Should I retire now at age 62 and collect Social Security benefits?
There’s no right time to begin collecting Social Security benefits, but the age at which you begin receiving benefits will affect how much retirement income you have, so you should weigh the consequences carefully.
Keep in mind that if you collect Social Security before your full retirement age, your benefit will be permanently reduced. Depending on the year you were born, you’ll receive between 25 and 30 percent less per month if you collect benefits at age 62 than if you wait until full retirement age to begin collecting benefits. However, this doesn’t necessarily mean that collecting benefits at age 62 is unwise. Unless you live to especially old age, you may end up with more money if you start collecting Social Security benefits at age 62 than if you wait until full retirement age, because you’ll receive more benefit checks.
However, there are also good reasons to wait until full retirement age (or beyond) to start collecting benefits. For example, if you work full-time past age 62, you’ll have the opportunity to increase your eventual retirement benefit, particularly if you are in your peak earnings years because your benefit will be figured using your 35 highest earnings years. Additionally, if you’ll barely scrape by after you retire, you may want to receive as much as possible from Social Security each month. If you can wait past full retirement age to begin collecting benefits, you will receive delayed retirement credits (up until age 70) that will permanently increase your benefit.
Other things to consider include whether other people will be eligible to receive benefits based on your work record, your eligibility for Medicare, your estimated life expectancy, and taxes. The Social Security Administration (SSA) has several online benefit estimators available at ssa.gov that can help you make an informed decision, and you can sign up at the SSA website for my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If you’re not registered for an online account and are not yet receiving benefits, you’ll receive a statement in the mail every year, starting at age 60. You can also talk to an SSA representative by calling (800) 772-1213 if you have questions.
Understanding Social Security
Approximately 67 million people today receive some form of Social Security benefits, including retirement, disability, survivor, and family benefits. (Source: Fast Facts & Figures About Social Security, 2018) Although most people receiving Social Security are retired, you and your family members may be eligible for benefits at any age, depending on your circumstances.
How does Social Security work?
The Social Security system is based on a simple premise: Throughout your career, you pay a portion of your earnings into a trust fund by paying Social Security or self-employment taxes. Your employer, if any, contributes an equal amount. In return, you receive certain benefits that can provide income to you when you need it most–at retirement or when you become disabled, for instance. Your family members can receive benefits based on your earnings record, too. The amount of benefits that you and your family members receive depends on several factors, including your average lifetime earnings, your date of birth, and the type of benefit that you’re applying for.
Your earnings and the taxes you pay are reported to the Social Security Administration (SSA) by your employer, or if you are self-employed, by the Internal Revenue Service. The SSA uses your Social Security number to track your earnings and your benefits.
You can find out more about future Social Security benefits by signing up for my Social Security account at the Social Security website, ssa.gov so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If you’re not registered for an online account and are not yet receiving benefits, you’ll receive a statement in the mail every year, starting at age 60. You can also use the Retirement Estimator calculator on the Social Security website, as well as other benefit calculators that can help you estimate disability and survivor benefits.
When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you have. Most people must build up 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but need fewer credits to be eligible for disability benefits or their family members to be eligible for survivor benefits.
Your retirement benefits
Your Social Security retirement benefit is based on your average earnings over your working career. Your age at the time you start receiving Social Security retirement benefits also affects your benefit amount. If you were born between 1943 and 1954, your full retirement age is 66. Full retirement age increases in two-month increments thereafter, until it reaches age 67 for anyone born in 1960 or later.
But you don’t have to wait until full retirement age to begin receiving benefits. No matter what your full retirement age, you can begin receiving early retirement benefits at age 62. Doing so is sometimes advantageous: Although you’ll receive a reduced benefit if you retire early, you’ll receive benefits for a longer period than someone who retires at full retirement age.
You can also choose to delay receiving retirement benefits past full retirement age. If you delay retirement, the Social Security benefit that you eventually receive will be as much as 8 percent higher. That’s because you’ll receive delayed retirement credit for each month that you delay receiving retirement benefits, up to age 70. The amount of this credit varies, depending on your year of birth.
If you become disabled, you may be eligible for Social Security disability benefits. The SSA defines disability as a physical or mental condition severe enough to prevent a person from performing substantial work of any kind for at least a year. This is a strict definition of disability, so if you’re only temporarily disabled, don’t expect to receive Social Security disability benefits–benefits won’t begin until the sixth full month after the onset of your disability. And because processing your claim may take some time, apply for disability benefits as soon as you realize that your disability will be long term.
