Annuities—a type of insurance product— can be an effective investment vehicle, especially in providing for your retirement. This Financial Guide will help you decide whether annuity investments are right for you and how to use them in retirement planning. It also discusses the tax treatment of annuities.

How Annuities Work

Annuities may help you meet some of your mid- and long-range goals, such as planning for your retirement and for a child's college education. This Financial Guide tells you how annuities work, discusses the various types of annuities, and helps you determine which annuity product (if any) suits your situation. It also discusses the tax aspects of annuities and explains how to shop for both an insurance company and an annuity, once you know which type you'll need.

While traditional life insurance guards against "dying too soon," an annuity, in essence, can be used as insurance against "living too long." In brief, if you buy an annuity (generally from an insurance company, which invests your funds), you will receive in return a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death. If you "die too soon" (that is, you don't outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you "live too long" (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.

The earnings that occur during the term of the annuity are tax-deferred. You are not taxed on them until they are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.

How Annuities Best Serve Investors

Tip: Assess the costs of an annuity relative to the alternatives. Separate purchase of life insurance and tax-deferred investments may be more cost effective.

The two primary reasons to use an annuity as an investment vehicle are:

1. You want to save money for a long-range goal, and/or
2. You want a guaranteed stream of income for a certain period of time.

Annuities lend themselves particularly well to funding retirement and, in certain cases, education costs.

One negative aspect of an annuity is that you cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10% premature-withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2 and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers’ penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.

These penalties lead to a de facto restriction on the use of annuities primarily as an investment. It only makes sense to put your money into an annuity if you can leave it there for at least ten years and the withdrawals are scheduled to occur after age 59-1/2. These restrictions explain why annuities work well for either retirement needs or for cases of education funding where the depositor will be at least 59-1/2 when withdrawals begin.

Tip: The greater the investment return, the less punishing the 10% penalty on withdrawal under age 59-1/2 will appear. If your variable annuity investments have grown substantially, you may want to consider taking some of those profits (despite the penalty, which applies only to the taxable portion of the amount withdrawn).

Annuities can also be effective in funding education costs where the annuity is held in the child’s name under the provisions of the Uniform Gifts to Minors Act. The child would then pay tax (and 10% penalty) on the earnings when the time came for withdrawals.

Caution: A major drawback is that the child is free to use the money for any purpose, not just education costs.

The Various Types Of Annuities

The available annuity products vary in terms of (1) how money is paid into the annuity contract, (2) how money is withdrawn, and (3) how the funds are invested. Here is a rundown on some of the annuity products you can buy:

• Single-Premium Annuities: You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout). The minimum investment is usually $5,000 or $10,000.
• Flexible-Premium Annuities: With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.
• Immediate Annuities: The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.
• Deferred Annuities: With a deferred annuity, payouts begin many years after the annuity contract is issued. You can choose to take the scheduled payments either in a lump sum or as an annuity—i.e., as regular annuity payments over some guaranteed period. Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used to fund tax-deferred retirement plans and tax-sheltered annuities. They may be funded with a single or flexible premium.
• Fixed Annuities: With a fixed annuity contract, the insurance company puts your funds into conservative fixed income investments such as bonds. Your principal is guaranteed and the insurance company gives you an interest rate that is guaranteed for a certain minimum period—from a month to several years. This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period. Thus, the fixed annuity contract is similar to a CD or a money market fund, depending on the length of the period during which interest is guaranteed. The fixed annuity is considered a low-risk investment vehicle. All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5% for the entirety of the contract. The fixed annuity is a good choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. Fixed annuity investors benefit if interest rates fall, but not if they rise.
• Variable Annuities: The variable annuity, which is considered to carry with it higher risks than the fixed annuity—about the same risk level as a mutual fund investment— gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.

   

Tip: You can switch your allocations from time to time for a small fee or sometimes for free.

The variable annuity is a good annuity choice for investors with a moderate to high risk tolerance and a long-term investing time horizon.

Caution: Variable annuities have higher costs than similar investments that are not issued by an insurance company.

Caution: The taxable portion of variable annuity distributions is taxable at full ordinary rates, even if they are based on stock investments. They do not enjoy capital gains relief or the reduced taxation available after 2002 and before 2009 for dividends from stock investments (including mutual funds).

Tip: Today, insurers make available annuities that combine both fixed and variable features.

Tip: Before buying an annuity, contribute as much as possible to other tax-deferred options such as IRA’s and 401 (k) plans. The reason is that the fees for these plans is likely to be lower than those of an annuity and early-withdrawal fees on annuities tend to be steep.

Tip:IRA contributions are sometimes invested in flexible premium annuities—with IRA deduction, if otherwise available. You may prefer to use IRAs for non-annuity assets. Non-annuity assets gain the ability to grow tax-free when held in an IRA. The IRA regime adds no such benefit to annuity assets which grow tax-free in or outside IRAs.

Choosing A Payout Option

When it’s time to begin taking withdrawals from your deferred annuity, you have various choices. Most people choose a monthly annuity-type payment, although a lump sum withdrawal is possible.

Caution: Once you have chosen a payment option, you cannot change your mind.

The size of your payout (settlement option) depends on:

1. The size of the amount in your annuity contract
2. Whether there are minimum required payments
3. Your life expectancy (or other payout period)
4. Whether payments continue after your death

Here are summaries of the most common forms of payout:

Fixed Amount

This type gives you a fixed monthly amount—chosen by you—-that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. Thus, if the annuity is your only source of income, the fixed amount is not a good choice. If you die before your annuity is exhausted, your beneficiary gets the rest.

Fixed Period

This option pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.

Lifetime or Straight Life

This form of payments continues until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds. The life annuity is a good choice if (1) you do not need the annuity funds to provide for the needs of a beneficiary and (2) you want to maximize your monthly income.

Life With Period Certain

This form of payment gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period, the lower the monthly benefit.

Installment-Refund

This option pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary. Monthly payments are less than with a straight life annuity.

Joint And Survivor

In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees (employment model), monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. The difference is that with the employment model , the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages, and whether the survivor's payment is to be 100% of the joint amount or some lesser percentage.

How Payouts Are Taxed

The way your payouts are taxed differs for qualified and non-qualified annuities.

Qualified Annuity

A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (simplified employee pension), or some other retirement plan. The tax-qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits—and penalties—that Congress saw fit to attach to such qualified plans.

The tax benefits are:

1. Any nondeductible or after-tax amount you put into the plan is not subject to income tax when withdrawn
2. The earnings on your investment are not taxed until withdrawal

If you withdraw money from a qualified plan annuity before the age of 59-1/2, you will have to pay a 10% penalty on the amount withdrawn in addition to paying the regular income tax. There are exceptions to the 10% penalty, including an exception for taking the annuity out in a series of equal periodic payments over the rest of your life.

Once you reach age 70-1/2, you will have to start taking withdrawals in certain minimum amounts specified by the tax law (with exceptions for Roth IRAs and for employees still working after age 70-1/2).

Non-Qualified Annuity

A non-qualified annuity is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings. However, you pay tax on the part of the withdrawals that represent earnings on your original investment.

If you make a withdrawal before the age of 59-1/2, you will pay the 10% penalty only on the portion of the withdrawal that represents earnings.

With a non-qualified annuity, you are not subject to the minimum distribution rules that apply to qualified plans after you reach age 70-1/2.

Tax on Your Beneficiaries or Heirs

If your annuity is to continue after your death, other taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn't designate a beneficiary).

Income tax: Annuity payments collected by your beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by you.

Exception: There's no 10% penalty on withdrawal under age 59-1/2 regardless of the recipient's age, or your age at death.

Estate tax: The present value at your death of the remaining annuity payments is an asset of your estate, and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.

Tip: Ask your sales representative for a recent survey by Variable Annuity Research & Data Service. Many annuity portfolios are tracked by this service.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

How To Shop For An Annuity

Although annuities are issued by insurance companies, they may be purchased through banks, insurance agents, or stockbrokers.

There is considerable variation in the amount of fees that you will pay for a given annuity as well in the quality of the product. Thus, it is important to compare costs and quality before buying an annuity.

First, Check Out The Insurer

Before checking out the product itself, it is important to make sure that the insurance company offering it is financially sound. Because annuity investments are not federally guaranteed, the soundness of the insurance company is the only assurance you can rely on. Consult services such as A.M. Best Company, Moody’s Investor Service, Standard & Poor’s Ratings, Duff & Phelps Credit Rating Company, and Fitch IBCA, The International Rating Agency to find out how the insurer is rated.

Next, Compare Contracts

The way you should go about comparing annuity contracts varies with the type of annuity.

• Immediate annuities: Compare the settlement options. For each $1,000 invested, how much of a monthly payout will you get? Be sure to consider the interest rate and any penalties and charges.
• Deferred annuities: Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract. It is important to consider all three of these factors and not to be swayed by high interest rates alone.
• Variable annuities: Check out the past performance of the funds involved.

Tip: Ask your sales representative for a recent survey by Variable Annuity Research & Data Service. Many annuity portfolios are tracked by this service.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

Costs, Penalties, And Extras

Be sure to compare the following points when considering an annuity contract:

Surrender Penalties

Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7% for first-year withdrawals, 6% for the second year, and so on, with no charges after the seventh year. Charges that go beyond seven years, or that exceed the above amounts, should not be acceptable.

Tip: Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.

Fees And Costs

Be sure to ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. Fees might include:

• Mortality fees of 1 to 1.35% of your account (protection for the insurer in case you live a long time)
• Maintenance fees of $20 to $30 per year
• Investment advisory fees of 0.3% to 1% of the assets in the annuity’s portfolios.

Extras

These provisions are not costs, but should be asked about before you invest in the contract.

Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.

There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time.

In deciding whether to use annuities in your retirement planning (or for any other reason) and which types of annuities to use, professional guidance is advisable.

Risk To Retirees of Using An Immediate Annuity

At first glance, the immediate annuity would seem to make sense for retirees with lump-sum distributions from retirement plans. After all, an initial lump-sum premium can be converted into a series of monthly, quarterly, or yearly payments that represent a portion of principal plus interest and is guaranteed to last for life. The portion of the periodic payout that constitutes a return of principal is excluded from taxable income.

However, this strategy contains risks. For one thing, when you lock yourself into a lifetime of level payments, you fail to guard against inflation. Furthermore, you are gambling that you will live long enough to get your money back. Thus, if you buy a $150,000 annuity and die after collecting only $60,000, the insurer often gets to keep the rest. Unlike other investments, the balance doesn't go to your heirs. Finally, since the interest rate is fixed by the insurer when you buy it, you may be locking yourself into low rates.

You can hedge your bets by opting for a "period certain", or "term certain" which, in the event of your death, guarantees payment for some years to your beneficiaries. There are also "joint-and-survivor" options (which pay your spouse for the remainder of his or her life after you die) or a "refund" feature (in which some or all of the remaining principal is resumed to your beneficiaries).

Some plans offer quasi-inflation adjusted payments. One company offers a guaranteed increase in payments of $10 at three-year intervals for the first 15 years. Payments then get an annual cost-of-living adjustment with a 3% maximum. However, for these enhancements to apply, you will have to settle for much lower monthly payments than the simple version.

Recently, a few companies have introduced immediate annuities that offer potentially higher returns in return for some market risk. These "variable immediate annuities" convert an initial premium into a lifetime income; however, they tie the monthly payments to the returns on a basket of mutual funds.

Older seniors—75 years of age and up— may have fewer worries about inflation or liquidity. Nevertheless, they should question whether they really need such annuities at all.

If you want a comfortable retirement income, consider a balanced portfolio of mutual funds. If you want to guarantee that you will not outlive your money, you can plan your withdrawals over a longer time horizon.

Source: CPA Site Solutions

'Doing it yourself' may be an option if you are young, and don't have many assets or special needs.

Proper estate planning can help to increase the size of your estate, whether large or small. Its basic purposes are to (1) choose how your property will be distributed after your death, (2) help assure that your property will be distributed in an orderly and efficient way and (3) minimize taxes.

This Financial Guide gives you a roadmap to the estate planning process. It will help you to get started: to provide for your heirs, to lessen the administrative burden on your survivors, and to understand what you’ll have to do to minimize estate and income taxes. It will enable you to approach your attorney and other professional advisors with a clearer idea of what the process should entail.

Topics

• The Overall Picture
• Estate Tax "Repeal"
• Wills
• Trusts
• Post-Mortem Letters
• Livings Wills
• Life Insurance
• Disclaimers
• Lifetime Gifts
• Government and Non-Profit Agencies

The Overall Picture

Just what is your "estate"? Simply stated, it includes everything you own at your death minus your debts. Some rather tricky rules apply, which may bring back into your estate assets you’ve given away, or thought you’d given away.

Most estates pass free of federal estate tax. You can leave an unlimited amount to a surviving spouse without having it be subject to federal estate tax (i.e., the bequest provides a marital deduction). And you can currently leave your other survivors up to $2,000,000 (the 2006-8 amount, $3,500,000 in 2009 and repealed thereafter) without paying federal estate tax. In addition to federal estate tax, state inheritance taxes, which vary from state to state, must also be considered.

In addition to the two primary estate planning tools wills and trusts, there are other essential tools you should consider:

• The post-mortem letter to your spouse and survivors,
• Living wills,
• Life insurance,
• Disclaimers,
• Lifetime gifts, and
• Powers of attorney.

Estate Tax "Repeal"

The 2001 Tax Relief Act repeals the federal estate tax in one of the most confusing tax measures ever enacted. The law reduces the overall estate tax burden over the years 2002—2009, until it is repealed in 2010—subject to revival, as if these changes had never happened, on January 1, 2011. This revival arises under a sunset provision which voids all provisions of the 2001 Act, effective 1/1/11. Sunset was considered a practical necessity under the parliamentary moves—limited Senate debate and amendments—adopted to put the 2001 Act on a fast track to enactment. There have been other tax sunsets, with less sweeping consequences.

