Most of us have had the experience of trying to fix a problem, and discovering that the solution creates its own new set of problems. That’s not a bad summary of what has happened with the federal SECURE Act, which passed at the end of 2019. Its primary purpose was to make it easier for small companies to offer retirement plans to their employees. But one of its consequences has been to create fresh headaches for the beneficiaries of certain retirement plans.

SECURE stands for “Setting Every Community Up for Retirement Enhancement.” The title isn’t the only thing awkward about this legislation. It offers welcome flexibility to people saving for retirement, by easing some of the rules about contributions and required minimum distributions after certain ages. But it also imposes new costs on those people’s heirs.

It does that by abolishing so-called “stretch” provisions that govern how inherited IRA or 401(k) assets are distributed, and how they are taxed. This affects mainly children, grandchildren, and other relatives – heirs other than spouses – who are beneficiaries of a retirement account. The crux of this is the “Required Minimum Distribution.” It used to be that people who inherit these retirement funds could spread out their required distributions over their own expected lifespan.

No more. Effective this year, those beneficiaries will have to take the entire inheritance as income within ten years. Other than spouses, the only exceptions to this are minor children (and their exemption lasts only until they come of age), people with disabilities or chronic illnesses, and those close in age to the retirement plan’s original owner. So, for example, a surviving sister seven years younger than her deceased brother would not be subject to this rule, because there was less than ten years difference in their ages. But an adult nephew 25 years younger would have to take all the proceeds within ten years.

This obviously can make a difference in those beneficiaries’ tax burden. Compressing the payout into just ten years, instead of a lifetime, can add substantially to taxable income in each of those ten years.

The good news about the SECURE Act is for those who set up Individual Retirement Accounts for themselves, and to some extent those covered by employer 401(k) plans. Those advantages are twofold.

It used to be that you couldn’t contribute to your IRA any longer once you were 70 and a half years old. Now, depending on a complex set of qualifying conditions, those older savers can potentially save up to $7,000 a year, or $14,000 for a couple. Those contributions may or may not be deductible, depending on the details. This is valuable for the many people who are continuing to work, at least part-time, into their retirement years.

The other advantage concerns those Required Minimum Distributions, which used to begin at age 70 1/2. Now – for anyone who hadn’t reached that milestone by the end of 2019 – it will not be necessary to start drawing from your IRA or 401(k) until your 72nd birthday.

So if you own one of these accounts, you may be able to take advantage of this new flexibility in how long you put your money in, and when you start to take it out. But you should also review your beneficiary designations. If you don’t, your heirs might end up with tax burdens you didn’t intend to impose on them.

For instance, you might have named your children as beneficiaries to ensure that they would have a lifetime income from whatever is left in your retirement account after your death. But the law now forces that income to be compressed into just ten years. Another strategy, such as creating a charitable remainder trust and/or buying life insurance policies, may now be a better alternative.

Especially important to consider: If you already have a trust designated as your retirement fund’s beneficiary, the new law may create some very unwelcome consequences for your heirs. A trust that was designed under the old rules may say an heir can collect only the required minimum distribution each year. But the new law creates a “gotcha” for those situations, because there is no RMD until after ten years. And then, the RMD equals “everything.” That Catch-22 could mean the trust’s beneficiary couldn’t get any money until a decade after your death – and then be forced to take a big, and substantially taxed, lump sum.

For some, these new rules may make it worthwhile to shift assets from a conventional IRA into a Roth IRA. The reason: while people who inherit Roth IRAs are subject to RMD requirements, their assets aren’t taxable – having been created to begin with from post-tax money. A Roth IRA conversion might help a retiree build more wealth and pay fewer taxes. It can especially help heirs work around the new ten-year RMD rule.

This is not the place to address all the possible complexities. Suffice it to say these changes mean it’s timely to review your estate plan, and especially any trusts, to be sure they can still accomplish what you want under the new law.

Keeping up with the complexities of retirement plans, tax law and trusts is not easy. But it’s a vital part of the job for professional financial advisers. The estate-planning experts at Old North State are savvy about how to make these requirements work to your benefit and can help ensure that you don’t inadvertently leave a problem for your heirs.

A too-common mistake that financial advisers make is to focus solely on those assets that generate monthly statements: the bank accounts and stocks and mutual funds. But those liquid assets typically represent less than half—actually more like 45 percent—of a wealthy person’s portfolio. No good estate plan can afford to ignore the other assets, the ones called “illiquid.”

That category includes anything that can’t readily be converted to cash, in a regulated market with readily determined prices. Common types are real estate, collectables, or ownership interests in privately held businesses. Other examples are livestock, mineral rights and timber, and certain financial instruments that don’t have a ready market. Those can include hedge funds, options, stock in non-public corporations, and certain debt securities.

Failing to take illiquid assets seriously is a mistake for both advisors and their clients.

The most important consequences won’t be felt until after the client’s death. First involves payment of estate taxes, which are levied on the value of inheritable assets transferable to heirs over a certain amount. Those taxes are due within months. But if a sizeable portion of those assets are illiquid, they may well have to be sold to raise the cash needed to pay those taxes or debts of the estate.

Therein lies a dilemma for the heirs.

Many assets can’t be sold—at least not for their real value—within that tight nine-month window or during a reasonable estate administration time frame. For example, real estate in a region with a depressed market can easily take a year or more to sell. Having to sell illiquid assets quickly—such as to settle an estate—may require accepting less than market value.

It’s not just taxes that may require raising ready cash. Many a will divides an estate among heirs in a way that has little relationship to the actual value of various assets. For example, if three children are each left a third of an estate that consists of two-thirds real estate and one-third cash or other liquid assets, that real estate may need to be sold if the heirs are unable or unwilling to own an undivided interest in the real estate property together.

That example is fairly simplistic. Maybe more typical is a situation in which the amount of cash needed to settle the estate is far less than the actual value of the illiquid asset that has to be sold. Maybe it’s a family farm, or a family business. Or a beloved family home or other heirloom.