If you begin receiving retirement or disability benefits, your family members might also be eligible to receive benefits based on your earnings record. Eligible family members may include:
- Your spouse age 62 or older, if married at least 1 year
- Your former spouse age 62 or older, if you were married at least 10 years
- Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled
- Your children under age 18, if unmarried
- Your children under age 19, if full-time students (through grade 12) or disabled
- Your children older than 18, if severely disabled
Each family member may receive a benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately. Your benefit won’t be affected.
When you die, your family members may qualify for survivor benefits based on your earnings record. These family members include:
- Your widow(er) or ex-spouse age 60 or older (or age 50 or older if disabled)
- Your widow(er) or ex-spouse at any age, if caring for your child who is under 16 or disabled
- Your children under 18, if unmarried
- Your children under age 19, if full-time students (through grade 12) or disabled
- Your children older than 18, if severely disabled
- Your parents, if they depended on you for at least half of their support
Your widow(er) or children may also receive a one-time $255 death benefit immediately after you die.
Applying for Social Security benefits
The SSA recommends apply for benefits online at the SSA website, but you can also apply by calling (800) 772-1213 or by making an appointment at your local SSA office. The SSA suggests that you apply for benefits three months before you want your benefits to start. If you’re applying for disability or survivor benefits, apply as soon as you are eligible.
Depending on the type of Social Security benefits that you are applying for, you will be asked to furnish certain records, such as a birth certificate, W-2 forms, and verification of your Social Security number and citizenship. The documents must be original or certified copies. If any of your family members are applying for benefits, they will be expected to submit similar documentation. The SSA representative will let you know which documents you need and help you get any documents you don’t already have.
Social Security Survivor Benefits
When you think of Social Security, you probably think of retirement. However, Social Security can also provide much-needed income to your family members when you die, making their financial lives easier.
Your family members may be eligible to receive survivor benefits if you worked, paid Social Security taxes, and earned enough work credits. The number of credits you need depends on your age when you die. The younger you are when you die, the fewer credits you’ll need for survivor benefits. However, no one needs more than 40 credits (10 years of work) to be “fully insured” for benefits. And under a special rule, if you’re only “currently insured” at the time of your death (i.e., you have 6 credits in the 13 quarters before your death), your children and your spouse who is caring for them can still receive benefits.
Survivor benefits may be paid to:
- Your spouse age 60 or older (50 or older if disabled)
- Your spouse at any age, if caring for your child who is under age 16 or disabled
- Your ex-spouse age 60 or over (50 or older if disabled) who was married to you for at least 10 years
- Your ex-spouse at any age, if caring for your child who is under age 16 or disabled
- Your unmarried children under 18
- Your unmarried children under 19, if attending school full time (up to grade 12)
- Your dependent parent’s age 62 or older
This is a general overview–the rules are more complex. For more information on eligibility requirements, contact the Social Security Administration (SSA) at (800) 772-1213.
How much will your survivors receive?
An eligible family member will receive a monthly survivor benefit based on your average lifetime earnings. The higher your earnings, the higher the benefit. This monthly benefit is equal to a percentage of your basic Social Security benefit. The percentage depends on your survivor’s age and relationship to you.
For example, at full retirement age or older, your spouse may receive a survivor benefit equal to 100 percent of your basic Social Security benefit. However, if your spouse has not yet reached full retirement age at the time of your death, he or she will receive a reduced benefit, generally 71 to 94 percent of your basic benefit (75 percent if your spouse is caring for a child under age 16). Your dependent child may also receive 75 percent of your basic benefit.
A maximum family benefit rate caps the total amount of money your survivors can get each month. The total benefit your family can receive based on your earnings record is about 150 to 180 percent of your basic benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately.
You can find out more about future Social Security benefits by signing up for my Social Security account at the Social Security website, ssa.gov so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If you’re not registered for an online account and are not yet receiving benefits, you’ll receive a statement in the mail every year, starting at age 60.
Don’t forget the lump-sum benefit
If you’ve accumulated enough work credits, your spouse may receive a lump-sum benefit of $255. Your spouse must have been living with you at the time of your death or have been receiving benefits based on your earnings record if living apart from you. If you’re not married at the time of your death, the death benefit may be split among any children you have who are eligible for benefits based on your earnings record.
If a loved one has died, contact the Social Security Administration immediately
If a loved one has died and you are eligible for survivor benefits, you should contact the SSA right away. If you’re already receiving benefits based on your spouse’s earnings record, the SSA will change your payments to survivor benefits (if your children are receiving benefits, their benefits will be changed, too). But if you’re not yet receiving any Social Security benefits or if you’re receiving benefits based on your own earnings record, you’ll have to fill out an application for survivor benefits.
