Jeff Witz, CFP

Jeff Witz, CFP, advises, "It is always a good idea to review your budget and determine whether your necessary spending has increased or decreased and then review your emergency fund to ensure it is properly funded."

2022 has been a challenging year for many. A lingering pandemic, high inflation, and struggling stock and bond markets have forced many investors to dip into emergency funds or adjust their approach to saving, spending, retirement plan distributions, and charitable gifting. When disruptions such as these occur, the end of the year presents a good opportunity to regroup, close out in the strongest position possible, and ready yourself for 2023. Here is a list of year-end items everyone should review. The sooner these items are addressed and adjustments made, the better position you likely will be in next year.

If you tapped into your emergency fund for any reason this year, it is important to make sure the account is replenished. It is always a good idea to review your budget and determine whether your necessary spending has increased or decreased and then review your emergency fund to ensure it is properly funded. As a reminder, the general rule of thumb for an emergency fund is 3 months’ of necessary expenses saved in cash if you are a dual-income household. Boost it to 6 months if you are a single-income household or if one person earns significantly more than the other and their income is relied upon to maintain your family’s standard of living.

Have you maxed out your retirement accounts or are they on track to max out by year end? 

401(k) and 403(b) contributions must be made by December 31, 2022. The 2022 contribution limit for employee contributions is $20,500 ($27,000 if you are 50 years or older). Individual retirement account (IRA) contributions can be made up until the tax filing deadline in April 2023. The 2022 contribution limit for IRAs is $6000 ($7000 if you are 50 years or older).

Have you used all the money remaining in your dependent care or healthcare flexible spending accounts? 

Most flexible spending accounts (FSAs) are use-it-or-lose-it accounts, meaning money left over in the account at the end of the year is forfeited back to the plan, not back to you. Some employers do offer a grace period into next spring or a $500 carryover to the next year for health care FSAs, but most do not. Make sure you use this money so you aren’t leaving anything on the table.

Have you made contributions to your children’s 529 savings plan accounts? 

As the cost of college continues to rise, it is important to start saving as soon as possible. 529s offer excellent tax advantages if saving for college or other post–high school educational opportunities. Many states offer a state income tax deduction for contributing to a 529 account. Sometimes these tax savings can be substantial. Contributions must be made before December 31, 2022, to receive a 2022 tax deduction.

Have you designated all the gifts you planned to give this year? 

For 2022, the annual gift tax exclusion amount is $16,000 per person or $32,000 for a married couple. This means you can give cash or assets (such as investments) valued up to these amounts to an unlimited number of individuals without having to worry about gift taxes. Making gifts can be a great way to remove assets from an estate if future estate taxes are a concern. Gifts must be made before December 31, 2022.

Have you made your charitable donations for the year? 

Giving to charity can be a very powerful tax-savings tool. Check if you have any appreciated investment assets you could donate instead of cash. Donating appreciated investments allows you to avoid paying capital gains taxes when you sell the investments, and you get to claim a deduction for the full value of the donated asset. The charity can then sell the investment and not have to pay capital gains taxes. However, be aware that with the increased standard deduction under current tax law, you may need to donate a substantial amount to see any tax benefit. Donations must be made by December 31, 2022, to count toward your 2022 taxes.

Have any of your investments lost money this year? 

The stock market has struggled in 2022, and many investments have had significant declines in value. If any investments in your taxable accounts are in the red, you could consider selling those investments to harvest the loss. Tax loss harvesting can be used to offset gains elsewhere or potentially lower your 2022 tax bill. If your captured losses exceed your realized gains, you will have a net capital loss. Up to $3000 ($1500 if you are married and file separately) of net capital losses can be deducted against ordinary income, including salary, self-employment income, and interest income. Any excess loss above these amounts can be carried forward to future years to cancel out gains or deduct against income. Sales to capture losses must occur before year end to count toward 2022.

Have you taken required minimum distributions? 

Under current tax law, if you are over age 72 years and have a pretax retirement account or have inherited an IRA, you need to make sure you have taken your 2022 

equired minimum distributions (RMDs)by December 31, 2022. The penalty for not taking an RMD is 

 of the RMD amount. Please note the RMD for IRAs inherited in 2020 and 2021 has been waived until 2023 for noneligible designated beneficiaries.

If there has been a major change in your life, such as a marriage or divorce, the birth or adoption of a child, or a death in the family, you may need to update the beneficiaries on your retirement accounts and life insurance policies. You may also need to update your will and power-of-attorney documents. There is no deadline for these changes, but the sooner the better.

There are likely to be other items to check on, but this list should give you a nice head start on making sure you close out 2022 on stronger financial footing.

Articles

"Giving to charity can be a very powerful tax-savings tool. Check if you have any appreciated investment assets you could donate instead of cash," writes Jeff Witz, CFP.

Top off your emergency fund and max out your IRAs before the year ends

Jeff Witz, CFP, writes, "An additional way to own real property that avoids probate is with a revocable living trust."

Owning a home or purchasing an investment property are common goals for physicians, as real property can be a useful tool to build wealth for themselves and their heirs. There are many ways to hold title to real property, which is defined as land and anything built on it. However, the way in which real property is titled will affect how it is transferred during the administration of an estate after death, so understanding the differences is important.

