Category Archive Estate Planning

ByCurtis Watts

Mint Money Audit: Making the Most of a Side Hustle

This week’s Mint audit introduces us to Selena, 48, a mom of two living in San Antonio, Texas. She is a community college director and her husband, 51, is a full-time graphic designer who also manages a booming side hustle in the same industry.

Selena and her husband have already achieved some impressive financial accomplishments, thanks to tracking their finances on Mint, leveraging coupons and shopping at thrift stores. They’ve paid off $52,000 in student loans and invested in a piece of land next door for $26,000, which they believe has appreciated by nearly 40% since purchasing it a few years ago.

But with retirement looming and two children (currently ages 9 and 12) to possibly put through college, Selena wants to learn about additional money moves that could better prepare them for future expenses. She would also love to pay off the family’s 30-year mortgage before she retires in the next 10 to 12 years. Currently they’re on track to pay it down by 2030.

First, a breakdown of their finances:

NET INCOME

  • Hers: $56,000
  • His: $40,000 plus an additional $40,000 in freelance work
  • Total: $136,000 per year

DEBT

  • Just paid off student loans and a property loan (for the lot next door)
  • Credit Card Debt: $0
  • Mortgage: $163,000 (Monthly payment, including real estate tax, is $1,985)
  • Car note: $5,300 (should be paid off within the year)

RETIREMENT SAVINGS

  • Selena’s teacher pension: Roughly $5,000 per month at retirement if she retires in 12 years ($3,800 if she retires in 6 years).
  • Various IRAs between the two of them: $65,000
  • Estimated social security payments: $2,500 to $3,000 (combined)
  • Husband does not have a 401(k)

RAINY DAY SAVINGS

In an emergency, the family has at least six months of expenses saved up or roughly $35,000.

COLLEGE SAVINGS

Selena and her husband haven’t specifically saved for their children’s college education. They’re concerned that a 529-college savings plan might limit their children’s options, if they didn’t choose to attend a traditional college program.

Recommendations

Leverage the Side Hustle

All in all, I think the family’s finances are in solid shape. But if they’re interested in further securing their future, I would suggest investing the annual side hustle income (which currently sits in a bank account earning no interest) to advance retirement savings and carve out an account for their two children.

Starting that side hustle was a very smart money move because it effectively boosted the family’s net income by 40%. And according to Selena, the business, which they operate out of their living room, is only growing, with profits expected to grow another 30% in the future.

Income from side hustles is how I managed to pay off debt in my 20’s and boost savings. Today, it’s more prevalent among working Americans. More than 44 million Americans have a side revenue stream, according to a recent survey by Bankrate. “Having a side hustle is fiscally responsible,” says Susie Moore, founder of the program Side Hustle Made Simple and the new book, “What If It Does Work Out: How a Side Hustle Can Change Your Life.” “It’s an economic hedge that mitigates disruption to wealth building and future planning. There is no such thing as a fixed income,” she says.

So, let’s do some math and see how far this $40,000 per year side revenue stream can go using a compound interest calculator.

Retirement

The couple’s retirement nest egg is not too shabby. Not including their existing IRAs, the couple has about $8,000 a month coming to them in retirement between social security and Selena’s pension. That amount, alone, basically replaces their current full-time income. (And I do recommend Selena wait 12 years before retiring so that she can take advantage of the maximum pension payment.)

But with all the uncertainty around social security and future health care costs, it can’t hurt to save a little more, right? By placing $6,500 in a Roth IRA each year for the next, say, 15 years (Selena’s husband can qualify for the catch-up contribution since he is 5- years old), they’ll have an additional $142,000 for retirement that won’t be subject to taxes. This assumes an average annual return of 4%. They can open a Roth IRA at any bank.

Future Savings for Children

While a 529 plan may not be the best fit for this family, Selena still would like to carve out savings for her kids’ future endeavors, be it to start a business or attend an alternative school. For this, I’d recommend opening a 5-year certificate of deposit or CD and placing $25,000 in it this year. The going yield right now for a 5-year CD at that deposit level is averaging a little more than 2%.

Then, every year, as income rolls in from the side hustle, create a new 5-year CD and deposit $25,000 in it. Do this for the next four or five years. All CDs will have matured by the time her youngest is starting college (or pursuing something else). And they’ll have at least $100,000 plus interest reserved for their kids. If they do choose to go to college, the family’s prepared to help pay for in-state tuition at one of the fine Texas universities.

Mortgage Payoff

After funding the Roth IRA each year ($6,500) and the annual CD contribution ($25,000), the family’s left with $8,500. They could choose to put this toward the mortgage principal to knock a few years off their payoff schedule. Or, they may want to just hold onto it for that annual family vacation. And if I’m being honest, I’d say, go for the vacation! They deserve it!

