Many people focus their efforts on increasing their financial resources, yet they may give relatively little attention to protecting those assets once they are accumulated. However, without the proper legal protection, the financial security you have worked long and hard to build could easily be threatened by an unexpected lawsuit.
In today’s litigious society it is not only the wealthy who should be concerned. Even individuals of moderate means, who have home equity, savings, or retirement accounts could be at risk. Business owners and professionals, such as doctors, dentists, lawyers, and accountants may be especially vulnerable to claims from customers/patients/clients, suppliers, employees, and lenders.
Lawsuits can be expensive and time-consuming to defend. Even if you think you are in the right, you may be forced to settle, because it may be more costly to fight a lawsuit than to pay a settlement. Also, regardless of whether you win or lose, you must generally pay for the costs of your own defense. However, with proper advance planning, there are some relatively simple and inexpensive ways to help protect your assets from the threat of litigation.
Life Insurance
In many states, life insurance death benefits and cash values are exempt (in whole or in part) from the claims of creditors of the insured. However, the exemption for life insurance cash values may depend on the ability to prove there is no attempt to defraud a creditor.
Qualified Retirement Plans
You may also want to consider maximizing your contribution to your qualified retirement plan. In order to be tax qualified in the eyes of the Internal Revenue Service (IRS), qualified plan assets may not be assigned. The United States Supreme Court has interpreted this to mean that account balances in a qualified plan are generally protected in bankruptcy situations. In nonbankruptcy situations, state laws govern whether assets in a qualified plan are protected from the claims of creditors.
Primary Residence
Life insurance policies and qualified plans aren’t the only ways to protect assets. Most states provide some kind of asset protection for a primary residence. The key may lie in how the residence is titled. One form of titling, called “tenants by the entirety,” is often necessary to insulate home equity against the claims of creditors.
Trust Funds
In some cases, a “spendthrift” clause in a trust will prevent creditors from attacking trust fund assets. However, this protection almost never applies in the case of so-called “self-settled” trusts. In other words, you cannot typically set up a trust for your own advantage, unless you cede all control and benefits. It may, however, be possible to establish such a trust to benefit selected family members.
Planning Your Estate: The Bottom Line
When planning your estate, it is important to give thought not only to building wealth, but also to protecting your assets from the threat of lawsuits and the potential claims of creditors. Some relatively simple and inexpensive strategies may exist to achieve this end. However, it is important to bear in mind that asset protection planning is a complex topic and may require the assistance of qualified legal and tax professionals.
We’ve all heard that our clients will go through three financial phases over the course of their lifetime: the accumulation phase, the preservation phase and the distribution phase. Consider the following guidelines to help your clients eliminate the tax traps that they could potentially fall victim to.
During the accumulation phase, your clients are likely deferring income into a plan like a 401(k). Then when your clients retire, they will need your help to recommend where that money should go as they enter the preservation phase of their retirement. Of course, we all know that the 401(k) rollover is ideal because it allows them to transfer their existing retirement account into another retirement account (usually a low-risk portfolio) without being subject to unnecessary taxes or withdrawal penalties. Because retirement accounts like a 401(k) are funded with pre-tax dollars and grow tax-deferred, that means if your clients take a premature distribution, the IRS will subject them to taxes on that withdrawal. In addition, if they withdraw the money prior to age 59-and-a-half, your clients could also face a 10% penalty tax.
Helping your clients avoid taxation during the rollover process can be tricky, and there may be complicated-looking forms to fill out, but it isn’t hard if you know the proper steps to take.
1. Schedule a call with the client and plan administrator.
First, I recommend a conference call with your client and the 401(k) provider to check eligibility. The employer can’t release the funds unless your client is terminated or separated from service. I’ve often seen cases where the employer doesn’t notify the plan provider, and my client is still flagged as an active employee in the system. So, save yourself some time and make sure your client is cleared to move the money and there are no unexpected penalties, fees or restrictions.
2. Request rollover documents from the plan administrator.
Next, I suggest you request the rollover forms and confirm what is needed for the new provider. While you are on the phone with the old provider, checking to make sure you are free to move the money, you can also use this time to ask for the required paperwork. In most instances, you will need to submit documentation to start the rollover process, so you’ll want to tell them that you are assisting your client and intend to roll the money over, so are requesting any necessary forms that need to be completed. By following this process, you will also help your client avoid the 20% mandatory federal tax withholding that most plans require if the funds are not rolled over directly.
3. Understand new account requirements.
Further, you’ll want to check with the new account provider to see what they require in order to accept the rollover. In some cases, you may be required to open up an account first before submitting a rollover form. In other cases, the account creation and subsequent rollover may all be part of the same form or process. Either way, your client is counting on you to know what is required and how to get it done. Make sure you have all of the appropriate information from the previous provider before you complete and submit the forms.
4. Check your work.
These forms may require a lot of information, so you’ll want to read them very carefully and make sure you fill them out correctly. If your client’s rollover form from a previous carrier asks what type of distribution this is, you want to be sure to choose a direct rollover. This ensures the funds are made payable to and go directly into their new IRA account with you. This often requires information such as how to make out the check or where to send the money.
5. Execute the rollover.
Now, it’s time to submit the forms, and most plans will require an original signature to initiate the rollover process. However, be sure to check with the plan administrator, as each has their own set of rules and every plan is structured in its own unique way. In many cases, your client will receive a check made payable to the new IRA custodian for the full amount of the rollover in the mail. It is then up to the client to get the check to you and make the deposit into the new account. Make sure the check is made out properly, and submit it for deposit with any required deposit forms.
