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Probate

By Arlen T Olberding, CFP® on May 1, 2022

Probate is simply the administration of a deceased person’s estate. Probate involves paying debts (including taxes) and then distributing the remaining assets. (There are also related tasks such as closing accounts, liquidating assets and so forth.) Last month’s article talked about being an executor and how to minimize your personal risk. This month we’ll discuss the overall probate process and some of the associated costs.

Probate Process

A simplified description of the probate process includes the following steps:

Filing of the will and opening an estate in the probate court.
Giving notice of the probate proceeding to legal heirs, beneficiaries and creditors.
Verifying that the will is legal and valid.
Figuring out the value of the property in the deceased person’s estate.
Paying the debts of the estate, including taxes.
Giving the heirs of the estate their inheritances, the gifts that the deceased person left to them in the will.

Probate Rules

An important thing to know is that the applicable estate laws are determined by where the person died, not where the executor lives.

The probate rules tend to vary by state and even by county. An attempt is underway to create a more nationwide approach to probate. It’s called the Uniform Probate Code or UPC. Colorado is one of eighteen states that have adopted these rules.

Under the UPC, there are three kinds of probate. They are informal, unsupervised and supervised formal. They basically differ by the amount of court involvement with informal having the least. The majority of the estates in Colorado are settled under the informal process. (There is also a highly simplified process for estates valued at less than $70,000 that have no real property.)

Probate Costs

First of all, it’s important to know that probate costs are almost always paid by the estate, not by the executor or the beneficiaries.

Probate costs can vary considerably depending mainly on the complexity of the estate and whether it is being challenged by a beneficiary or other interested party. Some common costs in the probate process are:

Court costs.
Attorney fees. These are especially common when the executor doesn’t live where the deceased lived. There is no legal requirement in Colorado to use a probate attorney.
Executor costs (sometimes waived by the executor).
Accounting fees (preparing tax returns and so forth).

It may be that there will be appraisal fees to establish the value of key assets on the date of death. In some cases a bond will be required to ensure that the executor doesn’t steal from the estate. Finally, there are various miscellaneous costs such as postage, shipping and so forth.

It has been estimated that typical probate costs are about 3-8% of the estate’s value. To help you understand where these costs come from, here are some key probate expenses. Court fees are typically a few hundred dollars. Probate attorneys generally charge about $3,500-$5,000 in Colorado. Colorado does not have a law specifying executor fees. That means reasonable compensation is the rule. In Colorado, that averages about 1.5% of the estate value. Accounting fees can be in the $500-$2,000 range. If a bond is required, that is typically about 0.5-0.8% of the estate value.

Length of Probate

The average time that an estate goes through the probate process is about 6-24 months. Complex estates and contested estates can be open even longer.

Exempt from Probate

Various asset types are exempt from probate. These include life insurance and retirement accounts (IRAs and 401(k)s for example). Joint-tenancy, payable-on-death and transfer-on-death assets also avoid probate. A living trust is another way to shield assets from probate. It used to be that this was aggressively pursued to avoid estate taxes. However, with the high estate tax exclusions that are currently in force ($12.06 million for an individual in 2022), this is less important for many estates. Nonetheless, you can see that probate expenses that are calculated as a percentage of estate value still can make estate value minimization important.

Hopefully this article helps you understand the probate process and some of its costs. If you’d like to talk about the probate process, your estate or go over any other financial matter, we can discuss things in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.

Posted in Estate Planning

Executor Liability

By Arlen T Olberding, CFP® on April 1, 2022

An executor (in Colorado, the term is personal representative) is responsible for settling an estate. Basically, this involves paying debts (including taxes) and then distributing the remaining assets. (There are also related tasks such as closing accounts, liquidating assets and so forth.) Typically, an executor is a family member, an attorney, a CPA or an institutional executor (such as the trust department in a bank). There are many things to do as an executor. In this article, we’ll be discussing the personal risks an executor faces. For simplicity, we’ll assume you’re doing this for your spouse and that you both lived in Colorado in the same household.

Should I Be an Executor?

Being an executor for your spouse can be a real act of love. It can comfort them prior to death knowing that a reliable person will fulfill their final wishes. On the other hand, it is a lot of work and can require your attention on a part-time basis for anywhere from 6-18 months for typical estates. So, when asked to be an executor, it’s really important to think this over and decline upfront rather than after your spouse has passed away. In addition to the work itself, there can be other issues. Most notably, dividing up assets can cause family problems that were never evident beforehand. Beyond that, you can have personal liability (up to the value of the estate) if assets are distributed before all debts are settled and taxes paid. Should you decide to become an executor, there are various things you can do to minimize your personal liability. Here are a few of the common ones.

