TOD or Living Trust, The Cost of Procrastination, and Pension Plans & De-risking

by Rita Wilczek on May 10, 2019

I thought you might find these articles of interest.

Regarding “Pension Plans & De-risking” many investors who don’t have a pension choose to set up a guaranteed income stream to provide a minimum income for life. Since the assets remain invested in mutual fund type investments, they sometimes get a raise in their monthly income benefit.

Worth checking out if you don’t have any guaranteed income in your retirement. Thanks and be well. Rita

TOD or Living Trust?

A look at two basic methods for shielding assets from probate.

Provided by Rita Wilczek

How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective.

One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed.¹

If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.²

This is not an either-or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should be transferred via a TOD arrangement versus a trust?

Many investment & retirement savings accounts are TOD to begin with. The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.

One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage, but by some other factor, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way (in fairness to one another)? Perhaps, and perhaps not.

How complex should your estate planning be? A conversation with a trusted legal or financial professional may help you answer that question and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.

Rita Wilczek may be reached at (952) 542-8911 or rwilczek@hirep.net

www.ritawilczek.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - investopedia.com/articles/pf/06/revocablelivingtrust.asp [3/7/2019]
2 - investopedia.com/terms/t/transferondeath.asp [4/25/2019]

The Cost of Procrastination
Don't let procrastination keep you from pursuing your financial goals.

Provided by Rita Wilczek

Some of us share a common experience. You’re driving along when a police cruiser pulls up behind you with its lights flashing. You pull over, the officer gets out, and your heart drops.

“Are you aware the registration on your car has expired?”

You’d been meaning to take care of it for some time. For weeks, you had told yourself that you’d go to renew your registration tomorrow, and then, when the morning comes, you repeat it again.

Procrastination is avoiding a task that needs to be done – postponing until tomorrow what could be done, today. Procrastinators can sabotage themselves. They often put obstacles in their own path. They may choose paths that hurt their performance.

Though Mark Twain famously quipped, “Never put off until tomorrow what you can do the day after tomorrow.” We know that procrastination can be detrimental, both in our personal and professional lives. From the college paper that gets put off to the end of the semester to that important sales presentation that waits until the end of the week for the attention it deserves, we’ve all procrastinated on something.

Problems with procrastination in the business world have led to a sizable industry in books, articles, workshops, videos, and other products created to deal with the issue. There are a number of theories about why people procrastinate, but whatever the psychology behind it, procrastination may, potentially, cost money – particularly, when investments and financial decisions are put off.

As the example below shows, putting off investing may put off potential returns.

Early Bird. Let’s look at the case of Cindy and Charlie, who each invest a hypothetical $10,000 to start. One of them begins immediately, but the other puts investing off.

Charlie begins depositing $10,000 a year in an account that earns a hypothetical 6% rate of return. Then, after 10 years, he stops making deposits. His invested assets, however, are free to keep growing and compounding.

While Charlie fills his account, Cindy waits 10 years before getting started. She then starts to invest a hypothetical $10,000 a year for 10 years into an account that also earns a hypothetical 6% rate of return.

Cindy and Charlie have both invested the same $100,000, but procrastination costs Cindy, as Charlie’s balance is much higher at the end of 20 years. Over 20 years, his account has grown to $237,863, while Cindy’s account has only grown to $132,822. Charlie’s account has not only put the power of compound interest to work, it has also allowed the investment returns more time to compound.¹

This is a hypothetical example of mathematical compounding. It’s used for comparison purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example. The results are not a guarantee of performance or specific investment advice. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for high returns also carry a high degree of risk. Actual returns will fluctuate. The types of securities and strategies illustrated may not be suitable for everyone.

Rita Wilczek may be reached at (952) 542-8911 or rwilczek@hirep.net

www.ritawilczek.com

Citations.

1 - nerdwallet.com/banking/calculator/compound-interest-calculator [12/13/18]

Pension Plans & De-risking
Corporations are transferring pension liabilities to third parties. Where does this leave retirees?

Provided by Rita Wilczek

A new term has made its way into today’s financial jargon: de-risking. Anyone with assets in an old-school pension plan should know what it signifies.

De-risking is when a large employer hands over its established pension liabilities to a third party (typically, a major insurer). By doing this, the employer takes a sizable financial obligation off its hands. Companies that opt for de-risking usually ask pension plan participants if they want their pension money all at once rather than incrementally in an ongoing income stream.

The de-risking trend began in 2012. In that year, Ford Motor Co. and General Motors gave their retirees and ex-employees a new option: they could take their pensions as lump sums rather than periodic payments. Other corporations took notice of this and began offering their pension plan participants the same choice.¹

Three years later, the Department of the Treasury released guidance effectively prohibiting lump-sum offers to retirees already getting their pensions; lump-sum offers were still allowed for employees about to retire. In March 2019, though, the Department of the Treasury reversed course and issued a notice that permitted these offers to retirees again.¹

So, whether you formerly worked or currently work for a company offering a pension plan, a lump-sum-versus-periodic-payments choice might be ahead for you.

This will not be an easy decision. You will need to look at many variables first. Whatever choice you make will likely be irrevocable.²

What is the case for rejecting a lump-sum offer? It can be expressed in three words: lifetime income stream. Do you really want to turn down scheduled pension payments that could go on for decades? You could certainly plan to create an income stream from the lump sum you receive, but if you are already in line for one, you may not want to make the extra effort.

You could spend 20, 30, or even 40 years in retirement. An income stream intended to last as long as you do sounds pretty nice, right? If you are risk averse and healthy, turning down decades of consistent income may have little appeal – especially, if you are single or your spouse or partner has little in the way of assets.

Also, maybe you just like the way things are going. You may not want the responsibility that goes with reinvesting a huge sum of money.

What is the case for taking a lump sum? One line of reasoning has to do with time. If you are retiring with serious health issues, for example, you may want to claim more of your pension dollars now rather than later.

Or, it may be a matter of timing. If you need to boost your retirement savings, a lump sum may give you an immediate opportunity to do so.

Maybe you would like to invest your pension money now, so it can potentially grow and compound for more years before being distributed. (As a reminder, pension payments are seldom adjusted for inflation.) Maybe your spouse gets significant pension income, or you are so affluent that pension income would be nice, but not necessary; if so, perhaps you want a lump-sum payout to help you pursue a financial goal. Maybe you think a pension income stream would put you in a higher tax bracket.²

If you take a lump sum, ideally, you take it in a way that minimizes your tax exposure. Suppose your employer just writes you a check for the amount of the lump sum (minus any amount withheld), and you direct that money into a taxable account. If you do that, you will owe income tax on the entire amount. Alternately, you could have the lump sum transferred into a tax-advantaged investment account, such as an IRA. That would give those invested assets the potential to grow, with income taxes deferred until withdrawals are made.²

Consult a financial professional about your options. If you sense you should take the lump sum, a professional may be able to help you manage the money in recognition of your financial objectives, your risk tolerance, and your estate and income taxes.

Rita Wilczek may be reached at (952) 542-8911 or rwilczek@hirep.net

www.ritawilczek.com

Citations.

1 - cnn.com/2019/03/20/economy/lump-sum-pensions-retirement/index.html [3/20/19]

2 - fool.com/retirement/2018/06/18/lump-sum-or-annuity-how-to-make-the-right-pension.aspx [6/18/18]