Financial Insight Online - Shari's Personal Blog for Clients and Friends

Inheriting an IRA from a Deceased Spouse

2008-05-12T15:54:00.003-05:00

The IRS gives a big break to spouses in this situation. As long as the money stays underneath some type of IRA umbrella and isn't withdrawn, no tax is owed. The key is knowing what rights you do and don't have. The first rule to know is that a spouse can follow the same basic pattern money-wise as an IRA beneficiary after the death of their spouse as before death. If withdrawals have been made in the past, some type of withdrawal can likely continue if set up properly.

The second rule to know is that a spouse has three basic options with regard to themoney. 1. Cash out the IRA all at once or in parts and pay the tax, which may be a larger amount if the withdrawal is made all at once. In addition, there maybe a 10% penalty for withdrawal if the either spouse is or was under age 591/2 . 2. Rollover the IRA funds to your own IRA. 3. Rollover the IRA funds to a Beneficiary IRA in the name of the deceased owner.

Two scenarios usually develop - one for younger folks and one for older folks. For those under age 70 1/2 or those who aren't intending to withdraw any money from the IRA: Most people look at rolling over the deceased person's IRA to their own IRA because no tax is paid (option #2). However, rolling over money to a Beneficiary IRA (option #3) may be a better choice if either person is under age 59 1/2. The Beneficiary IRA allows the spouse beneficiary to withdraw funds as if their age was the same as the deceased person. So, if Mr. Smith who is 60 dies and leaves his IRA to his wife who is 55, if she just rolls the money to her own IRA (like #2), she would incur a penalty if she touched it. She would have to wait almost 5 years to access that money penalty free. If the money were rolled to a Beneficiary IRA (#3), she could access funds with no IRS penalty. Withdrawals will be taxable in all cases, but the extra 10% penalty could be averted. In situations where life is in a state of flux, such as this, retaining the flexibility to tap money penalty free may come in handy. For those over age 70 1/2 and who are taking mandatory distributions: The spousal beneficiary can continue those distributions or alter them. There are other rules, but this is the short answer.

The bottom line is that a spousal beneficiary can rollover funds in some way, shape, or form and not pay tax. If however, they wish to withdraw funds, this can be arranged but planning must be done to avoid as much tax or penalty as possible. Consulting a qualified tax or financial professional would be wise in any case.

Local Column Cancelled in The Huntsville Times

2008-03-25T15:29:00.000-05:00

As of a few weeks ago, The Huntsville Times Business Editor decided to take the paper in another direction - with more of a national focus. As the last local columnist writing for the Business Section, my column was "cut" and it will no longer been published. If you have questions or concerns about this action that you'd like to submit, please feel free to contact Steve Byers at steve.byers@htimes.com. Or, you could write an editoral if you'd like to share your opinions more widely, letters of no more than 250 words can be mailed to: Your Views, The Huntsville Times, P.O. Box 1487, Huntsville AL 35807 or faxed to 256-532-4420 (typed letters only) or emailed to: letters@htimes.com.

If you choose to write the Editor, here are the rules: Letters or emails must bear the writer's full name including middle initial, address with zip code, and daytime phone number. Middle initials and zip codes will be published. Other information is used for verification but not published or given to other parties. Individual letter-writers may be limited to one published letter every 30 days. Letters become the property of The Huntsville Times and will not be returned. Letters may be edited and may be re-used in any medium.

I share this with you for a few key reasons. First of all, I want you to know that I see this as a natural evolution in my career and life - a positive move forward. I have been praying for God to "open and close the right doors". Writing the column was excellent "press" for our firm but was certainly a drain on my time. So, my intention is not to have a public outcry for the column in hopes of having it reinstated. My hope is that our local paper will receive comments from people across our city to make our paper better. There is quite a difference in opinion at The Times as it's future direction. They are at a critical point, losing market share to the internet. Any feedback they can get from loyal readers will be of help. Although I got many comments on my column, The Times heard very little. They need our opinions, our voices, and our ideas. I hope that many of you will take the time to email Steve and the Editorial desk with your feedback on how to help Huntsville continue to grow, be progressive, and be supported by a strong paper with a variety of information.