Add a No-Contest Clause

While your spouse is creating their will, ask them to add a no-contest clause. This is simply some language that states that anyone who challenges the will and fails will be excluded from the will (they won’t receive anything). The enforceability of no-contest clauses varies by state. Colorado allows their enforcement unless the litigant had probable cause to sue. So, this can be helpful, but it’s not bulletproof. For example, suppose the will leaves $100,000 to one child and nothing to a second child. The second child has nothing to lose, so they can sue without risk (neglecting their legal fees). (That’s one reason that people leave something, say $10,000 in this example, so that there’s a disincentive to risk being excluded.)

Act as a Fiduciary

Once your spouse has passed away, your overarching responsibility is to protect the financial interests of the beneficiaries. If you do this, if you are transparent with them and if you keep good records, you’ll have taken a big step in protecting yourself.

Consider Liability Insurance

Oddly enough, this is nearly unheard of in the U.S. It is much more common in Canada, England and Wales. However, a personal liability umbrella will protect you from legal actions in the case of your spouse. (Such coverage actually protects you when handling the estate of anyone who was living in your household – such as a parent.) Liability insurance is a good element in your financial plans whether you’re an executor or not. For a modest cost, it helps protect your assets.

Hire an Estate Attorney

A lot of people like to include an estate attorney on their team. Such a person has been through this process many times before. The attorney should practice law in the state where you and your spouse reside since estate law varies by state. Ideally, it should be the attorney who wrote your spouse’s will since they will have a detailed understanding of your spouse’s intentions.

Hire a CPA

Federal and state estate tax returns must be prepared and also Federal and state personal returns for the year in which your spouse died. It’s true that many estates do not pay any Federal taxes right now. In 2022, estates are exempt from Federal taxes if they are smaller than $11.7 million. State laws on estate taxes vary. Colorado does not have an estate tax at this time. (Nor does it have inheritance taxes – the taxes an individual owes when they receive assets from an estate.)

Seek Out Creditors

If you don’t pay debts (including taxes) before distributing assets, you may be personally liable for these expenses. Some debts will be obvious through credit card statements, mortgage statements and so forth. It’s important to actively seek out any creditors. Colorado statutes specify the following requirements: Unless one year or more has elapsed since the death of the decedent, a personal representative shall cause a notice to creditors to be published in some daily or weekly newspaper published in the county in which the estate is being administered, or if there is no such newspaper, then in some newspaper of general circulation in an adjoining county. Such notice shall be published not less than three times, at least once during each of three successive calendar weeks.

Protect Assets from Family

It’s actually not uncommon for family members to enter the deceased’s home and take things they’d like to have. Until you’re able to sort things out and determine a fair way to distribute belongings, it’s better to tell family members that you are required to retain control of everything for now. In some families, this actually means changing the locks. Failure to take prudent precautions may leave you open to actions by other family members.

Keep Good Records

Beneficiaries may ask for an accounting of how you’ve been managing the estate. So, good record keeping is very important. A spreadsheet of expenses and income is good. The use of a dedicated estate checking account is advised. Some type of journal is useful. And, documenting any oral communications in writing can be helpful later on.

Have Good Communication

You’ll head off many problems by keeping the beneficiaries up to date on important information. This begins by sending them each a copy of the will. It includes informing them of important steps you take. Importantly, it includes setting their expectations as to when distributions can be made (after creditors are paid and taxes are settled).

Consider Compensation

As I mentioned, many people agree to be an executor as an act of love and compensation is not front and center. If this is your position, you should at least reimburse yourself for out-of-pocket expenses. Your compensation may be specified in the will itself. You can accept this or decline it. (Note that whatever compensation you are paid is taxed as ordinary income. If you’re a beneficiary, estate benefits are often tax free.) If the will does not specify compensation and you’d like to be paid for your work, Colorado does not have specific laws about this and instead defaults to the notion of reasonable compensation. This can be hourly or a percentage of the estate. If a percentage is used, a smaller percentage is typically applied to larger estates. Compensation of 2% is a good mental ballpark for this. (It can range from about 1%-5% depending on state law and estate size.) The estate attorney that you hire should be able to advise you on this.

You can see that being an executor involves many steps and that while things normally go pretty smoothly, there is room for trouble and personal liability. Hopefully this article has given you some ideas about how to protect yourself. If you’d like to talk about being an executor or go over any other financial matter, we can discuss things in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Estate Planning

Sustainable Withdrawal Rate

By Arlen T Olberding, CFP® on March 1, 2022

A sustainable withdrawal rate simply means the amount of money a retiree can withdraw from their investments each year without running out of funds before they die. This month, we’ll look at some important considerations when estimating a sustainable withdrawal rate. We’ll also introduce one way of doing this which is used by many financial planners – the 4% Rule.

