How Can You Manage Your Inheritance?

Here are some tips that might help!

Jim Lorenzen, CFP®, AIF®

For most people, there are certain times when events can feel overwhelming.  For most of us, when it’s a money event (retirement plan rollover, selling property, winning the lottery, etc.) it’s usually when we think, ‘What do I do now?  I don’t want to screw this up!”

Here are some tips, along with a LifeGuide, that might help:

Take your time. This is an emotional time…not the best time to be making important financial decisions. Short of meeting any required tax or legal deadlines, don’t make hasty decisions concerning your inheritance.

Identify a team of reputable, trusted advisors (attorney, accountant, financial/insurance advisors). There are complicated tax laws and requirements related to certain inherited assets. Without accurate, reliable advice, you may find an unnecessarily large chunk of your inheritance going to pay taxes.

Park the money. Deposit any inherited money or investments in a bank or brokerage account until you’re in a position to make definitive decisions on what you want to do with your inheritance.

Understand the tax consequences of inherited assets. If your inheritance is from a spouse, there may be no estate or inheritance taxes due. Otherwise, your inheritance may be subject to federal estate tax or state inheritance tax. Income taxes are also a consideration.          

Treat inherited retirement assets with care. The tax treatment of inherited retirement assets is a complex subject. Make sure the retirement plan administrator does not send you a check for the retirement plan proceeds until you have made a distribution decision. Get sound professional financial and tax advice before taking any money from an inherited retirement plan…otherwise you may find yourself liable for paying income taxes on the entire value of the retirement account.

If you received an interest in a trust, familiarize yourself with the trust document and the terms under which you receive distributions from the trust, as well as with the trustee and trust administration fees.

Take stock. Create a financial inventory of your assets and your debts. Start with a clean slate and reassess your financial needs, objectives and goals.

Develop a financial plan. No one would begin building a home (ordering out materials and beginning construction) without a well thought out plan, blueprints, and a budget; so, why build your financial future without one? 

Long-term plans don’t change just because temporary conditions do.

Consider working with a financial advisor (preferably a CERTIFIED FINANCIAL PLANNER® (CFP®) professional to “test drive” various scenarios and determine how your funds should be invested to accomplish your financial goals.  Interest rates, markets, inflation, and taxes can all change.  But, your plan, if tested, is like the lighthouse in the storm – if you’re plan has been stress-tested, it’s the one thing that won’t move when everything else seems to be in turmoil.

Evaluate your insurance needs. If you inherited valuable personal property, you will probably need to increase your property and casualty coverage or purchase new coverage. If your inheritance is substantial, consider increasing your liability insurance to protect against lawsuits. Finally, evaluate whether your life insurance needs have changed as a result of your inheritance.

Review your estate plan. Your inheritance, together with your experience in managing it, may lead you to make changes in your estate plan. Your experience in receiving an inheritance may prompt you to want to do a better job of how your estate is structured and administered for the benefit of your heirs.

Don’t forget your LifeGuide!

Hope this helps,

Jim

 


Jim Lorenzen, CFP®, AIF®

 

 

 

 

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

CDs, Fixed Annuities, and Indexed Annuities Share Some Common Risks- copy

This time the unnamed beneficiary gets zero.

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Jim Lorenzen, CFP®, AIF®

The most common risk associated with all fixed-rate investments is interest rate risk.  If interest rates rise—and the fed has already sent some pretty strong signals higher rates are on the way—investors could be stuck with the old lower rates, especially  if the rate  hikes occur during the penalty period.

This may not be a huge issue with CDs most people tend to “ladder” shorter-term CDs .  Missing out on a half-point increase for six months is really an opportunity cost of 0.25%.  The bigger problem, of course, is the loss of purchasing power on an after-tax basis.