Under the current statutory scheme, absent further change, the federal estate tax is repealed only for those dying during the calendar year 2010. While the 2011 sunset would affect other provisions of the 2001 Act (such as tax rates), its biggest impact is in those situations for which taxpayers and tax professionals do long-term planning: especially estate planning.

Tax professionals consider that this situation presents at least two major reasons for planning as if your estate (if large enough) will be subject to estate tax: First, the uncertainty as to the time of death—that the repeal will have become effective in the year the individual happens to die. Second, the uncertainty about the law, that any repeal will stick—because of changes in economic forecasts and national priorities since repeal was voted.

States had death taxes long before there was a federal estate tax.  Today, many state death taxes are modeled in some way on the federal estate tax; some have other taxes taking effect at death. In some cases, the amount subject to state death tax falls as the amount subject to federal estate tax falls (absent further state action) and the tax will be repealed automatically (again absent further state action) upon the repeal of its federal counterpart. In other states, death taxes are independent of the federal tax and apply whether or not a federal tax applies. A number of states will revise their own death tax policies depending on what Congress decides to do to resolve the scheduled repeal and year-later reinstatement of the pre-2002 estate tax system.

Gift tax.  The lifetime gift tax exemption is $1,000,000. Gift tax rates fall at the same rates as estate tax rates but continue (at 35% or the top income tax rate) after estate tax repeal.

Gifts (apart from the annual exclusion of $12,000 per donee in 2007 and 2008 are applied against the $1,000,000 exemption so that gift tax is due when their total exceeds $1,000,000. If estate tax is still in existence when the donor dies, the estate will include prior taxed gifts and prior untaxed gifts counted against the $1,000,000 exemption. If an estate tax results (because the estate at death plus these prior gifts exceeds the estate tax exclusion amount applicable in the year of death), that tax is reduced by prior gift tax payments.

Some states impose gift taxes.

Caution: Under the estate/gift tax scheme now applicable, gift tax can result in situations where there would be no estate tax if assets of the same value had been held at death. So gifts that bring the gift total above the lifetime exemption should be made only on the specific advice of a tax professional.

Gift tax is continued after estate tax repeal as a device to limit asset transfers designed to avoid income tax.

Income tax after estate tax repeal. Assets acquired upon another’s death usually take a tax basis to the heir equal to the asset’s fair market value at date of death. Thus, for example, if a person bought 1,000 shares of stock at $10 a share and died when the shares were worth $50 a share (a $40,000 unrealized gain), his or her heir takes the shares at a total basis of $50,000. The heir can sell the shares for $50,000, free of income (capital gains) tax.

Fair market value basis at death is usually a step up in basis, though the basis is stepped down at death where value has fallen below cost. Basis step up—by which most inherited assets escape most capital gains tax—has been justified as a kind of compensation for the possible exposure of the entire asset (not just the unrealized gain) to estate tax, whether or not estate tax was actually imposed. The theoretical reason for basis step up is reduced if there is no estate tax. Accordingly, basis step up is repealed effective 2010, but with a major provision that allows step up to continue for up to $4,300,000 of appreciation in a decedent’s assets.

Complex estate planning for making use of this surviving basis step up is possible, but your professional adviser’s view of the prospects for estate tax repeal should govern whether such planning should be done now.

Wills

The will is the foundation of good estate planning. It’s critical to obtain competent legal help in drafting a will. A will that is poorly drafted or does not dot every legal "I" and cross every legal "t" can be the cause of endless trouble for your survivors.

Tip: Do not keep will originals in a safe deposit box. Instead, keep them in a fireproof safe at home. Give copies to your attorney and your executor.

Many people believe they do not need a will. There are many reasons, other than saving estate taxes, for having a valid and updated will.

Why You Need A Will

There are five basic reasons to prepare a will:

To Choose Beneficiaries. The intestate succession laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to his or her spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings if there are no parents). These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive. You may also wish to leave property to a charity after your death, and a will may be needed to accomplish this goal.

To Minimize Taxes. Many people feel they do not need a will because their taxable estate does not exceed the amount allowed to pass free of federal estate tax. However, your taxable estate may be larger than you think. For example, life insurance, qualified retirement plan benefits and IRAs typically pass outside of a will or of estate administration. But these assets are still part of your federal estate and can cause your estate to go over the threshold amount. Also, in some states an estate becomes subject to state death taxes at a point well below the federal threshold. A properly prepared will is necessary to implement estate tax reduction strategies.

Tip: Review of your estate plan is advisable to take into account the changes in estate and gift tax rules and in rules on items that affect the size of the your estate, such as retirement and education funding plans. Amounts subject to estate tax, and estate and gift tax rates, are scheduled to change periodically in future years. Your plan should take these planned future changes into account, but further review may be necessary.

To Appoint a Guardian. If you have minor children, you should prepare a will to name a guardian for in the event of your death and/or the death of your spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.

To Name an Executor. Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you would not have chosen. Obviously, there is an advantage, and peace of mind, in selecting an executor you trust.

To Establish Domicile. You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.

You should review your will every two or three years, or whenever your circumstances change. A change that might necessitate a change to your estate plan might include:

• Divorce,
• Having a child,
• Having children move out of the house,
• Acquiring a large asset,
• Selling a large asset, or
• A change in the tax laws.

Trusts

Today, trusts are not used only by the very wealthy. People of a wide variety of income levels use them as estate planning tools. Trusts are complex and costly to set up and run, requiring a higher level of services from an attorney than wills. They are useful in accomplishing various estate planning and financial planning goals.

What They Are

A trust owns its own property (holds the title). When it is set up, the trust appears on official papers and records as the legal owner of any property that is placed into it. The trust’s principal is the property that the trust owns, as distinguished from the interest or dividends earned by that property. The terms of the trust dictate who will get the benefit of the income from the trust property, how long the trust will last, and so on.

The trustee is the person or entity whose job it is to administer and manage the trust: make investment decisions, pay taxes, make sure the terms of the trust are carried out, and take care of the trust’s property. Generally speaking, the trust must pay income tax on any of its undistributed interest or other income.

There are basically two types of trust:

• An irrevocable trust is a separate entity, for both legal and tax purposes, and pays its own taxes. The irrevocable trust cannot be revoked or changed.
• A revocable trust is not considered a separate entity for tax purposes, although it may be considered a separate legal entity. The revocable trust can be changed or revoked—taken back—by the creator of the trust.

Another way to categorize trusts: A living (or inter vivos) trust is set up by a living person while a testamentary trust is created by a will.

What They Can Accomplish

Trusts can be used for many worthwhile purposes:

1. Give property to children.
2. Reduce estate taxes.
3. Leave assets to a spouse.
4. Provide for life insurance used to pay estate tax.

Giving property to children. People generally do not want to just give property to a minor child outright because of the financial risks involved (e.g., the child could squander it). Many people give property to a minor through a trust. The trust’s terms can be written so that the child does not get outright ownership until he or she has achieved a certain age, so that the child receives only the income from the trust property until that time. Another way to give property to a minor is via the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. These provisions, which apply in most states, provide for a custodianship over property given to a minor.

Reducing estate taxes. As noted earlier, if you leave everything to your spouse, it passes free of federal estate tax. However, when your surviving spouse dies, anything in his or her estate over the exclusion amount (also called "exemption amount") would be subject to estate tax. The exclusion amount for 2006-8 is $2,000,000; for 2009 it is $3,500,000.  The credit shelter trust, or bypass trust, is used to shelter up to the exclusion amount from the estate tax. Here’s a simplified example of how it might work:

Example: Simon and Sylvia have an estate worth $4 million. Simon’s will puts $2,000,000 worth of assets in a bypass trust. The ultimate beneficiary of this trust is Simon and Sylvia’s daughter. (The beneficiary can be anyone other than Sylvia.) Sylvia is to receive the income from that trust for her life, but her rights in the trust are limited, so that she is not considered the owner. The rest of Simon’s estate ($2,000,000) is left to Sylvia in his will.

Assuming Simon dies in 2008, the $2,000,000 in the bypass trust is sheltered by his estate tax exemption. The $2,000,000 that goes to Sylvia is deducted from the estate because of the marital deduction. Thus, on Simon’s death, the federal estate tax due is zero. When Sylvia dies, her estate will include only the $2,000,000 (if she still has it), plus any other assets she has accumulated. It will not include the $2,000,000 put into the bypass trust, which will be exempt from tax because of the $2,000,000 estate tax exemption.

Thus, the federal estate tax on Sylvia will apply only to her assets in excess of $2,000,000 (or $3,500,000 if she dies in 2009). Result: The family has sheltered assets worth $4 million from estate tax in the Simon/Sylvia generation. Without the bypass trust, the estate tax would have applied to an additional $2,000,000 of the estate.

Caution: Wills may be drafted to leave a bypass trust an amount equal to the exclusion amount in the year of death, rather than a specific dollar amount. However, because amounts change, review of the estate plan may be needed to keep the desired balance between what the spouse is to get and what trust beneficiaries are to get.

Leaving an asset to a spouse. The marital deduction trust allows the first spouse to die to place estate assets in a trust for the surviving spouse, instead of leaving them to him or her outright. If the legal requirements are met, the estate gets the marital deduction, but can still preserve assets for heirs other than the surviving spouse. Typically, the income of such trusts will go to the surviving spouse for life and the principal will go to children. All of the income must go to the surviving spouse for the trust to qualify for the marital deduction. It must be paid out at least once a year. The spouse may have some access to the principal. When the second spouse dies, the property is included in his or her estate for estate tax purposes.

Pay estate tax. Complex and expensive arrangements, life insurance trusts are usually used to finance future estate taxes on an estate that contains a business interest or real estate.

Post-Mortem Letters

Does anyone but you know where your tax records and supporting tax documents are located? How about deeds, titles, wills, insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? If you pass away without leaving your heirs this information, it will cause a lot of headaches. Worse than that, part of your estate may have to spent in needless taxes, claims, or expenses because the information is missing.

The post-mortem letter is an often overlooked estate planning tool. It tells your executors and survivors what they need to know to maximize your estate—the location of assets, records, and contacts. Without the post-mortem letter, you risk losing part of your estate’s assets because necessary documentation cannot be located.

Livings Wills

A living will makes known your wishes as to what medical treatment or measures you want to have if you become incapacitated and unable to make the decision yourself. It tells family and physicians whether you want to be kept alive through mechanical means or whether you would prefer not to have such means used. If there is no living will, this decision is left up to the family, or the physicians, to decide. Stating your preference in a living will can take some of the burden off family members and decrease the stress in an emergency.

Life Insurance

The main purpose of life insurance is to provide for the welfare of survivors. But life insurance can also serve as an estate planning tool. For example, it can be used to finance the payment of future estate taxes or to finance a buy-out of a deceased’s interest in a business. It can also be used to pay funeral and final expenses and debts.

Tip: If the decedent owns the policy, the proceeds will be included in the estate, and subject to estate tax. However, if the decedent gives away all incidents of ownership in the policy, and names a beneficiary other than the estate, the proceeds will not be included in the estate.

Disclaimers

The disclaimer is a way for an heir to refuse all or part of property that would otherwise pass to him or her, via will, intestacy laws, or by operation of law. An effective disclaimer passes the property to the next beneficiary in line.

Tip: With a properly drawn disclaimer, the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary. This may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intra-family income shifting for maximum use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.

Tip: Disclaimers can also be used to provide for financial contingencies. For example, a beneficiary can disclaim an interest if someone else is in need of funds.

Lifetime Gifts

The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income. You can make annual gifts in 2008 of up to $12,000 ($24,000 for a married couple) to as many donees as you desire. The $12,000 is excluded from the federal gift tax, so that you will not incur gift tax liability. Further, each $12,000 you give away during your lifetime reduces your estate for federal estate tax purposes.

Government and Non-Profit Agencies

• An organization that provides information on officers’ benefits and estate planning:

  Army and Air Force Mutual Aid Association

  800-336-4538

• This veterans’ benefit organization for Navy, Marine Corps, Coast Guard, Public Health, and NOAA personnel provides information:

  Navy Mutual Aid Association

  800-628-6011

• These publications contain estate planning tips for military personnel:
  • National Guard Almanac
  • Reserve Forces Almanac
  • Retired Military Almanac
  • Uniformed Services Almanac (Active Duty)

Source: CPA Site Solutions

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death—$2,000,000 in 2006-8, $3,500,000 in 2009. But there are a couple of important exceptions to the general rule. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. And estate taxes won't be assessed on any property you leave to a tax-exempt charity.ot:

Do states also impose death taxes?

Most states impose death taxes of some kind. In many cases, there's a state death tax only where a federal estate tax would apply. But some states have estate taxes that are "uncoupled" form the federal tax, and some have inheritance taxes.

Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you.

How can I minimize federal estate taxes?

There are various ways. One way is to leave your children, directly or in trust, an amount up to the estate tax exemption amount ($2,000,000 in 2006-8) and the balance to your spouse.

Can I avoid paying state death taxes?

In most states that base their death taxes on the federal estate tax, steps that avoid federal tax also avoid state tax. If your state imposes some other kind of death tax, your professional advisor can help minimize the state tax by actions specifically adapted to that tax.

If you live in two states—winter here, summer there—your inheritors may save on death taxes if you can make your legal residence in the state with lower death taxes.

Can I just give all my property away before I die and avoid estate taxes?

You can give up to $12,000 (2007 number) per person per year with no gift tax liability.  Gifts exceeding that amount are counted against a gift tax exemption of $1,000,000.  Gifts exceeding that exemption are subject to gift tax.  At your death, these gifts could become your taxable estate (with a credit for gift tax paid).

There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 (indexed; the 2007 amount is $125,000) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.

© CPA Site Solutions

Estate tax planning is very important to preserving your wealth for future generations. Knowing your potential estate tax liability is a great place to start your estate tax plan.