Number of Years

Well, the first assumption we must make is how long will we live. That is, how many years must our portfolio support us? Naturally, we can’t know this for certain, but we must estimate it nonetheless. CDC statistics tell us that the average male will live to about 75 and the average female will live to about 80 years old. So, if we retire at 65 years of age and if we have average lifespans, men will need to have their portfolio last about 10 years and women about 15 years. But, are we comfortable running out of money at 80 years old? I know in Fort Collins, I see in the obituaries that people are frequently living into their 90s and some even over 100! So, it might be better to plan on living longer than the CDC stats predict. The financial planning industry has kind of settled on 30 years as a reasonable timeframe to plan for.

Portfolio Growth

Even if we neglect withdrawal rate considerations for the moment, a diversified portfolio is very important during retirement. It will help protect your assets from many sources of volatility. Many advisors recommend having a 50% equity and 50% fixed-income mix in retirement. (Some prefer a 60% equity and 40% fixed-income mix and some the reverse of this, but most are in this neighborhood.) In any case, the portfolio mix will be used to estimate portfolio growth and thus the available revenue. Considering future growth of each stock, bond and fund in your portfolio is a huge exercise. Often portfolio growth estimates are made by combining each individual investment into one of two categories –equity and fixed income. This makes estimating portfolio growth much more manageable.

Inflation

Portfolio growth determines the nominal growth of your funds. However, when it comes to paying for things, the real growth (inflation-adjusted growth) is what really matters. So an inflation assumption is required too. The Federal Reserve has a 2% inflation target, but it has varied significantly over time. For example, inflation was around 13.5% in 1980, but it was about 1.2% in 2020. Estimating inflation several decades into the future is uncertain, but many financial planners use 2% as their assumption.

Historical Versus Forward-Looking Modeling

Many people have analyzed sustainable withdrawal rates using historical data. Historical modeling has the advantage of using actual data so that models can be checked against reality. Forward-looking modeling has produced some interesting concepts, but being estimates of the future, they can’t be validated like the historical approach can.

The 4% Rule

One approach, based on historical data, that has worked pretty well over nearly three decades is a technique called the 4% Rule. The concept is really pretty straightforward. You withdraw 4% of your portfolio in the first year of retirement. Then you continue to withdraw that same amount adjusted for inflation in subsequent years. This is still the most popular guideline in use by financial planners. Of course, there are arguments to be made that you should take out less with today’s markets (most recently argued by Morningstar) and it is also argued that the 4% Rule is too conservative and that you should take out more (argued by many). The key notion here is that 4% is a guideline, not a hard and fast rule that works for everyone.

Is 4% Enough for My Lifestyle?

If you’re still working and you determine that you need more than the 4% Rule recommends, you may want to accelerate your savings so that 4% of a larger portfolio produces a higher retirement income. If you’re about to retire or are already retired, the question isn’t so much how much do you need as it is how much can you afford. It is important, of course, to see how much money the 4% Rule needs to produce. Suppose you need $100,000 in year one of retirement. First, we can reduce the required amount by your Social Security income. Social Security depends on several factors such as your income history and the age that you start taking your benefits. As an example, suppose you receive $35,000 per year in Social Security payments. That means you only need to withdraw $65,000 from your portfolio to make up the difference. You may have other sources of retirement income such as pensions, annuities, trusts and so forth. If one of these sources produces say $25,000 per year in retirement, you now only need the 4% Rule to produce $40,000 per year. A $1,000,000 portfolio could produce this. Naturally this is only one scenario, but it hopefully makes the point that you probably have one or more retirement income source outside of your investment portfolio.

You can see that the 4% Rule is a guideline. Many factors will determine whether it’s right for you. For example, do you wish to leave an estate or do you want your last dollar to go to the undertaker? How long have people in your family typically lived? What kinds of assumptions give you the peace of mind to relax and enjoy retirement? If you’d like to review the specifics of your retirement situation, or go over any other financial matter, we can discuss things in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Retirement Planning

Aging in Place

By Arlen T Olberding, CFP® on February 1, 2022

Aging in place simply means continuing to live in our home as we get older. A recent AARP survey determined that 87% of adults over the age of 65 want to age in place. This month, we’ll take a closer look at whether aging at home is right for you.

People Who Want to Age in Place

People often say that it’s comforting to remain in their home and that it gives them the sense of independence and control that they desire. Maybe you have lived in your current home for a long time. Maybe you raised you kids there. Maybe you appreciate the ease of having established relationships with friends, with medical professionals and even with trusted services such as home and auto repair. And finally, it’s well known that change is difficult for most people and aging-in-place simply avoids (or at least postpones) such changes.

People Who Can’t or Don’t Want to Age in Place

Some people want or need more help than can be provided at home. Maybe they don’t have any nearby family. Maybe they need on-demand medical attention. Maybe they have dementia or other memory issues. Maybe they want easy access to other people and activities. Maybe transportation is an issue. Maybe they can’t afford to modify their home for an elderly resident. For these and other reasons, there are a number of options that include independent living, assisted living and nursing home care.