Yet the only way to get cash from the valuable asset is to sell it.

That can mean something that ought to be passed to the next generation can’t be.

This doesn’t need to happen.

Careful estate planning can ensure such assets are transferred systematically. (In November 2019, I discussed some specifics about succession planning for family businesses. http://www.wilmingtonbiz.com/insights/alyce_phillips/succession_planning_ensuring_your_business_goes_on_can_be_complicated/2562)

While it’s inevitable, death isn’t always predictable; taxes usually are. Thoughtful estate planning will anticipate what’s needed to pay estate taxes – significant only on large estates – and make provisions to come up with the necessary cash without having to sell off land, the family home, business or collectibles.

And that doesn’t necessarily require elaborate measures. A very simple option that’s often overlooked is life insurance. A policy of the proper kind will guarantee that a specific sum will be available at the owner’s death, so it’s not necessary to sell off those illiquid assets. Another important benefit of life insurance in situations like this is that the proceeds aren’t taxable for estate death tax purposes if payable to a named beneficiary and the owner of the policy is not the insured. Also, in this scenario, the insurance proceeds are not subject to income tax. This life insurance plan typically hinges on who the named beneficiary is, so pay close attention to that when taking out a policy. 

In many situations, a trust is the most useful approach to minimizing the financial burden on heirs. Those assets, whether land or art or classic cars or a coin collection, can be placed into a trust. Those assets remain in the trust at the owner’s death; they don’t have to be sold. This can give the trust’s beneficiaries and trustees some time to work out, at leisure, a plan to liquidate its assets and redistribute them if that’s necessary or desirable.

Before deciding on the best strategy, of course, it’s necessary to do a bit of homework. A good estate-planning advisor will ask the client to make an inventory. Not just of obvious assets like real estate, vehicles and boats, but also of jewelry, antiques and other fine furnishings, artwork and the like. Perhaps even such intellectual property as copyrights or patents. Whether you intend to have these sold upon your death, or leave them to heirs, it’s important to assign a value to everything. A professional appraisal, by someone with experience in the specific types of property, is the best way to establish value for such hard-to-liquidate assets.

While an inventory has obvious advantages in terms of managing death taxes, it will also minimize the possibility of disputes and ill-will among heirs, some of whom may feel slighted if they perceive others might have been unfairly favored.

Several years ago, a well-known Hollywood personality died in an accident. He had a large collection of classic cars, but had never created a detailed inventory. The result was a huge fight, involving lawsuits, between his heirs and a friend who was accused of taking some of those cars for himself.

In another example, the story had a happier ending. A retired Iowa farmer left a huge collection of antique tractors to his family. Because he had also left a detailed inventory, specifying which of the vintage machines were most important to him, his heirs were able to decide which to keep in an intact family collection, and which could be sold to raise cash. The late owner’s foresight in making his list, and expressing his wishes, made a huge difference in simplifying things for his family, and helping maintain family harmony.

That gets to a related matter. Certain illiquid assets have non-monetary value. You may want specific family heirlooms to go to relatives who either have shown a special interest or appreciation for them, or that you believe will best be able to care for them. Just as the Iowa tractor collector did, part of the inventory process should include documenting your judgments about what you’d prefer to have transferred intact, and what could just as well be sold off so heirs can get the cash.

However the ultimate strategy is determined, however, it’s essential that any estate plan take all assets, both liquid and illiquid, into equal consideration. Experienced professional guidance will help you make the plan that best achieves your objectives and minimizes headaches for your heirs. The experts at Old North State Trust will offer relevant, objective advice on how to ensure those hard-to-sell possessions get passed down to the next generations the you wish.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Health care has been on everyone’s mind for the last few years since Obama Care was passed in Washington, D.C.  A large portion of our clients are in the age range that they have made, or soon will make, the shift from private insurance to Medicare, the closest thing we now have to universal health coverage.

For those people, how to maneuver through Medicare’s complex interface of public and private coverage options is a serious issue. For example: even with publicly financed insurance through Medicare, you’ll need a “Medigap” policy, bought on the private market, for the 20 percent or so of expenses that aren’t covered.

We find ourselves answering a lot of questions about such things as when to start drawing benefits, how to choose the best combination of plans, etc. Health coverage is a major component of retirees’ living expenses. Recent statistics show that retirees spend, on average, three times as much for health care than the overall working-age population. So, it’s a very good idea to include health-care planning in your strategy for retirement and get advice from your financial adviser.

A couple of our clients recently asked us to do some research about when they should start receiving their benefits. Both become eligible this year. Both will need some income to replace an annuity that will cease upon retirement. Both needed advice about how to factor health-care costs and benefits, along with Social Security payments, into their cash-flow projections.

We had another client ask about a letter she received, stating that her part D — prescription-drug coverage — premiums would no longer be deducted from her monthly Social Security benefits. This was one of those odd things that pop up from time to time and can be baffling to try to make sense of for anyone to comprehend. Just for that example alone is why you should have someone you can consult.

The Social Security Administration, which administers Medicare, does have online tools for figuring out these kinds of issues. Unlike trying to get a clear answer from an SSA employee (hard to do, and not always reliable) these tools are helpful, but you should know what you’re looking for on these sites. Another reason why it makes sense to get help from someone who has navigated these perilous waters more than once!

Obviously, we can’t explain all the nuances in one brief article, but these are some essential elements that everybody should be aware of when approaching retirement.

Medicare has four components. The first, Part A, covers hospitalization. For most people, Part A is fully paid from the taxes that have been withheld from our paychecks. Enrollment is automatic when you sign up for Social Security.

It’s not so simple with Part B, which covers doctors’ visits and most routine health care. That requires a premium payment, like private insurance, but with a twist.

