How Relationship Status Affects Finances

Posted on by
Reply

Whether you said “I do” at the altar, entered a common law marriage, are in a domestic partnership or cohabit with your significant other, the laws about your financial rights and obligations vary by state, and sometimes even by city.

To understand how your relationships status and living situation impacts your legal rights and obligations, consider consulting with reputable financial, legal and tax professionals in your area. With that in mind, here are some important things you should know:

  • Only select states recognize common-law marriage. One of the most common myths about common-law marriage is that if you live with someone for a certain length of time—often believed to be seven years—you are considered married under the law. This is not true everywhere in the U.S. In the states that do allow common-law marriage the circumstances vary, as do the financial implications. If you think you may be eligible to enter a common-law marriage, do some research to see if it applies to you in your state and what the implications may be.
  • Since most states don’t recognize the rights of unmarried couples that cohabit, many couples enter cohabitation agreements. Designed to protect couples from an unfair distribution of assets and property, these agreements describe individual financial and household responsibilities and assign debt to one or both individuals. They are also becoming increasingly popular among cohabitating elderly couples who want to define their financial responsibilities for their partner’s medical care and other expenses.
  • If you live in a common-law marriage state and don’t want to be legally married, document your intentions. Meet with your lawyer to create a written record of your desire to remain independent from each other. If you don’t take this step and your living situation meets your state requirements for common-law marriage, you are considered legally married in every way. For example, if your relationship ends, you are required to get a divorce. Or if one of you dies, your assets automatically pass to the other.
  • Domestic partnerships may occur between same-sex or opposite sex couples.  Again, the definitions and rights vary by state or even by cities within a state. Even if your state doesn’t recognize domestic partnerships, your city may have ordinances that allow domestic partners who meet certain criteria the opportunity to secure voluntary employer benefits and a limited form of legal recognition to protect their families.

Once you become familiar with your legal rights and obligations as an unmarried couple, you can take steps to financially protect yourself—and your partner. Start by discussing:

  • Whether your assets will be shared or separate—Couples who live together face financial vulnerabilities that married couples do not when it comes to shared checking accounts, credits cards and other investments. Often it’s easiest—and smartest—to keep your assets separate and split bills and other joint expenses down the middle. But regardless of how you choose to manage your finances, documenting your decisions with a written legal agreement is the best way to protect yourself—and your credit score – if the relationship doesn’t stand the test of time.
  • Who will pay for property purchased together—Before you buy a home, decide if you will be joint tenants in which ownership is equally shared or tenants in common in which you each have a distinct percentage of ownership. Unlike joint tenancy, if your co-owner dies, you don’t have rights to their share of the property. Instead, their share becomes part of their estate and their will or state intestacy laws will determine how it’s distributed. Also consider who owns what when making other big purchases together like a vehicle or small business.
  • Who will inherit assets in the event of death—As an unmarried couple, your assets don’t automatically pass to your partner in the event of your death. If you have assets you want your partner to inherit, properly document your intentions in writing to help ensure your wishes are carried out. If you don’t, state and federal laws will dictate who gets what—and typically it’s your next of kin or your estate. Also, if your significant other is the desired recipient of your retirement funds and life insurance policies, be sure to list him or her as the beneficiary. Keep in mind that your beneficiary designations override the directives of your will, so it’s critical to keep them current.

Again, since the legalities governing marriage, common-law marriage, co-habitating and domestic partnerships are complex and vary by state, please consult reputable legal, tax and financial professionals in your area for more information on how to protect yourself, your significant other and your assets.

###

James Rex Naylor, Jr., CFP, is a Financial Advisor and CERTIFIED FINANCIAL PLANNER professional ™ with Ameriprise Financial Services, Inc. in Lewistown, PA.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 21 years. His office is located at 21 South Wayne Street, Lewistown, PA  17044, 717.248.1577, www.ameripriseadvisors.com/james.r.naylor.

Advisor is licensed/registered to do business with U.S. residents only in the states of AZ, CO, FL, ID, IN, MD, ME,  NC, PA, VA, WY.

Ameriprise Financial and its representatives do not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific tax issues.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

© 2013 Ameriprise Financial, Inc. All rights reserved.

Estate Planning for Childless Couples

Posted on by
Reply

Planning for the future can take a different shape when children aren’t involved. With no braces to pay for or tuition bills to finance, couples don’t have many of the financial obligations that require resources and can impact an estate. On the other hand, these couples must plan for a future that will not include adult children to give them a helping hand – physically, emotionally or financially – as they age.