It’s helpful to have the following documents when you apply, but if you don’t have all the information required, the SSA can help you get it:
- Proof of death (a death certificate or funeral home notice)
- Your Social Security number, as well as the deceased worker’s number
- Your birth certificate
- Your marriage certificate, if you’re a widow or widower
- Your divorce papers, if applicable
- Dependent children’s Social Security numbers, if available
- Deceased worker’s W-2 forms, or federal self-employment tax return, for the most recent year
- The name of your bank, as well as your account numbers, for direct deposit
Visit the SSA website or your local SSA office or call (800) 772-1213 for more information on survivor benefits and how to apply for them.
Social Security Disability Benefits
Like most people, you probably don’t expect to become disabled. However, according to the Social Security Administration (SSA), studies show that 1 in 4 of today’s 20 year-olds will become disabled before reaching full retirement age. (Source: SSA Publication 05-10029, Disability Benefits, August 2018) That’s why it’s important to understand what disability benefits you may be entitled to under Social Security.
The SSA administers two programs that pay disability benefits. The Social Security Disability Insurance (SSDI) program pays benefits to qualified individuals who are under full retirement age, regardless of their income. The Supplemental Security Income (SSI) program pays benefits to qualified individuals with limited income. Only the SSDI program is discussed here.
To qualify for benefits, you must meet a strict definition of disability
Because the definition of disability that the SSA uses is strict, it’s hard to qualify for Social Security disability benefits. To receive benefits as an adult, you must have a physical or mental impairment that has lasted or is expected to last for at least 12 months or is expected to result in your death. Your impairment must also be severe enough to prevent you from performing any “substantial gainful activity” or, in other words, the work that you were doing when you became disabled or any other work.
The SSA has a list of impairments that are considered so severe that they automatically define you as disabled. If your condition is not on the list, the SSA must decide if it’s severe enough.
When determining your ability to work, the SSA will consider your medical condition, age, education, past work experience, and transferable skills. If you’re working, the amount of income that you can earn also plays a role. If your average monthly earnings from work exceed a maximum amount set by the SSA, you generally won’t be considered disabled for Social Security purposes. Special rules and income limits apply if you’re blind.
You’ll also need to meet two earnings tests
In general, to get disability benefits, you must meet two different earnings tests. The first is a recent work test, based on your age at the time you became disabled. The second is a duration of work test to show that you worked long enough under Social Security. For a table that illustrates these requirements see SSA Publication 05-10029, Disability Benefits.
Your family members may also collect benefits
If you qualify for disability benefits, certain family members can also collect monthly benefits based on your work record. Eligible family members may include:
- Your spouse age 62 or older, if married at least one year
- Your former spouse age 62 or older (if you were married at least 10 years)
- Your spouse or former spouse of any age, if caring for your child who is under age 16 or disabled
- Your unmarried child under age 18 (or under 19 if still in high school)
- Your unmarried child older than 18 with a qualifying disability that started before age 22
Each eligible family member may receive a monthly check equal to as much as 50 percent of your basic benefit. This is in addition to your benefit — your check doesn’t get reduced.
The amount of money that you’ll receive depends on your Social Security earnings record
The amount of your monthly disability check is based on your average lifetime earnings. To view your earnings record and get an estimate of how much you would receive if you were disabled right now, sign up for my Social Security account at the SSA’s website, ssa.gov so that you can view your Social Security Statement.
Eligibility for other state and federal benefits may affect the amount of your SSDI check. And because the SSA will periodically review your case and decide whether you are still disabled, your disability benefits may stop altogether. This will happen if your medical condition improves to the point that you’re no longer considered disabled, or if you can earn a substantial amount of money. Finally, once you reach full retirement age, your disability benefits will automatically convert to Social Security retirement benefits (the amount is usually the same).
You should apply for benefits as soon as possible
You should apply for benefits as soon as you become disabled, and it appears that the disability will continue. Processing an application can take three to five months. Disability benefits will be paid for the sixth full month after the date your disability began.
You can file for benefits in person, online, or over the phone. You’ll be asked to provide information such as your Social Security number, your birth or baptismal certificate, medical records, a workshop summary, and a copy of your most recent W-2 form, or if you’re self-employed, a copy of your federal tax returns for the past year.
Once your application is complete and has been reviewed by your local Social Security office, it will be sent to the Disability Determination Services (DDS) office in your state. There, the DDS will determine whether you are disabled under Social Security rules. If your claim is approved, you’ll receive a letter showing the amount of benefit that you’ll receive and when your benefits will begin. If your claim is denied, you’ll receive a letter explaining the decision and telling you how to appeal if you don’t agree with it.
For more information on Social Security disability benefits, visit your local Social Security office, look at publications available on the SSA website, or call the SSA at (800) 772-1213.