Inheriting an IRA or 401K - If You Aren't a Spouse

2008-03-20T11:22:00.004-05:00

A tremendous number of Americans have money in an IRA. Many more are sinking huge portions of their salaries into a 401(k) accounts. With an increasing number of employers also contributing matching funds, it is no wonder that the fastest growing, largest pot of money in our society today sits in some sort of retirement plan.

Many never think about what happens when family members inherit these accounts and The Tax Man wants his piece of the action.

A ticking time bomb.
IRA's and 401(k)'s are not inherently bad investments. Quite to the contrary! Most of them trigger a tax break when money is added. At the very least, no tax is owed on earnings until the money is ultimately touched. There is an increasing trend to retire and either live off the earnings of these accounts or never touch them at all. Even the mandatory withdrawals at age 70 � don't deplete the account for a long time. This leaves a lot of money to beneficiaries that has never been taxed. Leaving money to your spouse as beneficiary doesn't trigger any taxes if no withdrawals are made. But once the funds finally make it to the children, that's when things get interesting. Too many times, the children just cash out the whole account minus the tax. On average, this leaves only 50-80% of the balance in their hands.

Beneficiaries other than a spouse can cash out and pay a ton of tax OR take payments which allow most of the money to continue to grow. This cushions the tax blow. Payments are made from an account called a Beneficiary IRA and can be paid out - for as short as 5 years or as long as a lifetime. For more money in the long run, the Beneficiary IRA is the only way to go.

Let's look at an example.
Out of a $500,000 IRA, if a son decided to cash out, he would walk away with about $300,000 after tax. Instead, if the son were age 50 and set up a Beneficiary IRA, he would start off taking an income of around $16,000 per year AND have close to $750,000 at his age 65 if the investment grew at 6%.

Rules get even more tricky if no beneficiary is listed or if "estate" is listed on the beneficiary form. Also, if the beneficiary is a non-living person (like a charity or trust), then other rules apply.

It is best to consult a qualified financial planner on the subject, especially if your beneficiary has designated multiple children or a charity. You could end up limiting the growth of your 401(k) or IRA when it passes to your heirs just by not knowing your options or dying at the wrong time!

Should You Cancel Life Insurance at Retirement?

2008-02-07T15:06:00.000-06:00

Should I Cancel My Life Insurance When I Retire?

The light at the end of the tunnel. The Big Day ? Your Last Day. We all work so hard to get retired that sometimes that there isn?t time to fully think through all the financial changes. We?ve all been taught to get rid of unnecessary expenses but what about life insurance premiums? Should we continue to keep paying?
We suggest that most people review two things when it comes to their life insurance going into retirement.

First, seek advice on how much coverage is actually needed. Perhaps your need for coverage has actually gone down now that children are out of the house. Perhaps your need has gone up because you are using the life insurance as a fall back in the event you die and no pension is left to your spouse. Inflation and your expected longevity (or lack thereof) also plays a role.

There are a few questions you can ask yourself to determine a rough amount of appropriate coverage. In the event of death, do I want to
? pay off my house for my spouse or heirs?
? pay off additional debts?
? pay for the cost of a funeral?
? pay a set amount of monthly money to my spouse since some of my other benefits (pension, social security, etc.)

If the answer to any of these questions is ?yes?, then likely you need some type of life insurance.
Second, we suggest that you determine what type of coverage is most appropriate given your new situation. Term insurance is less expensive but goes away after a time. Universal and whole life are more expensive, but build a cash value and are intended to cover you for longer periods of time. Variable universal life is an investment geared cash value type of coverage which also may be worth exploring.

A few last tips:
? If you have cash value built up in a policy already, you will want to evaluate your status. Typically keeping that type of coverage or decreasing your face value amount down to a paid up policy is a way to continue coverage but decrease your expenses going into retirement.
? If you have term insurance, you may want to check to be sure you?ve got coverage that will extend for the period of time you want and perhaps add on some options to purchase additional insurance (or convert it to permanent cash value insurance) with no physical exam.