Affordability

Whether you age-in-place or move to a setting that offers more care, costs must be considered.

For those who stay at home, there are often costs to modify their home. This can include railings in the bathrooms and walk-in showers, remodeling to live downstairs in a two-story house, stairlifts to get up and down stairs, wheelchair access and so on. Remodeling your home to meet your needs can run between a few thousand and tens of thousands of dollars depending on your situation. And, of course, the main expense may be hiring people to come in to take care of you, to prepare meals, to do yardwork and so on. As an example, caregiver services can run about $4,500/month.

Should you choose to live elsewhere, such as assisted living, there are usually upfront costs and then monthly fees. As an example, the cost of assisted living in Colorado is about $4,000-$5,000/month and the cost of being in a nursing home is about $9,000/month. Some people opt for a Life Plan Community arrangement. In this situation, people start in their own apartment in independent living. As their needs change, they can transition to assisted living and eventually to nursing care all within the same facility. The upfront fee for such places ranges between $250,000 and $750,000 depending on the number of bedrooms.

Generally, Medicare does not fund most of these expenses. People can employ their savings and long-term care insurance if they happen to have a policy. When moving elsewhere, the gain on the sale of your home is available to help cover these expenses.

There are many other important topics such as smart homes, wearables, meal delivery, medication reminders, money management (including bill paying) and adult daycare which we didn’t cover in order to focus on how to decide whether to age in place or not. If you’d like to go over the specifics of your situation, or any other financial matter, we can discuss them in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Fundamentals, Retirement Planning

Preparing for Incapacity

By Arlen T Olberding, CFP® on January 1, 2022

First of all, Happy New Year! I hope that 2022 will be a safe, healthy and prosperous year for everyone.

This month I’d like to talk with you about incapacity – that is, how to manage things when you are unable to act for yourself. The pandemic has certainly reminded us that we can become incapacitated with little or no warning and that it’s important to be prepared in advance. We’ve talked before about your estate plans – these tell people what to do after your death. For more information on estate planning, please see my previous articles: Common Issues Found in Estate Planning Documents and How to Title Your Assets.

Unfortunately, incapacity can occur quickly, and without warning. You might need some help making your healthcare and financial decisions. Getting ready for this situation involves documents that are separate from your estate documents and we’ll review the essentials of how to prepare in this article.

You’ll need two separate documents to cover the bases here. Attorneys often title these as something like Durable Power of Attorney for Healthcare and Durable Power of Attorney for Financial Matters. Durable means that someone else can make your decisions while you’re incapacitated. (A simple Power of Attorney, without the word Durable, is used before you are incapacitated. An example would be allowing someone to take care of some legal matter in your absence. Power of Attorney authority can end when you revoke it and must end when you become incapacitated.)

Durable Power of Attorney for Healthcare. In many states, including Colorado, this document specifies who will make healthcare decisions for you (called your Agent) and it also describes how you would like to be cared for, when to discontinue life support and so forth. In some states, the description of your care is contained within a separate Advance Healthcare Directive (also referred to as a Living Will).

Durable Power of Attorney for Financial Matters. This document is similar to the healthcare version except it gives your Agent the right to make financial decisions for you. They can do everything that you could have done if you were not incapacitated.

You can see that your named Agent should be chosen very thoughtfully. They can do anything that you could have done prior to your incapacitation. Often the Agent is your spouse or partner. Substitute agents (they step in if the Agent can’t or won’t act) can also be named. This is often one of your adult children.

So, in review, a Durable Power of Attorney lets others make decisions for you while you’re alive and incapacitated. Wills tell people how to take care of things after you have died. I’ve tried to give you an overview of the documents you’ll want to have should you ever become incapacitated. There are many details (such as living trusts, guardianship and conservatorship, etc.) that I’ve omitted for clarity. If you’d like to go over the specifics of your situation, or any other financial matter, we can discuss them in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Estate Planning

2021 End-of-Year Financial Planning

By Arlen T Olberding, CFP® on December 1, 2021

Okay, the leftover turkey has been dealt with and there are still 31 days until the end of the year. So, maybe it’s a good time to think about end-of-year financial planning. Here are a few of the more common things you might want to consider.

Withholding. Ideally, the taxes withheld from your paychecks add up to something close to your final tax liability. Withhold too little and you may owe an underpayment penalty. Withhold too much and the government gets an interest-free loan that won’t be repaid until after you file next year’s return. You control the amount withheld through the W-4 form that you completed with your employer. The IRS rules say that you can avoid a penalty by setting your withholding at either 90% of the taxes you expect to owe this year or 100% of the taxes paid in the previous year. (110% for incomes above $150,000.)