The post Mint Money Audit: Making the Most of a Side Hustle appeared first on MintLife Blog.

Source: mint.intuit.com

ByCurtis Watts

Per Stirpes vs. Per Capita in Estate Planning

Three generations of one familyWhen creating an estate plan, one of the most basic documents you may wish to include is a will. If you have a more complicated estate, you might also need to have a trust in place. Both a will and a trust can specify how you want assets distributed among your beneficiaries. When making those decisions, it’s important to distinguish between per stirpes and per capita distributions. These are two terms you’re likely to come across when shaping your estate plan. Here’s a closer look at what per stirpes vs. per capita means.

Per Stirpes, Explained

If you’ve never heard the term per stirpes before, it’s a Latin phrase that translates to “by branch” or “by class.” When this term is applied to estate planning, it refers to the equal distribution of assets among the different branches of a family and their surviving descendants.

A per stirpes designation allows the descendants of a beneficiary to keep inherited assets within that branch of their family, even if the original beneficiary passes away. Those assets would be equally divided between the survivors.

Here’s an example of how per stirpes distributions work for estate planning. Say that you draft a will in which you designate your adult son and daughter as beneficiaries. You opt to leave your estate to them, per stirpes.

If you pass away before both of your children, then they could each claim a half share of your estate under the terms of your will. Now, assume that each of your children has two children of their own and your son passes away before you do. In that scenario, your daughter would still inherit a half share of the estate. But your son’s children would split his half of your estate, inheriting a quarter share each.

Per stirpes distributions essentially create a trickle-down effect, in which assets can be passed on to future generations if a primary beneficiary passes away. A general rule of thumb is that the flow of assets down occurs through direct descendants, rather than spouses. So, if your son were married, his children would be eligible to inherit his share of your estate, not his wife.

Per Capita, Explained

Older couple signs a will

Per capita is also a Latin term which means “by head.” When you use a per capita distribution method for estate planning, any assets you have would pass equally to the beneficiaries are still living at the time you pass away. If you’re writing a will or trust as part of your estate plan, that could include the specific beneficiaries you name as well as their descendants.

So again, say that you have a son and a daughter who each have two children. These are the only beneficiaries you plan to include in your will. Under a per capita distribution, instead of your son and daughter receiving a half share of your estate, they and your four grandchildren would each receive a one-sixth share of your assets. Those share portions would adjust accordingly if one of your children or grandchildren were to pass away before you.

Per Stirpes vs. Per Capita: Which Is Better?

Whether it makes sense to use a per stirpes or per capita distribution in your estate plan can depend largely on how you want your assets to be distributed after you’re gone. It helps to consider the pros and cons of each option.

Per Stirpes Pros:

  • Allows you to keep asset distributions within the same branch of the family
  • Eliminates the need to amend or update wills and trusts when a child is born to one of your beneficiaries or a beneficiary passes away
  • Can help to minimize the potential for infighting among beneficiaries since asset distribution takes a linear approach

Per Stirpes Cons:

  • It’s possible an unwanted person could take control of your assets (i.e., the spouse of one of your children if he or she is managing assets on behalf of a minor child)

Per Capita Pros:

  • You can specify exactly who you want to name as beneficiaries and receive part of your estate
  • Assets are distributed equally among beneficiaries, based on the value of your estate at the time you pass away
  • You can use this designation to pass on assets outside of a will, such as a 401(k) or IRA

Per Capita Cons:

  • Per capita distributions could trigger generation-skipping tax for grandchildren or other descendants who inherit part of your estate

Deciding whether it makes more sense to go with per stirpes vs. per capita distributions can ultimately depend on your personal preferences. Per stirpes distribution is typically used in family settings when you want to ensure that individual branches of the family will benefit from your estate. On the other hand, per capita distribution gives you control over which individuals or group of individuals are included as beneficiaries.

Review Beneficiary Designations Periodically

Multi-generational family

If you have a will and/or a trust, you may have named your beneficiaries. But it’s possible that you may want to change those designations at some point. If you named your son and his wife in your will, for example, but they’ve since gotten divorced you may want to update the will with a codicil to exclude his ex-wife. It’s also helpful to check the beneficiary designations on retirement accounts, investment accounts and life insurance policies after a major life change.

For example, if you get divorced then you may not want your spouse to be the beneficiary of your retirement accounts. Or if they pass away before you, you may want to update your beneficiary designations to your children or grandchildren.

The Bottom Line

Per stirpes and per capita distribution rules can help you decide what happens to your assets after you pass away. But they both work very differently. Understanding the implications of each one for your beneficiaries, including how they may be affected from a tax perspective, can help you decide which course to take.