This calculator can help you estimate your estate tax liability. You can also use it to project the value of your estate, and the associated estate tax, for the next ten years.

Please be aware that certain estate planning documents, which are beyond the scope of this calculator, may be necessary in order for assets to be distributed according to your wishes.

When seeking legal aid, as in purchasing any product or service, it’s important to be a smart consumer: to be well informed and to know exactly what you are getting for your money. This Financial Guide discusses how to find an attorney who will provide cost-effective help with your legal problems.

Topics

• Step 1: Decide Whether You Need A Lawyer
• Step 2: Get Some Names
• Step 3: Start Asking Questions
• Step 4: Interview The Candidates
• Step 5: Make Your Decision
• Step 6: Clarify Fee Arrangements and Similar Issues
• Step 7: Define Your Relationship And Stay Involved
• Elder Law
• Recommended Books
• Legal Hot-Lines
• Other Free Or Low-Cost Services

This Financial Guide gives you a roadmap to the process of finding a good lawyer and making sure that the legal services you are getting are cost-effective. Before hiring an attorney, take the following steps.

Step 1: Decide Whether You Need A Lawyer

You hire a lawyer to help you resolve disputes, engage in legal transactions, or assert your legal rights. For certain legally complex or time-consuming disputes or problems, there is no doubt that a lawyer is necessary. For example, if you want a will prepared, or a more complex business deal handled, you will need a lawyer. Or if a court case is involved (other than a simple, routine matter), you’ll almost always need a lawyer. There may, however, be ways to resolve a problem or dispute without the specialized assistance of a lawyer.

In deciding whether to hire a lawyer, consider the following:

• Does the matter involve a complex legal issue, or is it likely to go to court? These two factors indicate you need a lawyer.
• Is a form or self-help book available that you can use instead of hiring a lawyer? You may be able to solve certain problems with no legal help or with only minimal assistance.
• Is a large amount of money, property, or time involved? These factors indicate you need a lawyer.
• Are there any non-lawyer legal resources available to assist you (such as mediation, arbitration, or small claims court)?

Mediation or Arbitration

Dispute resolution centers have been established in almost all states. The American Bar Association's Section on Dispute Resolution estimates that there are currently more than 450 community dispute resolution centers and more than 1,200 court-related dispute resolution programs throughout the country. While the centers vary, most specialize in helping to resolve problems in the areas of consumer complaints, landlord/tenant disputes, and disagreements between neighbors or family members.

The names, services, and fees (if any) of the centers vary from place to place, but they generally use two different processes to resolve problems: mediation and arbitration. Mediation involves a neutral person who assists the two sides to discuss their differences and possibly reach an agreement. In arbitration, the neutral third party conducts a more formal process and makes a decision (usually written) after listening to both sides.

If both parties can agree to it, using a dispute resolution center (sometimes called a community justice center) or a private mediation center can be a low-cost alternative to bringing a suit in court or hiring an attorney to represent you in a negotiation. In some areas, the court itself may refer certain types of cases to a mediation program.

Small Claims Court

Small claims court may be appropriate if you have a monetary claim for damages within the limits set by your state (usually $1,000 to $5,000). These courts are more informal and involve less paperwork than regular courts. The filing costs are low and the system is faster than the regular court system. If you file in small claims court, be prepared to act as your own attorney, gather the needed evidence, research the law, and present your story in court.

Are you willing to collect information and do research on your own? Is there a time limit on when you must file suit? Ask the small claims court clerk or look it up in your local law library. You must file your case before this time limit (usually within a year). Are you able to prove that the person against whom you are making the claim owes you money? You must be able to prove legal liability and that you have suffered a financial loss as the result of someone else's action.

In deciding whether to use small claims court, check the many "how-to" books in the library for general information. Check with the clerk in the small claims court, local consumer agency, or legal aid office for more information in your area.

Step 2: Get Some Names

Once you have decided you need a lawyer, it’s time to begin shopping around. The first step is to compile a list of names. The recommendation of someone whose judgment you trust is an excellent place to start your search. You may want to begin by asking relatives, friends, clergy, social workers, or your doctor for recommendations. Often those persons can refer you to someone who has provided similar legal services for them. You need to know more about the lawyer than simply that he or she is a good attorney. Ask those making the recommendation for specific information about the type of legal help the lawyer provided them and how their case was handled.

Bar Association Referral Lists

Many state and local bar associations maintain lawyer referral lists by specialty. A referral service will provide you with the name of an attorney who specializes in the area you need. Keep in mind, however, that a referral is not a recommendation and does not guarantee a level of experience. Bar associations may charge participating lawyers and law firms a fee to be included on the referral list.

Caution: Many bar associations have committees that conduct training or public service work in specialized areas. An attorney serving on one of these committees could have the expertise you are looking for.

Tip: If you use a referral service, ask how attorneys are chosen to be listed with that particular service. Many services make referrals to all lawyers who are members (regardless of type and level of experience) of a particular organization.

Other Resources

Two of the larger lawyer directories are probably available at your local library. The Martindale Hubbell Law Directory lists 600,000 American and Canadian lawyers alphabetically by state and by categories. Each entry has a biography, with information on each lawyer's education, specialty, law firm, and the date of admittance to the bar. It also includes a "rating" based on information supplied by fellow lawyers. The Who's Who in American Law directory lists about 24,000 lawyers and includes biographical notes. This directory is somewhat difficult to use because the lawyers are listed alphabetically rather than by state or specific area of expertise.

Many communities also have other lawyer referral services to assist people in finding a lawyer. Often the services are for specific groups such as persons with disabilities, older persons, or victims of domestic violence. Groups that may be good sources for a local referral include the Alzheimer's Association and other support groups for specific diseases, such as Children of Aging Parents, the Older Women's League, the state civil liberties union, a local social services agency, or the local agency on aging.

Other referral services may be financed by a few lawyers who receive all the referrals. Some services may screen the lawyers who wish to have referrals in a particular area.

Lawyers are permitted to advertise within specific guidelines. You will be able to gather some useful information from ads. However, as with any advertisement, take everything with a grain of salt.

Many attorneys specializing in areas of the law in which there may be substantial fees--such as personal injury or medical malpractice--advertise free consultations. Advertisements may list a set fee for a particular type of case. Many attorneys who do not advertise may also provide free consultations or offer set fees for a certain legal problem.

Caution: Keep in mind that set fees are usually for routine, uncomplicated cases. Your case may not be regarded as simple.

In addition, the court and your banker may be good referral sources. Finally, the yellow pages of the telephone book often lists lawyers according to their specialties.

Step 3: Start Asking Questions

To start the process of hiring a lawyer, call several lawyers to whom you have been referred or about whom you have heard. Ask them the preliminary questions listed below before committing yourself to a consultation. The answers you get will help you choose the two or three lawyers you wish to interview.

Since this is only a preliminary telephone conversation, ask questions that can be answered briefly. Here are some questions to ask:

• Will you provide a free consultation for the initial interview?
• How long have you been in practice?
• What percentage of your cases are similar to my type of legal problem? (A lawyer with experience in handling cases like yours will be more efficient, which may save you money.)
• Can you provide me with any references, such as trust officers in banks, other attorneys, or clients?
• Do you represent any clients or special-interest groups that might cause a conflict of interest?
• What type of fee arrangement do you require? Are the fees negotiable?
• What type of information should I bring with me to the initial consultation?

Follow up your phone calls by scheduling interviews with at least two of the attorneys. Don't feel embarrassed about selecting only the best candidates or canceling appointments with some of the attorneys after you complete all of your exploratory calls.

Step 4: Interview The Candidates

A personal interview is absolutely necessary. Whether you want a lawyer for a single transaction or over a period of years, you will be sharing details of your life and relying upon this person's expertise and advice. Since the lawyer will act on your behalf, it is critical that you feel comfortable with your attorney and that your will function in an atmosphere of mutual respect. A personal interview is the best way to make this judgment.

Come prepared with a brief summary of your immediate case (including dates and facts) as well as a list of general questions for the attorney.

The purpose of the interview is twofold: (1) to decide if the attorney has the necessary experience and is available to take your case; and, (2) to decide if you are comfortable with the fee arrangement and, most importantly, comfortable working with the attorney.

Since this an initial consultation, it may not be a lengthy one. Be concise and approach the interview in a businesslike manner. Be prepared to take notes, to listen carefully to the attorney, and to make observations about the office and how it is run.

Bring to the interview:

• A brief, written summary of your case
• A list of questions for the attorney
• Cards or a small notebook
• A pen/pencil for notes
• Copies of any notices you have received

In addition to any unanswered questions from the telephone calls, you may want to consider asking the following questions:

• How long has this attorney worked on cases like yours?
• Based on your brief description of the problem, ask about the range of outcomes you could expect (rough estimate of length of time, cost for legal services, and size of the award if any). Ask if the case is likely to be settled or will it go to trial.

  Caution: Many factors affect how a case is decided. If the attorney gives you an ironclad promise that you will win, a red flag should go up.

• Ask for an opinion of the strengths and weaknesses of a case like yours. This should be based on your lawyer's experience with similar cases.
• Ask who will be working on your case. Will this attorney be doing all of the research, case preparation, negotiation, and court work, or will associates or non-attorney advocates be handling parts of it? What are the experience and expertise of these other advocates? Will other experts, including other attorneys, be consulted? If so, who will they be? If others will work on the case, what will the fee arrangement be? (These questions are particularly important to ask of attorneys practicing in large law firms where work is often delegated to associates and/or paralegals.)
• Ask about fees and expenses. These are not the same. An attorney's fee is the payment you make for the attorney's time. Expenses refer to a variety of other costs including witness fees, court filing fees, copying, messenger service, etc. (See the question on fees below.)
• Ask if the attorney will work out a written fee agreement with you. (The specifics of the arrangement should be in writing.)
• Ask how often the attorney will bill you; is a retainer required?
• Decide what type of involvement in the case you want. Ask if the attorney is comfortable with that level of involvement. (See the questions below on client involvement and cutting costs.)
• Find out what hours the attorney will be available for meetings. This may be particularly important if you must leave work to meet with the attorney. Will you meet in the evening or on weekends? Will the attorney visit your home, if needed?

Observe how the attorney responds to your questions. Does he or she seem organized (take notes, etc.)? Respond openly and directly to your questions? Provide you with written background material on the topics of interest to you? Provide clear explanations?

Observe the physical surroundings and office staff. Is the staff friendly? Are they responsive? Do people identify themselves on the telephone so you know to whom you are speaking? Does anyone explain the roles of people with whom you may be dealing? Is the pace frenetic, lackadaisical, or busy in an organized fashion?

Observe your attorney during the preliminary interview to see whether he or she fits the bill:

• Neatness counts. Does the attorney appear neat and clean?
• Timeliness. You should not be kept waiting for your appointment.
• Focus. Does the attorney leave the room frequently during your appointment? Does he or she take phone calls? You should be getting his complete attention. Does the attorney listen attentively, or does he or she appear bored or distracted, or glance at his or her watch?
• Openness about fees. An attorney who does not discuss fee arrangements up front may be more likely to surprise you with large, unexpected bills. The fee should be discussed at the first interview.

Step 5: Make Your Decision

After the interviews, review your notes. Look at the strengths and weaknesses of each attorney you interviewed. Decide what is most important to you. Factors to consider in choosing an attorney include:

• Cost. Cost is rarely the only deciding factor unless it is a simple case which will take little time and that is the only contact you plan to have with the attorney. However, it is critical that you feel comfortable and knowledgeable about the financial arrangement. Disputes over fees are one of the most common conflicts between clients and attorneys.
• Experience. Does the attorney have the necessary experience for the case you have? For a simple will, a relatively new attorney may be a cost-effective choice. However, for a complex estate plan, you need someone with more experience. The higher fee is likely to be balanced by not having to pay for the attorney to learn on the job.
• Availability. Can the attorney accept the case immediately? Will the attorney be able to devote the time you want to the case? This is particularly important if you prefer a lot of interaction with your attorney.
• Your Comfort Level/Mutual Respect. It is important not to choose an attorney simply because you are impressed by the firm's reputation. You should be satisfied with the expertise of the people actually working on your case. Will you trust them enough to tell them private matters relevant to the case that you may not have shared with others? Do you believe the attorney treats your ideas and opinions with respect?

Step 6: Clarify Fee Arrangements and Similar Issues

Fees are one of the least discussed parts of any legal case, yet are highly important to both client and lawyer. Frequently fees are not discussed early enough, candidly enough, or in enough detail. Why? Generally, the discussion can be uncomfortable for both parties. However, becoming knowledgeable about the types of fee arrangements can increase your comfort level in dealing with this crucial part of hiring an attorney.

Tip: Remember: The specifics of a fee arrangement should be in writing.

The market rate for any given legal service varies by locality. A "fair" fee is what seems fair to you, based on your knowledge of going rates. Whether you are comfortable with a fee is likely to be based on the following factors:

• How much you can afford
• Whether the case is routine or requires special expertise
• The range of attorney rates for this type of case in your area

The fee arrangement you make with your lawyer will significant affect how much you will pay for the services.

Types Of Fee Arrangements

Here are several common types of fee arrangements used by lawyers:

Flat fee. The lawyer will charge you a specific total fee for your case. A flat fee is usually offered only if your case is relatively simple or routine.

Tip: Ask if photocopying, typing, and other out-of-pocket expenses are covered by this flat fee. Often the total bill is the flat fee plus these out-of-pocket expenses.

Hourly rate. The attorney will charge you for each hour (or portion of an hour) that he or she works on your case. If your attorney's fee is $100 per hour, and he or she works ten hours, the cost will be $1,000. Some attorneys charge a higher rate for court work and less per hour for research or case preparation.

Tip: If you agree to an hourly rate, be sure to find out how much experience your attorney has had with your type of case. A less experienced attorney will usually require more time to research your case, although he or she may charge a lower hourly rate.

Large law firms usually charge more than small law firms and urban attorneys often charge more per hour than attorneys practicing in rural areas.