Credit Reports. There are three main credit reporting agencies: TransUnion, Equifax, and Experian. Upon request, they’ll send you a free report once a year and they’re worth looking over. You may spot errors, fraudulent activity or other things that require your attention. While you’re at it, you might consider locking your credit reports. This prevents unauthorized parties from accessing your credit reports. You can turn the lock on and off easily. It’s free from TransUnion and Equifax. Experian does charge $24.99 per month for a kind of deluxe version of credit locking. Now, that’s about $300/year, so you might opt to lock the free reports and monitor Experian.

Estate Plans. Naturally estate planning is important to everyone, even if you’re far from retirement age. They specify how to distribute your assets when you die. What does your partner get? How about your children and grandchildren? Maybe you want to make some charitable contributions. Your will takes care of these matters. Estates should also include medical and financial power of attorney documents so that others can help you if you’re unable to act on your own behalf prior to death. Once these are in place, it’s a good practice to review them from time to time. Maybe your family grew. Maybe you got divorced. Whenever you have a major life event, it’s important to review your estate plans.

Beneficiaries. Did you know that some assets pass outside of your estate? IRAs, 401(k)/403(b) plans and life insurance are examples of such assets. Last month I wrote an article on beneficiaries (and the companion topic of asset titling). This should help you think about properly handling these out-of-estate assets.

Savings. A well thought-out savings plan is essential to your financial health. I wrote an article on this (and on investments) earlier this year. It would be good to check this out. A great thing to try and do at the end of the year is to increase your level of saving. If you do so by some smaller percentage, you may not even notice the decrease in cash flow.

401(k) Plan. If you participate in a 401(k) plan, it’s a good idea to see if you’re on track to maximize your savings. If your employer has matching funds, that should be your minimum goal for the year. Contribute enough to rake in every free dollar that your employer is willing to give you. If your budget allows, it’s a great idea to contribute the maximum amount allowed by law to your plan. In 2021 that’s $19,500.

Capital Gains. If you have realized capital gains this year, the associated taxation can be reduced by up to $3,000 by selling some of your losses. (There’s also a carry-forward provision that lets you deduct up to a $9,000 loss at $3,000 annually over three years.)

RMDs. Have you taken your Required Minimum Distributions for the year? If you’re 70½ or older, you must make these withdrawals by the end of the year or face a 50% tax on the amount you failed to withdraw. If you’re younger, but have an inherited IRA (also called a stretch IRA), you’re also subject to these rules.

Charitable Donations. If you itemize your deductions, charitable contributions are a wonderful way to reduce your tax bill. If you’re subject to an RMD, we suggest that you directly transfer money from your IRAs to get the deduction and to avoid capital gains on the transfer!

HSAs. If you have a Health Savings Account, try and fund it to the allowed maximum. In 2021, this is $3,600 for an individual and $7,200 for a family. If you’re 55 or older, you’re eligible for a HSA catch-up contribution which adds an additional $1,000 for an individual and $2,000 for a family. HSAs can carry over from year to year, so fully funding them each year makes sense. It may be that your employer contributes to your HAS fund, so be sure to check on that. Finally, if your health insurance does not qualify for an HSA, be sure to consider an FSA (Flexible Savings Account).

529 Plan. If you’re using a 529 plan to save for a family member’s college expenses, don’t forget to make your desired contribution in order to benefit from in-state tax deductions. (For grandkids, don’t forget that you can gift up to $15,000 per year tax free.)

IRA. If you’re still working, try to contribute as much as possible to an IRA. 2021 contribution limits are $6,000 if you’re under 50 and $7,000 if you’re 50 or older. Generally it’s advisable to make a contribution to a traditional IRA if your income level allows your contribution to be made using pre-tax dollars. If you’re earning too much for that, you can still contribute to a traditional IRA using after-tax dollars and then convert it to a Roth IRA for future tax-free distributions.

You can see that there are quite a few things to consider before the end of the year. Some of them involve IRS rules that must be strictly followed. If you’d like some help applying these ideas to your personal situation, we’d be happy to help you think this through. Please visit our website or give us a call at 970.419.8212 so that we can discuss this important topic in a no-charge, no-obligation initial meeting.

Posted in Fundamentals

How to Title Your Assets

By Arlen T Olberding, CFP® on November 1, 2021

Asset titling is often overlooked and can be one of the most important elements of an estate plan. If asset titling has not been correctly coordinated with your estate plan, your plan may not turn out as you intended.

Most of us would like to specify how the assets we accumulated over our lifetime are distributed after our death. Many of us (mistakenly) believe that we do this entirely through our will. That actually may or may not be true. Various types of assets can be directed to others outside of your will. There can be good reasons for this such as avoiding probate and minimizing taxes.