Subject to the terminology of each state, most private residences are owned by one of the following:

- tenants by the entirety (a married couple owns property with each spouse passing it to the surviving spouse);

- joint owners with rights of survivorship (the property is owned with another person and either party will inherit the other party’s share);

- revocable living trust (1 or more persons can own the trust);

- an entity such as a corporation, LLC, or partnership; and

- tenants in common (an individual owns property with another person, but the heirs of each party inherit their own share).

Each ownership method must be dealt with during the estate administration process. You need to make sure you own real estate in a way that will fulfill your wishes upon death and at the same time, streamline the process of transferring ownership of the property. Certain ownership methods can result in probate, which is a court-supervised procedure of administering a deceased person’s estate. Probate can be a long and public process, and many families prefer to keep their affairs private. Estate planning techniques to avoid probate depend on how you choose to hold title to the property, but sometimes probate is unavoidable.

Sole ownership is when a property is titled in one individual’s name. That individual owns 100% of the property, with title being transferred during the probate process by direction of a will after their death. If no will was created, title will be transferred based on the decedent’s state of residency’s intestate succession laws. With sole ownership, probate cannot be avoided.

The most common way to avoid probate if you are married is to own property as tenants by the entirety. If the property is owned together, it passes to the surviving spouse outside the probate process, avoiding delays.

Another method to avoid probate is for 2 individuals (who do not need to be married) to own the real property jointly with rights of survivorship. However, you must be careful that this option meets your wishes because you may not want the other owner to inherit your share of the property. At the death of 1 owner, the other owner becomes 100% owner of the property. If the goal is to pass ownership of the property to someone else, this form of ownership may not be appropriate.

An additional way to own real property that avoids probate is with a revocable living trust. The benefit of the trust holding title to the real estate is that you can have the trust document specifically address who will inherit the property without needing to probate the property. If a property you own has a mortgage and you want to place it in a trust, there are additional considerations. You must review the mortgage agreement and, in most cases, get preapproval of the transfer of property. Generally, mortgage companies permit the transfer to a revocable trust.

Some owners of real property want to avoid personal liability, especially if they own commercial or rental property. These owners typically create a corporation or a limited liability company to own the real property. This provides some protection from being personally responsible for the debts or liabilities of the entity. At the time of death, these shares or membership interests in the corporation or LLC pass through the individual’s estate through the probate process. In the individual’s will, the testator (the person whose will it is) can designate who will inherit the share of the corporation or allow it to pass to the residual estate.

Holding title as tenants in common will result in the property going through probate as well. Holding title to property as tenants in common sometimes results in contention with the other owner and the individuals who will inherit your share or the other party’s share. It is best to discuss these issues with the other owner and the heirs to help alleviate any tension that may occur with new ownership of the real property. Consult your estate planning adviser about the best way to title your real property so that you have an estate plan that best meets your wishes and streamlines the transfer process upon your death.

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"The way in which real property is titled will affect how it is transferred during the administration of an estate after death," says Jeff Witz, CFP.

How does titling real property affect its future transfer?

Jeff Witz, CFP, writes that "trusts are an excellent tool to help safeguard your preadult children in the event of your death."

Children who benefit from trust funds are frequently portrayed unfavorably in the news, in movies, and on television. Often referred to as 

, they are stereotyped as coming from extreme wealth. In reality, trusts are a powerful estate planning tool designed to safeguard your children in the event of your premature death. Trusts ensure that your assets do in fact pass to your children and further protect your children from themselves by making certain they do not overspend at an accelerated rate.

Upon your death, your assets are typically directed by a will or, in the absence of a will, the intestate laws of your primary state of residence. Assets such as retirement accounts and life insurance are disbursed according to the beneficiary designations on record. If the recipient of your assets is a minor, a conservator is assigned by the court to manage the assets until the child is of legal age to take possession. In many cases, the conservator is a family member you know and trust.

The courts supervise the conservator to ensure the money is used properly. However, even with court supervision, we still hear countless stories in the news of conservators taking advantage of their position and leaving the children with a small portion of the estate when they reach adult age. Without clear direction, it is easy to justify expenses that markedly benefit the conservator and benefit the children very little.

A trust ensures that assets are protected from abuse and used for very specific purposes. A trust is a legal entity that holds assets for a person or organization. They hold money, real property, investments, business interests, personal property, artwork, or a combination of these assets. They also serve as a primary or contingent beneficiary on retirement plans and life insurance policies.

Upon death of the grantor (the person who established the trust), assets are moved into and held by the trust. The trustee (the person assigned to oversee the trust) manages the assets and distributes them according to the instructions laid out in the trust document. The beneficiary then receives the assets for their personal use.

Many trusts have detailed language outlining what the assets can and cannot be used for. Common provisions include health, education, maintenance, and support. This wording requires that the money is disbursed only for major expenses, such as medical expenses, a college education, buying a home, starting a business, or even caring for a child. This very detailed language ensures the money isn’t misused.