The bottom line is that life insurance, even in retirement, can play a major role in the whole financial planning process.

Personal 2008 New Years Goals

2008-02-07T14:57:00.000-06:00

Many of you know that I'm a big fan of New Years. It's a chance to throw out the OLD (i.e. what's not working), correct all your problems, and bring in the NEW! I think it's a wise thing for us all to take time to remember how blessed we are and make some intentional changes in our lives to better ourselves. We can be a better person to others if we better ourselves. So, here are some of my goals for the new year.

1. Take off Fridays. Use it as a day to read, have lunch with a friend, volunteer for a community project, or do something non-work related!
2. Make a "date night" for Jamie and I each week. Have a "personal night" at least 1-2 times a month.
3. Take up tennis - - again!!!!
4. Add 10 clients with at least $1 million to invest who also need ongoing financial coordination from our consulting department. Yeah, I know this is a business goal, but it's personal time and interaction that will make this happen.
5. Do some reading on Christian books and those of other religions to better understand my 'path'.
6. Spend some more time with my mother-in-law, who is GREAT.
7. Do something special for our niece, who is about to be a teenager!
8. Complete a house renovation that will transform the "Burnum Manor" as we know it!
9. Take 2 big trips.
10. Reach for balance - daily.
11. Meet with some key people who know more about living and our world's issues than I do. See what they think our solutions are and begin to formulate how I might communicate these to others. We have a whole generation of older people whose stories need to be told.
12. Raise some funds for our church foundation.
13. Leave behind activities that focus my attention on building, building, building. Instead, focus my attention on maintaining and giving away.

Further Thoughts on Repositioning a Portfolio

2008-01-30T15:38:00.000-06:00

Because of the volume of positive comments from my last column, I wanted to share some additional repositioning strategies if you are inclined to move funds in this volatile market. First, let me reiterate that selling after you have lost may not be the best move - - often it's not. Better to be diverse and not so aggressive than to fall big and then try to sell. But for those who may have taken a bit too much risk and want to pull some money off the table, here is some further food for thought:

1. Compare how much you have lost in each investment from 1/1/08 to present with the S&P 500 index for the same time period. If your investment has fallen more than the index, perhaps selling is a mistake. Why? Let's assume your investment lost 15% year to date compared to an 8% loss in the S&P 500. If you'll rebuy back into another equity type of investment, then essentially you are selling at a 15% discount and rebuying into an area that is likely down about 8% - - that's a 7% deficit. You'd need to decide whether you felt comfortable taking a 7% hit.
If your investment hasn't fallen as much as the market, then count yourself lucky and consider whether to ride out the storm OR sell it and invest in something that has fallen even further. The idea would be selling low, but buying into something even lower.

2. If your investment is something more aggressive (or materially different) than the S&P 500 index, also compare your investment performance to the comparable index. If it is acting similar or better than the index, likely there is nothing really wrong with the investment and you just have to decide whether the volatility is something you can stand. Often your time horizon has a lot to do with holding or not. If your investment is performing worse than the index, you might consider cutting your losses.

A good example of this strategy could be applied to the real estate sector. Real estate is an area of the market that institutional investors and large endowment managers routinely hold for the long term because it typically moves independent of the stock market. Returns in this area weren't exactly great last year on the index, although many individual holdings faired pretty well. Year to date, many losses match about what the general market has lost. Therefore, if your sector or your investment holding is something you would likely hold onto for a long period of time and today it just happens to not look so hot, then perhaps holding through the volatility is warranted, assuming this only represents a slice of the portfolio. If the slice has gotten too big, then perhaps cutting some of your losses may be in order.

3. Stay away from sector investments that are too narrow. Sectors can be an excellent way to enhance returns in a difficult market, if you bet right. But trying to be so specific (i.e. buying a single country fund or gold or steel) can get you into trouble because these type of areas are more volatile - good and bad. Even putting a large percentage of the portfolio in one area that is broad can be still be dangerous. Better to limit the percentage you put in any one sector and be sure that the sector can cover lots of areas if you are feeling queezy these days. As an example, if you like the idea of investing in gold but know you are buying at a high in gold prices, consider a precious metals or general commodities investment that hits all sorts of areas and let the manager work out the details.