In addition to wills, account titles and beneficiary designations control who gets which assets upon your death. These mechanisms actually supersede the instructions in your will. For example, your will may say that if your spouse predeceases you, everything should be divided equally among your kids. However, if one of your children is included in a certain type of account tile or is a named beneficiary of a certain asset, they will receive 100% of that asset (contrary to the specifications in your will). It’s probably easiest to think about this as assets that are included in your will and assets that are excluded from your will. Excluded assets can be created through an account title or a beneficiary designation.

Account title and beneficiary designation do the same thing. They transfer assets outside of your will. Some assets may use account titles and different asset types need to use beneficiary designations. Account titling is used for assets such as bank/checking/CD/money-market accounts, many of your investment accounts and your home. Beneficiary designations control who receives things like life insurance, IRAs, 401(1)/403(b)/etc. and annuities.

Beneficiary designation is pretty straightforward. You simply fill out a form that specifies who the beneficiaries are. (You can also specify what percentage goes to each beneficiary.) Asset titling has more options. These include individual account, joint account (Joint Tenants with Right of Survivorship or Tenants in Common), Transfer on Death /Payable on Death, trust, accounts for minors (Uniform Gifts to Minors Act or Uniform Transfers to Minors Act). Let’s take a closer look at each of these.

Individual Account. Only your name appears on the title. When you die, the account goes into your estate. This is the most direct way to ensure that your will controls the distribution of your assets.

Joint Account. There are two types of joint accounts that are frequently used. These are Joint Tenants with Right of Survivorship (JTWROS) and Tenants in Common. JTWROS is a very common way for couples to share an asset. When the first person dies, the second one becomes the sole owner. This all happens outside of the estate. Tenants in Common is often used when the parties do want the portion owned by the decedent to flow into his or her estate and to be governed by their will.

Transfer on Death (TOD) and Payable on Death (POD). This is an individual account that passes to named beneficiaries upon your death. It happens outside the estate.

Trust. Trusts are legal entities that are set up by you and managed by a trustee. A common example is when you leave assets to minors. The trust will have language specifying who the beneficiaries are and how the assets will be managed and distributed. Assets can be placed into a trust immediately or upon your death. For example, a POD account title can be used to transfer that account into the trust outside of the estate process.

Minors Accounts. There are two types of Minors Accounts. One is the Uniform Gifts to Minors Act (UGMA) and the other is the Uniform Transfers to Minors Act (UTMA). Both are a way to transfer assets to minors without the cost of a formal trust. UGMA is for financial assets and UTMA can contain other assets such as works or art or real estate. All states recognize UGMAs. All but two states recognize UTMAs (Vermont and South Carolina). Along with the simplicity of Minors Accounts comes a lack of control compared with a formal trust. For example, Minors Accounts become the property of the trust beneficiary when they reach a certain age (21 years in Colorado). In a trust you can release funds on any scheduled you like – such as 25% at age 25 and the balance at age 30.

So, asset titling and beneficiary designation override what you declare in your will. It’s important to have everything synchronized so that the final result is what you want. If you have a number of assets, this can become a bit challenging. One way that some people handle this challenge is to keep things simple. They simply have joint accounts with their spouse (JTWROS) or designate their spouse as the beneficiary and specify the contingent beneficiary as their estate. Some version of this approach might fit your situation.

The concepts discussed in this article are pretty straightforward, but the details definitely matter and it can be easy to become confused. If you’d like to go over your situation, or any other financial matter, we can discuss this in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Estate Planning, Fundamentals

Do You Really Need This Insurance?

By Arlen T Olberding, CFP® on October 1, 2021

Some insurance is certainly essential to our financial health. This normally includes health insurance, auto insurance and homeowner’s or renter’s insurance. Often it also includes long-term-care insurance and personal liability umbrella insurance. Business owners need additional coverage. However, there are several types of insurance that just aren’t worth the money for most of us. Here’s a quick overview of them.

Extended warranties and service contracts. This type of insurance seems to be offered more and more frequently. Buying an appliance, some electronics, etc.? You’ll certainly be offered a chance to sign up for some type of product-protection insurance. Almost always, you’re better off keeping that insurance money in your pocket and mentally reserving it for the infrequent product problems that can come up. The exception to this might be people who make a big-ticket purchase like a new appliance and who are fairly risk adverse. For them, the peace of mind might be worth it.

Pet insurance. For many of us, we’re better off self-insuring for pet care. We simply pay out of pocket whenever we visit the vet or have an emergency. On the other hand, vet bills are getting bigger and bigger. Should you decide to get pet insurance, there are three tiers of coverage. Tier 1 covers accidents. Tier 2 covers accidents and illness. Tier 3 covers accidents, illness and wellness. The cost typically ranges from $20-$80/month/pet. That’s $240-$960/year/pet. So, for a two-pet family, the insurance comes in at around $2,000/year for tier 3 coverage. If you put aside $2,000 per year to cover future needs and just pay for vet visits as needed, you are likely to come out ahead.

