Holiday Tip and Gift Guidelines

Posted on November 28, 2016 by steven

As we recover from Thanksgiving, we turn to Black Friday and then Cyber Monday, so the holiday season is in full swing.

Part of your gift giving may be tipping those around you upon whom you depend. While gift giving etiquette may be obvious in some instances, it can get less clear when considering gifts for people outside of your friends and family. So, to help you navigate the season, we have put together a guide of suggested amounts for gifts and tips, as well as final comment on notes and cards in lieu of cash.

We all have people in our lives that help us keep our families, homes and businesses on track and get through each day as we move forward throughout the year. In many cases, the services they provide ensure we can go to work, have clean homes and stay fit, including caregivers, delivery, home maintenance, and personal care services:

Caregivers (for kids, parents and pets, too!)

Caregivers for your children, parents and pets can be lifesavers. They provide care, education, exercise, and attention to those you care about most. This is the time of year to let them know how thankful you are for all that they do. The amount of service they provide and the arrangement you have with them can dictate the appropriate gift level:

Nanny/au pair – a week’s salary and a small gift;
Daycare teachers – a $25-$70 gift;
Home healthcare worker – a week to a month’s salary;
Teacher – a small gift and a handmade card from your child;
Dog walker – depending on your walker’s schedule, you may want to gift a day’s pay or a full week’s pay; and
Dog groomer – half the cost to the full amount for the service.

If you contract any of these services through an agency, you may want to contact the agency to find out if they have a gift-giving policy in effect. If the agency prohibits gifts, consider alternatives like making a donation to the agency or sending in homemade cookies to the office.

“Neither snow nor rain…”

Despite the weather, terrain or traffic, your mail carrier delivers your mail every day and your online purchases arrive on time and in good condition. Let those who make those deliveries know you’re grateful. In deciding what and how much to give, consider the particular company’s gift giving restrictions:

Mail carriers – are not prohibited from receiving cash gifts and gifts more than $20;
FedEx – employees may accept gifts under $75, though no cash or gift cards;
UPS – workers are allowed to accept tips, but UPS discourages the practice; and
Newspaper delivery – $10-$30 is standard.

Home Maintenance:

Whether you live in a single-family home or a large apartment building, it’s likely there is someone who services your home or property in some way.

Trash and recycling collectors – $10-$30, which you may want to mail directly to the collection company if you’re not home to hand deliver it;
Doorman – $25-$100;
Regular cleaning person – the cost of one visit;
Landscapers/gardeners – $20-$50 per person or if you have just one person doing the work, the cost of one visit;
Parking garage attendant – $10-$50; and
Building’s handyman, superintendent and custodian – $20-$100.

If you have someone who always goes the extra mile, such as a handyman who’s prompt and efficient or a doorman who is quick to carry heavy packages for you, then a larger tip may be warranted.

Personal Services:

It’s hard work keeping you fit, perfectly coiffed and beautiful, but recognizing the efforts of those who do is easy and may also buy you scheduling flexibility when you really need it. In deciding whether to tip and how much, consider this:

Hairdresser/manicurist – if you’re a frequent visitor, tip the cost of one visit. If you’re a less frequent customer, then $20. However, if you tip generously through the year, you do not need to give an extra tip at the end of the year;
Personal trainer – up to the cost of one cost;
Massage therapist – also cost of one visit; and
Golf or Tennis instructor – a thoughtful gift.

If you’re unable to tip or give a gift, a thoughtful thank you note will acknowledge the good work these people do for you throughout the year. Another effective gesture of gratitude is to send a thank you note to the supervisors of the people who provide you with great service throughout the year, letting them know how impressed you are with the service you receive. Good feedback is appreciated by both the supervisor and the people who are helping you out.

What is the AMT?

Posted on November 27, 2016 by steven

Not, it is not a dyslexic version of ATM!

Back when people could shelter almost 100% of their high income, Congress decided to make that more difficult by creating the alternative minimum tax (“AMT”), a minimum tax that all must pay with a rate of 28%. This along with sweeping changes made in 1986 made it difficult for the top taxpayers, people with income over $1 million, to get much below an average tax of 20%.