Distributions from Traditional IRAs: Between Ages 59 1/2 and 70 1/2
What is an IRA distribution?
A withdrawal from an IRA is referred to as a distribution. Distributions can come in the form of several payment patterns, from a one-time (lump-sum) payment to a series of distributions over several years. Depending on how old you are at the time of the distribution, the payment may be classified as a premature distribution (made before age 59½), a normal distribution (between ages 59½ and 70½), or a required minimum distribution (after age 70½). There are tax consequences to any type of traditional IRA distribution.
Caution: This discussion pertains primarily to distributions from traditional IRAs. Qualified distributions from Roth IRAs are tax-free. Even Roth IRA distributions that don’t qualify for tax-free treatment are tax-free to the extent of your contributions to the Roth IRA. Only after you’ve recovered all of your contributions are distributions considered to consist of taxable earnings. Further, special rules apply to distributions taken from Roth IRAs that have funds rolled over or converted from traditional IRAs.
Caution: This article applies to distributions to IRA owners. Special rules apply to distributions to IRA beneficiaries.
IRA distributions subject to income tax
When you receive a distribution from your traditional IRA, the amount you receive is generally subject to income tax. If you have made nondeductible contributions to your traditional IRA, part of any distribution will be considered non-taxable.
Caution: Taxable income from an IRA is taxed at ordinary income tax rates even if the funds represent long-term capital gains or qualifying dividends from stock held within the IRA.
Premature distribution tax does not apply
Once you reach the age of 59½, you are allowed (but not required) to take distributions from your IRA without being subject to the 10% premature distribution tax. You may choose to take distributions sporadically, as you need the money, or you may request an automatic distribution from your account according to a prearranged schedule you establish with your IRA administrator.
Withholding from IRA distributions
Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. Generally, tax is withheld at a 10% rate. If you receive an annuity or similar periodic payment, tax withheld is based on your marital status and the number of withholding allowances you claim on your withholding certificate (Form W-4P). No withholding or waiver is needed when the distribution is a trustee-to-trustee rollover from one IRA to another. See the following section.
IRA rollovers and transfers
In general, there are two ways to transfer assets between IRAs, indirect rollovers, and trustee-to-trustee transfers (also known as direct rollovers). With an indirect rollover, you receive funds from the distributing IRA and then complete the rollover by depositing the funds into the receiving IRA within 60 days. A trustee-to-trustee transfer is a transaction directly between IRA trustees and custodians. If properly completed, rollovers and trustee-to-trustee transfers are not subject to income tax or the 10% premature distribution tax.
Tip: You can rollover (or transfer) funds from a traditional IRA to another traditional IRA or from a Roth IRA to another Roth IRA. Special rules apply to convert or rolling over funds from a traditional IRA to a Roth IRA. You may also be able to roll over (or transfer) taxable funds from an IRA to an employer-sponsored retirement plan.
60-day rollover: you receive the funds and reinvest them
With an indirect rollover, you receive a distribution from your IRA, and then, to complete the rollover, you deposit all or part of the amount distributed into the receiving IRA within 60 days of the date the funds are released from the distributing account.
Example(s): On January 2, you withdraw your IRA funds from a maturing bank CD and choose to have no income tax withheld. The bank cuts a check payable to you for the full balance of the account. You plan to move the money into an IRA account at a competing bank. Fifteen days later, you go to the new bank and deposit the full amount of your IRA distribution into your new rollover IRA CD. Your rollover is complete.
If you don’t complete the rollover transaction or miss the 60-day deadline, your distribution is taxable to you. However, the IRS can extend the 60 days, in limited circumstances, when the failure to timely complete the rollover is not the taxpayer’s fault.
Example(s): Assume the same scenario as the first example, except that when you receive your check from the first bank, you cash the check and loan the money to your brother-in-law, who promises to repay you in 30 days. As it turns out, he doesn’t pay back the loan until March 5 (the 62nd day after your withdrawal). You deposit the full sum into the IRA account at the new bank. However, because you didn’t complete your rollover within the 60 days, the January 2 distribution will be taxable (excluding any nondeductible contributions, as described above).
Caution: Under recent IRS guidance, you can make only one tax-free, 60-day, rollover from one IRA to another IRA in any one year no matter how many IRAs (traditional, Roth, SEP, and SIMPLE) you own. This does not apply to direct rollovers (trustee-to-trustee transfers), or Roth IRA conversions.
If you roll over a part, but not all, of your distribution within the 60 days, then only the portion not rolled over is treated as a taxable distribution.
