Why is Estate and Succession Planning a Process?

If you hear of someone heading off to her attorney to do their succession planning, it’s really just one of several meetings that are necessary to draft a sound succession plan, says Dairy Herd in the article “Estate Planning Is A Process, Not An Event.”

In fact, succession planning is a process. Ten years of time can fly by very quickly, so the earlier you can start having these conversations with your attorney, the better.

The amount of time needed to draft a solid succession plan is different for every family. If things are fairly straightforward, it may take only six to nine months. However, it’s not uncommon for this process to take a year or more.

That’s especially true in the ag sector, because once the good weather arrives, this process slows down to a halt—good weather means that everyone is focused on crop production.

There’s no magic age to start the process, but again, sooner is better.

You can spend your entire career building your business. However, very few people have really spent  much time thinking about how they will effectively exit from it.

You may not be thinking of retiring or transitioning the farm operation for 15 or 20 years but having an idea of where you’re trying to get, gives you a better track on which to run.

Succession planning should happen well before retirement, so that’s why the best plans are flexible and adaptable.

Every plan is unique to each family’s particular farm operation (or business) and circumstances.

The best plans are dynamic and draw on the expertise of an entire team of professionals. That way you’re seeing all of those issues and changes along the way.

Contact our estate planning professionals to understand how your family will benefit from a comprehensive estate plan.  

Reference: Dairy Herd (January 15, 2019) “Estate Planning Is A Process, Not An Event”

How Do I Trade Options in My Roth IRA?

A Roth IRA is a very popular retirement account choice. You pay taxes on the contributions today, and then investors can avoid paying taxes on capital gains in the future. It’s a really smart strategy, if you believe your taxes are likely to be higher after you retire.

In Investopedia’s article, “Trading Options in Roth IRAs,” the use of options in Roth IRAs and some important considerations for investors are examined. Unlike stocks themselves, options can lose their entire value, if the underlying security price doesn’t reach the strike price. This makes them much more risky than the traditional stocks, bonds, or mutual funds that are typically in Roth IRA retirement accounts.

Although risky, there are situations when they might be good for a retirement account. Put options can be used to hedge a long stock position against short-term risks, by locking in the right to sell at a certain price. Covered call option strategies can be used to generate income, if an investor is okay selling her stock.

Many of the riskier strategies in options aren’t permitted in Roth IRAs, because retirement accounts are designed to help individuals save for retirement—not become a tax shelter for risky speculation. Investors should understand these restrictions to avoid issues that could have potentially costly consequences. IRS Publication 590 has several of these prohibited transactions for Roth IRAs. The most important is that funds or assets in a Roth IRA can’t be used as security for a loan. Since it uses account funds or assets as collateral by definition, margin trading usually isn’t allowed in Roth IRAs to comply with the IRS’ tax rules and avoid any penalties.

Roth IRAs also have contribution limits that may prevent the depositing of funds to make up for a margin call, placing more restrictions on the use of margin in these accounts. In addition, the IRS rules imply that many different strategies are off-limits, such as call front spreads, VIX calendar spreads and short combos. These all involve the use of margin.

It’s also important to note that different brokers have different regulations, when it comes to what options trades are permitted in a Roth IRA. The brokers permitting some of these strategies, have restricted margin accounts, where some trades that traditionally require margin are permitted on a limited basis.

The use of these strategies also depends on separate approvals for certain types of options trades, based on their complexity. Therefore, some strategies may be forbidden to an investor regardless. Many of these applications require that traders have knowledge and experience as a pre-requisite to trading options, in order to reduce the likelihood of excessive risk-taking. Roth IRAs aren’t usually made for active trading, but experienced investors can use stock options to hedge portfolios against loss or generate extra income. These strategies can help improve long-term risk-adjusted returns and reduce portfolio churn. You should guard against using options as a mere speculative tool in these accounts, in order to avoid potential issues with the IRS and assuming excessive risks for funds designed to finance retirement.

Reference: Investopedia “Trading Options in Roth IRAs”

What Comes First: College Expenses or Your Retirement?

Here’s the biggest difference between retirement savings and college expenses: you can get a loan for college. No financial institution will give you a loan for retirement. Therefore, when it comes to finding money for college, financial planners and estate planning attorneys agree, as does this article from the Star Tribune: “Do your kids a favor: Pick retirement savings over tuition.”

The number of people who are making that decision are on the decline. The 2016 edition of that survey is down from 39%. It’s good that more parents are thinking twice about making this financial mistake.