It’s very important to sign up for Medicare as soon as you’re eligible. Normally that means within three months of turning 65. Anyone who started drawing Social Security benefits before 65 will be automatically enrolled as of their 65th birthday, unless they opt out, but that doesn’t apply to people who wait until age 65. The most important thing to remember is that a stiff penalty applies for late enrollments in Part B. Stiff, and permanent.

The penalty is a whopping 10 percent of the premium for every year past the eligibility date that a recipient fails to enroll. For example: If you think you don’t need Medicare Part B at 65, but by the time you’re 70 deteriorating health has changed your mind, you will pay 50 percent more on your premiums than if you had signed up right away. And that penalty is forever. You’ll pay it until the day you die.

Similar penalties apply for parts C and D. Those are the optional “Medicare Advantage” managed-care plans and prescription drug coverage plans. The idea, of course, is to strongly encourage everyone to sign up as soon as possible rather than play the “wait and see” game.

One other wrinkle can complicate matters further. Say you’re employed and have a good health insurance plan, and don’t intend to retire at 65. That employee health coverage provides a loophole, allowing you to defer Medicare enrollment — but only if you’re not getting Social Security. When to start collecting Social Security benefits, and when to enroll in Medicare, can be tricky decisions that are best discussed with an expert as part of your overall retirement planning.

Then there’s the question of whether to go with traditional Medicare, which typically includes Part B, Part D, and a supplemental Medigap policy. The alternative is a “Medicare Advantage” plan. This can cost less than the traditional option, because it includes prescription coverage and plugs the coverage holes that Medigap policies are designed to fill. The downside is that, as managed care plans, Advantage policies limit you to a specific network of providers.

This may not be a problem for retirees in relatively good health. Still, it’s important to be sure your doctors and other providers are part of the insurer’s network before enrolling in an Advantage plan.

It’s possible to switch back to traditional Medicare – parts B and D. An enrollment period from mid-October to early December each year allows recipients to change their coverage. Here’s one more Catch 22, though. If you need a Medigap policy more than six months after turning 65, you may not be able to get it, or may be charged higher premiums, because of pre-existing conditions. That’s not true during that initial six-month window, when insurers must cover you at the lowest possible rate regardless of health.

The same annual enrollment window also allows for changing Part D prescription plans. It’s a very good idea to review your options, because insurers may change coverage from year to year. This can be complex and is another area where an experienced financial planner can offer useful advice.

A couple of other considerations should be discussed with your adviser. One of those should be part of your tax planning strategy. Just as with certain taxes, Medicare premiums go up for people over a certain income level. That’s $85,000 for individuals and $170,000 for couples. Also, for the first time in several years, the income brackets used to determine Medicare surcharges for high income retirees will be indexed to inflation for year 2020.  The brackets will be increased for both individuals and couples.  Some of the projections are that it will mean income tiers will increase by $1,000 to $3,000 for individuals and by $2,000 to $6,000 for married couples filing joint returns.

Then there’s the matter of health savings accounts or HSAs. While these have tax advantages for working people, they aren’t compatible with Medicare. That means you must stop contributing to your HSA when you sign up for Medicare. However, for some people who are still working after 65, it can make sense to defer Medicare and continue to use an HSA. The details can be tricky and making the wrong decision can be expensive. So, this is definitely an issue to discuss with your financial planner well before you turn 65.

 The good news: For half a century now, Medicare has been a vital component of retirees’ financial security. There’s really no bad news, just the reality that Medicare is a machine with many moving parts, and it’s wise to have an expert help ensure you’re managing the controls correctly.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete, or timely. 

Nobody said planning for retirement is easy; that’s especially true for people who run their own businesses. Finding the best way to keep a business operating, while transferring control and/or ownership to someone else, can be dauntingly complex, with the potential for serious tax consequences for all the parties concerned.

The various options fall under the broad category of “succession planning,” which is something every business owner should consider.

Among the ways to transfer a business are outright sales and gifts. Both are generally better choices than simply including the business in your estate, to be sorted out when your will is probated. A number of sophisticated vehicles can be used to transfer a business, either during the owner’s lifetime or at death. They also allow a choice between relinquishing control all at once, or gradually over a number of years.

One very big question, of course, is whether a business will be viable without its current owner at the helm. If not, selling to an outside buyer, or even closing and liquidating its assets, may be the best option. But even when competent management is available to carry on, a systematic approach to succession carries its own set of challenges.

Where it can get very complicated is choosing from the many tools available to balance control, costs, and maximum tax advantage. Those include buy-sell agreements, private annuities, self-canceling installment notes, gifts via trust, and gifts via family limited partnership. Without bogging down into too much detail, I’ll address each of those in turn.

But first, it’s important to emphasize that which approach is best depends, first, on the owner’s purpose in transferring a business. For some, it’s simply a matter of maintaining a lifestyle after relinquishing the burdens of running the business. For others, it may be to ensure that estate taxes and other final expenses will be taken care of. On the other side of the coin is the question of who should benefit from the business—which family members, for example—and who is best suited to operate it.

One other very important fact is that, in the great majority of cases, smart succession-planning strategies ensure that a business is transferred without incurring gift taxes. If the transfer is made during the owner’s lifetime, however, those who gain control of the business may have to pay capital gains taxes.

The simplest approach is to give each intended recipient an interest in the business that doesn’t exceed $15,000 each year. That’s the current threshold for federal gift tax annual exclusion. The drawback, of course, is that at this rate for a large, valuable enterprise, it can take many years to complete the transfer.

For more about gift tax considerations, see my October, 2019 article on year-end planning:  http://www.wilmingtonbiz.com/insights/alyce_phillips/it%E2%80%99s_never_too_early_to_think_about_end-of-year_planning_and_gifting/2539

If you sell the business outright, whether to a family member or anyone else, the deal isn’t subject to transfer taxes as long as the price reflects the full, fair market value. While this isn’t the place to define how that number is determined, let me point out that a sale at less than fair market value may be considered a partial gift for tax purposes.