Tip: Ask what is included in the hourly rate. If other staff such as secretaries, messengers, paralegals, and law clerks will be working on your case, find out how their time will be charged to you. Ask about costs and out-of-pocket expenses, which are usually billed in addition to the hourly rate.

Contingency fee. Under this arrangement, the attorney's fee is based on a percentage of what you are awarded in the case. If you lose the case, the attorney does not get a fee, although you will still have to pay expenses. The contingency fee percentage varies and some lawyers offer a sliding scale based on how far along the case is when it is settled. A one-third fee is common.

A contingency fee is usually found in personal injury cases, accidental claims, property damage cases, or other cases where a large amount of money is involved.

Referral fee. On occasion, an attorney who has accepted your case may refer you to another attorney who specializes in the area you need. Sometimes the first attorney will ask for a portion of the total fee you pay for the case. This "referral fee" may be prohibited under state codes of professional responsibility unless certain rules are followed. The rules usually include a requirement that client fees be split only if each attorney does some work, the client knows about the arrangement, and the total fee is reasonable.

Suggestions for Ensuring Cost Effectiveness

It is important to remember that a lawyer's fees are often negotiable. Your lawyer is unlikely to invite you to bargain over fees, and you may not want to bring the subject up. Keep in mind, however, that there are some situations in which attorneys are more likely to consider a lower fee. If your case is interesting, unique, or extremely lucrative, an attorney may be willing to negotiate. If the firm is actively seeking more work or is new to your locality, it may handle a case for less as a way to build its caseload.

There are two general situations in which you may wish to raise the issue of lower fees. First, if your case has the possibility of significant attorney's fees, you are in a stronger position if you are willing to shop around and to negotiate. It's wise to negotiate, for example, in personal injury cases. Most lawyers will propose a standard contingency fee for one-third of any damages that they win for you, nothing if they lose.

Tip: The contingency fee is designed to cover the risk the lawyer is taking; yet some experts estimate that at least one out of every five contingency fee cases involves virtually no risk.

It makes sense to sit down with several different lawyers before choosing one. Ask each to assess the merits of the case and the likelihood that you will receive money if you are successful. The consultations will be free and you will come away with a more realistic sense of what fee arrangements you should agree to. Generally, the higher the likelihood of success in a case, the lower the contingency percentage you may be able to negotiate. Some clients also prefer to pay their lawyers on a sliding scale. For example, 33 percent for the first $100,000 in damages, 25 percent for the next $100,000, and 15 percent above that.

You may be able to negotiate other arrangements that will save you money, including flat fees instead of hourly charges, hourly rates up to a prearranged maximum for the entire project, and fees based partly on the outcome.

Comparison Shop for Flat Fees on Simple Cases

When you need a simple transaction like a will, a real estate closing, or a power of attorney, you can comparison shop. Contracting for legal services is like any other consumer transaction in that the prices and the work product vary. Call several attorneys and compare their answers to the questions listed above. Only after you get a sense of the range of fees will you be able to determine which rate and which attorney best suit you and your budget.

Ask About Billing Method for Hourly Rates

A written agreement specifying the fee arrangement and the work involved is the best way of assuring clear communication between you and your attorney about the total cost of the case.

Tip: In some cases, it may save hundreds of dollars if you ask a lawyer to bill at 6-minute instead of 15-minute intervals. For example, if a lawyer's minimum billing unit is 15 minutes, each 5-minute phone call will be billed at one-fourth of the hourly rate. At 6-minute phone intervals, a 5-minute phone call costs just one-tenth of the hourly rate.

Choose a Lawyer with the Appropriate Qualifications

Most legal work is relatively routine. It often has little to do with complex legal theory or analysis, and much more to do with knowing which form to fill out and which county clerk will process it most quickly. Smaller firms, attorneys charging lower rates, and less experienced attorneys are often well suited for the broad range of legal work needed by many consumers. Recently graduated attorneys may offer to work for a somewhat lower price to compensate for the extra risk and time involved in becoming familiar with the specific area of law. Lawyers who charge $300 an hour and up are appropriate for very sophisticated trusts and estate work, corporate litigation, or complex criminal defense work.

Tip: Be wary of big law firms where you may get the impression that the young associate who has been assigned to your case (at a lower rate) is being supervised closely by the senior partners listed in the firm name. The associate may take three or four times as long as an experienced lawyer to draft the necessary papers. You might want to meet with the associate and the supervising partner before work begins to ascertain who is going to do what, and to get an estimate as to how much the work should cost. Such a meeting may prevent the firm from charging you for an associate's on-the-job training.

Offer to Perform Some of the Work

Discuss ways that you can help the attorney on the case. For example, if the attorney needs copies of birth certificates or other records, you can write the letter to request them and save your attorney the time needed to dictate and process the letter.

Splitting the work with an attorney also can cut the cost of writing a will or health-care power of attorney or setting up a trust. You can draft the document, using a standard form as a guide, and then present it to your lawyer for reviewing and finalizing the work. Make sure that your attorney is willing to do this kind of work and discuss the fee if major rewriting is needed.

Hire the Attorney to Act as Go-Between

Some lawyers are open to negotiating a lower fee if you are only looking for their legal expertise to write a letter to the other side to settle. You may wish to hire the attorney for this type of limited assistance initially and follow up yourself. If you are unsuccessful, you may wish to retain the attorney to further pursue the case.

Hire the Attorney to Act as Your Pro Se Coach

If you want to represent yourself in court (called "appearing pro se"), hire your attorney to act as a pro se coach who will review documents and letters that you prepare and sign. The attorney may also help you prepare for a hearing in which you represent yourself. This might be appropriate when appearing in small claims court to enforce a lease or collect bills owed to you, for example.

Not all attorneys will be comfortable in this role, but some, especially in smaller firms, may be interested in empowering consumers.

Choose a Lawyer Who Specializes in What You Need

You are likely to save money by choosing someone who has the knowledge and office systems set up to handle cases like yours cost-effectively. That attorney is also more likely to be knowledgeable about specific procedures relating to your case, expert witnesses in the area, and other attorney experts for consultation.

Note: A rapidly growing specialty in the legal profession is "Elder Law," which includes traditional areas of legal practice such as estate planning and probate, as well as public benefits such as Medicare and Social Security, and issues such as planning for long-term care placement and health-care decision-making. Some attorneys have begun identifying themselves as elder law specialists. Most of these do not specialize in all of the areas covered by the broad term elder law. Therefore, you should ask which areas an attorney handles.

Prepare for Your Attorney Meetings

Come prepared with all of the necessary information and papers. Ask questions to make sure that you are providing everything the attorney needs. Think about your legal problem and gather the information your attorney will need. Write down the names, addresses, and phone numbers of other people involved in the case. Write down the important events or facts. Bring any relevant papers such as contracts, letters, court notices, or leases. Keep copies of this information and provide it to your attorney. The more work you do to prepare, the less time your attorney needs to spend and charge you for finding the information.

Answer Your Attorney's Questions Fully

Your communications to your attorney are confidential. Pay close attention to the questions your attorney asks you and offer complete and honest answers. If you are not sure if a piece of information is relevant, ask your attorney. If your attorney knows all the facts as early as possible in the case, it will save time and money that might be spent later on further investigation or misdirected case development.

If the Situation Changes, Tell Your Attorney as Soon as Possible

You are the primary source of information about your case and your attorney will act based on the information you have provided. If something happens or if you find out new information which may affect your case, give the information to your attorney quickly. It may change what he or she is doing on your case. It may save the attorney's time and your money or save the attorney from heading in the wrong direction on a case.

Maximize the Value of Your Contacts with Your Attorney

Keep in mind that you will pay for virtually every minute you spend with your attorney. Consolidate your questions or information-giving into a single call. Pass on information in writing or to other office staff rather than speaking directly with the attorney, unless you have a specific reason to do so.

Caution: While a friendly relationship can facilitate the handling of your case, limit phone calls and meetings to the business of the case. You do not want to pay for a long, friendly conversation about other matters.

Examine Your Bill

Request that your attorney bill you on a regular basis. Even if you have agreed on a contingency fee and will not actually pay the expenses until the case is settled, you should periodically examine the expenses. Question any items that you do not understand or that are not covered in your fee agreement.

Caution: Your attorney may list the cost of attending continuing legal education seminars in the area of your case. Unless you have agreed to cover these costs, you should question this entry.

Step 7: Define Your Relationship And Stay Involved

In films or television, a client simply tells the attorney of the problem and the attorney, without regard for expenses or further consultation, solves the case. In real life, a partnership is necessary. You must state, at the outset, your expectations on how much you want the attorney to consult with you and which decisions (if any) he or she can make without consulting you. You must also discuss the details of your legal costs in the case.

There are many variations of the attorney-client relationship, from full representation to having the attorney act as a "pro se coach."

The bottom line is that the outcome of the case affects you much more than it affects your attorney. No matter what role you envision for your attorney, you should be the decision-maker on all major points in your case. An attorney is hired for his or her experience on legal procedures and familiarity with the appropriate court system, but the more fully informed you are, the better prepared you will be to make the necessary key decisions and to oversee the work of your attorney.

At a minimum, educate yourself about the general area of law relevant to your case by reviewing one of the many self-help legal manuals and gathering information from the attorney interviews you conduct. You can find out about courtroom procedures from staff at the court (although they may be reluctant), legal aid staff, or the law library or your public library.

Further, you can support the attorney by gathering documents and performing other agreed upon tasks. It may be wise both financially and in terms of your staying involved in the case for you to undertake certain tasks to support the work on your case. There are various tasks in the development of any case which do not require specialized legal expertise, e.g., compiling information, researching regulations or company policy, obtaining birth certificates or other documents, or reviewing the factual portions of documents prepared for court.

In making the decision about the degree of your involvement, ask yourself the following questions:

• How much time and effort can I realistically contribute?
• How much do I need to control (monitor) the day-to-day direction of the case?
• How familiar am I with this area of the law?
• How much is this case worth to me (financially)?
• How important is the outcome?

You will need to have clear agreement with your attorney about your relative roles and expectations. On one hand, your involvement should not hinder the attorney from exercising the expertise for which you hired the attorney. On the other, all options should be explained to you in clear language. Ask questions about the relative merits of a proposed step until you understand it.

Be wary of an attorney who makes strategic decisions without you, or who presents a proposed next step as necessary without explaining its merits and costs.

Here is a list of questions to be addressed, which can serve as a guideline:

1. Do you want your attorney to act as pro se coach or as your representative? What work can you provide on the case? How frequently do you want to receive a billing (or a list of expenses if a contingency fee)?
2. Do you want to review copies of pleadings (court papers) before they are filed? Receive copies after they are filed? Review some but not all documents? Which ones?
3. How often is it appropriate to meet? What benchmark should trigger a meeting?
4. How often do you want to talk to the attorney or receive a case update? Can staff convey the message? Will a short note be sufficient?
5. Are there spending limits or benchmark figures for expenses or fees which should trigger a client consultation before going ahead on the case?

Elder Law

Many attorneys who specialize in the elder law area are familiar with the other professionals (such as ombudsmen, social workers, geriatric care managers, or other elder care professionals) who can provide related services to older people. They may also be trained in the mental and physical effects of the normal aging process.

What Elder Law Includes

The broad range of legal areas covered by "elder law" includes:

• Estate planning, including the management of an estate during the person's lifetime and planning how the estate will be divided upon the person's death through wills, trusts, asset transfers, tax planning, and other methods.
• Long-term care planning, including nursing home issues such as quality of care, admissions contracts, prevention of spousal impoverishment, and resident's rights. It also includes life care or retirement community issues such as evaluating the proposed plan/contract.
• Retirement issues, including Social Security (retirement and disability and survivors' benefits) and other public pensions (veterans, civil service) and benefits as well as private pension benefits.
• Health care issue, including Medicare, Medicaid, Medigap insurance, and long-term care insurance.
• Housing issues, including home equity conversion and age discrimination.
• Planning for possible incapacity, by choosing in advance how health care and financial decisions will be made if you are unable to do so (methods include durable powers of attorney, health-care powers of attorney, living wills, and other means of delegating the decision making). The attorney may also be able to advise on conservatorship and guardianship proceedings in the event that the elder has not planned for incapacity.
•  
• Age discrimination issues including bringing cases under the Age Discrimination in Employment Act.

Today most lawyers limit their practices to a few areas such as domestic relations, criminal law, personal injury, estate planning and probate, real estate, or tax issues. Even attorneys who list themselves as elder law specialists are unlikely to be expert in all the areas detailed above.

Do You Need An Elder Law Specialist?

The answer depends on your situation. If you already have a good working relationship with an attorney, discuss your particular legal needs with that attorney. Ask about your lawyer's experience in the issues typical of elder law. If the attorney is experienced in the areas of most concern to you, it is unlikely you will wish to go elsewhere. If the attorney is unfamiliar with elder law issues, ask the attorney for a referral.

Another reason you may want to seek out an elder law specialist is that finding the best solution is likely to involve a variety of other professionals such as physicians, home care agency workers, geriatric care managers, bank officers, and long-term care ombudsmen. An attorney familiar with this network can be very helpful. If needed, the attorney can act as a legal representative (fiduciary) if a client becomes incapacitated. Elder law specialists may work closely with financial planners, social workers, or geriatric care managers. This can be an advantage for many clients as a number of elder law issues involve both legal and non-legal solutions.

Note: It is always necessary to look for someone with the appropriate technical expertise and experience regardless of how the lawyer identifies himself or herself.