On the other hand, an AMT rate as high as 28% is still great if your marginal rate is 39%.

Why do you care? Despite the title, you do not get to pick

You must pay the higher amount determined by the regular and AMT tax calculations. If you have to pay the AMT, you are paying almost a flat rate of 26% to 28%, not a graduate rate, and you are losing the value of many itemized deductions, including state income taxes paid, most mortgage interest and miscellaneous deductions. To make sure you pay taxes, certain “preference” amounts are added to your AMT income, including incentive stock options and alternate depreciation schedules.

Data on 2012 income tax indicates that nearly every married taxpayer with income between $100,000 and $500,000 owed some AMT. Thus, the AMT is no longer just for the ultra rich!

So what do you do? Plan carefully

Make sure that efforts to reduce regular taxes do not push you into paying the AMT. Here is one example: If you have a year with high ordinary income, be sure to pay all of the state income taxes due during that calendar year, since you are less likely to be in the AMT doing so but are like to be in the AMT next year if you wait until April to pay those state taxes. The lower ordinary income of next means that you will certainly be in the AMT.

Note: some states also impose an AMT, making planning quite … er, taxing!

Oh, that looks complicated!

Good planning pays off, as in the example above, where preserving the deduction can be a very substantial savings on your federal income taxes.

Roth or not to Roth? Deciding requires predicting your future tax rate

Posted on November 26, 2016 by steven

More employers now provide the option of a Roth 401(k) as well as a traditional 401(k), so you may ask:

Which should contribute to a Roth 401(k) or a traditional 401(k)?

The answer is not so simple and it depends on your income tax rate now and at retirement. Before offering background and explanation, we start with this Quick Summary

If you have a high tax rate now, and expect a low tax rate later, pick the traditional 401(k)

The traditional plan is better because get the current tax deduction, reducing taxes now at the higher tax rate. This may be true for people in middle or later years of employment.

Note: this is only financially better if you invest the amount of taxes saved.

If you have a low tax rate now, and expect a high tax rate later, pick the Roth 401(k).

The Roth plan is better because you avoid higher taxes later. This may be true for most people starting work now.

If expect to have the same tax rate later as you have now, pick the Roth 401(k)

The Roth plan has other benefits described below.

Background – How the Plans Work:

Tax deferred growth

Earnings on both the traditional 401(k) and the Roth 401(k) are not taxed. Not paying taxes on investments in your retirement account means more grows and compounds tax-free – that is why contributing to a retirement plan is so important.

Contributions “pre-tax” vs. after tax

Contributions to a traditional 401(k) are made “pre-tax,” meaning that the amount contributed is excluded from your taxable income for the year.

Contributions to a Roth 401(k) are made after tax – they are not excluded from taxable income.

Taxing withdrawals vs. no tax

Withdrawals from a traditional 401(k) are taxed in the year of withdrawal.

Withdrawals from the Roth plans are not taxed. That is, the after-tax contributions are not taxed a second time and neither is the growth on those contributions.

Other rules – early withdrawal and require minimum distribution

There are penalties for withdrawal before reaching age 59½, unless certain exceptions are met, such as disability or first-time home buyer.

You must begin withdrawing when you reach age 73 under the revised IRS Required Minimum Distribution or “RMD” rules. For more on RMD rules, see IRS Retirement Topics – RMDs

Hedging your bets:

If you are not sure of your tax rates, or if you just want more options because you cannot predict, then you can opt to combine plans. For example, you can contribute to your traditional 401(k) up to the employer match and then put the rest in a Roth IRA, if the contribution limits allow.

Conversions:

When you change jobs, you can convert a 401(k) to a Roth IRA, but doing so is a taxable event. If you expect your tax rate to be higher in the future, this is a good move. However, you will want to pay taxes due from other sources. If you have to take funds from the IRA to pay the taxes, you reduce the amount going into the Roth IRA which dramatically reduces the future benefit.

If you convert after-tax contributions made to a traditional 401(k) or non-deductible IRA, you have less on which taxes are due because the after-tax portion is not taxed in converting to a Roth IRA.