Tips for Estate Planning

  • Consider talking to a financial advisor about how to get started with estate planning and what per stirpes vs. per capita distributions might mean for your heirs. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect, within minutes, with a professional advisor in your local area. If you’re ready, get started now.
  • While it’s always a good idea to consult with a financial advisor about estate planning, you can take a do-it-yourself approach to writing a will by doing it online. Here’s what you need to know about digital DIY will writing.

Photo credit: ©iStock.com/Georgijevic, ©iStock.com/monkeybusinessimages, ©iStock.com/FatCamera

The post Per Stirpes vs. Per Capita in Estate Planning appeared first on SmartAsset Blog.

Source: smartasset.com

ByCurtis Watts

3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions

Using donor-advised funds is a more advanced tax strategy that has gotten more popular recently with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA nearly doubled the amount of the standard deduction, which makes it less advantageous to itemize deductions such as charitable contributions. For people with a lot of charitable contributions, donor-advised funds are one option to still get a deduction for charitable contributions.

What is a donor-advised fund?

A donor-advised fund (DAF) is a registered 501(c)(3) charitable organization that accepts contributions and generally funds other charitable organizations. While the concept of a donor-advised fund has been around for nearly 100 years, they were typically only used by the ultra-wealthy. And while it is true that donor-advised funds are still not going to be useful for the vast majority of people, recent tax law changes have made their use more prevalent.

You can set up a donor-advised fund with most brokerages, including Fidelity, Vanguard, and Bank of America. You can donate cash, securities, or other types of assets to the DAF. The exact list of assets eligible for donation depends on the brokerage. After you have contributed, you can then make charitable contributions from the balance of your account.

You can maximize your charitable tax deductions in one year

One common reason that people set up donor-advised funds is to maximize their charitable tax deductions in a particular tax year. To show why this can be beneficial, I’ll use an example:

Our example family files their taxes married filing jointly and has regular charitable contributions of $20,000 per year. The standard deduction in 2020 for married filing jointly is $24,800. Because their amount of charitable deductions is less than the standard deduction, they may not see any tax benefit from their charitable contributions (depending on their amount of other itemized deductions). In 2021 they again plan to contribute $20,000 to charitable organizations and again are unlikely to see any tax benefit from doing so.

Now consider this same family now decides to set up a donor-advised fund in 2020. They have extra money sitting around in low-interest savings or checking account or in a taxable investment account. So they set up a donor-advised fund in 2020 and fund it with $40,000 in cash, stocks, or other assets. They are eligible to take the full $40,000 as an itemized deduction, even if they only use $20,000 to donate to the charity of their choice. Then in 2021, they can donate the remaining $20,000 to their preferred charity. They will not be able to deduct any charitable contributions in 2021 but can instead take the raised standard deduction amount.

You may be able to deduct the full value of stocks or other investments

Another reason you might want to set up a donor-advised fund is that you may be able to deduct the full value of stocks or other investments. Again, I’ll use an example to help illustrate the point.

Let’s say that you have shares that you purchased for $20,000 that are now worth $50,000. Many charities, especially smaller organizations, are not set up to accept donations of stocks or other investments. So if you want to donate that $50,000 to charity, you may have to liquidate your shares. This will mean that you will have to pay tax on the proceeds.

With a donor-advised fund, you can donate the shares to your fund and deduct the full fair market value of your shares. Then the fund can make the contribution to the charity of your choice.

Donate a wide range of assets

Another benefit to setting up a donor-advised fund is the ability to donate a wide range of different classes of assets. As we mentioned earlier, many charities are not set up in such a way to be able to accept non-cash donations. While the exact list of assets that a donor-advised fund can accept varies by the firm running the fund, it generally will include more types of assets than a typical charity.

Why you might not want to set up a donor-advised fund

While there are plenty of advantages to setting up a donor-advised fund, there are a few things that you might want to watch out for.

  • It’s definitely more complicated than just making charitable contributions on your own. You may find that the tax savings are not worth the extra hassle.
  • On top of the added layer of complexity, most firms with DAFs charge administrative fees that can cut into your rate of return.
  • You may be limited on the charities that you can donate to. Each donor-advised fund typically will have a list of eligible charities. So you may find that a charity that you want to donate to is not available.
  • You also lose control over the funds that you donate – the donation to the fund is irrevocable, meaning once you’ve donated to the fund you cannot get the donation back. While most advisors state that they will donate the money as you direct, they are not legally required to do so.
  • The money in a DAF is invested, so it may lose value. That means that the amount you were hoping to donate may be less than you were anticipating. You also typically have a limited range of investments available for your investment, and those funds also often come with fees.

It’s also important to keep in mind, the annual income tax deduction limits for gifts to donor-advised funds, are 60% of Adjusted Gross Income for contributions of cash, 30% of AGI for contributions of property that would qualify for capital gains tax treatment; 50% of AGI for blended contributions of cash and non-cash assets.

The post 3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions appeared first on MintLife Blog.

Source: mint.intuit.com