Get With The Plan: September 30, 2012

Gracie is a widow with 11 children and 23 grandchildren. Her greatest wish is to see a great-grandchild, and while she waits, the 84-year-old wants to make sure her finances are in order.

“An Ask The Biz Brain answer left me doubting my plan,” she said. “My will calls for equal distribution to my children upon my death.”

While she has questions about distributing her estate equally among her kids upon her death, she wants to make sure she’d have the money she needs for her expenses during her lifetime.

Gracie, whose name has been changed, has set aside $59,600 in annuities, $294,800 in mutual funds, $92,400 in a brokerage account, $25,000 in Certificates of Deposit, $10,000 in savings and $54,000 in checking.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Gracie design her financial plan.

“At this point in her life, she is concerned about having enough assets to live on the rest of her life and not be a burden on her family,” he says. “Also, given the amount of her assets, she needs to think about estate planning since she does have a taxable estate in New Jersey.”

Duerr says Gracie has budgeted herself to be able to live off her Social Security and the balances in her checking and savings accounts for the next three years. After that, she will need to live off of some of her other assets. Duerr says this shouldn’t be a problem because her expenses are modest and she has a solid asset base.

Gracie also has two annuities: one in her name and one in her late husband’s. These two annuities have a combined annual payment of approximately $10,500.

“At the present time, she does not use this money for herself but uses the funds for gifts to her children and grandchildren,” Duerr says. “When her funds in the bank accounts decrease, she may have to reconsider using some of the annuity payments to help pay her bills or begin drawing down on some additional assets.”

Gracie says she’d like to re-title several assets to list her children on the accounts. Duerr says that’s a good way to go.

“By doing this she would still maintain control of these assets,” he says. “She would also still have access to these assets to pay any bills that she may encounter.”

Additionally, by making some of her children joint owners of these accounts, half of the value of the accounts will be considered theirs. This will help to decrease the overall value of her estate, potentially lowering estate taxes that could be due. Plus, the children could authorize transactions on Gracie’s behalf should she need assistance.

Gracie’s estate is worth approximately $850,000. While this is not a taxable estate for federal purposes, it is a taxable estate in the state of New Jersey.

“There is a taxable estate in New Jersey if gross assets are greater than $675,000,” Duerr says. “By re-titling some of her assets as joint accounts with her children, Gracie may be able to lower her total assets to under $675,000 and thus not have a taxable estate in New Jersey.”

Gracie would also like to make some of her bank accounts Payable on Death (POD) to some of her children. By doing this, the accounts would pass upon her demise to the child listed on the account.

“Unlike making the accounts joint, like her investment accounts, these accounts would be 100 percent in Gracie’s name and count in her estate for estate tax calculations,” Duerr says. “No portion of the value would be in her children’s names until she passed away.”

Also, it’s important to note that because the accounts would be POD and not joint accounts, her children could not do anything or act on Gracie’s behalf without a power of attorney on file at these banks.

Duerr says Gracie should consider some big changes for the mutual funds she owns. The majority of the funds in her portfolio are not income-oriented funds.

“At some point over the next few years she will most likely need to live off some of these assets,” Duerr says. “If they are modified to more income-generating investments, she will be able to live off the income generated and hopefully not need to take as much of the principal in order to pay her expenses.”

Reallocating these funds will also help her decrease some of the overall risk and volatility for her portfolio, he says.

At the present time, one of Gracie’s children is the executor of her estate, and Gracie has drafted a living will but not a general power of attorney.

While Gracie doesn’t want to spend unnecessary money on attorney’s fees, Duerr says she needs the power of attorney.

“Several of her children are or will be listed on her accounts,” he says. “However, having a general power of attorney is important should she someday not be able to make financial decisions for herself.”

If she gave a general power of attorney to one of her kids, they would be able to coordinate her financial transactions and act on her behalf.

“I believe this is a necessary cost,” he says. “I would also consider a review of her other documents as well just to be sure everything is set up properly based on her wishes.”

Duerr says, overall, Gracie is fortunate to have enough assets to live and her family around her to help her.

“A little additional planning should be able to help her ensure all of her wishes occur and her family has an easier time taking care of her financial needs if she is unable to care for them herself in the future,” he says.