Other considerations:

While a Roth 401(k) is subject to RMD, a Roth IRA is not. If you can re-characterize the Roth 401(k) to a Roth IRA, you avoid the RMD. This may mean that you pass more on to your heirs. Also, you may gain investment flexibility compared to a company plan.

If you use a Roth plan, then your taxable income at retirement will be less than if you were withdrawing from a traditional plan where withdrawals are taxed. This could lessen tax due on social security benefits.

On the other hand, if you expect to use funds in your retirement plan to donate to a charity, you are better off getting the tax savings for yourself now. The charity is not subject to much if any income tax.

Also, if you expect your heirs to receive your retirement plan assets and know that those heirs will be in a lower income tax bracket, you should use a traditional plan now to get the tax benefit for yourself. How can you possibly determine that heirs will get more of your retirement than you and also be in a lower tax bracket? I cannot imagine – well, maybe I can, but none of the ideas sound good. Anyway, it seemed like a good idea to mention (they teach you to think this way in law school).

If you help support others, you need life insurance and an estate plan – really

Posted on July 30, 2016 by steven

Purchasing adequate life insurance and doing your estate plan, meaning signing a will and creating a trust, are probably low on your list.

If you help support others, I hope you will rethink your priories. I will give you two good reasons that you should:

I saw the confusion and pain a wife had to address when she lost her husband, before he bought the life insurance he had promised to obtain, and had to help her kids adjust to the massive change of lifestyle as they sold their home and downsized because they could no longer afford what their dad, the chief income earner of their family, had provided them. If they had proceeds from his life insurance, they would have only been dealing with the grief of losing him.

I saw adult children deal with the probate process so they could be appointed administrators of their mom’s estate just to be able to access bank accounts, pay funeral expenses and then sell and distribute the remainder of her assets, making their own decisions in place of knowing what she would have wanted.

If you have not obtained life insurance to replace your earning power, which helps support your family, and if you have not executed a will, along with a trust, medical directive and other documents that may be appropriate, you are not just avoiding an inconvenient imposition on your time and the payment of premiums and fees, you are failing to properly think of the consequences of not acting and the impact that could have on your loved ones.

So please think again.

Estate planning overview update – key issues to consider for your wills & more

Posted on November 25, 2015 by steven

Whether you’re updating an existing plan or starting from scratch, this overview presents the key issues to consider when designing and executing the best estate plan. The work does not stop at signing your estate plan documents; you must also complete the follow up work of beneficiary designations, memorandum to fiduciaries, etc. The goal is to avoid the pitfall of having no plan and the disaster when wills and trusts are in place but the asset ownership and beneficiary designations frustrate the plan by having assets pass to the spouse and not the trust.

If you do nothing else after reading this, write and deliver a “Memorandum to Survivors” and review asset ownership, all as described at the end of this post. A comprehensive estate plan can accomplish many goals, such as providing for survivors, ensuring your children are cared for, determining the flow of your assets upon your death, and reducing the amount of taxes your estate will pay while administering your estate. The most important goal is that you have peace of mind knowing that your estate will be administered in accordance with your wishes.

Updating an Existing Plan
If you have a plan already in place, be sure to review it every couple of years. As you grow older, your life circumstances change and these changes may affect your wishes and plans for your estate. Events such as the emancipation of your children, divorce, lapsed relationships with fiduciaries will likely affect your estate plan. Keep these matters in mind when reviewing the remainder of this post. Your change of circumstances could change your pyramid level.

Estate Planning Pyramid
Constructing a pyramid can be helpful for understanding all that goes into an estate plan, much like nutrition and investments. Each level of the pyramid addresses a new level of complexity in your family and financial situation – that is, everyone needs level one, but not all need the later, more complex levels.

Pyramid: Level One
The first level of estate planning provides the most basic protections so it is most suitable to single individuals with no children and few assets. This level of estate plan typically includes the following forms:

Health Care Proxy: This document allows you to appoint people to make decisions about your health care and treatment when you are not capable of doing so. You typically select the surviving spouse and then have a first and second alternate if you wish. Some states call such documents “medical directives” or “medical powers of attorney.”