The National Academy of Elder Law Attorneys (NAELA) is a nonprofit professional association of attorneys specializing in legal issues affecting older persons. NAELA is not a legal referral service; however, it does sell a registry listing over 350 member attorneys nationwide ($25 including shipping and handling). National Academy of Elder Law Attorneys, Inc., 1604 N. Country Club Road, Tucson, AZ 85716, (602) 881-4005

The Area Agency on Aging

The Older Americans Act (OAA) requires your state office on aging to fund a local Area Agency on Aging (AAA) program that provides free legal help on non-criminal matters to people age 60 and over. Most of the over 644 local AAAs set aside funds to provide free legal assistance for those older persons who are in the greatest social and economic need. In many states, the AAAs contract with the Legal Services Corporation (LSC) funded programs described below. They may also set up their own programs or contract with private attorneys to provide legal services to older persons.

OAA legal services advocates provide representation in court or at administrative hearings, community education, and self-help publications. The OAA programs offer other types of assistance and services as well. For example, an advocate may assist an older person with a food stamp appeal and arrange for transportation to a nutrition site. The OAA legal services programs do a great deal of outreach to the community. Some attorneys spend as much as half of their time speaking at senior centers or visiting people in their own homes.

There are no income guidelines that clients must meet in order to qualify for services. However, the legal services provider and the Area Agency on Aging may set priorities about the preferred type of representation, such as obtaining government benefits, and may not be able to provide help in cases the agency considers to be a lower priority.

There is no cost to eligible clients. OAA legal services providers handle civil (not criminal) matters for persons age 60 or older regardless of income. Local offices set priorities for the types of cases they will handle. Not all cases can be handled.

Programs or offices providing free legal help to older persons can be identified by calling your local Area Agency on Aging listed in the government section of the telephone directory.

A national directory of OAA legal services providers (entitled Law & Aging Resource Guide) lists a state by-state breakdown of the addresses and phone numbers of each office and is available from the American Bar Association Commission on Legal Problems of the Elderly, 1800 M Street, NW, Suite 200, Washington, DC 20036, (202) 331-2297. Single state profiles are free. A complete copy of all state profiles is $20.

Other Sources of Legal Assistance For Senior Citizens

There are a number of sources of legal help for elderly people:

The Administration on Aging offers free pension counseling programs. It has offices in the following locations:

Region I- CT, MA, ME, NH, RI, VT: (617) 565-1158
Region II & III- NY, NJ, PR, VI, DC, DE,MD, PA, VA, WV: (212) 254-2976
Region IV - AL, FL, GA, KY, MS, NC, SC, TN: (404) 562-7600
Region V- IL, IN, MI, MN, OH, WI: (312) 353-3141
Region VI - AR, LA, OK, NM, TX: (214) 767-2971
Region VII - IA, KS, MO, NE: (816) 426-3511
Region VIII - CO, MT, UT, WY, ND, SD: (303) 844-2951
Region IX - CA, NV, AZ, HI, GU, CNMI, AS: (415) 437-8780
Region X - AK, ID, OR, WA: (206) 615-2298

The National Citizens' Coalition for Nursing Home Reform can locate an ombudsman in your area and provide general information on nursing homes.

1828 L Street, NW, Suite 801
Washington, DC 20036
Tel. (202) 332-2275

Legal Hot-Lines

In this section, we list publications helpful to those trying to find a lawyer and lists of sources for legal services for seniors and low-income people.

• The American Association of Retired Persons (AARP) and the federal government's Administration on Aging (AoA) sponsor statewide legal hot-lines that provide legal advice to all persons age 60 or older, regardless of income or the nature of their problem. The hot-lines are staffed by attorneys who give advice, send pamphlets, or make referrals to special panels of attorneys or to legal services programs.

Most (including the AARP and AoA-funded hot-lines) do not charge for the advice given. Cases which require additional service are referred to special panels of attorneys who charge reduced fees or to free legal services programs.

Other Free Or Low-Cost Services

American College of Trust Estate Counsel has a national directory of lawyers specializing in estate planning.

3415 S. Sepulveda Blvd., Suite 460
Los Angeles, CA 90034
Tel. (310) 398-1888

U.S. Labor Department Pension and Welfare Benefits Administration Field offices offer free help with pension problems.

• Atlanta area: (404) 302-3900
• Boston area: (617) 565-9600
• Chicago area: (312) 353-0900
• Cincinnati area: (859) 578-4680
• Dallas area: (972) 850-4500
• Detroit area: (313) 226-7450
• Kansas area: (816) 285-1800
• Los Angeles area: (626) 229-1000
• Miami area: (954) 424-4022
• New York area: (212) 607-8600
• Philadelphia area: (215) 861-5300
• San Francisco area: (415) 625-2481
• Seattle area: (206) 553-4244
• Washington, DC area: (301) 713-2000

Source: CPA Site Solutions

Just what is probate?

Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:

• The appointment of an individual by the court to act as "personal representative" or "executor" of the estate. This person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
• Proving that the will is valid.
• Informing creditors, heirs, and beneficiaries that the will is probated.
• Disposing of the estate by the personal representative in accordance with the will or state law.

The spouse or personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process.

Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets that are jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

What is a living trust?

A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A flesh-and-blood person, however, must actually be in charge of the property; that person is called the trustee. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

There are many kinds of trusts. A "living trust" (also called an "inter vivo" trust by lawyers who can't give up Latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.

All living trusts are designed to avoid probate. Some also help you save on death taxes, and others let you set up long-term property management.

Do I need a living trust?

You may want to consider a living trust as a way to avoid probate. If you don't take steps to avoid probate, after your death your property will probably have to detour through probate court before it reaches the people you want to inherit it. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.

For sizable estates, months can pass before full distribution is made to inheritors. During the process, some of the property will be spent on lawyer, executor and court fees. The exact amount will depend on state law and local practices.

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee--the person you appointed to handle the trust after your death--simply transfers ownership to the beneficiaries you named in the trust.

In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust?

The expense of a living trust comes up front. Many lawyers would charge relatively little for drafting your will, in hopes of getting your estate later as a client. They may charge more for a living trust.

Some people have chosen to use a self-help book or software program, to create a Declaration of Trust (the document that creates a trust) yourself. They may consult a lawyer if they have questions that the self-help publication doesn't answer. But there's always the danger of problems they don't see, that a lawyer could help avoid if consulted.

Is a trust document ever made public, like a will?

A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate--inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a trust protect property from creditors?

Holding assets in a revocable trust doesn't shelter them from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

Do I need a trust if I'm young and healthy?

Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your early death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance, would be simpler.

Can a living trust save taxes?

A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death. Professional guidance is needed to set up such trusts.

© CPA Site Solutions

The post-mortem letter, a simple and practical estate planning tool you can put together yourself, can protect your estate, maximize the amount available to heirs and save your spouse and executors a lot of trouble. This important letter tells your executor and survivors where to locate everything they need to carry out your instructions.

Does anyone other than yourself know where your tax records and supporting tax documents are located? How about deeds, titles, wills, insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? Your financial planner? Your insurance agent? If you pass away without leaving your heirs this information, it will cause a lot of headaches. Worse than that, part of your estate may have to be spent in needless taxes, claims, or expenses because the information is missing.

The post-mortem letter is an often overlooked estate planning tool. Tell your executors and survivors what they need to know to maximize your estate—the location of assets, records, and contacts. Without the post-mortem letter, you risk losing part of your estate’s assets because necessary assets and documentation cannot be located.

What The Post-Mortem Letter Does

The post-mortem letter is an extra step you should take to make sure executors are able to carry out your estate plan. It provides executors and survivors with the location of assets, the identity of professionals consulted by you during life, and the location of important records.

To represent you after your death, your executor must know almost everything you know. He or she must have all of the facts, figures, and proof that you have at your fingertips. Only with the aid of this information can the executor carry out your desires.

The letter also serves to inform your loved ones of things you would like done in the event of your death and guidance as to how you would like certain items handled. This includes many things which may not be appropriate to include in your will or which need to be handled immediately after death and prior to a reading of your will.

What The Post-Mortem Letter Does Not Do

The post-mortem letter can not be used in place of a properly executed will and does not have the legal force of a will. Similarly, it does not take the place of a living will. The post-mortem letter is designed to convey instructions after your death, as opposed to after a life-threatening injury. It is vital to have both a will and a living will in addition to a post-mortem letter.

How To Get The Post-Mortem Letter To Your Executors

Write the post-mortem letter now. Leave several copies of the letter in places where it is certain to be found after your death—e.g., attached to your will, in your desk, with your spouse, with your attorney, with your executor, and/or in a safe deposit box.

If you do not want the information in the letter revealed before your death, leave the letter sealed.

Do not leave the only copy of your post-mortem letter in your safe deposit box. It may never be found or may be inaccessible after death.

Caution: It is extremely important that instructions be left with the survivors that none of your papers are to be thrown away until the matter is discussed with your attorney, accountant, or executor. Otherwise your efforts to provide information helpful to your estate may be thwarted.

Tip: It is critical to update the letter periodically to account for changes that occur after you write it.

What The Post-Mortem Letter Should Contain

The following items should be included in the post-mortem letter.

To-Do List

• Notify your employer (remember to include phone numbers).
• Notify certain friends and relatives (provide a list with phone numbers).
• If you have volunteered as an organ donor, provide the information necessary for your family to act on your wishes.
• Notify the Social Security Administration (include your social security number for convenience).
• Any instructions on the care of pets.

Wills

The location of your final executed will should be mentioned, along with any copies.

Caution: Do not leave a will in a safe deposit box. Safe deposit boxes are sealed on the death of the decedent in many states; this will cause headaches and delay.

Guardians of Children

The names and addresses of guardians for minor children in case they are orphaned should be mentioned in your will. These should also be included in the letter. 

Funeral and Cemetery Plot

If you have made arrangements for funeral services or have established a pre-need funeral trust, provide details in the letter. The location of your cemetery plot and the location of the deed or certificate relating to the burial plot should be mentioned. Any specific instructions for the executor relating to burial should be mentioned in the letter.

Tip: For the reasons mentioned above under "Wills," do not leave the cemetery plot deed or certificate in a safe deposit box.

Safe Deposit Boxes

The location of safe deposit boxes, along with the location of keys, passwords, and combinations, should be mentioned. The letter should indicate whether anyone else has access to the boxes.

Tip: If other people have access, ask the executor to take inventory of the box before anyone else is allowed to take items out of the box.

If you have rented a post office box, include the number, location of the box and location of the key.

Bank and Credit Card Accounts

All checking and savings accounts and their account numbers should be mentioned. Instruct the executor whether a stop should be placed on withdrawals from these accounts, and whether anyone else has the right to withdraw from them, whether as a co-depositor or under a power of attorney.

Tip: Be sure to mention any accounts that are not in your name, such as deposits in a Swiss numbered account. Otherwise, these accounts may be lost because no one knows about them.

Tip: Keep savings accounts active by periodically sending a request for the balance in writing, or by making deposits. Inactive accounts that are left for a certain period may revert to the state.

A list of credit card accounts and numbers should be included. The executor should be instructed to cancel credit card accounts immediately, and to change joint accounts to single accounts.

Loans

Provide information on any outstanding debts. Some loans such as student loans and home mortgages may have an insurance feature which cancels the debt in the event of your death. In the case of student loans, this was often paid for in the form of a fee at the amount the loan was disbursed and many people are unaware of this feature. Examine your loan documents for any such features and detail them in your letter.

Tax-Related Matters

The location of copies of your income-tax returns going back as far as possible should be mentioned.

The location of copies of any gift-tax returns filed at any time should also be mentioned. If copies cannot be located, your memory of when and where the gift tax returns were filed, and the gift to which they related, should be mentioned. If there are any refund claims pending, or if you feel a refund should be filed for, mention these as well.

Attorneys and Other Professionals

Mention the names and addresses of any professionals associated with your affairs, or who could be of assistance to the executor. Include accountants, attorneys, insurance agents, financial advisors, bank officers, realtors, and brokers. If you relied heavily on these people, they could save your estate plenty of money and trouble just by answering a few of the executor’s questions.

You may have a number of options as to HOW you can take retirement plan distributions, i.e., your share of company or Keogh pension or profit-sharing plans (including thrift and savings plans), 401(k)s, IRAs, and stock bonus plans. Your options depend (1) on what type of plan you are in and (2) whether your employer has limited your choices. Essentially, you can:

• Take Everything in a Lump Sum
• Take An Annuity
• Roll Over The Distribution
• Take A Partial Withdrawal
• Do Some Combination Of The Above
• Life Insurance Options
• Assets Withdrawn In Kind
• The Economics Of Retirement Annuities
• Can Creditors Reach Your Retirement Assets
• State Taxes On Retirement Plan Distributions

You may have a number of options as to HOW you can take retirement plan distributions, i.e., your share of company or Keogh pension or profit-sharing plans (including thrift and savings plans), 401(k)s, IRAs, and stock bonus plans. Your options depend (1) on what type of plan you are in and (2) whether your employer has limited your choices. Essentially, you can:

1. Take everything in a lump sum.
2. Take some kind of annuity.
3. Roll over the distribution.
4. Take a partial withdrawal.
5. Do some combination of the above.

Note: As you will see, the rules on retirement plan distributions are quite complex. They are offered here only for your general understanding. Professional guidance is advised before taking retirement distributions or other major withdrawals from your retirement plan.

Before discussing the specific withdrawal options, let's consider the general tax rules affecting (1) tax-free withdrawals and (2) early withdrawals.

Tax-free withdrawals. If you paid tax on money that went into the plan—that is, if it was made with after-tax funds—that money will come back to you tax-free. Typical examples of after-tax investments are:

• Your non-deductible IRA contributions.
• Your after-tax contributions to company or Keogh plans (usually, thrift, savings or other profit-sharing plans, but sometimes pension plans).
• Your after-tax contributions to 401(k)s (in excess of the pre-tax deferral limit).

Early Withdrawals. Tax-favored retirement plans are meant primarily for retirement. If you withdraw funds before reaching what the law considers a reasonable retirement age—age 59 ½--you usually will face a 10% penalty tax in addition to whatever tax would ordinarily apply.

Example: At age 47, you withdraw $10,000 from your retirement account (and do not roll over the funds). That $10,000 is ordinary income on which you’ll owe regular tax at your applicable rate plus a 10% penalty tax ($1,000).