I mentioned earlier that a sale can take place at any time, even after the owner’s death. A buy-sell agreement is a useful way to control how that works, as well as to spell out details of the payment terms. A buy-sell agreement guarantees that a sale will definitely be made, locking in both the buyer and seller. When that sale happens can be defined as a certain date in the future. Or it can be triggered by a certain event. That might be retirement, disability, divorce, or death.

Keep in mind that if you enter into a buy-sell agreement, it can restrict your ability to reduce the size of your estate by making gifts during your lifetime. So it’s vital to carefully coordinate all the parts of your retirement, estate-planning and succession-planning strategies.

As to who can buy your business: it can be an individual or a group of individuals, such as other co-owners. It can also be the business itself, especially if it’s organized as a corporation or partnership, which has its own legal identity independent of its owners.

A private annuity is a way for a business owner to get a guaranteed income for life. The buyer gets full ownership, but promises to make fixed payments for the seller’s lifetime. As with other kinds of annuities, this can be structured on a “joint and survivor” basis, meaning the seller’s spouse continues to collect after the seller’s death.

Somewhat similar is a self-canceling installment note. It also provides for regular payments to the seller for life, with the obligation satisfied at the seller’s death. The difference from an annuity is that the seller retains a security interest in the sold business, akin to a mortgage lien.

More elaborate, and complex, options include grantor-retained annuity trusts and grantor-retained unitrusts: GRATs and GRUTs. In both cases, assets (such as a business) are transferred to a trust, which makes regular payments to the grantor, usually for a specified period. At the end of that period, the asset goes to the ultimate beneficiary. The difference between a GRAT and a GRUT is that one provides for payments of a fixed dollar amount; the other of a fixed percentage of the trust’s assets.

A family limited partnership is another complex alternative. This has both general and limited partners. The owner, who is the general partner, transfers the business to the partnership and retains control. Then, systematically, the owner/general partner makes gifts of the limited-partner interests to the family members who ultimately will take over.

If all that sounds daunting: it is! Each of these options has major advantages, but also potential drawbacks. All require serious expertise to set up correctly. The Estate and Trust specialists in our company are prepared to assist with succession planning in partnership with your CPA and Attorney.

Still, there’s no substitute for experienced personal guidance.  Succession planning is complex, but is a vital consideration for business owners, especially those approaching retirement. To help you manage all the moving parts, and craft a plan that’s best for you, your business, and your family, the experts at Old North State Trust are well qualified to advise you.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Planning for retirement typically includes provisions for how loved ones can look out for the interests of their aging relatives. But for more than one-fifth of the Baby Boom generation who are now reaching retirement age, there will be no loved ones. No spouse, no children, no close relative. These “solo agers,” as they have been called, face the challenging but essential task of making other arrangements for their own care.

Several important demographic changes are driving this trend. First, Baby Boomers on average have far fewer children than the previous generation. Those born between 1946 and 1964 were in families with an average of four children. But when they started their own families, the average was only two. Many Boomers, far more than in earlier generations, had no children at all. That means, of course, that far fewer younger family members are available to be caregivers or advocates for aging parents.

Another important trend is related to the radically different status of Boomer women compared to their elders. With professional career opportunities opening up in the 1960s and afterward, almost 20 percent of women in the postwar generation remained childless, most often by choice. The more highly educated the woman, the less likely she was to become a mother.

We can speak to this from one of our client’s situation. Our client had three sisters. In the next generation, our client had three children. His oldest sister had only one child, the next had three, and the youngest had none. In just one generation, they went from an average of four children to less than two. Now, in our client’s next generation, only his children have children; none of the other four cousins do.

Some numbers directly related to the trust business shed even more light on this trend. Our client’s father set up a perpetual trust that will be disbursed after the last of his seven grandchildren dies. Going back just one generation, our client’s grandfather had a similar trust. It was disbursed just last year, when the last of his grandchildren – our client – died at the age of 86. The total number of beneficiaries from that trust exceeded thirty people, mostly distant cousins. That gives a pretty good idea of how family structures changed in just a single generation.

Two other important societal trends mean many of the currently retiring generation have no partners. Soaring divorce rates – up to half of late Twentieth Century marriages did not last – and the increasing acceptability of remaining unmarried combined to leave significant numbers of Boomers as singles.

One study ten years ago found that more than a third of adults were unmarried. Among the Baby Boom generation, nearly three in five were divorced and fully a third had never married. Only 10 percent of the single boomers were widowed, although that number has undoubtedly risen in the decade since.

All these trends – fewer children, many childless people, many unmarried people – combine in something of a perfect storm, aggravated by one other factor. Even when a retiree has children, chances are they live far away, across the country and even around the world. And that, of course, leaves them unable to provide the regular support their aging parents may come to need.

Gerontologists who have considered this predict that between a quarter and a fifth of Baby Boomers may end up with no family caregivers at all.

So, what is a “solo ager” to do?

Many Boomers are still in that “young elderly” category, in which their health is good, their energy and funds seem inexhaustible, and their chief concerns are finding rewarding ways to spend their retirement. But inevitably, health can decline, energy fade, and full independence may no longer be possible.

The stakes are high. While many people are able to successfully “age in place,” isolation is often a serious problem. It can be psychologically harmful, and presents physical dangers, too. Whether from frailty, dementia, or both, the risk of accidents or medical emergencies inevitably grows as the years go by.

There are solutions, of course. Last month we wrote about the important practice of shared housing or co-living. That’s a way for elderly persons to minimize isolation by living in close proximity to others, whether related or not. That article can be found here: http://www.wilmingtonbiz.com/insights/alyce_phillips/instead_of_isolation_or_institution_a_third_approach_to_senior_housing/2490

One solution is absolutely essential, regardless of living arrangements. That is to have a trusted, and trustworthy, person or persons who can represent a “solo ager’s” interests when they can’t do so themselves. Space doesn’t permit elaborating on the various aspects of this, which include such roles as health care power of attorney, power of attorney for finances, investment advisor, emergency contact, and custodian for essential documents such as wills, trusts, living wills and the like.