4. Use dollar cost averaging to your advantage. One potential way to win back losses in a falling market is to sell a portion of assets to cash and reinvest back a portion into those same investments (assuming they were sound in the first place) over a period of weeks or months. You earn interest on the cash and get to buy at lower prices if you are right and the market falls. The only catch is if the market turns up, then you buy higher.

If you are uncomfortable in today's market, it might mean you didn't have the portfolio positioned right in the beginning. Seek wise counsel. Listen for two or three trusted opinions who know your specific situation. Every case is different and unique and the above strategies are not meant to solve every situation for a nervous investor. They are meant to stir up further questions to help you decide on the best course of action.

Repositioning Your Portfolio After You've Lost Money?

2008-01-15T16:28:00.000-06:00

The last month in the market has been no picnic. It often raises the question - Is it too late to sell and reposition after I have already lost money?

It seems contrary to sell out at a loss just to get the portfolio in a better position for the next time the market experiences a correction. Why not wait until the portfolio recovers, then sell and reposition? The question is not easily answered but there are a couple of lines of thought that one should consider.

First, never discount the possibility of further loss. Just because you might be down 10-15% from the last few months does not mean you cannot fall further. Big losses are what kill the values of our portfolios. The recession of 2000-2002 proved that well enough. If you think we are facing some more hard times ahead and you are not happy with your portfolio, you need to think hard whether you can withstand more losses. Remember, when you lose 50%, it takes 100% to get back to even. If you are in investments that are volatile, then you really have to evaluate when this repositioning should take place. If now, even after a 10-15% market correction, then so be it. You might save yourself further loss.

Second, evaluate if there is a chance that the economic circumstances or the management style might recover. If so, perhaps waiting to sell and reposition is the answer. It is pretty amazing how volatile the market can be on the smallest piece of news. For instance, the market may surge up and give us a one day wonder when things like the Fed lowering interest rates or oil dropping far off that $100 mark happen. You might gain 2-4% in a single day if you are watching. That could potentially provide just the opportunity to sell and reposition.

What would my answer be today? My thoughts are that the economy has slipped pretty dramatically to the downside in the last 3-4 weeks. Most people expect a rough six months in the market, so cashing now and repositioning would admit defeat (i.e. you would take your 10-15% loss) but the move might shelter you from further erosion. I hate to sell low as much as the next guy, though, and might see if I could evaluate my more volatile positions and move those around at opportune big market positive days.

There has been a lot of selling of late. Perhaps even with the downward pressure on stocks and selling there might be windows to recover some, sell, and reposition on a good market day. Splitting the difference and selling some positions now and waiting on others could work just fine.

The other advice I might have for those wanting to reposition is to put a portion of the proceeds immediately back to work in the newly restructured portfolio. This way, if the market does decide to head up (and we were too pessimistic in our outlook), you should get upside. Also, dollar cost average back a portion back into the market over time so that if the market falls further, you will continue to have some of your funds buying at these low prices. If you are aggressive, perhaps the dollar cost averaging should be just on more volatile holdings. If not, moving in money each week or so for the whole portfolio is probably the safer bet. You may miss some upside, but you will experience better buying if the market heads down further in the short run.

Every strategy is unique. It is always better to think about risk and understand how much you are taking before the market decides to go backwards, but better late than never!

New Years Goals for Young Professionals

2008-01-02T14:18:00.000-06:00

Is it really worth sacrificing the rest of your life because you lived too high on the hog in your young years? As much as I love that Nickelback song RockStar and see so many Young Professionals living with similar excessive tendencies, many more people have found greater financial success by exercising fiscal discipline, especially in younger years. And what better time to evaluate priorities than a New Year!