As with any other tax on withdrawal, the 10% penalty doesn’t apply to any part of a withdrawal that would be tax-free as a return of after-tax investment

Tip: There are several ways to avoid this penalty tax. The most common are:

• You’re age 59 ½ or older.
• You’re retired and are age 55 or older (however, this does not apply to IRAs).
• You’re withdrawing in roughly equal installments over your life expectancy or your joint-and-survivor life expectancy (discussed later).
• You’re disabled.
• The withdrawal is required by a divorce or separation settlement (here, too, this does not apply to IRAs).
• The withdrawal is for certain medical expenses.
• The withdrawal is for health insurance while unemployed (also available to self-employed).
• For IRAs only: The withdrawal is for certain higher education expenses and for first-time home purchases (up to $10,000).

Now let's review the basics for each of the options for taking retirement plan distributions and then discuss the tax planning for each option.

Take Everything in a Lump Sum

The Basics

You might want to withdraw all retirement funds in a lump sum, perhaps to spend them on a retirement home or assisted living arrangement, on a second home, or to buy or invest in a business. Or you might want to take everything out of a company account because you mistrust leaving funds with a former employer or to take control of investment decisions—though here a rollover (discussed later) might be preferred. Maybe you have to take a lump sum, as some employers will require, though here, too, a rollover option is probably available.

Lump sum is the standard form of retirement distribution for profit-sharing, 401(k) and stock bonus plans, but may also happen in other plans. Put another way, while plans generally allow lump sum distribution, the employer may have decided to preclude the lump sum form.

Tip: While your funds remain in the plan, earnings on the investment assets grow tax-free. The tax shelter ends once the funds are withdrawn. Preserving this tax shelter is one reason to decide not to withdraw the funds at all or to decide against withdrawing everything in a lump sum. The tax shelter continues, in one form or another, for funds withdrawn as annuities and for funds left in the plan when there’s a partial withdrawal of funds. And the shelter continues on rollovers.

Tax Planning

Special tax relief applies, in certain cases, for those who withdraw their pension assets in a lump sum. For most, this relief, in the form of "forward averaging," explained below, came to an end on 12/31/99—meaning that withdrawals taken after that date don’t get that relief.

Forward averaging reduces your tax below what it would be if figured at regular progressive rates. You will pay tax in one year (for the year you receive it) as if the lump sum amount was received in equal installments over 10 years (for the relief allowed in limited cases after 1999). Forward averaging isn’t allowed if any part of the account is or was rolled over to an IRA.

Capital gain treatment for lump sums is available only for those born before 1936 and only with respect to plan participation before 1974. Capital gain may be taken instead of forward averaging and is available after 1999.

It’s a "lump sum" if you take out everything left in your account in a single calendar year. If you took $50,000 last year and $250,000 this year, and nothing is left, $250,000 is the lump sum. If you took $250,000 last year and $50,000 this year and nothing is left, $50,000 is the lump sum. In general, lump sum relief is available only once in a worker’s lifetime.

The limited lump sum relief remaining is the result of a Congressional plan to phase out the relief, as it has brought down top tax rates and liberalized rollover rules.

Tip: Because lump sum withdrawal ends the tax shelter, it’s rarely the road to maximizing wealth. Retirees will usually do better with arrangements that preserve the shelter, through rollovers, annuities or partial withdrawals.

Take An Annuity

The Basics

You might want to withdraw all retirement funds in a lump sum, perhaps to spend them on a retirement home or assisted living arrangement, on a second home, or to buy or invest in a business. Or you might want to take everything out of a company account because you mistrust leaving funds with a former employer or to take control of investment decisions—though here a rollover (discussed later) might be preferred. Maybe you have to take a lump sum, as some employers will require, though here, too, a rollover option is probably available.

Lump sum is the standard form of retirement distribution for profit-sharing, 401(k) and stock bonus plans, but may also happen in other plans. Put another way, while plans generally allow lump sum distribution, the employer may have decided to preclude the lump sum form.

Tip: While your funds remain in the plan, earnings on the investment assets grow tax-free. The tax shelter ends once the funds are withdrawn. Preserving this tax shelter is one reason to decide not to withdraw the funds at all or to decide against withdrawing everything in a lump sum. The tax shelter continues, in one form or another, for funds withdrawn as annuities and for funds left in the plan when there’s a partial withdrawal of funds. And the shelter continues on rollovers.

Tax Planning

Special tax relief applies, in certain cases, for those who withdraw their pension assets in a lump sum. For most, this relief, in the form of "forward averaging," explained below, came to an end on 12/31/99—meaning that withdrawals taken after that date don’t get that relief.

Forward averaging reduces your tax below what it would be if figured at regular progressive rates. You will pay tax in one year (for the year you receive it) as if the lump sum amount was received in equal installments over 10 years (for the relief allowed in limited cases after 1999). Forward averaging isn’t allowed if any part of the account is or was rolled over to an IRA.

Capital gain treatment for lump sums is available only for those born before 1936 and only with respect to plan participation before 1974. Capital gain may be taken instead of forward averaging and is available after 1999.

It’s a "lump sum" if you take out everything left in your account in a single calendar year. If you took $50,000 last year and $250,000 this year, and nothing is left, $250,000 is the lump sum. If you took $250,000 last year and $50,000 this year and nothing is left, $50,000 is the lump sum. In general, lump sum relief is available only once in a worker’s lifetime.

The limited lump sum relief remaining is the result of a Congressional plan to phase out the relief, as it has brought down top tax rates and liberalized rollover rules.

Tip: Because lump sum withdrawal ends the tax shelter, it’s rarely the road to maximizing wealth. Retirees will usually do better with arrangements that preserve the shelter, through rollovers, annuities or partial withdrawals.

Roll Over The Distribution

The Basics

Rollovers are transfers of funds from one plan to another (from one company or Keogh plan to another, from a company or Keogh to an IRA, or from one IRA to another, or from an IRA to a company or Keogh plan.

Rollovers are usually distributions from a company or Keogh plan that are put into an IRA. You might do this (1) to transfer control of the funds from your employer to yourself or (2) because your employer forces the distribution when you leave so as to close its books on your plan participation. In your own Keogh plan, you might make the rollover as part of a decision to terminate your plan or your business.

Tip: A rollover to your own IRA can give you flexibility in dealing with the funds (for example, so you can invest in options or create a separate IRA for each beneficiary) that would not be available for funds left in your employer’s plan. Rollovers can be of the entire retirement account or only part of the account.

Rollovers can be made from one IRA to another. Apart from Roth IRA situations, these are usually done to expand investment options or to create several IRA accounts. Rollovers also can be made from one pension, profit-sharing or 401(k) plan to another or between types of plan. This might happen if you change jobs or set up a new Keogh plan because of starting a new business after you retire.

Rollovers from company or Keogh plans preserve the retirement plan tax shelter while postponing retirement distributions, thereby often prolonging the tax-free buildup of retirement funds. They have other consequences, some undesirable:

Caution: Federal law grants a person no rights in his or her spouse’s IRA. Thus, a plan participant’s rollover will strip the participant’s spouse of rights the spouse had under the plan from which the assets are being removed. In the case of a pension plan, the spouse has a measure of protection because the spouse must approve the transfer that will forfeit his or her rights. However, no such approval is required in the case of 401(k)s or profit-sharing plans. Thus, a rollover from such plans can eliminate spousal rights. (Employers sometimes provide spousal rights that federal law does not require.)

Caution: A rollover will eliminate the chance of lump sum tax relief, unless the IRA was just a conduit for the movement of funds between retirement plans.

Tip: In some cases, a rollover from an IRA to a retirement plan can extend the tax shelter period. IRA distributions must begin at age 70 1/2, but distributions from a retirement plan can be postponed beyond that until the participant retires, unless he or she is an owner of the business.

Tip: A rollover from an IRA to a retirement plan could also get greater creditor protection than if left in an IRA.

Tax Planning

Rollovers are tax-free when properly handled, but consider these qualifications and exceptions:

• After-tax investments can be rolled over from a company or Keogh plan to an IRA and, in some cases, to defined contribution plans, but not to defined benefit plans.
• You can’t roll over amounts you’re required to withdraw after reaching age 70 1/2 or amounts you’re due to receive under a fixed annuity.

Caution: If you do the rollover yourself—personally withdrawing funds from one plan and moving them to another—the plan you’re withdrawing from must withhold tax at a 20% rate on the withdrawal. To avoid tax on the 20% withheld, you’ll have to come up with that amount from elsewhere and add it to the rollover IRA. (The tax withheld can be taken as a credit against the year’s tax liability.) On the other hand, a direct rollover (having the funds transferred directly from the transferring plan to the receiving plan) avoids withholding.

Caution: If you do the rollover yourself, the withdrawn funds are taxable if they don’t reach the rollover destination within the deadline (generally, 60 days). Therefore, the least risky way to roll over funds is a direct rollover.

Where the plan holds specific assets for your account, a rollover may (1) transfer the specific asset or (2) sell it and transfer the cash.

Caution: The rollover is not tax-free if cash is withdrawn, used to buy investment assets, and the new assets are then transferred to the new plan.

Take A Partial Withdrawal

The Basics

Partial withdrawals are withdrawals that aren’t rollovers, annuities or lump sums or don’t qualify for lump sum forward averaging or capital gain relief. They include certain withdrawals that you can make while you are still working as well as withdrawals at or after retirement. They may be made for investment or consumption, including education and health care. Because they are partial, the amount not withdrawn continues its tax shelter.

A partial withdrawal will usually leave open the option for other types of withdrawal (annuity, lump sum, rollover) of the balance left in the plan.

Note: Before retirement, partial withdrawals are fairly common with profit-sharing plans, 401(k)s, and stock bonus plans. After retirement, they are fairly common in all types of plans (though least common with defined-benefit pension plans)

Tax Planning

A partial withdrawal is taxable (and can be subject to the penalty tax on early withdrawal) except to the extent it consists of after-tax funds. The withdrawal is generally tax-free in the proportion the after-tax investment bears to the total retirement account.

Example: Your retirement account totals $100,000, which includes an after-tax investment of $10,000. You withdraw $5,000. The withdrawal is tax-free to the extent of $500 ($10,000/$100,000x$5,000).

Note: The tax-free portion is computed differently for plan participants who were in the plan on 5/5/86.

Do Some Combination Of The Above

Life Insurance Options

Here are your typical options where whole life insurance is held for you in a retirement plan:

• Your employer surrenders the policy to the insurance company for its cash surrender value, which it pays over to you.
• Your employer trades in the policy for an annuity on your life.
• Your employer distributes the policy to you.
• Some mix of the above, such as getting some cash proceeds and an annuity.

The tax shelter ends when cash is received. Otherwise, it continues, to some degree.

In general, assets withdrawn in kind (i.e., withdrawn in the form held by the retirement plan, rather than withdrawn in cash) are taxed at their fair market value when received, reduced by after-tax investment. Exceptions:

• Stock distributed by a stock bonus plan. Your after-tax investment in the stock comes back tax-free and you pay no tax on the stock’s appreciation in value until you sell it. But you have the option to pay tax on the value when received.
• Annuity contract. These aren’t taxed when distributed. You’re taxed under the annuity rules above on annuity payments as received.
• Insurance policy. If you convert the policy to an annuity contract within 60 days, the distribution is tax-free. However, you’re taxed under the annuity rules as payments are received. If you keep the policy, you’re taxed on the policy’s cash value (less your after-tax investment).

Retirement annuity economics are built around the straight life annuity, where the retiree receives a certain amount for life, however long or short that might be. This amount stops at the retiree’s death. The cost of such an annuity is computed, and that’s the cost the employer is obligated to provide.

However, you may want, or be obliged to take, something other than a straight life annuity, such as:

• A fixed-term annuity, whereby the annuity will continue for a fixed term (say, ten years) even though you die before the end of this term. (This additional benefit is called a "refund feature.")
• A joint and survivor annuity, where the annuity is payable over two lives instead of one.

These types of annuity are worth more than the straight life annuity. But the employer isn’t obliged to pay for more than the cost of a straight single life annuity. So if you opt for something other than straight life, the amount you collect each period will be correspondingly reduced to the "actuarial equivalent" of straight life.

Federal law generally protects your retirement assets or accounts against claims of your creditors so long as the assets remain in the retirement plan, except for unpaid federal taxes.  Generally, this protection is in federal labor law (ERISA).  Protection denied under labor law is provided under bankruptcy law (if the case is begun after October 16, 2005) to:

• Keogh plans where the Keogh owner (or owner and spouse) are the only ones in the plan and
• IRA plans, up to the amount rolled over from retirement plans, plus up to $1 million (which the bankruptcy court may increase where appropriate).

With 50 different state tax systems, only an overview is possible on how states tax retirement plan withdrawals. Here are the highlights:

• A state cannot tax a retirement plan distribution if it imposes no income tax on individuals (viz., Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming).
• A state from which a pension is paid, by an employer or former employer in the state, can’t tax the pension recipient in another state. In other cases, states generally follow the basic federal approach of taxing retirement distributions as ordinary income (and treating return of after-tax investment as tax-free). But some states don’t follow the federal rules for Keogh or IRA investment. Hence, withdrawals from such plans can get state tax relief not allowed under federal law.
• Some states grant tax relief for a certain dollar amount of retirement income, relief which extends to retirement plan withdrawals. In some states the relief may look something like the federal credit for the elderly.
• Rarely if ever, would a state impose a penalty tax on early withdrawal or on inadequate withdrawals after age 70 1/2.

Source: CPA Site Solutions

When must you start withdrawing the funds in your retirement plans? And what happens if the fund aren't withdrawn before you die? To what extent will your heirs be taxed? The rules are complex but there are ways the savvy taxpayer can maximize the tax shelter.