When you take a distribution from your traditional IRA, your IRA trustee or custodian will generally withhold 10% for federal income tax (and possibly additional amounts for state tax and penalties) unless you instruct them not to. If tax is withheld and you then wish to roll over the distribution, you have to make up the amount withheld out of your pocket. Otherwise, the rollover is not considered complete, and the shortfall is treated as a taxable distribution. The best way to avoid this outcome is to instruct your IRA trustee or custodian not to withhold any tax. Unlike distributions from qualified plans, IRA distributions are not subject to a mandatory withholding requirement.
Example(s): You take a $1,000 distribution (all of which would be taxable) from your traditional IRA that you want to roll over into a new IRA. One hundred dollars is withheld for federal income taxes, so you receive only $900. If you roll over only the $900, you are treated as having received a $100 taxable distribution. To roll over the entire $1,000, you will have to deposit in the new IRA the $900 that you received, plus an additional $100. (The $100 withheld will be claimed as part of your credit for federal income tax withheld on your federal income tax return.)
A trustee-to-trustee transfer (direct rollover) occurs directly between the trustee or custodian of your old IRA and the trustee or custodian of your new IRA. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution (and therefore the issue of tax withholding does not apply). Further, trustee-to-trustee transfers are not subject to the 60-day deadline, or the “once-per-12-month” limitation.
Example(s): You have an IRA invested in a bank CD with a maturity date of January 2. In December, you provide your bank with instructions to close your CD on the maturity date and transfer the funds to another bank that is paying a higher CD rate. On January 2, your bank issues a check payable to the new bank (as trustee for your IRA) and sends it to the new bank. The new bank deposits the IRA check into your new CD account, and your trustee-to-trustee transfer is complete.
trustee-to-trustee transfers avoid the danger of missing the 60-day deadline and are generally the safest, most efficient way to move IRA funds. Taking a distribution yourself and rolling it over only makes sense if you need to use the funds temporarily, and are certain you can rollover the full amount within 60 days.
Converting traditional IRAs to Roth IRAs
You may be able to convert your traditional IRA to a Roth IRA, but you will have to pay income taxes on the amount of the traditional IRA contributions you previously deducted and any earnings you withdraw. Generally, if you’re over age 59½, withdrawals from your Roth IRA are considered to be qualified tax-free distributions once you satisfy a five-year holding period.
Other types of distributions
A lump-sum distribution is one whereby you receive the entire balance of your account in one payment. The trustee or custodian of your IRA will withhold 10% of your balance for taxes unless you choose not to have taxes withheld. You must report your distribution for income tax purposes and are subject to regular income taxes on the distribution.
Caution: The amount of your distribution is included in your income in the year received. A large enough lump-sum distribution could have the effect of causing a portion of your income to be taxed at a higher marginal tax rate (i.e., “pushing you into a higher tax bracket”).
Discretionary distributions do not follow a payment schedule and are considered nonperiodic payments. Under this withdrawal scheme, you take distributions as the need arises. The IRA custodian or trustee will withhold 10% of your withdrawals for federal income tax unless you choose not to have tax withheld.
Example(s): You have $55,000 in your IRA. You are age 60. You decide to take a distribution from your account to celebrate your 25th wedding anniversary with a cruise. You withdraw $10,000. You are subject to federal and state income taxes on the amount of the distribution. If you have made only deductible contributions to the IRA, the entire amount of the distribution is subject to tax. If you have made nondeductible contributions, a portion of the distribution will not be subject to tax.
Caution: The amount of your distribution is included in your income in the year received.
Substantially equal periodic payments
You may have begun taking substantially equal periodic payments from your IRA before reaching age 59½ to avoid the 10% premature distribution tax (refer to Internal Revenue Code Sec. 72(t)). The rules for substantially equal payments require that you receive payments over your life expectancy (or the joint life expectancy of you and your designated beneficiary). The payments must occur at least annually. If you started taking substantially equal payments before age 59½, you can’t modify the payments before five years from the payment start date or upon reaching age 59½, whichever is later. If you began receiving payments under this guideline and you increase or decrease the payment amounts before this period ends, the premature distribution tax generally applies retroactively to all distributions before age 59½.
Example(s): Billy Bob, at age 57, needed some cash from his IRA and didn’t want to pay the premature distribution tax, so he began receiving substantially equal payments from his IRA. The balance in his IRA at the time was $60,000, and according to the charts accepted by the IRS at the time, his life expectancy was 27.9 years. Based on this life expectancy and the IRA balance, and applying the level payment amount amortization method, the amount allowed each year under substantially equal payments was $5,435 (derived by amortizing $60,000 at 8% interest in level payments over 27.9 years). Three years later, on his 60th birthday, Billy Bob increases the distribution amount to $7,000. Because the substantially equal payments did not run for five years before the change, Billy Bob must pay the premature distribution tax on the full amount received from age 57 until age 59½.