For those of you interested - here's a great excerpt from the Nickleback song: I want a brand new house on an episode of Cribs and a bathroom I can play baseball in and a king size tub big enoughf or ten plus me(So what tell me what you need?). I'll need a credit card that's got no limit and a big black jet with a bedroom in it. Gonna join the mile high club at thirty-seven thousand feet. [Chorus:] 'Cause we all just wanna be big rockstars and live in hilltop houses, driving fifteen cars. The girls come easy and the drugs come cheap. We'll all stay skinny 'cause we just won't eat. And we'll hang out in the coolest bars...Every good gold digger's gonna wind up there. Every Playboy bunny with her bleach blond hair. Hey hey I wanna be a rockstar.

It's hard to get past materialism. My comments will focus toward Young Professionals in this column because the habits they develop today can profoundly change their tomorrow. If you are or know a young person with potential, be sure to forward these New Years Financial Resolution ideas.

1. Only buy it if you can afford it. Society encourages big spending. We are taught that our lifestyle must include the latest cell phone, IPod, MP3, or electronic gadget - - or driving a new $40,000 car, spending all we want on vacations, parties, entertainment, and eating out. What ever happened to waiting to buy it until you can afford it? A typical 20-something cannot live like a typical 40-something or like a 20-something Britney Spears. Math doesn?t lie. You can either live the life of the rich and famous that Nickelback asserts and increase your chances of eventual self-destruction OR exert some discipline, start a savings program, and have piles of money later on. The richer you want to be, the more savings minded you need to while you are young. Forget what your friends buy or what your boss drives. If you go by the rule to buy only what you can afford, you will likely have much more for a longer period in the end.

2. Evaluate any debt you have or might incur in the next few years. Credit cards are not evil but they do become a problem if you cannot pay off your balance each month. Avoid high interest credit cards at all costs. On the flip side, low interest debt (like a mortgage) can be quite useful. Some financial experts suggest paying cash for everything because all debt is bad. While this is a good theory and keeps people out of trouble, I would encourage Young Professionals to look deeper at their debt picture. For instance, if you purchase a home at an interest rate of 6% but after the tax break you only are paying 4%, why make a large down payment at purchase or make double house payments? Either could be invested. If you could make 10% on that money and only pay 4% on the mortgage, it seems to me you are pocketing 6%. The catch is you can?t consistently make 10% without some risk.

3. Add a savings for future consumption account to your monthly budget. This savings fund is a liquid account designed to pay big-ticket or non-monthly items instead of having to go into debt or running short on cash when these big bills come up. The first step to establishing such a fund is to determine how much is spent on non-recurring monthly items like vacations, home repair (or home fund), car repair, or medical costs. Quicken has a great program to track all your expenses and really get a handle on where each dollar actually goes. Once you see your non-monthly expenses, go ahead and deduct the amounts you will eventually spend on these type of items and move that amount to a savings account. When it comes time to spend, you?ll have the funds.

4. Save money in your 401K or similar retirement plan as soon as you can and raise the amount you save every year. Contribute at least as much to any employer plan that they match ? it is free money! Consider implementing a Roth IRA, which will give you tax free money on the back end, which counterbalances a good bit of the taxes you will pay in retirement from those employer pre-tax retirement plans. Not only do you get the long term tax benefits, this gets you saving more and more on a monthly basis. Make a goal to invest a certain percentage of any bonuses or salary changes as well.

5. Determine what financial things you want short and long term and re-look at your savings plan. Perhaps instead of saving all money to a 401K or to a house fund, you might do a little of both. I hate to see people save all their money toward a home purchase, when that little extra savings only compounded over the few years until purchase doesn?t substantially reduce the monthly payment. Whereas investing the same into a retirement fund that compounds for 30 years makes a much larger difference down the road. Think about making financial progress in 3 different areas: short term (today?s expected and the unexpected stuff), medium term (what you want in 5-10 years) and long term (retirement) - - and balance them all.

If you are dedicated and disciplined to save now, you have a much better chance of attaining and sustaining that richer lifestyle later.