Living Will: This makes your wishes clear as to whether or not you want to have heroic means used to prolong your life.

Anatomical Gift Instrument: This allows you to have a hospital use organs and other body parts for others in need of a transplant.

Pyramid: Level Two
The second level is most appropriate for individuals in committed relationships. This level includes all the forms listed in the first level, but adds a durable power of attorney. This document grants a power of attorney to the other to manage your financial affairs if you are absent or you become incapacitated.

Pyramid: Level Three
When you have children, you want to ensure that they will be both cared for and provided for in the manner you wish. To achieve this, you need a will to appoint a guardian, for the “care,” and create a trust to manage assets, for the “providing.”

A will is a formal document that designates your personal representative or executor, any alternates, plus a guardian and any alternates for children under age 18, then instructs your personal representative to pay off your debts, and distribute your estate per your wishes.

A trust is an entity that you create and can be used for many purposes. The trustee acts as the owner of what the trust holds, while the beneficiaries get all the benefits from what the trust holds. For estate planning, trusts are used to reduce estate taxes in various ways. Trust vehicles can also describe how and when assets are distributed. For example, the grantor of a trust could insist that assets not go to children until they are age thirty-five. The trust vehicle could also provide where assets flow if all family members die without issue. For example, assets could flow to a charity or educational institution.

Providing for Survivors: You need to address how your assets and any life insurance flow after your death in order to ensure that your resources allow those who survive you to maintain the same standard of living, during their life expectancies, that you all had during your life. If your investments are not sufficient, even after making liquid certain kinds of personal property (e.g., a second home), then there is a need for life insurance.

Life Insurance: Term insurance, providing only a death benefit, funds the shortfall between assets required to maintain the lifestyle of the survivors and actual assets available. Whole life, variable or other types of insurance should only be used when permanent insurance is required, as in the case of maintaining estate liquidity throughout your lifetime.

Flow of Assets: After you determine the assets required to support the lifestyle of the survivor, you determine to whom the assets flow. For example, at Levels One and Two, you can leave everything directly to survivors, while at Levels Three to Six, you use a trust, and at Level Six you may even separate some portion of the assets by gift now.

Control Over Assets: In Levels One and Two, the survivors have complete control over the assets. At higher Levels, trust vehicles are used for the estate tax savings. However, you also gain a heightened level of attention on the assets: you have engaged a trustee to focus on providing for the surviving spouse, maintaining his or her lifestyle, while still attending to the interests of other beneficiaries, such as children. In this way, the trustee will try to preserve the trust assets in the best way possible for the longest duration. Finally, the trustee must distribute the assets per your instructions; if assets went to a survivor, they are not bound in any way to follow your wishes, so you may not achieve your estate planning goals.

Fiduciaries: In designing the estate plan, many choices revolve around the fiduciary that you select for a particular role.

Personal Representative or Executor: This is the person who “marshals” all assets of the estate together, pays death expenses and transfers ownership of property to the surviving spouse or trust. This is approximately a nine-month task.

Guardian: This is the person whom you select to love and care for your children in your absence. The spouse selects the surviving spouse and then a second or third choice beyond that. This job lasts until each child has reached majority (age eighteen).

Trustee: This person has potentially the longest-term job because he or she must manage the trust assets and make distributions of income and sometimes principal to the surviving spouse, children and even grandchildren. Depending on the terms of the trust, this job could last until the children are young adults.

Beneficiary Designations and Ownership: ownership and how life insurance proceeds and retirement plan assets flow is described below.

Pyramid: Level Four
This level of planning addresses state taxes. When the potential combined estate of a husband and wife exceeds $1 million, and they have other beneficiaries for whom they want to maximize the estate after taxes, then trusts are typically used. States such as Massachusetts impose an estate tax over $1 million. Other states have similar amounts, but many are increasing, such as New York which will match the federal credit in 2019. Therefore, additional planning is required if you reside in a state with an estate tax.