Flight accident insurance. This used to be fairly popular, but most people skip it nowadays. Most of us have other insurance (health and life) that should cover things if disaster strikes.

Wedding insurance. There are two basic types of wedding insurance – cancellation/postponement and liability. You should already be in fairly good shape on liability if you own a personal liability umbrella policy as noted above. On cancellation, it must be said that most weddings occur pretty much as planned. Should major problems come up, and if some peace of mind will help you enjoy the big day, maybe you should consider it. $225 policies can provide up to $25,000 in coverage. If you decide to get some coverage, be sure to read the fine print as coverage varies and restrictions are common.

Smartphone insurance. Okay, you just shelled out hundreds of dollars for a new smartphone and the salesperson wraps things up by offering phone insurance. This is probably an item that you can self-insure for. Just mentally put aside the cost of the insurance and if problems come up, consider them prepaid with the insurance premiums you saved.

Identity-theft insurance. It seems like we regularly see news stories about people having their identities stolen. So you might be thinking about identity-theft insurance, especially since it’s not very expensive (around $50/year). However, there are laws that protect you from excessive financial harm when your identity is stolen. The key is to report the theft immediately to your financial institutions.

Laptop insurance. This is another form of an extended warranty. And as we noted above, it’s seldom worth it. Average repair costs for laptops and iPads is $100-$150. That’s about the price of a year of insurance, so for most of us, we’re better off keeping these premiums in our pocket.

Travel and trip cancellation. If you’re taking a trip to visit family or something simple like that, trip insurance is probably overkill. However, if you’re planning a 6-month, around-the-world cruise that costs a ton of money, insurance might be worth it. The key is to figure out what your nonrefundable deposits add up to and see if you want to self-insure for that amount or if you want insurance coverage. Trip insurance is typically 5-10% of the total cost of the trip, so it’s not cheap. Also, airlines typically let you reschedule for a reasonable fee. Finally, some credit cards offer some degree of coverage when they’re used to pay for the trip. If you chose to buy this insurance, be sure you read the fine print so you know what’s covered and what isn’t

Rental car collision. Generally, you don’t need this – despite the hard sell that many rental agents use. For most of us, our existing personal automobile insurance covers any car that we drive. In addition, many credit cards provide some level of coverage if they’re used to rent the car.

Of course insurance needs vary from person to person. And there are other types of insurance (accidental death and dismemberment insurance, mortgage life insurance, cancer insurance, etc.) that you may be considering. If you’d like to go over your situation, or any other financial matter, we can discuss this in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Insurance

Top Reasons to Become Debt-Free

By Arlen T Olberding, CFP® on September 1, 2021

For most of us, debt is a necessary part of life. It’s the only way we can afford big-ticket items such as a home. Unfortunately, many of us get too attached to using debt to obtain things we want (but may not actually need). So, how bad is this, really? Well, studies have shown that too much debt can affect our financial health, our mental and physical health and our relationship with our partner and with others. In short, it’s best to minimize or even eliminate debt. In this article, we’ll take a closer look at some of the reasons for eliminating debt.

Improve Financial Health

Less debt can improve our financial health in a number of ways. For starters, lower debt frees up money that can be used for other things. We can save for retirement or college. We can save for a dream vacation. We can save for an emergency and a rainy-day fund. Beyond that, less debt can raise our credit rating which lowers the cost of borrowing. So, less debt really does improve our financial health.

Help Your Mental and Physical Health

Less debt can actually lower the stress in our lives and that’s a very good thing. Lower stress can reduce anxiety and help us feel positive about life. As stress goes down, our energy goes up which makes it possible to be our best self. So, when we’re not stressed out, we feel better about ourselves and life in general. And that’s a very good thing. You’ve probably read about the mind-body connection – how one affects the other. It’s no surprise then that we’re better off with less stress. Reduced stress strengthens our immune system and that can keep us healthy. Lower stress can lower our blood pressure which is good for our cardiovascular system. So, less debt can reduce stress which can improve both our mental and physical health.

Strengthen Relationships

Less debt can help you feel relaxed. Your relationships will be smoother – including with your partner and your kids. This will reduce problems at work. And that’s got to be good. In terms of your partner, money troubles are a primary issue cited in many divorces. And who wants to hurt their own kids? It goes without saying that it’s probably not a good idea to antagonize your boss either. So, for all these reasons, life will be better and relationships will be smoother when you have a feeling of well-being.