Tip: One of the methods that can be used to calculate substantially equal periodic payments is effectively the same as that used to calculate required minimum distributions.
Should you withdraw money from your IRA between ages 59½ and 70½?
It depends on your circumstances. If you need the money for income or unforeseen expenses, it may very well be advisable to draw on your IRA. However, if you have other sources of income and don’t need the IRA funds, you may want to think twice about withdrawing funds. Even though you will be free of the premature distribution tax once you’ve reached age 59½, you still may have to pay income taxes on all or part of any IRA withdrawals (depending on whether or not the contributions you made were tax-deductible). If the amount of a taxable distribution is substantial, it may even push you into a higher tax bracket for that year. This could increase your annual tax liability significantly.
Besides, if you take some large IRA distributions after reaching 59½, your IRA could be depleted (or at least reduced in size) more quickly than you had planned. This could mean a smaller nest egg for your later retirement years when you may need income the most, and a much smaller balance available to leave to your beneficiaries when you die. And, of course, the longer you leave funds in an IRA, the greater the opportunity for compounded, tax-deferred growth of earnings. The point is that it’s often not wise or appropriate to take distributions from an IRA between ages 59½ and 70½.
Planning a Funeral
What is planning a funeral?
A funeral is an event that allows the family and friends of someone who has died to both celebrate that person’s life and mourn that person’s death. Funerals are often planned by taking into account religious and social traditions. According to the Western tradition, funerals usually include a visitation of the body (also called a viewing or awake), as well as a ceremony performed by a clergy member, family member, or friend. There may be readings, music, and words spoken about the deceased person’s life. However, funerals are personal–not legal–events and should reflect the preferences of the deceased individual or his or her family.
How to do it
Talk to family and friends
It’s often said that funerals are not for the dead but the living. For this reason, you must discuss your funeral preferences with your friends and family if you are preplanning your funeral. What they want is important, because the funeral is really for them; after all, you won’t be there to see it! On the other hand, you will want your funeral to reflect your style and individuality, so make sure that your friends and family know what you want your funeral to be like. If you are in charge of planning someone else’s funeral, involving family and friends will ensure a more meaningful funeral and help the healing process.
Select a funeral director
Many people plan funerals with the help of a funeral director because of the vast knowledge and contacts he or she has. Often a funeral director is one of the first persons called after someone dies because the funeral director transports the body to the funeral home. A funeral director helps you make arrangements and sees that the funeral service goes as planned. In general, he or she assists you in the following ways:
- Gives you information about burial and cremation
- Plans when and where the funeral service or memorial service will take place
- Helps you plan the funeral service and coordinates all participants and services
- Helps you choose a casket or urn
- Helps you choose a burial site (you may have to contact the cemetery directly, however, for information on gravesites, etc.)
- Embalms or prepares the body
- Arranges transportation to and from the burial site
- Notifies your attorney if you need legal help
- Discusses benefits to which you are entitled
- Discusses options for paying for the funeral
- Arranges for death certificates and notices
Using the services of a funeral director is a legal requirement in some states. Still, there’s no reason why you can’t assume some of the planning responsibility yourself or delegate it to friends or family members. Also, most funeral directors are willing to accommodate special requests and personal preferences.
Many people organize funeral services based on social or religious traditions, but there’s no right or wrong way to organize the service. No matter what form it takes, you can have a meaningful funeral service if you remember that it should honor an individual’s life as well as mourn that individual’s death. Besides, the funeral service gives people a chance to grieve together. Some people mistakenly believe that cremation rules out a funeral. However, funerals can be held before cremations, just as they are held before burials. If time is short or if you are too upset to arrange a funeral, you can arrange for the body to be buried or cremated, then hold a memorial service for the deceased person several days or weeks later.
Arrange for burial, entombment, or cremation
Choosing burial, entombment, or cremation is a personal decision, sometimes guided by religious or social tradition, sometimes by emotion, or even sometimes by financial factors. In the United States, cremation is a much less popular option than burial or entombment, chosen by fewer than one in four individuals. Burial, however, is usually much more expensive than cremation because of the costs involved in buying, opening, and maintaining a gravesite, as well as the cost of paying for markers and sometimes a vault to house the casket.
How to get good service
Choose a reliable funeral director
A funeral director’s reputation is an important indicator of the quality of service he will give you. If you don’t know anything about the funeral directors or funeral homes in your area, ask a relative, friend, or clergy member for a recommendation instead of picking one out of the phone book. Also, ask if the director is licensed and a member of a professional association such as the National Funeral Directors Association (NFDA) or National Selected Morticians (NSM) because their members must adhere to a code of ethics. If possible, visit the funeral home, look around, and get information about products and prices before you have to use the funeral home’s services.