Pyramid: Level Five
The fifth level contains trusts that address federal estate taxes, as well as state. Congress has retained the unified gift and estate tax credit, now at approximately $11.4 million (inflation adjusted) with a 40% estate tax rate. In addition, the unused portion of the estate tax credit of a deceased spouse is “portable”, allowing it to pass to the estate of surviving spouse.

With the trust structure, sub-trusts can be created so that both the credit and the marital deduction are used. This structure takes advantage of the credit at the first and second deaths. In contrast, wills that pass all assets outright to the surviving spouse would only take advantage of the credit at the second death. The total tax savings for an estate of $10 million or more is excess of $1.75 million for the combined estates.

Life Insurance Trust: You can also make an irrevocable trust the owner of any insurance on your life to exclude all proceeds at death from both estates, avoiding estate taxes. That is, the proceeds are completely estate tax free. However, this requires an irrevocable transfer to the trust; you cannot get the insurance back out. You can use this trust to receive insurance proceeds that can pay for estate taxes, thereby preserving more of your estate after taxes without increasing the taxable estate.

Pyramid: Level Six
The final level is for complex estate planning that minimizes federal and state estate taxes through multiple generations. An example of this is a generation-skipping trust. These trusts transfer assets from the grantor’s estate to his or her grandchildren. This is what allows the grantor’s estate to avoid taxes that would apply if the assets were transferred directly to his or her children. The grantor’s children can still enjoy financial benefits of the trust by accessing any income that is generated by the trust while leaving the assets in trust for grantor’s grandchildren.

Other entities: Separating assets by gift now would be important if you wanted to ensure some minimum funding for children, such as guaranteeing coverage for their college expenses.

529 Plans: you can use 529 plans or trusts for gifting to cover college costs of a child.

After the Plan has been Executed – Ownership and Beneficiary Designations
Once the documents and insurance are in place, make sure to review and complete the following:

Qualified Plans (IRA’s, 401k plans, etc.):

Primary Beneficiary – to the surviving spouse (so he or she can roll over the proceeds to an IRA and thereby defer income taxes); and

Secondary Beneficiary – to your children (or your own revocable, depending on whether you want the assets controlled or available to children).

Life Insurance and Annuities:

Primary Beneficiary – when not owned by an irrevocable trust, such as group term, to your own revocable trust (for estate tax benefits, e.g., using credit at first death); and

Secondary Beneficiary – to the surviving spouse (in case of trust has been terminated for some reason).

Other Assets
Consider changing ownership of any jointly held assets to ownership by one of you. Any assets held as joint tenants with rights of survivorship will go to the survivor by operation of law and never get to your revocable trust. (You want to be sure that you have sufficient assets going to the trust to realize the full tax reduction effect.)

You may even want to fund your trusts, moving investment accounts over to your own revocable trust. This has no impact on your income taxes. You can also choose to fund your revocable trust now. This will save a significant amount of time for the executor, and the attorney he or she hires, as this will need to be done after your death otherwise.

Memorandum to Survivors
Compile a reference book or add to your financial plan book photocopies of important papers, identifying where the originals are, then adding a list of important contacts, instructions to your executor and trustee and other important notes for family and friends. You would update this at least annually with new asset statements (consider this as you gather information for preparing your taxes). To be more specific, the list (and copies) should include:

Location of original will, trust, etc.;

Location of health care proxy and durable power of attorney;

List of professionals with contact information: doctor, attorney, CPA, etc.;

List of fiduciaries with contact information: health care proxy, guardians, executors and trustees, attorney-in-fact for durable power of attorney, etc.;

Location of insurance policies and valuables such as original titles, etc.;

Location of safe deposit box for valuables and items in #5 or 7;

List of all bank and investment accounts and location of any stock certificates or other documentation for investments;

List of all mortgages, loans and credit card accounts;

Any appraisals or other listing of items by value;

All automatic debits that need to be addressed (stopped, changed); and

List of all password protected accounts (e-mail, on line banking and credit cards, etc.) and where to locate the passwords… and the password to access the password.

Please see planning-for-the-inevitable-end-of-life-services for more ideas on such memoranda. Also, after you review this overview, let us know how we can help you get your estate plan in order.

Your family will appreciate it.