Topics

• Withdrawal While You're Alive
• Withdrawal After You Die
• Tax Planning

The basic rule is that you must begin withdrawing funds—and incurring taxes on these withdrawals —no later than April 1 of the year after you turn 70-1/2. This rule exists so that retirement funds will be distributed—whether or not spent—during what for most people is their retirement years.

An exception to this general rule is that, where your retirement plan permits, you do not need to begin these mandatory withdrawals until you retire, if you are still employed when you reach the mandatory withdrawal age. The exception doesn't apply where you're a 5% or more owner of the business that provides the plan, or to withdrawals from traditional IRAs--in those-cases you are subject to the mandatory withdrawal rules.

Preserving the tax shelter. Your funds grow sheltered from tax while they are in the retirement plan. So the longer your financial situation lets you prolong the distribution—or the smaller the amount you must withdraw—the more your assets grow. Some taxpayers choose to defer withdrawals for as long as the law allows, to maximize assets, and the shelter, for the next generation.

The law has specific rules about how fast the money must be taken out of the plan after your death. These rules curtail the ability to prolong a tax shelter that started out to aid your retirement.

The rules are complex, but here's a general overview of the timing of retirement plan distributions which will help avoid unnecessary tax headaches for you and your heirs. Because of the complexity of the rules, professional guidance in this area is strongly suggested.

Withdrawal While You're Alive

Before You Reach Age 70 1/2

Until the year you reach 70 1/2, you need not take your money out of your retirement account—though your employer’s plan might require you to do so. In fact, there will usually be a 10% early-withdrawal penalty if you make withdrawals from an IRA before age 59-1/2. Between the ages of 59-1/2 and 70-1/2 you pay only the income tax on any amounts you decide to withdraw, with no tax on the return of after-tax contributions you made.

Once You Reach Age 70 1/2

Once you hit 70 1/2, withdrawals must begin. Technically they can be postponed until April 1 of the year following the year you reach 70 1/2--say April 1, 2008, if you reach 70 1/2 in 2007. But waiting until April 1 means you must withdraw for two years—2007 and 2008—in 2008. To avoid this income bunching and a possible higher marginal tax rate, tax advisers generally suggest withdrawing in the year you reach 70 1/2.

IRS has greatly simplified and relaxed the withdrawal rules, effective for 2003 and after. The thrust of the changes is to increase the retirement plan tax shelter, by lengthening, in most cases, the period over which plan withdrawals may be stretched.

The rules allow you, automatically, to spread your withdrawals over a period substantially longer than your life expectancy.

Under these rules the taxpayer (say, an IRA owner) first determines his or her retirement plan asset values as of the end of the preceding year. Then the owner takes the number for his or her age from an IRS table (the table is unisex). The number corresponds to the period over which the withdrawals may be spread. The owner divides that number into the retirement asset total. The result is the amount to be withdrawn for the year.

Example: Joe reaches age 70 1/2 in October of this year. Retirement plan assets in his IRA totaled $600,000 at the end of last year. The IRS number for age 70 is 27.4. Joe must withdraw $21,898 ($600,000/27.4) this year.

Example: Two years from now Joe is 72 and his IRA was $602,000 at the end of the preceding year (when Joe reached age 71). The IRS number for age 72 is 25.6. Joe must withdraw $23,517 two years hence.

The distribution period in the IRS table in effect assumes distribution over a period based on your life expectancy plus that of a beneficiary 10 years younger than you. (Distribution after your death is based on the actual life span or life expectancy of your actual beneficiary—see “Withdrawal After You Die” below.) Only where your designated beneficiary is a spouse more than 10 years younger than you is his or her actual life expectancy used to figure the withdrawal period during your lifetime. You may use these rules to prolong distribution for 2003 and after, even though you have been taking withdrawals over a shorter period under previous rules.

Under the current rules, the life expectancy of your designated beneficiary (if you have one) is irrelevant in figuring your withdrawal period (except for a beneficiary spouse more than 10 years younger). Thus, you can change your designated beneficiary at will, or replace one who died, without affecting your withdrawal period (except for a change to or from a spouse more than 10 years younger).

Caution: You can always take out money faster than required--and pay tax on these withdrawals. However, the tax code is strict about minimum withdrawals. If you—or your beneficiaries or heirs—fail to take out what's required, a tax penalty will take 50% of what should have been withdrawn but wasn’t.

Withdrawal After You Die

Designating a beneficiary is no longer needed to prolong distributions during your lifetime (except where your beneficiary spouse is more than 10 years younger than you). But it's still needed to prolong the distribution during your beneficiary's lifetime, should the beneficiary want that (some will want the money right away).

Of course, designating a beneficiary is wise as a matter of planning for the disposition of your assets. You may change the beneficiary later without affecting the amount you withdraw (except for a change to or from a spouse more than 10 years younger).

The rules as to how fast your beneficiaries or heirs must withdraw funds from your account—and pay the income tax—differ, depending on your beneficiary choice.

Your Spouse. Naming your spouse as beneficiary carries the most flexibility. A surviving spouse has options that no other beneficiary has.

• Rollover. A spouse-beneficiary of your IRA can elect to treat the balance in your IRA as his or her own IRA (like a rollover). This provides the optimal extension of the withdrawal period if your spouse is younger than you, since your spouse doesn't have to start withdrawing funds until he or she turns 70 1/2. At age 70 1/2, your spouse can then use the period in the IRS table—or a longer one if he or she then has a spouse more than 10 years younger. Rollover isn't allowed if a trust is the beneficiary, even if the spouse is the trust's sole beneficiary. A similar extension is allowed for a balance you might leave in a qualified retirement plan: your spouse can roll it over into his or her IRA. And your spouse can roll over a distribution from your retirement plan to another retirement plan in which he or she participates, as well as to an IRA.

• Remaining a beneficiary. Instead of a rollover, a surviving spouse can simply leave the money in the deceased participant's account. There's no 10% early-withdrawal penalty if the spouse takes funds out of your account, but that penalty would apply if the spouse rolled over the money into his or her own IRA and tapped it before reaching 59 1/2.

Tip: Leaving the money in your account makes sense if your spouse is under age 59 1/ 2 and needs the money soon after your death.

Tip: If your spouse remains a beneficiary, he or she doesn't have to start withdrawals until you would have reached age 70 1/2—after which withdrawals will be taken under the IRS table. Generally, there will not be an estate tax on retirement plan assets left to a spouse and the spouse will pay income taxes only as funds are withdrawn.

Someone Other Than Your Spouse. A child or other non-spouse beneficiary of an IRA can choose to start withdrawals by the end of the year after your death and spread distributions over his or her own life expectancy. This method extends the payout period and the tax deferral. The life expectancy for a 55-year-old, for example, is 29.6 years.

A non-spouse beneficiary of funds in a retirement plan can elect after 2006 to have the funds rolled to an IRA, and then spread withdrawals as described above.

Tip: The required payout schedules set the minimum that can be withdrawn. The beneficiary can always take out more.

If you name your children as a group as beneficiaries, minimum payouts are based on the life expectancy of the eldest child. On the other hand, if you create a separate share or account for each child, the child uses his or her own life expectancy.

No beneficiary. If you die before April 1 after the year you reach age 70 1/2 having named no beneficiary or, in most cases, where your beneficiary is not a human being (such as an estate or a charity), all funds must be distributed —and income taxes paid—within five to six years of your death. Heirs don't get the option of using their own life expectancy.

If you die on or after that April 1 date without having named a beneficiary or having named your estate as the beneficiary, the money must come out by the end of the period remaining under the IRS table. For example, at age 80 the table period is 18.7. On a death at age 80, the estate or heirs would have 18.7 years to complete withdrawal.

Death before distributions begin.  If you should die before the time (age 70 1/2) required distributions are to begin, minimum distributions to your beneficiary can be spread over his or her life expectancy.

Estate tax. There may be an estate tax on retirement funds left to someone other than your spouse, who will also owe an income tax as funds are withdrawn. Where an estate tax is imposed, the taxpayer who received the retirement funds is entitled to a partial income tax deduction for the estate tax paid.

Tax Planning

The above discussion covered the general rules as to the withdrawal of retirement plan distributions both before and after you die. Now let's look at some specific tax planning techniques, particularly as regards the estate tax, for minimizing the tax bite when the funds accumulated in your retirement accounts (including pension and profit-sharing plans, 401(k) plans, IRAs and rollover IRAs) are passed on to your heirs.

How Your Heirs Are Taxed

The general rule is that, while there may be an estate tax bite at your death, inherited assets are received income-tax-free by your heirs. Unfortunately, this general rule doesn't apply to money in a retirement plan. Whoever gets the money will incur income tax on it, unless it’s left to charity (more on giving retirement assets to charity below).

Example: If you gave your wife a $500,000 stock-and-bond portfolio, she will not pay income tax on receipt of the portfolio. Or if you leave your son a $150,000 vacation home, he will not pay income tax when he receives it. But if you leave your daughter the $150,000 in your IRA, she will be subject to income tax on it, more or less as you would be if you had received the distributions yourself. (Moreover, there may be a further estate tax as well.)

The basic income tax rule is that retirement plan distributions to heirs are taxable at ordinary rates, except for after-tax investments, which come out tax-free. There are, however, the following key exceptions or qualifications:

• On a lump sum distribution, heirs of persons born before 1936 can sometimes claim tax relief.
• Life insurance proceeds paid in a lump sum are tax-exempt. However, if they are paid in installments, the interest element is taxable.
• The value of a stock bonus is taxable when received as ordinary income, less unrealized appreciation and after-tax investment. Any appreciation is taxable as capital gain when the stock is sold.
• Your spouse can roll over from your retirement account (IRA or other) to his or her IRA. No other heir can roll over from your account.
• There’s no early withdrawal penalty on what your heir withdraws after your death, even if the heir is under age 59 ½. But if your spouse is your heir and rolls over your retirement account to his or her IRA, a withdrawal from the IRA while under 59 ½ is subject to the penalty unless one of the exceptions applies.

Some Tax Planning Opportunities

The federal estate tax isn’t a major problem for most Americans. Less than 2% of those who die in any year leave an estate that’s hit by estate tax. But the larger a taxpayer's retirement account, the more likely it will be cut down by the federal estate tax on top of the federal income tax described above. The estate tax burden is declining, but many tax professionals doubt that the estate tax repeal (scheduled to become effective in 2010) will occur.

Unlike the income tax, which is collected only as amounts are distributed—and thus is deferred on annuities and the like—the estate tax is collected up front, at the owner’s death, on the present value of the annuity.

One common planning technique—making lifetime gifts to reduce your taxable estate—is impractical for retirement accounts. Even where you might be able to give part of your retirement account away (as with an IRA, for example), your gift is a taxable distribution to you and no IRA tax shelter survives for your donee. But here are more practical techniques:

• Make your spouse the beneficiary of your retirement plan assets and leave non-retirement plan assets to non-spouse beneficiaries. This reduces estate taxes and permits deferral of income taxes for the longest period possible.
• If you plan on leaving assets to charity, use retirement plan assets. You can eliminate estate and income taxes on this amount while achieving charitable goals.
• A charitable remainder trust is a sophisticated way to benefit family, as well as charity, at a reduced tax cost. Typically, your children or other non-spouse beneficiaries will draw the income from the retirement assets for a period, after which the remainder goes to charity. An estate tax deduction is allowed for the present value of what will go to the charity.
• Consider buying life insurance to pay estate tax that can’t be avoided (perhaps because you want a large retirement account to go to someone other than a spouse or charity). The insurance proceeds will be exempt from income tax (while funds withdrawn from the account to pay estate tax will be subject to income tax). With proper planning, the withdrawn funds can escape estate tax as well.

Source: CPA Site Solutions

There are three types of reverse mortgage plans available today: (1) FHA-insured, (2) lender-insured, and (3) uninsured. This guide describes the similarities and differences among them and discusses the benefits and drawbacks of each. Since each plan differs slightly, it is important to choose the one that best meets your financial needs.

The reverse mortgage is not without risk and negative aspects. Knowing the pros and cons will help you acquire the best possible deal should you decide to go with a reverse mortgage. Staying informed of your rights and responsibilities as a borrower may help to minimize your financial risks and avoid the threat of losing your home.

Topics

• How Does A Reverse Mortgage Work?
• General Rules That Apply To Homeowners
• How Payments Are Received
• Tax Rules
• Maximum Loan Amounts
• Negative Aspects
• Is A Reverse Mortgage For You?
• Other Alternatives
• How Federal Rules Help With Mortgage Shopping
• A Summary Of Available Plans
• Recommended Books
• Government and Non-Profit Agencies

How Does A Reverse Mortgage Work?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

The reverse mortgage’s benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

Note: Reverse mortgages are now available in every state except Alaska, South Dakota and Texas. But willing lenders may still be scarce in some places.

When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

General Rules That Apply To Homeowners

• To qualify for a reverse mortgage, you must own your home.
• The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging.
• Because you keep the title to your home, you are responsible for taxes, repairs, and maintenance.
• Depending on the reverse-mortgage plan you choose, your reverse mortgage becomes due, with interest, when you move, sell your home, die, or reach the end of the selected loan term.
• The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually paid off by refinancing it into a forward mortgage (assuming the heirs are eligible) or with the proceeds from the sale of the home.
• A real benefit of reverse mortgages is that borrowers can live in their homes as long as they like, even after they have completely exhausted their equity. Borrowers must do their best to maintain the value of the home with diligent upkeep.

How Payments Are Received

Depending on the lender, borrowers can choose to receive monthly payments, a lump sum, a line of credit, or some combination.

Tip: The line of credit offers the most flexibility by allowing homeowners to write checks on their equity when needed up to the limit of the loan

A few reverse-mortgage programs guarantee monthly payments for life, even after the borrower no longer lives in the home.

You can request a loan advance at closing that is substantially larger than the rest of your payments.

