have. And finally, make sure you have your documents reviewed every 3-5 years to ensure they are current with state legislation. Remember, the only constant in life is change.

My husband does not utilize mise en place very often. He doesn’t really need to. Since he cooks daily, he doesn’t get rusty in the kitchen. But when it comes to executing an estate, he fortunately has zero experience. That is why he truly appreciated the very candid meeting we had with his parents this year. We now know where everything is and what the plans are and that gives us peace of mind.

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Trouble on My Mind

In 2007, Leona Helmsley passed away.  She famously left $12 million for the care of her beloved Maltese named Trouble.  The courts eventually decided that $2 million was a more appropriate sum.  The story created a lot of buzz.  Some people were appalled that she would leave such a huge amount to an animal.  Others understood why she did it and found nothing wrong.

Whether or not you agree with what she did, the story highlights a topic that may not be discussed during estate planning.  What happens to your pets when you pass away or are unable to care for them due to serious illness or disability?  You may think your children or a friend would step in and care for your pet.  Unless you have made advance plans, there are no guarantees that will happen.

When I began writing this post, I already knew that pets are regarded as property, not a furry child.  I have referenced my pets in my will.  As I researched this blog, I realized that was not enough.  Wills are not processed right away, so your wishes for your pet could be unknown for some time.  Also, wills do not apply unless you are dead.  A serious illness or disability would not require the reading of a will.

Pet protection agreements and trusts are other vehicles that can be used to outline care for your pet.  The documents can include instructions for feeding, exercise, toys, anything you want.  They can specify funds for care and outline a disbursement plan. 

Pet trusts are recognized in 46 states.  Since it is a trust document, it is more complicated and would require the assistance of an attorney.  For that reason, a pet trust could be more expensive than a pet protection agreement.

If you live in the Asheville area, Brother Wolf Animal Rescue offers classes about estate planning for your pet.  Visit their website at www.bwar.org and click the Events page for dates and times of upcoming classes. 

I dearly love my pets.  When I adopted them, I became responsible for their care for their entire life.  If they outlive me, I want to know their lives will be just as happy as when I was with them.  You feel the same way, or you would not have read this post all the way to the end. 

When you are thinking about who should get Grandma’s pearls, please take a moment and consider what should happen to your furry friends.  You should mention it to your estate planning attorney, if you have one.  Just like Grandma’s pearls, you want to know your friends will be treasured when you are gone. 

Cristy Freeman, AAMS
Senior Operations Associate

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