Paying for college expenses from a tax-advantaged employer retirement account, like a 401(k), can become very costly. Here’s why:

  • How does a 10% tax penalty on early withdrawals, if you’re under 59½ sound? Not good.
  • The money you withdraw is taxed as income.
  • You’re losing the tax-free growth of your savings. Remember, these retirement accounts grow tax-free.
  • You lose the benefit of compounding, so your growth potential is losing ground.

The “least worst” option, say experts, is to fund a Roth IRA. Unlike qualifying contributions to a 401(k) or traditional IRA, the Roth IRA contributions are not tax-exempt. As a result, there are fewer restrictions on early withdrawals.

However, you’re still losing out in many ways. This includes when you get further along into your retirement years and you don’t have enough money to support yourself. Take a very long-term perspective on what will happen in the future.

Parents must understand that while it’s nice that they want to sacrifice to help their children through college, they may actually be generating far more stress for their children when the kids have to help Mom and Dad later in life. That’s likely when their kids are having children of their own, paying a mortgage and saving for their own children’s college expenses.

One last, major consideration is: college aid. Your withdrawals from retirement funds will be counted by financial aid offices as ordinary income. If it pushes your total wages up too high, your college-bound student may not qualify for assistance.

Retirement accounts are not counted, when considered if your student qualifies for financial aid. Therefore, your best bet is to continue funding retirement accounts. If you start cashing them out to pay for college expenses, everyone loses in the long run.

Reference: Star Tribune (Nov. 6, 2018) “Do your kids a favor: Pick retirement savings over tuition”

He’s 60. She’s 48. What Does Their Retirement Plan Look Like?

When couples are about the same age, working the retirement numbers is complicated enough.  However, what about when there’s a big age gap? In fact, an article from The Washington Post asks “How will a couple’s retirement look when there’s a big age gap?” Apparently, a big age gap can lead to some special challenges.

Not only are men who have recently remarried more likely to have a spouse who is younger, said one researcher, in many cases they are marrying women who are much younger. Twenty percent of newly married men wed women who are at least 10 years younger than themselves and another 18% marry women who are six to nine years younger.

By comparison, just 5% of men in their first marriage marry women who are 10 years younger.

For women, the likelihood of having a far younger spouse is very low.

That big age gap can be a big factor in decisions about when you retire, when spouses take Social Security and in planning how much money the couple needs to save and how to invest their savings.  Since women tend to outlive men, it’s especially important for retirement savings to last longer, when the wife is much younger than her husband.

When to retire is one of the big questions. Long-term care considerations, health insurance and other health costs become more significant, when there’s a younger spouse.

Couples with big age gaps need to have a plan that accommodates the partner with the longest life expectancy. Therefore, a 70-year-old husband and a 56-year-old wife need to plan for their portfolio to last over the wife’s longer life span. That could be 30 years, especially if she has good health and a family history of longevity.

If the older partner had a higher income level over his working career, delaying Social Security filing past full retirement age to age 70 could be extremely important. It will enlarge the higher-earning spouse’s benefit and it will also enhance the lifetime benefits for the surviving spouse.

If there is a big age gap between you and your partner, you’ll need to have a lot of discussions about the issues that retirement and retirement planning brings.

Couples should sit down with our estate planning attorneys and discuss the challenges they may face because of a large age difference. Our attorneys will be able to provide guidance, including exploring the use of many kinds of trusts or other estate planning tools that will protect the younger spouse.

Reference: The Washington Post (Oct. 22, 2018) “How will a couple’s retirement look when there’s a big age gap?”

Retirement: Financing Assisted Living by Saving, Planning and Insurance

“In March 2018, the U.S. Census Bureau reported that by 2030, all baby boomers will be over the age of 65, leading to a unique situation in demographics: 20% of U.S. residents will be at retirement age.”

Part of the increase in the number of people who live long enough to be of retirement age, is because life expectancies have increased. The average U.S. life expectancy has increased from 68 years in 1950 to 79 years in 2013, according to the Population Reference Bureau cited in an article from U.S. News & World Report titled “How Should I Finance Assisted Living?”

How Social Security Benefits All Americans

“The federal government ushered in a slew of progressive programs during the Great Depression with the aim of helping the most downtrodden Americans. Few of these programs have held the progressive banner higher than Social Security.”

Social Security was created to ensure that Americans with low lifetime incomes would have an adequate retirement income, so aging Americans would not live in dire poverty. …

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