Tax Rules

The reverse mortgage payments you receive are nontaxable. Further, if you receive Social Security Supplemental Security Income, reverse mortgage payments do not affect your benefits, as long as you spend them within the month you receive them. This rule is also true for Medicaid benefits in most states.

Tip: To find out the exact impact of reverse mortgage payments on benefits you are receiving, check with a benefits specialist at your local area agency on aging or legal services office.

Interest on reverse mortgages is not deductible until you pay off your reverse mortgage debt.

Maximum Loan Amounts

Maximum loan amount limits are based on the value of the home, the borrower's age and life expectancy, the loan's interest rate, and whatever the lender's policies are. Maximums range (depending on the lender) from 50% to 75% of the home’s fair market value. The general rule is: The older the homeowner and the more valuable the home, the more money will be available.

Example: A 65-year-old homeowner with a home worth $150,000 would be able to get a $30,000 lump sum or credit line. A 90-year-old homeowner with the same home could be eligible for as much as $94,000.

All reverse mortgages have non-recourse clauses, meaning the debt cannot be more than the home’s value. Thus, the lender seeks repayment from heirs, family members, or the borrower's income or other assets.

Negative Aspects

Here are some of the downside aspects of reverse mortgages.

You Incur A Large Amount of Interest Debt

Reverse mortgages are rising-debt loans: The interest is added to the loan balance each month, since it is not paid currently, and the total interest you owe increases greatly over time as the interest compounds.

Note: Some plans provide for fixed rate interest. Others have adjustable rates that change based on market conditions.

Fewer Assets for Heirs

Reverse mortgages use up the equity in your home, leaving fewer assets for you and your heirs.

High Costs

The high up-front costs of reverse mortgage make them less attractive. All three types of plans (FHA-insured, lender-insured, and uninsured) charge origination fees and closing costs. Insured plans also charge insurance premiums, and some plans charge mortgage servicing fees.

Tip: If you are forced to move soon after taking the reverse mortgage (e.g., because of illness), you will almost certainly end up with a great deal less equity to live on than if you had simply sold the house. This is particularly true in the case of loans terminated in five years or less.

Tip: Your lender may permit you to finance these costs, so that you won’t have to pay them up front. But they will be added to your loan amount. Because of the high up-front costs on all reverse mortgages, effective interest rates for short-term loans are out of this world.

Adjustable Interest Rates

With many reverse mortgage plans, interest rates are adjustable annually or monthly and tied to a public index, in some cases with limits on how far the rate can go up or down. Reverse mortgages with interest rates that adjust monthly have no limit. Bear in mind that the higher the rate, the faster your equity is used up.

In order to give a fixed rate, one lender requires appreciation sharing, with which it gets a part of any increase in the home's value over and above the debt. Another lender offers percent of value pricing, collecting a fixed percentage of the home's value when the loan comes due. The latter option can be very expensive if the loan must be paid off after only a few years.

Is A Reverse Mortgage For You?

Although a reverse mortgage may be the answer for house-rich and cash-poor retirees, they are not for everyone. For instance, if you plan to move a few years down the road or there is a possibility you will have to move—e.g., due to illness—the reverse mortgage makes no sense. They make the most sense for those who plan to stay in their homes permanently. Also, if you already have a substantial mortgage on your home, the reverse mortgage is probably not for you, since you will have to pay it off before you can become eligible.

If you want to pass your home to your children or heirs, the reverse mortgage is not a good alternative for you, since the lender will get most of the equity when the home is sold.

Other Alternatives

Besides the reverse mortgage, here are some alternatives to consider.

• Programs that help with real estate taxes, repairs. Many state and local governments have programs that provide special purpose loans to seniors for (1) the deferral of property taxes and (2) making home repairs or improvements. These loans can often prevent retirees’ having to sell their homes. To find out whether your state has a special-purpose loan program for property taxes and/or for home repairs and improvements, contact your state agency on aging.
• The qualified personal residence trust. If you want to pass your home to your children or other heirs, this option should be considered, especially if your home is worth a great deal and you want to remove it from your estate for estate tax purposes. The QPRT trust allows you to keep the home for a certain amount of time with ownership eventually passing to your heirs.
• The sale-leaseback. You sell your home to your kids, and continue to live in it, paying them a fair market rent.

Note: Do not arrange a sale-leaseback without professional guidance.

How Federal Rules Help With Mortgage Shopping

Reverse mortgages are complex financial transactions, and a lot of calculations are required to make sure you are getting a good deal.

One of the best protections you have with reverse mortgages is the Federal Truth in Lending Act, which requires lenders to inform you about the plan's terms and costs. Be sure you understand them before signing. Among other information, lenders must disclose the Annual Percentage Rate (APR) and payment terms. On plans with adjustable rates, lenders must provide specific information about the variable rate feature. On plans with credit lines, lenders also must inform you of any charges to open and use the account, such as an appraisal, a credit report, or attorney’s fees.

New rules require that total cost estimates illustrate at least three loan periods (short-term, life expectancy and long-term) and three likely appreciation rates (the predicted percentage increase in the home's value over the loan period).

Armed with these estimates from several lenders, borrowers can more easily match programs to their needs and shop for the best mortgage value.

A Summary Of Available Plans

This section describes how the three types of reverse mortgages — (1) FHA-insured, (2) lender-insured, and (3) uninsured—vary according to their costs and terms. Although the FHA and lender-insured plans appear similar, important differences exist. This section also discusses advantages and drawbacks of each loan type.

FHA-Insured

This plan offers several payment options:

• Monthly loan advances for a fixed term, or for as long as you live in the home
• A line of credit
• Monthly loan advances plus a line of credit

This type of reverse mortgage is not due as long as you live in your home. With the line of credit option, you may draw amounts as you need them over time. Closing costs, a mortgage insurance premium, and, sometimes, a monthly servicing fee are required. Interest is at an adjustable rate on your loan balance. Interest rate changes do not affect the monthly payment, but rather how quickly your loan balance grows.

The FHA-insured reverse mortgage allows you to change the way you are paid at little cost. This plan also protects you by guaranteeing that loan advances will continue to be made to you if a lender defaults. However, the downside of FHA-insured reverse mortgages is that they may provide smaller loan advances than lender-insured plans. Also, loan costs may be greater than with uninsured plans.

The most widely available plan is the Federal Housing Administration's Government-insured Home Equity Conversion Mortgage (HECM) program. To qualify for an HECM loan, homeowners must be at least 62 and live in a single-family home or condominium that is their principal residence. Under this program, the amount of equity homeowners may borrow against depends on where they live, as well as on prevailing interest rates.

For people who have more expensive homes or who need to borrow more, there are alternatives. A program from the Federal National Mortgage Association grants larger reverse mortgages on home equity.

Tip: Most private reverse mortgages are not insured. Only the strength of the lender backs whatever promises it may make as to payments and other terms. So if you are looking to a reverse mortgage for future income, rather than a lump sum up front, you are better off in a federally insured program.

Counseling is required before homeowners can apply for an HECM loan. This counseling allows homeowners to discover whether a reverse mortgage is really the best answer to their cash-flow problems.

Tip: For an approved counselor, contact any HECM lender.

Lender-Insured

These reverse mortgages offer monthly loan advances or monthly loan advances plus a line of credit for as long as you live in your home. Interest may be assessed at a fixed rate or an adjustable rate, and additional loan costs can include a mortgage insurance premium (which may be fixed or variable) and other loan fees.

Loan advances from a lender-insured plan may be larger than those provided by FHA insured plans. Lender-insured reverse mortgages also may allow you to mortgage less than the full value of your home, thus preserving home equity for later use by you or your heirs. However, these loans may involve greater loan costs than FHA insured, or uninsured loans. Higher costs mean that your loan balance grows faster, leaving you with less equity over time. Some lender-insured plans include an annuity that continues making monthly payments to you even if you sell your home and move.

Tip: The security of these payments depends on the financial strength of the company providing them, so be sure to check the financial ratings of that company.

Annuity payments may be taxable and affect your eligibility for Supplemental Security Income and Medicaid. These review annuity mortgages may also include additional charges based on increases in the value of your home during the term of your loan.

Uninsured

This reverse mortgage is dramatically different from FHA and lender-insured reverse mortgages. An uninsured plan provides monthly loan advances for a fixed term only—a definite number of years that you select when you first take out the loan. Your loan balance becomes due and payable when the loan advances stop. Interest is usually set at a fixed interest rate and no mortgage insurance premium is required.

Tip:If you consider an uninsured reverse mortgage, think carefully about the amount of money you need monthly, how many years you may need the money, how you will repay the loan when it comes due, and how much remaining equity you will need after paying off the loan.

If you have short-term but substantial cash needs, the uninsured reverse mortgage can provide a greater monthly advance than the other plans. However, because you must pay back the loan by a specific date, it is important for you to have a source of repayment. If you are unable to repay the loan, you may have to sell your home and move.

Government and Non-Profit Agencies

• To obtain a current list of lenders participating in the FHA-insured program, sponsored by the Department of Housing and Urban Development (HUD), or additional information on reverse mortgages and other home equity conversion plans, write to:

AARP Home Equity Information Center
American Association of Retired Persons
601 E St., NW
Washington, DC 20049

• A free information kit, including an extensive state-by-state Reverse Mortgage Lenders List, is available from the American Association of Retired Persons (AARP). Address a postcard to:

D15601
AARP Home Equity Information Center EE0756
601 E St. NW
Washington, DC 20049

• For additional information, you also may contact the:

National Center for Home Equity Conversion
7373 147 St. West Suite 115
Apple Valley, MN 55124

• If you have a question or complaint concerning reverse mortgages, you may write:

Correspondence Branch
Federal Trade Commission
Washington, DC 20580

(Although the FTC generally does not intervene in individual disputes, the information you provide may indicate a pattern or practice that requires action by the Commission.)

Source: CPA Site Solutions

What happens if I die without a will?

If you don't make a will or use some other legal method to transfer your property when you die, state law will determine what happens to your property. (This process is called "intestate succession.") Your property will be distributed to your spouse and children or, if you have neither, to other relatives according to a statutory formula.

If no relatives can be found to inherit your property, it will go into your state's coffers. Also, in the absence of a will, a court will determine who will care for your young children and their property if the other parent is unavailable or unfit.

Can I just make a handwritten will if I don't have much property?

Handwritten wills, called "holographic" wills, are legal in about 25 states. To be valid, a holographic will must be written, dated and signed in the handwriting of the person making the will. Some states allow will writers to use a fill-in-the-blanks form if the rest of the will is handwritten and the will is properly dated and signed.

If you have very little property, and you want to make just a few specific bequests, a holographic will is better than nothing if it's valid in your state. But generally, we don't recommend them. Unlike regular wills, holographic wills are not usually witnessed, so if your will goes before a probate court, the court may be unusually strict when examining it to be sure it's legitimate. It's better to take a little extra time to write a will that will easily pass muster when the time comes.

Do I need to file my will with a court or in public records somewhere?

No. A will doesn't need to be recorded or filed with any government agency, although it can be in a few states. Just keep your will in a safe, accessible place and be sure the person in charge of winding up your affairs (your executor) knows where it is.

Can I use my will to name somebody to care for my young children in case my spouse and I both die suddenly?

Yes. If both parents of a child die while the child is still a minor, another adult--called a "personal guardian"--must step in. You and the child's other parent can use your wills to nominate someone to fill this position. To avert conflicts, you should each name the same person. If a guardian is needed, a judge will appoint your nominee as long as he or she agrees that it is in the best interest of your children.

The personal guardian will be responsible for raising your children until they become legal adults. Of course, you should have complete confidence in the person you nominate, and you should be certain that your nominee is willing to accept the responsibility of raising your children should the need actually arise.

What happens to my will when I die?

After you die, your executor (the person you appointed in your will) is responsible for seeing that your wishes are carried out as directed by your will. He or she may hire an attorney to help wind up your affairs, especially if probate court proceedings are required.

What if someone challenges my will after I die?

Very few wills are ever challenged in court. When they are, it's usually by a close relative who feels somehow cheated out of his or her rightful share of the deceased person's property.

Generally speaking, only spouses are legally entitled to a share of your property. Your children aren't entitled to anything unless you unintentionally overlooked them in your will.

To get an entire will invalidated, someone must go to court and prove that it suffers from a fatal flaw: the signature was forged, you weren't of sound mind when you made the will or you were unduly influenced by someone.

What instructions should I give my survivors about funeral ceremonies and the disposition of my body?

Letting your survivors know your wishes saves them the difficulties of making these decisions at a painful time. And many family members and friends find that discussing these matters ahead of time is great relief -- especially if a person is elderly or in poor health and death is expected soon.

Planning some of these details in advance can also help save money. For many people, death goods and services cost more than anything they bought during their lives except homes and cars. Some wise comparison shopping in advance can help ensure that costs will be controlled or kept to a minimum.

If you die without leaving written instructions about your preferences, state law will determine who will have the right to decide how your remains will be handled. In most states, the right -- and the responsibility to pay for the reasonable costs of disposing of remains -- rests with the following people (in the order shown):

• Spouse
• Children
• Parents
• The next of kin, or
• A public administrator (who is appointed by a court).

Disputes may arise if two or more people--the deceased person's children, for example--share responsibility for a fundamental decision, such as whether the body of a parent should be buried or cremated. But such disputes can be avoided if you are willing to do some planning and to put your wishes in writing.

What you choose to include is a personal matter, likely to be dictated by custom, religious preference or simply your own whims. A typical final arrangements document might include:

• The name of the mortuary or other institution that will handle burial or cremation
• Whether or not you wish to be embalmed
• The type of casket or container in which your remains will be buried or cremated, including whether you want it present at any after-death ceremony
• The details of any ceremony you want before the burial or cremation
• Who your pallbearers will be if you wish to have some
• How your remains will be transported to the cemetery and gravesite
• Where your remains will be buried, stored or scattered
• The details of any ceremony you want to accompany your burial, interment or scattering
• The details of any marker you want to show where your remains are buried or interred

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