Estate planning is important regardless of your parental status. A well-crafted estate plan assigns decision makers, designates heirs and specifies who gets what after you and your partner pass away. It allows couples to create contingencies for individual survivorship and can help minimize taxes. It also can help ensure your mutual wishes are respected as health or cognitive abilities decline.

Assign decision makers. Couples without children can each execute a power of attorney naming their spouse to act on their behalf. Each can also designate an alternate attorney-in-fact to act on your behalf in the event you both become unable to make decisions regarding your finances and property. This person may also be assigned the responsibility of executor of your estate1. If you have no children to name, you might consider asking a trusted family member or friend (generally someone younger) or a professional in the estate planning business to take on these responsibilities.

 A living will—also called an advance healthcare directive—is another important legal document both of you should have on file. It specifies your wishes in the event of an incapacitating illness and enables your assigned designee to make decisions about your health care on your behalf.

Decide how your assets will be distributed. An attorney can help you draw up a will that specifies how and to whom your assets will be distributed when one or both of you pass away. Without a will in place, your estate will be handled according to the statutes of the state in which you reside. Often, when there are no children or designated heirs identified in a last will and testament, the surviving spouse is the primary heir, then other living relatives, which could include parents and/or grandparents, siblings and siblings’ children. If this is what you intend, you can make that clear in your will; if not, determine how you want to split your assets among your relatives, loved ones and causes that are important to you.

Your estate plan can include strategies for giving financial gifts before or after your death. Under current federal tax law for 2013, an individual may gift up to $14,000 per person to as many people as he or she would like without gift tax consequences. You can also pay college tuition for anyone without being subject to gift taxes or using any of your annual or lifetime gift tax exclusions, as long as you pay the institution directly.

Create avenues for charitable giving. If you don’t plan to leave a significant amount of your assets to family, you may choose to give charitably to causes you’re passionate about. There are other ways to be generous in a tax-efficient way while you and your partner are both are still living. You can donate to a donor-advised fund and receive tax benefits upfront, while suggesting how the funds should be invested and later distributed to your chosen nonprofit organization. With a charitable lead trust, the charity receives payments for a period of time after which you or your heirs receive any remaining assets in the trust. A charitable remainder trust operates in the reverse, giving you or your heirs a stream of payments for a period of time (not exceeding 20 years) or for life, and leaving any remaining amount to the selected charity.

Plan for the unexpected. Your estate plan should include adequate insurance coverage for unexpected events. Be sure to name the appropriate beneficiaries, including one another, on your respective policies. Since moving in with a child isn’t an option, you may wish to purchase long-term care insurance policies that help cover assisted living services or nursing home care as needed later in life.

Consult the experts to create a comprehensive estate plan.

A financial advisor can help you and your spouse or partner make plans for the handling of your estate. In conjunction with legal and tax advisors who understand state and federal tax and estate planning laws, you can take steps to ensure you both have sufficient means to live well after the other passes and that your mutual wishes are respected regarding the legacy you leave.

###

1 Note that naming the same person as executor is done separately and is not part of the Power Of Attorney agreement, but is usually done as part of a will.

James Rex Naylor, Jr., CFP, is a Financial Advisor and CERTIFIED FINANCIAL PLANNER professional ™ with Ameriprise Financial Services, Inc. in Lewistown, PA.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 21 years. His office is located at 21 South Wayne Street, Lewistown, PA  17044, 717.248.1577, www.ameripriseadvisors.com/james.r.naylor.

Advisor is licensed/registered to do business with U.S. residents only in the states of AZ, CO, FL, ID, IN, MD, ME,  NC, PA, VA, WY.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

Ameriprise Financial does not provide tax or legal advice. Consult your tax advisor or attorney.

© 2013 Ameriprise Financial, Inc. All rights reserved.

Charitable Giving in 2013

Posted on by
Reply

Most people have an organization or cause they’re passionate about, and contributing financially to non-profit organizations may be a part of many peoples’ annual financial plans. In planning for 2013, consider the America Taxpayer Relief Act of 2012 that was part of the legislation to partially avoid the “fiscal cliff.” This legislation could have implications on your charitable giving intentions, particularly if your income exceeds certain thresholds.

The changes may enhance the tax advantages of making charitable donations in some cases, while at the same time creating a less favorable tax environment in other cases. It is important to note that most taxpayers won’t see any impact on the tax status of their charitable donations in 20131.