Tips for Conservative Investment Money

2007-12-21T12:14:00.000-06:00

Mary called, frantic. "My savings account is paying under 3 percent but, if I lose a penny of this inheritance, I'll lose my mind. Is there something relatively safe that pays more?" This is a common question from more conservative investors.

Here are two options:
Option 1 - Certificates of deposit. Mary knew in general about the guarantees of bank CDs. She was surprised to learn that CDs come from a variety of places, and taking the highest rate for the longest term wasn't always the best strategy.

Tips for buying CDs now: Be sure to check rates at 2 places - local banks or credit unions and nationally offered CDs through a brokerage house. Sometimes a local bank may run a rate special in response to a large business loan. If they can pay CD buyers more and still profit after lending funds to the business, then it's worth dangling that extra incentive out there for CD buyers. At other times, national and/or brokered CDs give a more competitive rate. Also, it may be prudent to stick with a 1-3 year maturity, as rates are likely to rise, allowing quicker reinvestment at the higher rate.

Option 2 - Fixed Annuity. Mary had heard that annuities had higher fees and upon death, her heirs got little. What she didn't know is that she had half the story and many changes have occurred with annuities over the years. There are many types, all used for different purposes. The fixed deferred annuity is the easiest to understand. It is a contract between an individual and an insurance company. Interest earned during the term of the contract is nontaxable if reinvested. Principal is guaranteed by the insurance company. Withdrawals may be subject to income tax and, prior to age 591/2, a 10 percent federal penalty tax may apply. Withdrawals will affect both the account value and death benefit.

"What if the company goes belly up?" Mary recalled hearing about a failed insurance company a decade or two ago. Annuity money is only as safe as the company and the reserves it puts aside by state law. As an Alabama resident, there is an insurance fund set up in case the insurance company failure, but it's still a good idea to look for an A or A+ rated carrier.

Tips for buying annuities now: The rate can be locked in for a period of time or can adjust each year. Since we expect rates to increase, perhaps buying the adjustable one may be the best alternative. Be careful of higher "bonus" rates in the first year, as renewal rates may not be as high in later years. Look for annuities with a shorter surrender charge period (5-8 years) if you are concerned about flexibility. Most offer a 10 percent per year withdrawal. But if most of the money is stuck (not touchable) because of a high surrender penalty, the company can pay you whatever interest it wants when the annuity rate renews each year. And remember, the longer the surrender charge period, the more chance the agent got paid more of a commission....which sometimes means you get paid less in the end.

Removing Money From Retirement Accounts

2007-12-13T12:52:00.000-06:00

Year end brings many questions about the nuiances of removing money from IRA?s ?those Required Minimum Distributions (RMD?s). This article is key for people over age 70 � or for children who care about their ultimate inheritance and can counsel parents with multiple accounts, which lend themselves to multiple mistakes!

For those readers not familiar with RMD?s, the government requires that once you turn 70 1/2, you must withdraw annually from most retirement type of plans ? and pay those taxes on the distribution. Calculations are done each year based on your balances and life expectancy (or joint expectancies with a spouse) ? but there are some creative ways to work these distributions and that?s where the questions come in!

Persons working over age 70 � with multiple IRA?s, ESOP?s (employer stock option plan), and 401K?s typically ask a few questions about their IRA and RMD?s. First, since they are still working, do they have to count his current company 401K as part of the money on which RMD?s must be figured? The good news is no - - unless the person is a 5%+ owner in the business, or unless he retires. One strategy we?ve used for people with 401K?s from previous employers is to roll them to the current 401K, which allows the worker to exempt these funds from the RMD calculation. We had a case this year of someone not implementing this strategy and it cost them $2,000 in taxes to keep the money in the old 401K. There are trade-off?s to the 401K transfer, but it is something to consider and shows the value of hiring someone to oversee the entire financial picture, instead of just manage an account or two?something we highly recommend you do.