Additionally, a trust helps protect children from themselves. Most grantors hope their children become financially responsible individuals. Unfortunately, that isn’t always the case, especially when they are young. A trust allows you to control when and how much money is distributed at one time. You may set up a monthly disbursement as an allowance or something more occasional such as quarterly, semiannual, or annual distributions. By spreading out the distributions, you can ensure the money is not spent too quickly and is available to support the child for a longer period.

Many trusts do eventually give the beneficiary access to larger portions of the assets. For example, it is not uncommon for a trust to give the beneficiary access to 50% of the assets at age 30, another 25% when they reach age 40, and the final 25% at age 50. After all, most grantors want the beneficiary to enjoy and benefit from the assets. At some point, they need broader access to accomplish that.

Overall, trusts are an excellent tool to help safeguard your preadult children in the event of your death. It ensures the assets go to your children and are not misused by those tasked with caring for them. They also protect your children from themselves by making sure they do not spend the money irresponsibly.

To determine whether a trust can be a useful estate planning tool for you, speak with your estate planning attorney. They will explain in greater detail how the trust functions, how it accumulates assets upon your death, and your options for directing use of the assets in the years after your death.

"Trusts are a powerful estate planning tool designed to safeguard your children in the event of your premature death," writes Jeff Witz, CFP. 

The case for establishing trusts for your children

With the 2022 federal estate tax exemption amount at $12.06 million ($24.12 million for a married couple), it may seem unlikely that your heirs will need to pay estate taxes under the current tax law. However, this law is expected to sunset at the end of 2025, with the exemption reverting to an inflation-adjusted amount of approximately $6.2 million ($12.4 million for a married couple). Unless Congress votes to extend the higher estate tax exemption amount, many more Americans will be at risk of having their estate subject to taxes. At a tax rate of 40%, this can mean a substantial amount going to the Internal Revenue Service (IRS) instead of loved ones. Additionally, your state also may have an estate tax. State exemption amounts are often smaller than the federal amount, so your state of residence could collect considerable taxes upon your death as well.

One estate planning tool in particular can be used to pay all or a portion of estate taxes when a large part of the estate consists of physical assets such as real estate, art, jewelry, collectibles, and so on. If your goal is to keep these tangible assets in the family, life insurance owned by an irrevocable life insurance trust (ILIT) can be used to pay estate taxes, so the assets don’t need to be sold.

An ILIT is a type of trust that is funded during your lifetime with 1 or more life insurance policies. It is irrevocable, meaning that once you create an ILIT the trust generally cannot be changed or revoked. In exchange for moving your life insurance policy into an ILIT, there are several benefits: you can avoid having the life insurance policy’s death benefit included in your estate for federal estate tax purposes; fund the trust with life insurance to help provide the cash needed to cover estate taxes and other expenses after you die; and finally, have the ability to direct, through the trust document, how and when the death benefit is used and for whom.

However, it is important to remember that this is an irrevocable trust. Once you either transfer an existing policy into the trust or purchase new life insurance using the trust, you must relinquish any right to make changes to the policy or trust. If you retain any rights to the policy, such as the ability to remove the cash value, both the IRS and state tax authorities would view you as still having “incidents of ownership” and would require the policy to be included in your estate. Therefore, you must select someone else such as a spouse, sibling, adult child, or attorney to be the trustee of the ILIT. The trustee would then oversee maintenance of the policies held in the ILIT, and the life insurance would no longer be a part of your estate.

To pay premiums on the life insurance policies, you transfer money to the ILIT and the trust pays the premiums. However, you must consider gift taxes. Putting money into a trust that someone else will benefit from can be considered a gift. If the premium payment for each beneficiary exceeds the gift tax exemption of $16,000 per year, gift taxes could be owed.

One way to avoid this is to have the trustee send the beneficiaries a “Crummey letter” each time you transfer money to the trust. This letter would notify them that they can request their share of the deposited money within a specific time period. If they have an immediate right to the money, the gift tax doesn’t apply. However, your beneficiaries would be foolish to take the money out because without this money the insurance premiums would go unpaid and the policy would lapse. The eventual life insurance death benefit payout would far exceed the amount that was intended to pay the premiums.

If you own an existing policy and transfer it into the ILIT, the IRS will still count it as part of your estate if you die within the next 3 years. (This doesn’t apply to policies purchased by the trust.) With the existing estate tax law scheduled to sunset at the end of 2025, we are approaching an alignment between when the tax law expires and the 3-year waiting period for life insurance transfers into the ILIT ends. Depending on age and expected life expectancy, this timeline may be of some importance to you.

Determining whether you are at risk of paying estate taxes and whether an ILIT makes sense for you will likely require coordination between your certified public accountant, your financial adviser, and your estate planning attorney. Due to the irrevocable nature of ILITs, all aspects of your financial life should be carefully considered.

Irrevocable life insurance trusts can be used to pay all or a portion of estate taxes.

Jeff Witz, CFP

Articles

Top off your emergency fund and max out your IRAs before the year ends

How does titling real property affect its future transfer?

The case for establishing trusts for your children

How to use life insurance to pay estate taxes