Dissolving the Mystery of Probate

Probate can be avoided with proper estate planning, or certain assets can be placed outside of the probate process.

The Street’s recent article on this subject asks “What Is Probate and How Can You Avoid It?” The article looks at the probate process and tries to put it in real-life terms.

Probate is an estate planning process that works within a probate court with a probate judge presiding over the proceedings. Usually, surviving families and other interested parties initiate a probate process, to address issues relating to the deceased individual’s estate settlement. These include:

  • The handling of the deceased’s valid will;
  • Properly citing and categorizing the deceased’s assets;
  • Appraising the deceased’s estate and property;
  • Paying off any of the deceased’s existing debts; and
  • Distributing the deceased’s property to those directed by the will (or, if there’s no will, the probate court will direct the distribution of estate assets, according to the laws of intestacy).

The executor handling the deceased’s estate will typically start the process. Here are the basic steps:

File a Petition. The estate’s executor will file a request for probate where the deceased resided.  The court will then assign a date to confirm the executor and, once that is done, the probate judge will officially open the probate case.

Notice. The executor must send a notice that the deceased’s estate is officially in probate to all applicable beneficiaries, heirs, debtors and creditors.

Inventory Assets. The executor will then collect, list and present a value for all of the deceased’s assets and supply this to the probate court.

Pay the Bills. The executor will need to pay all outstanding debts owed by the estate.

Complete Any Tax Returns. The estate may also have existing tax returns that need to be filed. An accountant can be hired by the estate to work on this, or the executor may choose to file the taxes on his or her own.

Pay the Heirs. The executor can now distribute the remainder of the estate to any heirs, according to the will’s instructions.

Close the Estate. Finally, the executor will file paperwork with the court and file to close the estate.

An experienced estate planning attorney licensed to practice in your state will be able to explain what strategies are used to avoid probate, how to remove certain assets from the process, or whether it needs to be avoided at all. In some regions, probate is swift, while in others it is long and tiresome. A local estate planning attorney is your best resource.

Reference: The Street (July 29, 2019) “What Is Probate and How Can You Avoid It?”

Suggested Key Terms: Estate Planning Lawyer, Wills, Executor, Asset Protection, Probate Court, Inheritance, Probate Attorney, Intestacy, Tax Planning

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Women and Social Security Benefits in a Two-Income Household

In an unexpected twist, because of how Social Security was designed and when, the people who are most at risk for coming up short on benefits, are women in a two-income household, says Benefits Pro in a recent article “How Social Security rules harm the two-earner household.”

It doesn’t seem right, but this counter-intuitive fact is the conclusion of a brief from the Center for Retirement Research, the highly respected center at Boston College. They examined how women’s changing marital history affects retirement income. The conclusion is a surprising one.

As women’s marital and work status have changed over the years, with women spending more time as single than in the past, they will spent about half their adult lives married. Therefore, the sources of funds they would have otherwise counted on have shrunk.

To keep it in perspective, most households in general are not prepared for retirement. The National Retirement Risk Index shows that 50 percent of all American households are at risk of falling short in retirement, the report said, even if they work to age 65 and annuitized all of their financial assets.

Social Security has not kept up with the changes of more women opting to be single and working outside of the home. Women continue to face a higher risk of running out of money during retirement, in part due to lower earnings, less time in the workplace and often working part-time while raising children, rather than full-time. However, women in a two-income household face more of a risk. Here’s why.

Social Security provides a benefit equal to 50 percent of the worker’s benefit. If a second spouse is working, the spousal benefit drops gradually, and disappears completely when the second spouse’s worker’s benefit matches or exceeds the level of the spousal benefit. This means that the average two-income couple has a Social Security replacement rate that is not only lower than the one-income household, but also significantly below the rate for single women.

Another problem for two income households: often only one of the two workers is eligible for an employee-benefit retirement plan. Instead of saving for two, that spouse is likely to save for a single participant. That’s half of what the couple will need.

Another handicap for women’s retirement is the financial scars left by divorce. Nearly a third of all women in a couple have been married before, and this boosts retirement risks by as much as 10 percent.

So not only do two-income households need to save more for retirement, Social Security needs to maintain its currently scheduled benefits for single women.

Reference: Benefits Pro (July 22, 2019) “How Social Security rules harm the two-earner household”

Suggested Key Terms: Social Security, Retirement, Single Women, Spousal Benefits, Two Income Households

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Do Annuities in 401(k)s Work for Retirement Income?

The role of annuities in retirement planning is one aspect of the Secure Act that was passed by the House in May and is still awaiting a vote in the Senate. The Secure Act is supposed to make retirement better for communities, as is implied in its name—The Setting Every Community Up for Retirement Enhancement Act. But, says Barron’s “Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why.”

Annuities are legally allowed in 401(k) plans. However, they are found in only about 10% of the many 401(k) plans offered to employees. Americans hold $8.2 trillion in employer sponsored defined benefit contribution retirement plans (as of the end of March 2019), and $5.7 trillion is in 401(k) accounts.

Employers have been reluctant to offer annuities in retirement plans, mainly because of liability issues. They are concerned that employees might sue their companies, if the insurance company in the plan goes out of business or fails to pay claims, for whatever reason.

The Secure Act provides a “safe harbor” for employers, if something should happen to the annuity company they select. That may be good news for employers, but not such good news for employees.

An immediate annuity turns a lump sum of money into a stream of payments right away, while deferred annuities provide payments at a designated date in the future. The advantage of an annuity is that they offer investors a guarantee of income for the rest of their lives and it removes the risk of market fluctuations. The general consensus about annuities is that they are very expensive, with high commissions and fees that take big bites out of the benefits. It must be said that there are also low-cost annuities.

One concern about the language in the Secure Act is that it is overly broad. It would easily allow an employer to offer high-cost annuities. The provision applies to all annuities. Some are more accessible and better understood by the average consumer. However, there are others that are complex financial instruments, with high costs, which may not be understood by everyone.

The Consumer Federation of America and the Center for Economic Justice are two associations that have sent a letter to the Senate seeking to change some of the language of the bill. They want to see it revise the definition of annuities to include only “simple fixed annuities” and not variable and fixed-indexed annuities that are focused on accumulation. Another point is to add a requirement that employers review the financial well-being of the insurance companies, before choosing to allow their employees to purchase financial products from the companies.

Many people are also watching the provision regarding the change to the ability to stretch IRAs distribution for non-spouse beneficiaries. Some say the best bet right now is to wait and see what the final version of the legislation is, at which point many people will need to review their estate plans for determining the best way to pass assets to the next generation, while minimizing costs and taxes.

Reference: Barron’s (June 28, 2019) “Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why”

Suggested Key Terms: Annuities, 401(k), Retirement, Variable, Stretch IRAs, Secure Act

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