6. Prepare for distribution.
Now fast forward to the third financial phase, which occurs in retirement — the distribution phase. Once your client starts taking distributions from the IRA you established, you’ll need to be aware of the most common distribution mistakes. The following tips apply when your clients reach age 70-and-a-half and you need to help them avoid a 50% tax on Required Minimum Distributions (RMDs) that are not taken by the Required Beginning Date (RBD).
The RBD is when your clients must start withdrawing from their IRAs. This can initially be confusing because the rules for the first RMD will vary slightly in the first year compared to all future years once your client is over 70-and-a-half. The RBD is April 1st of the year following the year your client has turned 70-and-a-half. If your client turned 70-and-a-half in 2011, the RBD will be April 1, 2012. Remember, if your client missed an RMD, the penalty is 50% of the required amount that was not taken.
Here’s an example:
If John turns age 70-and-a-half in 2011, his RBD will be April 1, 2012, and his first RMD must be taken by that date. However, John’s second RMD for tax year 2012 must be taken before the end of 2012 and must follow this schedule from now on. This results in two taxable withdrawals in one tax year, which can cause your client to pay higher taxes for that year. I recommend processing the first RMD withdrawal before the end of the year when the client turns 70-and-a-half to avoid this double RMD tax trap.
Be careful, as many financial advisors I’ve met with are unsure of these rules and believe that RMDs can be taken by April 1 of the following year, every year, and not just the first year. I recommend setting up a systematic RMD to avoid any confusion and potentially expensive tax penalty in future years.
With more than 76 million boomers transitioning into retirement, and the trillions of dollars invested in their 401(k)s that will need to be rolled over, you must be equipped with this information to help your clients make important rollover decisions. By following the steps outlined here, you will be able to help them avoid the potentially expensive tax traps that could happen during retirement.
If you have several credit lines, spread across various banking service providers and lenders, then you are probably having a hard time managing all those responsibilities. Provided you are eligible for such an offer, chances are one banking institution or another will make a balance transfer offer to you. Of course, terms and conditions apply, but such an offer is one you might stand to profit from, irrespective of your overall financial standing. What you need to know is how to make the best use of such an offer– balance transfer credit cards can either make your life a whole lot easier or, on the contrary, further complicate it. Read on below, to find out what you need to know about such cards.
Balance Transfer Credit Card Mechanisms
The actual details of balance transfers can greatly vary from one provider to the next. However, most lenders will most likely offer you a ‘zero interest’ deal, which you will be able to benefit from for a limited span of time. This rate, which only applies early on in the contract, is called an introductory rate. As you transfer your credit lines from other institutions to your new one, you have several options. You can either make the transfer yourself, or let your new lender’s representatives take care of the process for you. In both cases, you will still benefit from the 0% interest rate, which will most likely stay in effect throughout the duration of your first year with the new bank.
Can You Save Money with Balance Transfers?
Indeed, balance transfers do offer one the option on cutting down costs and potentially even saving up some cash. This applies both for persons who want to transfer all the crediting lines to a single institution for personal use, as well as to business credit cards. The biggest perk of such a move is that you will be cutting down on all the APRs you are currently paying. You are probably paying all your banks and lenders much more in interest than you ever should. This is especially true for people who have large balances. A balance transfer, which essentially means you’d be moving all your balances to a single card, will give you zero interest for at least twelve, or perhaps even for eighteen months. By cutting back on that cost, you will be saving quite a hefty sum, at least for the first year and a half.
Balance Transfers and Smart Debt Strategies
As discussed above, a balance transfer credit card will potentially give you the alternative of saving up quite a bit of money. What will you do with that money? If you’re using a business credit card in particular, perhaps you should look into the option of paying back the debt. After all, you have no interest to pay for twelve to eighteenth months. Why not take advantage if your new conditions and make them work in your favor. At the very least, even if you don’t manage to pay back the whole debt, you will at least have paid it down substantially, to a large degree.
When choosing your investment and seeking the highest CD rates, you will also need to be aware that there are several types of CDs to choose from, they are available from a broad range of issuers. These types of CDs include:
Traditional CD. With a traditional CD, you receive a fixed interest rate that is set for a specific period of time. When that time expires, the CD matures. At that time, you can either withdraw your funds or you can reinvest it into a new certificate of deposit.
Bump-Up CD. This type of CD will allow you to trade your current certificate of deposit interest rate with one that is higher if the rate on the new CD increase during your investment time period.
Liquid CD. Liquid CDs allow you to withdraw a portion of your funds without a penalty. In return for the liquidity feature, this type of CD offers a lower interest rate.
Zero-Coupon CD. These CDs do not have an annual interest payout. Instead, they reinvest those payments and allow you to earn interest on a larger deposit in total. When compared to other types of CDs, a zero-coupon CD has a higher rate of interest.
Callable CD. A callable certificate of deposit can be recalled by the bank after a certain amount of time has passed. If your CD is called, your deposit plus your interest earned will be paid to you at that time. Because of the callable feature, financial institutions generally offer higher interest rates on callable CDs.
Brokered CD. Brokered CDs are sold by brokerage firms. This type of CD has a higher interest rate than those offered by banks due to the fact that brokerage firms must compete nationwide for their investments. However, you will have to balance the higher interest rate on a brokered CD with the fee that most brokerage firms charge you to purchase the CD through your brokerage account.
Regardless of what type of CD you decide upon, be sure that you know and understand the rate of interest that you will receive and read disclosure statement. Read newspaper advertisements, research personal finance blogs, financial blogs, visit local financial institutions in order to find the best deals on CD rates.