Second, wouldn?t it be wise to delay taking distribution as long as possible and take this first distribution out in 2008, since the tax laws allow such a move? Normally, I would be in agreement to keep money compounding as long as possible. Although, your first RMD is figured in the year you reach 70 �, you can wait until April 1st of the following year to actually pay it, allowing money to compound longer. It seems logical to wait to pay. However, you would have to take out TWO distributions in 2008 (2007?s and 2008?s). Since the distribution amounts might be of reasonable size, perhaps taking two distributions in one year might push you into a higher tax bracket - which might not outweigh any extra investment compounding. To muddy the water even more, if you are juggling the possibility of retiring in 2008, which would lower your tax bracket, it might be better to delay and take two distributions in the year of retirement. Needless to say, the decision of doubling up on RMD?s in 2008 isn?t quite so easy.

The third question has to do with the mechanics of withdrawing funds ? is there an easier way rather than taking little pieces out of so many areas? It is perfectly OK, even preferable at times, to take the distribution from one place, as long as you figure all accounts when performing the RMD calculation. Always consider removing money first from the lowest yielding investment, which leaves other investments to compound at higher rates.

So it goes, life and finances are rarely simple. This is just another reminder that most financial matters are inter-connected. When it comes to finances, it?s usually preferable to seek Financial Insight!

Christmas Open House - This Friday

2007-12-03T14:16:00.000-06:00

We are diligently getting ready for our event on Friday! It's chocolate everything and lots of Holiday Spirits for all! We appreciate all our clients and want to share in this joyous season with those who mean the most to us! See you between 2-6 PM on December 7th!

Shari Makes Executive Council for 2007 with Raymond James Financial Services

2007-12-03T14:12:00.000-06:00

It is a great honor to have been selected by our partner, Raymond James Financial Services, to be a member of the 2007 Executive Council. To qualify, you must have ethical standards, a clean 'compliance' record, outstanding client service, and a minimum of $500,000 of annual revenue. This is the third year we have received this honor.

How Property Transfers Upon Death

2007-12-03T13:48:00.000-06:00

Many articles have been written on the benefits of a will in an effort to preach "be prepared," but how many people understand how a will works and how property is transferred? Probably fewer than we'd like to admit.

Most people want to transfer property upon their death in the most efficient way possible - without time, hassle, and expense. Many are surprised to learn that the quickest and least expensive way to transfer property is not through a will. You probably still need a will, but it's helpful to understand how to get property transferred without one.

Say Bob wants to leave one-third of his assets to each of his three daughters. He's an executive and has accumulated most of his money in a 401(k), where he listed his oldest daughter as beneficiary. His will designates the oldest daughter will settle his estate, so he lists her as beneficiary, assuming she will distribute equal portions to the other daughters. But at his death, the oldest daughter gets all of the 401(k) instead of one-third, and she may risk adverse tax consequences if she "shares" with the other sisters. If Bob understood more about how to transfer property, he likely would not have created this mess.

Jointly held property is one of the first types of property to be transferred upon death. If a name is added to your property deeds, bank accounts or other assets, you convert that property to a joint ownership position. Legally speaking, you have made a gift of a portion of your property to someone else. The advantage is that the others left on the account need only remove the deceased person's name by submitting a death certificate. No cost. Little delay. The big disadvantage is that joint owners have immediate access to your assets, so withdrawals can be made at any time without your permission. Also, if that person on your accounts were to be involved in any type of legal action (including divorce), your funds may be at risk. So, although easy and cheap, there are some drawbacks.

Another way to transfer property before a will takes effect is by using a beneficiary designation. These are available only on certain types of accounts: annuities, Transfer on Death (TOD) accounts, IRAs and other retirement accounts. The beneficiary tells the holder of the account whom to transfer the account to upon the holder's death.

Only after joint property and beneficiary property is settled does a will come into play. If you're not using a trust, most of the other property will likely be solely in your name. The will directs the court how to divide what's left in a process called probate. In Alabama, probate takes a minimum of 6 months; that gives time for creditors to "make claim" against your estate. Once that time passes and all debts are paid, the estate can be settled and property can be transferred according to the terms of the will.

When we can no longer bless our families with our lives, we can at least make the transition easier for them after we're gone. Understanding the basics is a good start.