Naturally, everyone’s situation is different, but some of the things we’ve discussed are pretty common. I’ve written before about dealing with debt, about reasons to eliminate credit card debt and about lowering your mortgage. I suggest you read over these articles and if you’d like to discuss your own situation, we can discuss it in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Fundamentals

Document Retention

By Arlen T Olberding, CFP® on August 1, 2021

Who hasn’t wondered how long we should keep various documents? Keep them too long and it becomes unwieldy and makes it hard to find what you want. Don’t keep them long enough and you may not be able to respond to the tax man or some other authority. Is an electronic copy good enough or do we need hard copy? What’s the best way to get rid of documents we no longer need? There are many documents that you should keep for at least some time. We’ll take a look at some of the more common ones in this article.

Taxes
Retention Rules. The rules on this are reasonably straightforward. Here’s a chart from the IRS:

For most of us, 3 years is probably a pretty good retention period. On the other hand, who knows what the IRS may want to look at. So, unless item 6 applies to you, a 6-year retention period seems like a pretty safe bet.

That covers Federal tax returns, but how about your state returns? There is variation from state to state on this. Colorado, for example, is 4 years from the date you file your return or the date it is due — whichever is later.

Electronic or Hard Copy? Either.

What to Keep? You probably already have an idea which documents might be useful during an IRS audit since you needed those items to prepare your return. Naturally you’ll want to be able to verify your income (W-2, 1099, K-1, etc.) and expenses (invoices, receipts, cancelled checks, etc.). If you itemize you may have additional documents (charitable contributions, medical expenses, etc.).

Home Ownership
This is really an important special case of taxes. The price you paid for your home is its basis. The difference between that and the amount you receive when you sell it is the capital gain. It used to be that the entire gain was taxable, but you could reduce the gain by documenting all qualifying improvements that you made. This was pretty cumbersome, so the IRS now allows the first $250,000 of gain to be tax-free for individuals and the first $500,000 for joint filers. If your gain is higher than that, you may want to document at least major improvements (new addition, etc.) You should also keep the property’s abstract, title, appraisals, deed and all closing documents as well as receipts for major improvements. Mortgage documents, including the certificate you’ll receive once you pay off the mortgage, are also important.

Retention Rules. The same rules as for your taxes.

Electronic or Hard Copy? Either.

IRA
This is another important special case of taxes. Contributions to your IRA may include deductible or nondeductible funds. (This is typically based on your income in the year the contribution was made.) Naturally contributions of nondeductible funds become part of your IRA basis and are not taxed upon withdrawal. The best way to track your IRA basis/nondeductible contributions is to file Form 8606 each year that you make such a contribution.

Retention Rules. Until all of the funds have been distributed to you or your heirs.

Electronic or Hard Copy? Either.

Power of Attorney
Hopefully each of you has a medical and financial power of attorney document. This is used by your agent to take care of financial and healthcare decisions while you’re still alive, but unable to make such decisions yourself. Healthcare directives are useful in communicating the kinds of medical treatments you do or do not want to receive.

Retention Rules. As long as you are alive.

Electronic or Hard Copy? Original hard copies. Keep originals where your agent can access them. That means they should not be in a safe deposit box.

Estate Documents
As with Powers of Attorney, you should have your estate documents in order no matter what age you are and no matter how healthy you are. (The pandemic has certainly taught us that things can change very quickly.) Of course your key estate document is your Last Will & Testament. It tells your agent (executor) how to dispose of your assets. Trust documents are often part of your estate plan too.

Retention Rules. Until your estate is completely settled.

Electronic or Hard Copy? Original hard copies. Keep originals where your agent can access them. That means they should not be in a safe deposit box. (It’s interesting that your Will often grants access to your safe deposit box and if your Will is kept in the safe deposit box, it will be difficult to gain access!)

Protecting Documents
If your documents are kept as hard copies, the most important ones might be kept in a safe deposit box at your local bank. See Power of Attorney and Last Will & Testament exceptions to this. POAs and Wills might be kept in a safe at home (should be fire, water and theft resistant). Bulkier documents like 3-7 years of tax records and the supporting paperwork are often stored at home. This also makes the annual destruction of the oldest records and the addition of the newer records easier. People have different approaches to this. Many feel that the likelihood of record loss and an IRS audit are low and they just keep one copy at home. Others want more protection so they create an electronic copy of such documents to act as a backup. For electronic record keeping, it’s important to be sure the copy is legible. The other significant consideration is a good backup in the event that your primary copy is lost or damaged. Cloud services are one option for this if you’re comfortable with this important information being in the hands of others. You could also make a copy onto some storage device like a memory stick or DVD and place that in your safe deposit box. If you use this method, remember to update the offsite copy whenever important new documents occur.

Document Destruction
Hard copies can simply be run through an in-home shredder. Electronic copies can be deleted. However, you should know that even after deletion, the documents may still be present of the disk drive. So, it’s important to use some type of file wipe software to totally remove the files.

Of course document retention plans vary from person to person. If you’d like to discuss your situation, or any other financial matter, we can discuss this in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.

Posted in Estate Planning, Fundamentals, Taxes

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