Don’t fall for a sales pitch
Funeral directors are in an awkward position; they have to be both friendly, sympathetic counselors, and salespeople. However, a scrupulous funeral director should be able to explain available options to you and let you decide without playing on your feelings of guilt or sorrow. If you feel that you’re getting a sales pitch rather than good service, look for another funeral home before you’re talked into buying a funeral that you don’t want or need or can afford.
Complain if you must
If you have a complaint about the service that you receive from your funeral director, try to resolve it with him or her directly first. Reputation is very important to a funeral director, and he or she is usually attentive to service. Explain what your problem is and what action you would like taken. Then, give him or her the chance to correct the situation. If you are not satisfied with the outcome, the Funeral Ethics Association may be able to help you. This association will help mediate a solution between you and the funeral director. You may also want to contact your state consumer protection agency if your complaints are not resolved to your satisfaction.
Questions & Answers
How can you preplan a funeral?
Start by writing down your wishes regarding burial or cremation, the type of funeral you want, and other relevant information. Then, fill out a funeral preplanning worksheet (ask your local funeral director for one) and keep it with your will or important papers.
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Medicaid Planning Basics
The best time to plan for the possibility of nursing home care is when you’re still healthy. By doing so, you may be able to pay for your long-term care and preserve assets for your loved ones. How? Through Medicaid planning.
Eligibility for Medicaid depends on your state’s asset and income-level requirements
Medicaid is a joint federal-state program that provides medical assistance to various low-income individuals, including those who are aged (i.e., 65 or older), disabled, or blind. It is the single largest payer of nursing home bills in America and is the last resort for people who have no other way to finance their long-term care. Although Medicaid eligibility rules vary from state to state, federal minimum standards and guidelines must be observed.
In addition to you meeting your state’s medical and functional criteria for nursing home care, your assets and monthly income must each fall below certain levels if you are to qualify for Medicaid. However, several assets (which may include your family home) and a certain amount of income may be exempt or not counted.
Medicaid planning can help you meet your state’s requirements
To determine whether you qualify for Medicaid, your state may count only the income and assets that are legally available to you for paying bills. That’s where Medicaid planning comes in. Over the years, several tools and strategies have arisen that might help you qualify for Medicaid sooner.
In general, Medicaid planning seeks to accomplish the following goals:
- Exchanging countable assets for exempt assets to help you meet Medicaid eligibility requirements
- Preserving assets for your loved ones
- Providing for your healthy spouse (if you’re married)
Let’s look at these in turn.
You may be able to exchange countable assets for exempt assets
Countable assets are those that are not exempt by state law or otherwise made inaccessible to the state for Medicaid purposes. The total value of your countable assets (together with your countable income) will determine your eligibility for Medicaid. Under federal guidelines, each state compiles a list of exempt assets. Usually, this list includes such items as the family home (regardless of value), prepaid burial plots and contracts, one automobile, and term life insurance.
Through Medicaid planning, you may be able to rearrange your finances so that countable assets are exchanged for exempt assets or otherwise made inaccessible to the state. For example, you may be able to pay off the mortgage on your family home, make home improvements and repairs, pay off your debts, purchase a car for your healthy spouse, and prepay burial expenses.
For more information on this topic, contact an elder law attorney who is experienced with your state’s Medicaid laws.
Irrevocable trusts can help you leave something for your loved ones
Why not simply liquidate all of your assets to pay for your nursing home care? After all, Medicaid will eventually kick in (in most states) once you’ve exhausted your resources. The reason is simple: You want to assist your loved ones financially.
There are many ways to potentially preserve assets for your loved ones. One way is to use an irrevocable trust. (It’s irrevocable in the sense that you can’t later change its terms or decide to end it.) Property placed in an irrevocable trust will be excluded from your financial picture, for Medicaid purposes. If you name a proper beneficiary, the principal that you deposit into the trust (and possibly any income generated) will be sheltered from the state and can be preserved for your heirs. Typically, though, the trust must be in place and funded for a specific time for this strategy to be an effective Medicaid planning tool.
For information about Medicaid planning trusts, consult an experienced attorney.
Nursing homes are expensive. If you must go to one, will your spouse have enough money to live on? With a little planning, the answer is yes. Here’s how Medicaid affects a married couple. A couple’s assets are pooled together when the state is considering the eligibility of one spouse for Medicaid. The healthy spouse is entitled to keep a spousal resource allowance that generally amounts to one-half of the assets. This may not amount to much money over the long term.