When family members aren’t available to fill any of those roles, trained professionals are. Whether it be an attorney, a trust officer, or a team of specialists, professional experts can also help ensure that the solo ager’s wishes are well documented and that those vital documents are up to date and accessible in an emergency.

However well supported a single elderly person may be, odds are the time will come that independent living isn’t possible any more. That gets, finally, to the matter of who will oversee arrangements such as assisted living and, possibly, nursing home care. It’s a sad reality that not all facilities are well managed, and not all staffers are well trained, qualified or even kind. So even when a solo ager makes the move to institutional living, it’s still important to have an advocate. That person monitors the quality of care and ensures that everything is actually operating as advertised.

If you are a single person approaching or already in retirement, and don’t have family members as a potential support system, it’s a good idea to consult with professionals who can step in as both advisor and advocate. The experts at Old North State Trust can advise you on such essentials as living wills, health care arrangements, and investment options to help ensure that your retirement is happy, safe, and satisfies your needs and wishes.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

People who are aging – and their family members – often face a dilemma when it comes to choosing the best housing arrangement. Staying in their homes can become overwhelming and can lead to isolation, which can be dangerous both physically and psychologically. But institutions including retirement apartment communities and “assisted living” can have their drawbacks, too, notably the cost and distance from loved ones.

A third option that might be ideal for many is some variation on the concept of shared housing. This can allow for comfortable aging in place at a modest cost yet with a built-in social or family support system.

The idea is simple enough. It’s to adapt to multi-generational living, ideally in a way that retains a necessary degree of privacy and independence for all parties. This can also go a long way toward helping young people meet the often impossible challenge of finding affordable housing in booming metro areas.

In Wilmington, for example, many younger working people, in jobs such as retail or even teaching or law enforcement, have been all but priced out of home ownership.

Here’s one simple example we’re aware of, it involved an elderly woman, widowed, who was increasingly frail and forgetful. Yet she was reluctant to leave the large home where she’d lived for decades. Her grandson, a university student, needed an affordable place to live. The win-win solution was for the young man to move into what, years before, had been his father’s room, and take on the responsibility for keeping the house maintained and secure. This allowed his grandmother to remain at home for years after she was no longer capable of living alone and gave the grandson rent-free housing.

But that approach, with two generations sharing the same living space, won’t work for many families. The related alternative, sometimes known by the old phrase “mother-in-law apartment,” has many advantages. The newer buzz-word for this is “accessory dwelling unit,” but it means the same thing: a portion of the house, or maybe a detached building in the back yard, or a garage apartment, that has a separate entrance and allows for a balance between proximity and privacy.

A working-age couple with children might create an accessory apartment as a place for an aging parent to live. Or elderly parents might stay in their own home but subdivide it to provide an affordable place for an adult child or grandchild to live. One beauty of the concept is its flexibility. Over time, the older generation in the arrangement might end up needing less space, while the younger might have a growing family. At some point they could trade places between the house’s main living area and the smaller “accessory” apartment.

These arrangements don’t have to be all in the family, by the way. An older homeowner might choose to live in the “accessory” space while renting the rest of the old homestead to a younger, unrelated family.

Many variations are possible, depending on individual circumstances. Rent might provide much-needed income for the owner. Or reduced-rent arrangement might help a disabled relative who works part-time afford to live a largely independent life. The recent college graduate who’s struggling to get by while waiting tables, or the freshly divorced young mother trying to rebuild her life, can all benefit from this kind of close, but separate, relationship with older family members.

As much as members of an extended family might want to be close to each other, differences in lifestyle dictate that everybody is happier if they don’t rub elbows in the same space. That eliminates struggles over kitchen space, tensions about who’s in the bathroom when, or resentments about late nights, early mornings or choice of entertainment.

In fact, despite the up-to-date sound of “accessory dwelling unit,” such arrangements are a throwback to what was once a very common approach to housing. It has become rare in many places, however, because of one major obstacle.

That is restrictive local zoning ordinances. A related obstacle is a negative attitude among many homeowners, who see the presence of rental housing in their neighborhoods as a threat to property values. That is certainly an issue in Wilmington and New Hanover County, where single-family zoning expressly outlaws these kinds of arrangements in many neighborhoods. Many private homeowners’ associations also forbid “mother-in-law” apartments.

Advocates for such shared housing arrangements argue that they actually have many benefits for their communities, not just their own residents. These include a broader mix of ages than are typically in many neighborhoods, reduced turnover, even less crime because of more “eyes” on the street at all times of day. Both the elderly and children benefit from living in “walkable” neighborhoods instead of sterile apartment complexes.

So, what are your options if you’re considering creating some form of accessory dwelling arrangement on your property? First, of course, you need to learn what the rules are. If your neighborhood is governed by a homeowners’ association, find out what the bylaws are. If they are an obstacle, the best way to overcome them is to work with neighbors and the HOA board to amend those rules, explaining the benefits to both individuals and the community.

Even without HOA restrictions, you still have to comply with your jurisdiction’s zoning ordinance and building codes. We won’t attempt to break down the complexities of those regulations here, except to note that “mother-in-law apartments” are allowed in some residential zones, under some circumstances, especially in older neighborhoods with larger lots.

If you find that the zoning rules work against you, it’s the members of your city council or, if outside the city limits, board of county commissioners, who determine just what those rules are. Those elected officials are sensitive, of course, to traditional homeowners’ worries about protecting property values. But they are also well aware that our communities are facing growing challenges to provide affordable housing for working people and to help their constituents safely age in place.

In short: your local representatives should be willing to listen to your concerns and your arguments about how to make housing work better for everybody.