Fixed annuities tend to have surrender charges  with longer  time spans—and therefore have a larger interest rate risk exposure.   Penalty periods of five to ten years aren’t  uncommon.  Waiting several years through several potential rate increases can have a larger impact.    The longer surrender period usually does come with higher interest crediting rates, to be sure; but, it’s worth doing the math—it’s hard to get ‘sold’ on longer terms and accompanying surrender charges when the outlook for increases is unknown.  Given how long rates have been so low, a pendulum swing isn’t  hard to believe.  Remember, the insurance company’s annuity products purchased today will be backed by low-yielding bonds held today for most of the penalty period.

Fixed Indexed Annuities offer an opportunity for higher interest based on the performance of some outside index.  Despite the fact many people choose the S&P500 index as the calculation benchmark, these products are not investments in the stock market.  They are still insurance company IOUs paying a fixed rate—it’s just that the fixed rate paid each year is determined by the performance of the outside index; however,  they always come with some limiting factor—usually a ‘cap’ on the amount they’ll credit or crediting based on some sort of ‘spread’ factor.   Many professionals figure a fixed indexed annuity might actually return 1-2% more than it’s fixed-rate guarantee.   So, one that offers a fixed rate of 4% might be expected to provide a long-term return of 5-6%;  however, the return could be less.  It all depends on the performance of the external index chosen, so short-terms carry more risk than long term, if history is any indication.

Remember, too, that insurance companies can change their  crediting rates.  Nevertheless,  when you compare the expected  return of an FIA to a 5-year CD, it’s still a popular alternative, providing other factors meet with your needs.  Remember, however, longer-term products also mean longer-term  interest rate exposure, as noted above.

Premium Bonuses, too, may not be as good as they sound.  While they provide purchasing incentives, they virtually always result in lower crediting rates, further increasing interest rate risk.  It may be better to seek a shorter-term product without a bonus that allows you to move to a higher rate product sooner.  Why get stuck in a long-term contract?

Personal Take:   Generally, whatever you want to accomplish with an annuity might be better accomplished in another way, often with greater liquidity and sometimes even better benefits.  In any case, it pays to do your homework.   Just as all investments can’t be good, all annuities aren’t necessarily bad.  For many, the peace of mind knowing income is  protected is worth the trade-off.  Just remember, tax-deferred means tax postponed.  Do YOU know what tax rates will be when you plan to begin taxable withdrawals?   Neither do I.

Jim


Jim Lorenzen, CFP®, AIF®

 

 

 

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

A “Safe” Route to Higher Income in a Rising Rate Environment

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Jim Lorenzen, CFP®, AIF®

Think interest rates may be headed up in the future?

Looking for a “safe” way to produce a rising income if that happens?

First, the good news:  It’s pretty simple to do.  It’s called a bond ladder, but it can be accomplished using bank CDs or virtually any other fixed-rate instrument that has a maturity date.

You simply divide your money into time frames or baskets, i.e., 1 year, 3, year, 5, year, 10 years.   As each basket matures, you simply buy another basket with the same time frame.

It looks something like this:

Building a Bond Ladder

Now the bad news:  The rates may or may not keep up with inflation.  And, unless held in a long-term tax-deferred account – and many aren’t because people consider this money to be ‘liquid’ emergency money – the interest is also taxable.

For example, as I write this, according to bankrate, a 5-year CD is currently paying around 1.67%.  Someone in the 30% combined state and federal tax bracket would realize only 1.17% while inflation, according to the government calculations, is 1.1%.  In other words, you’re treading water.  And, while most people like liquidity and safety, they also don’t generally want to have a lot of money going nowhere.

There’s something else to consider, too.  Given the current U.S. government debt level and the state of the U.S. economy, there is pressure to keep rates low (it’s in the government’s interest as long as heavy borrowing continues); so, rising rates may be a ways off and slow in coming at that, while inflation – and higher taxes – just could arrive first!

If you’re stuck in low interest rate accounts, there are other options available.  Whether they are right for you would depend on a number of factors, which I’ll cover in an upcoming webinar entitled, Marooned With Low Rates?  It’ll be held on Saturday morning, June 18th and will be accessible to all of our ezine subscribers.   If you subscribe to our ezine (see side panel), you’ll be receiving an invitation soon.

Jim

 


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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.