Charitable IRA Rollover in Place for 2013

A popular strategy used in the past by individuals age 70½ or older was to roll IRA dollars directly to a qualified charity. The new tax bill reinstated this provision for direct charitable rollovers of up to $100,000 for 2013. The charitable IRA rollover offers two notable advantages:

  1. Rather than claiming income from an IRA distribution and then deducting the amount of the contribution on a tax return, the money can be rolled directly to the charity. This avoids the need to claim income first before making the deduction, potentially reducing the overall tax liability2.
  2. For those who must take required distributions from their Traditional IRA (an obligation after reaching age 70½), all or some of that distribution can be represented in the charitable IRA rollover. Again, this eliminates the requirement to claim income when the individual may not need it to meet living expenses.

For now, the IRA direct charitable rollover provision does not apply beyond 2013.

Limits on Itemized Deductions

There has been much publicity about the reinstatement of a law that expired after 2009 that calls for a limit on itemized deductions. The so-called Pease Provision (named for a retired Congressman who authored the law) applies a limit on married couples filing a joint return who earn more than $300,000 and single tax filers earning more than $250,000.3

The Pease Provision applies a 3 percent cut in itemized deductions based on adjusted gross income (AGI) that exceeds the above-listed thresholds. In the case of a single person earning $400,000 in AGI in 2013, $150,000 will be used to determine the 3 percent reduction in itemized deductions. Three percent of $150,000 results in deductions being reduced by $4,500. For a married couple filing a joint return with earnings of $500,000, itemized deductions would be reduced by $6,000 (3 percent of the $200,000 above the threshold amount for married couples). However, a taxpayer can’t lose more than 80 percent of their deductions, and the reduction doesn’t apply to certain itemized deductions (i.e. medical expenses, casualty and theft losses).

What’s important to keep in mind is that the reduction in itemized deductions is calculated based on the amount of AGI, not on the value of deductions taken. Most taxpayers will not see their charitable deductions impacted by these limitations. There are rare situations when individuals with itemized deductions that represent a very small share of total income may have less incentive (from a tax perspective) to expand those deductions.

The benefit to higher income taxpayers

Taxpayers subject to the reduction in itemized deductions may have more reason to expand giving anyway. At the highest levels, tax rates have increased. For single filers with taxable incomes over $400,000 and married couples filing a joint return with taxable incomes above $450,000, the highest tax rate has risen to 39.6 percent from the previous top rate of 35 percent.

As a result, for every $1,000 in annual charitable contributions, federal income taxes may be reduced by $396 dollars (not accounting for the limit in itemized deductions mentioned above or state income taxes) for taxpayers in the top income tax bracket. In and of itself, each charitable gift for these taxpayers has a more favorable impact on tax liability than was the case in previous years.

Gifting appreciated assets

Those in higher brackets may also want to explore the benefits of gifting appreciated assets such as stocks that have grown in value in recent years.

Those meeting the $400,000 (individual) and $450,000 (married couples) taxable income threshold are also subject to a long-term capital gains tax of 20 percent on gains from the sale of appreciated assets, a bump up from the previous top rate of 15 percent.

As an example, by gifting to a qualified charity shares of stock that have risen in value, the investor avoids the capital gains tax and may be able to deduct the fair market value of the gift from his or her income. Gifting appreciated assets (to the extent the gains would otherwise fall into the top tax bracket) is not a new strategy, but may be more appropriate given the new, higher tax rates that now apply to some investors.

No matter what your giving intentions are, it’s important to understand how tax changes can impact your financial plans. Consider working with a tax advisor or another financial professional if you plan to gift a significant amount to charity this year.

###

1 Keep in mind that under existing rules, charitable deductions may be limited based on the taxpayers AGI, type of property donated, type of charitable organization, use of the donated property, etc.

2 For example, using this provision can avoid the negative tax consequences that may result from having a higher AGI, such as causing social security benefits to be subject to taxation or phasing out other tax benefits.

3 This applies to taxpayers with AGI in excess of $250,000 (single), $275,000 (head-of-household), $300,000 (married, filing jointly) and $150,000 (married, filing separately).

James Rex Naylor, Jr., CFP, is a Financial Advisor and CERTIFIED FINANCIAL PLANNER professional ™ with Ameriprise Financial Services, Inc. in Lewistown, PA.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 21 years. His office is located at 21 South Wayne Street, Lewistown, PA  17044, 717.248.1577, www.ameripriseadvisors.com/james.r.naylor.

Advisor is licensed/registered to do business with U.S. residents only in the states of AZ, CO, FL, ID, IN, MD, ME,  NC, PA, VA, WY.

Ameriprise Financial and its representatives do not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific tax issues.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

© 2013 Ameriprise Financial, Inc. All rights reserved.