If you are interested in exploring alternative housing arrangements, it’s a good idea to understand how they might fit in with your broader financial objectives. The experts at Old North State Trust can help you structure your portfolio of assets, including real estate, to help meet your goals for retirement.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

It’s hard to follow the news without seeing almost daily discussion of Social Security and Medicare, and how viable these bedrocks of retirement planning will be in the future. The challenges are obvious.  Relatively fewer working people every year are paying into the funds that support a steadily growing number of retirees. The math is clear: sooner or later there won’t be enough money.

Not so obvious: just how serious this problem is, and what’s the best way to solve it.

In April 2019, the trustees of the Social Security and Medicare trust funds issued a report on the current status, likely prospects, and potential changes to these all-important programs.

The short-term news is that in 2020 the cost of paying Social Security benefits – to retirees, survivors and the disabled – will exceed the amount of money coming in from taxes. That annual deficit will continue, and grow, for at least the next 75 years. But that doesn’t mean Social Security is “running out of money.” Not yet, anyway.

What it does mean is that the government will have to start drawing on the trust fund’s reserves. It’s something like how a family with expenses exceeding its income may have to draw on its savings. But like a savings account, the trust fund isn’t infinite. Eventually, it will be used up. Unless Congress makes changes in how taxes or benefits work, that will happen in 2035. Because of recent improvement in the economy, that happens to be a year later than what the trustees predicted in their 2018 report.

The worst-case scenario – again assuming nothing changes – is that payroll taxes will be enough to cover only 80 percent of benefits in 2035, then gradually dwindling to 75 percent by 2093.

One important technicality is that Social Security actually has two trust funds, one for retirement and one for disability. If the disability “pot” is considered separately, it would not be empty until 2052. That date is a full two decades later than the trustees predicted just a year ago, based on a decline in the number of disabled workers drawing benefits or applying for new benefits. After 2052, payroll taxes should be sufficient to pay 91 percent of the government’s disability obligations.

Medicare, which provides health coverage for retirees and some people with disabilities, has been teetering back and forth between deficit and surplus for a number of years. Medicare paid out more than it took in from 2008 through 2015, ran surpluses in 2016 and 2017, but was back in the red in 2018, a trend that’s expected to continue. Medicare’s main trust fund is expected to be used up by 2026, after which tax revenue would cover 89 percent of benefit costs, diminishing to 78 percent by 2043 but then rising again to 83 percent by 2092.

The curve in that chart is far less reliable than the projections for Social Security. As everybody who pays for medical care knows, costs have been rising steadily, and Medicare is certainly not immune to those pressures. That’s why Medicare’s trustees caution that their projections “are highly uncertain.”

Clearly, something will have to be done, and should be done soon. But what? A badly divided Congress has shown little appetite for tackling this tricky problem, which has been called “the third rail of politics.” Referring to the high-voltage power source for subway trains, the label means “you touch it and you die,” politically at least.

But our lawmakers understand that if they don’t touch these retirement benefits, actual people – their retired constituents – may literally die, or at least find themselves hurting financially and medically.

Some of the proposed solutions, as the trustees’ reports summarize, are:

  • Raising the Social Security payroll tax rate. It’s now 12.4 percent. An immediate increase to 15.1 percent, the trustees project, would solve the long-term revenue shortfall. It’s important to note that while that’s just 2.7 percentage points on the rate, it amounts to a tax increase of almost 22 percent. If Social Security taxes aren’t raised until 2035, just as the trust funds run dry, the rate would have to go up to 16.5 percent.
  • Eliminating the income cap for Social Security taxes. As it stands now, income over $132,900 a year isn’t subject to Social Security taxation. Taxing higher incomes would put more money back into the “pot.”
  • Raising the normal retirement age – now 67 for full benefits – for younger workers, those born after 1960. Advocates for this note that when Social Security began in the late 1930s, the standard retirement age of 65 was older than Americans’ average life expectancy! But now people are living much longer, drawing benefits much longer, and often able to continue working productively well into the 60s and beyond. Opponents point out that for people in physically demanding occupations, continuing to work after 40 or more years in the labor force is often difficult, if not impossible.
  • Reducing benefits. If nothing else is done to stave off running out of money, everybody’s retirement benefits would have to be cut by 17 percent, starting immediately. Or alternatively, if current recipients were to be protected from benefit cuts, all new Social Security recipients would see their benefits 20 percent lower than what’s promised now!
  • Various technical fixes. These would change the formulas by which benefits, and annual cost-of-living increases are calculated. But even if hidden behind arcane formulas, this would still mean that benefits would be reduced, or grow more slowly.

So, what does this mean as a practical matter for people who are now retired, or contemplating retirement?

Two broad points should be made. First is that you should let your representatives in Congress know your thoughts about how Social Security should work. You may favor one or another of the possible solutions, or a combination. Whatever you think is the best approach, write to your representative and your senators. A broad consensus about both the problems and the solutions is essential. Achieving that consensus requires that Congress hears from citizens.

The second point is that it’s vital to have other resources, in addition to Social Security, to ensure a comfortable and worry-free retirement. Whether a corporate pension, tax-sheltered retirement plans like IRAs and 401-Ks, or other investment vehicles, anybody who is earning income should be putting a significant portion of it away for the future.

To be sure you have made adequate provisions for your retirement, and that your own pensions and investments are sufficient to support you beyond what Social Security provides, it’s always a good idea to consult with a qualified financial planner. The investment experts at Old North State Trust can help you evaluate your retirement goals and investments, and structure a plan that ensures your future comfort and peace of mind.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Should strictly financial considerations be the sole criteria for investing? Or does it make sense to consider the non-economic impacts that investment decisions have on the world?

For many investors, it’s important to put their dollars where their beliefs are. A shorthand way to describe this attitude is “ESG investing,” the initials standing for environmental, social and governance, meaning how corporations govern themselves. Investors may be concerned with such matters for purely ethical, altruistic reasons. But some ESG investors take a pragmatic approach, too, on the basis that attention to these three factors determines how sustainable an investment will be.

Considering sustainability is another way of asking: will this enterprise be viable for the long term?

On a purely ethical basis, some individuals and institutions have been considering these factors for many years. Examples included people opposed to the Vietnam War divesting themselves of stocks in military contractors or putting pressure on public pension funds not to invest in companies doing business in South Africa during the Apartheid era.

Even earlier, union pension funds have directed their investments toward what they considered socially desirable ventures. In the 1950s and 60s, for example, the union representing electrical workers invested in low-cost housing ventures; miners supported development of health facilities.

Environmentally conscious investing has a high profile today.  And it seems, every investor has their own unique prospective of what environmentally conscious investing means.   Nowadays many individual investors, and some institutions, too, are focusing on so-called “green industries” such as solar or wind power, steering clear of fossil fuel companies, or otherwise measuring companies’ carbon footprints. On the “social” side of things, it can get complicated. For example, some people avoid buying stocks or bonds of companies that take certain political or religious positions on public issues. Other investors, of course, may want to support those same corporations precisely because of the positions they have taken.

Aside from the matter of the investor’s own values is the question of how well the ESG approach addresses an investment’s value. On this question, economic theory has made a 180-degree turn over the past half century. Many who have studied the matter now believe that ESG criteria can help predict a company’s exposure to risk and its return on investment.

At one time, economists believed it was a mistake to consider anything but a company’s financials. In the 1960s and 70s, the conservative economist Milton Friedman argued that such “ESG investing” considerations actually hurt investment performance. But that view also posed a dilemma. If the bottom line is the only consideration, then the social or environmental costs of an investment decision can become somebody else’s problem. Is it unethical to let someone else pay the price for your profits? Another way to think about it: does “social capital” have value that investors should consider?

A number of twenty-first century studies suggest that it does. Contrary to Friedman’s belief, some economists now believe, that value is reflected in economic performance. One obvious example is that good corporate governance, which includes transparency, rigorous audits, and control of conflicts of interest, correlates with reduced risk and long-term profitability.

So, if you want your investments to promote your values, do good in the world, and still grow, how do you go about it?

It’s easier for large institutions to do the necessary homework, and keep up with the records of the companies they invest in. Examples are college and university endowments, government and union pension funds, and religious organizations. But to make this easier for individual investors, such products as socially conscious mutual funds are now available. The best of these will provide detailed guidelines about where they will – and won’t – put their clients’ money.

The simplest of these guidelines involves a screening process to rule out companies in certain product lines, or that do business in problematic places. Common examples are those that profit from gambling or selling alcohol, tobacco, or weapons. Other areas a fund may steer clear of include polluting industries or companies that do business with autocratic countries.

Somewhat more sophisticated are guidelines that seek out companies with a positive social or environmental impact. These assess corporations’ business practices to determine if they pursue a specific benefit. That might be taking certain environmental initiatives; it might be observing a specified religious ideology.

Other objectives can include supporting communities, whether those are high-poverty inner-city or rural areas or indigenous people around the world. Funds aimed at these goals can help small businesses that otherwise have trouble getting more conventional financing.

On the corporate governance front, activist investors, whether large funds or individuals, now have a say on the biggest corporations’ executive pay practices. A provision of the Dodd-Frank law passed after the 2009 financial crisis; this has been considered an important boost for shareholder advocacy.

Lest this all seem too earthy-crunchy, or divorced from business realities, consider so-called “impact investing.” This is a system of applying standard business-school tools to social-benefit investments, to ensure that all their objectives are actually met. That means not only their social goals, but also their financial returns.

Maybe the best advice on this subject is first, know your goals and what non-financial objectives you want to achieve. Then second, don’t let your heart get the better of your head. Many environmentally or socially responsible companies and funds are well managed and provide a good return on investment; but not all. Also, remember that while small companies may have great ideas and great potential, larger ones have the resources to hang in for the long run, and to acquire promising start-ups. As with any speculative investment, putting all your eggs in one basket is dangerous.  Diversifying to spread risk across a number of investment options is of paramount importance.  Becoming too concentrated in any type of target investment, corporation, or social objective, increases risk and diminishes a portfolio’s odds of meeting long-term objectives.

To help navigate this complex universe, it’s a good idea to consult with experienced advisors who can help you match your objectives, including your tolerance for risk, to suitable investments. The investment experts at Old North State Trust can help you clarify all your investment goals and point you in the right directions about where to make your investment dollars work for what’s most important to you.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.

Caring for a child with special needs puts huge burdens on families, both emotionally and financially. Some are obvious: paying for specialized services, which may include education; medical care; physical, speech, or occupational therapies; and residential care. High among the emotional burdens is worry about the future.

While some families are fortunate that government programs can shoulder some of the financial load, many are not. In North Carolina, for example, a Medicaid-based program called Carolina Access pays for services for people with developmental disabilities. But limited state budgets mean many families that should qualify are excluded simply because all available slots are filled. The waiting list is years long.

An easily overlooked financial burden is loss of income. Parents often have to quit their jobs so they can care for a disabled family member. Similarly, the parent of a special-needs child may have limited economic mobility. For example, somebody might be unable to take a better job because relocation would end the child’s eligibility for public benefits. Comparable benefits might not be immediately available in a new community, or at all. We know of cases where a parent of a disabled child had to forego an executive career track, turning down a promotion. The job’s time demands were incompatible with the child’s need for parental care.

Some help is available in the form of Supplemental Security Income (SSI), the Social Security Administration’s program for people with disabilities. Like Medicaid, this comes with important restrictions.

Beyond current concerns, all parents of special-needs children have a permanent worry: what will happen when those children become adults, the parents age, and eventually die? Who will care for the disabled persons then? Who will be an advocate for their needs? How can parents who now provide a safe and nurturing environment be confident the same level of care will continue after they’re gone?

A legal “gotcha” works against families that want to build up assets for a special-needs child’s future care, much as they might save for a mainstream child’s college education. Both Medicaid and SSI require that those receiving benefits have essentially zero assets. Families have been forced to liquidate investment accounts they’d set up at birth for a child’s benefit, so the child could qualify for desperately needed services that Medicaid pays for.

Because of the problem of losing SSI and Medicaid, it’s not sufficient to leave assets directly to a disabled child through a will. A similar problem arises in designating beneficiaries for investment accounts and insurance policies.

Fortunately, there are ways around this dilemma. The best known is a special-needs trust. Its purpose is to ensure that the money you leave for the child’s support, and that others might contribute, doesn’t jeopardize those essential public benefits. It also addresses the beneficiary issue: instead of the disabled child being named directly, the trust becomes the beneficiary for investments and insurance.

A special-needs trust can be created during the parent’s lifetime, or through a will. The key legal aspect is that assets placed in the trust, and the income they generate, aren’t considered “available” to the child. That means the trustee has sole discretion over where these funds are used. Typically, it’s to supplement the essential housing and medical needs that SSI and Medicaid cover, paying for such things as dental care, home health workers, vision care, or personal expenses like transportation, recreation, and vacations. The trustee would buy these things directly, rather than putting any money into the beneficiary’s name. There is no limit to the amount of assets that a special needs trust can hold. And there’s no restriction on how much can be added, or how often.

One useful approach is to set up a special-needs trust, but not fund it immediately. That will be done upon a parent’s death, with assets from a will, insurance proceeds, etc.

An alternative to a trust is a new type of financial instrument called an ABLE account. In some ways it’s like the popular “529” college savings plans, with specific tax benefits. Like a trust, it allows families to plan for future expenses without jeopardizing eligibility for public benefits. Set up by states, these were made possible by federal legislation in 2014, the Achieving a Better Life Experience act. We’ll get into more detail about ABLE accounts in a future article.

An essential provision is to designate a guardian. Typically, a parent is named guardian of a person who is deemed legally incompetent on reaching adulthood. But since children usually outlive their parents, it’s necessary to decide who will take on the guardian’s role when the parent dies or becomes incapable of serving. The choice of guardian is vital: it should be someone who has the child’s best interests at heart and is also capable of dealing with the legal and financial complexities that go with overseeing an incompetent adult’s life.

Note that it’s possible, and often desirable, to designate two guardians. One, the “guardian of the person,” oversees issues of daily living, medical care, housing, and the like. That might be a relative. The other, “guardian of the estate,” is in charge of assets and making financial decisions. That role can be filled by a professional, such as a financial planner or attorney who might also be named trustee of a special-needs trust.

There are costs to having a professional guardian, whose time and expertise will need to be paid for. But there are also potential costs to designating a guardian who’s not capable of properly managing a disabled person’s estate and/or personal needs. Every situation is different, so there’s no universal best answer to this question.

Not all people with special needs require guardians. For example, a physically disabled person who is fully competent mentally may require a trust to pay for living expenses, medical care, etc., but is entirely qualified to manage their own affairs. In a case like this, a trust can be structured that sets up a cooperative relationship between the trustee and the beneficiary of the special-needs trust.

One other key tool is a letter of intent. This isn’t a legally binding document but allows parents to specify how they would like future trustees, guardians, etc., to care for their disabled family member. It can give guidance about daily routines, the person’s likes and dislikes, advice on how to handle behavioral issues, and any other instructions that would help to ensure a happy, comfortable way of life.

Because of their complexity, special-needs trusts require a well-qualified professional to set them up. The financial-planning experts at Old North State Trust are knowledgeable and can advise you in making provisions for a disabled relative’s future care.  That includes making recommendations about whether a trust or an ABLE account will best achieve your objectives and working with other professionals to provide the best care for your loved one.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

In the last year there has been one dominant theme in the news- Women. People are listening and noticing what women have to offer the working world, the family care they provide and to life in general.  They invest in both their future as well as the future of their family. I believe there has always been the perception that they are the backbone of the family and do the lion’s share of the household work, however in the past, women were more silent to the importance of the role they played and the contributions they made to society. Today, we have women leaders as CEO’s, Philanthropists, Doctors, and Lawyers and the list doesn’t stop there.  We have women leaders in the military, high ranking women Politicians and women News Anchors.  We even have women Sports Commentators, coaches and officials. While women are balancing their careers and families, they also need to focus on their financial goals as well. According to a survey that PIMCO conducted, “50% of women say it’s difficult to think about their financial goals due to the day-to-day demands.” Women are often also “sandwiched” between taking care of their aging parents and their own families, which can put stress on what they contribute to their retirement plans. Some have even had to leave the workforce all together for a period of time and lose those few years of savings.

One of the biggest concerns today for women regarding their finances is they are not being heard when trying to express their financial goals to advisors.  While the fundamentals of investing may carry over client to client, many women have specific short-term and long-term financial goals and may need those managed simultaneously.  Perhaps the author Margaret Bonnano said it best when she said, “Being rich is having money; being wealthy is having time.”  The constant balance of “living for today” while also planning ahead can prove challenging if a client-specific plan is not developed.  Many women want to be financially secure but not ultra-wealthy if that comes at the expense of giving up some of their lifestyle to include work-life balance. 

Here are Five tips for women and investing:

  1. Plan with a purpose by mapping out your goals. Make a timeline of what you would like to achieve.  Be sure to think both short and long-term
  2. Start saving for retirement and stay committed to the path you have outlined.
  3. Diversify your investments to spread the risk out in your portfolio.
  4. Meet with your advisor(s) annually if not more to discuss your portfolio and goals. Make changes or reallocations to better position you to meet your goals.
  5. Have confidence in yourself, after all, it is your money and goals!

If you have any questions, one of our advisors at ONST would be happy to help guide you into your future.  We will listen, strategize, and work with other advisors to meet your individual needs. We provide the human touch to all of our clients.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.