A healthy spouse may want to use jointly owned, countable assets to buy a single premium immediate annuity to benefit himself or herself. Converting countable assets into an income stream is a plus because each spouse is entitled to keep all of his or her income, in contrast to the pooling of assets. By purchasing an immediate annuity in this manner, the institutionalized spouse can more easily qualify for Medicaid, and the healthy spouse can enjoy a higher standard of living.
Be aware, however, that for annuities purchased on February 8, 2006, and thereafter (the date of enactment of the Deficit Reduction Act of 2005), the state must be named as the remainder beneficiary of the annuity after your spouse or a minor or disabled child.
Beware of certain Medicaid planning risks
Medicaid planning is not without certain risks and drawbacks. In particular, you should be aware of look-back periods, possible disqualification for Medicaid, and estate recoveries.
When you apply for Medicaid, the state has the right to review or look back, at your finances (and those of your spouse) for months before the date you applied for assistance. In general, a 60-month look-back period exists for transfers of countable assets for less than fair market value. Transfers of countable assets for less than fair market value made during the look-back period will usually result in a waiting period before you can start to collect Medicaid. So, for example, if you give your house to your kids the year before you enter a nursing home, you’ll be ineligible for Medicaid for quite some time. (A mathematical formula is used.)
Also, you should know that Medicaid planning is more effective in some states than in others. Besides, federal law encourages states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. This means that your state may be able to place a lien on your property while you are alive, or seek reimbursement from your estate after you die. Make sure to consult an attorney experienced with Medicaid planning and the laws in your state before taking any action.
Settling an Estate
What is settling an estate?
Definition of estate
When people die, they usually leave behind money and other things of value (assets). Also, they may have auto loans, mortgages, and other outstanding debts (liabilities). Together, the assets and liabilities left by a decedent are known as the estate. Settling an estate means that someone follows the legal and administrative procedures set up to pay the liabilities of the estate and distribute the remaining assets to the rightful beneficiaries.
Who settles an estate?
An estate is settled by the executor named in the decedent’s will. Typically, the executor is the spouse or a close family member of the decedent but maybe another party. If the decedent left no valid will or the named executor fails to serve, the probate court will name an administrator to fulfill those duties. If you have been named executor in a will or appointed as the administrator of an estate, you are responsible for carrying out the terms of the will (if there is one) and settling the estate, either alone or with the help of an attorney.
Is settling an estate complicated?
Settling an estate may be tedious and time-consuming, but not necessarily complicated. It depends on the value of the estate, the state in which the decedent lived, and whether you must go through probate. Probate is the court-supervised process of proving the authenticity of the will and executing its terms. Formal probate may not be required if the decedent’s property is worth less than a certain amount, or if all the assets are non-probate assets. If minimal probate proceedings are required and there is no challenge to the will, settling an estate can be a relatively simple matter.
Do you need an attorney to help you?
If you are the executor, you aren’t required to hire an attorney to help settle the estate, but you might consider it if the estate is complex or if you don’t have the time, energy, or expertise to handle it yourself. If you hire an attorney, remember that he or she works for you, not for the estate, and that you are still the fiduciary. Be sure that you trust him or her to do a good job, and that you understand how the fees will be paid. In general, attorneys charge either by the hour or a lump sum, and the estate pays their fee. However, some states allow attorneys to take a percentage of the estate, an arrangement that can be quite expensive.
If you feel that you can settle the estate without much help, you should consider hiring an attorney as an advisor only. He or she will look over documents you prepare, give you specific advice in certain areas, and charge you an hourly rate for those limited services.
How to do it
Hire an attorney or other advisors
You may want to hire an attorney to help settle the estate, but other professionals such as accountants or financial advisors can also help with specialized issues. Such issues may include paying income and estate taxes, accounting for estate debts and expenses, and collecting insurance and pension benefits.
Locate and read the will
Finding the will should be relatively easy. You may already know where it is located. Otherwise, you may be able to look in the decedent’s safe-deposit box, a file cabinet, or with the decedent’s attorney or other family members. When you have found the will, read it to make sure who the executor is, as well as who the beneficiaries are. Also, try to determine if the will you’ve found is the most recent version since more than one version may exist.
Tip: If your spouse left no will or if the will is invalid, he or she is said to have died intestate. The probate court will establish who the legal heirs are under your state’s intestate succession laws and may appoint you as administrator.
Caution: If the decedent has a safe-deposit box, his or her bank may seal it at the time of death and may deny entry, even if you are the decedent’s spouse. However, an exception might be made if you are a joint or cosigner for the box and have a key. To open the safe-deposit box, you may have to get court authorization. For this reason, either don’t store your will in a safe-deposit box or have another copy stored someplace else, for example with your attorney.
Carry out funeral arrangements
Complete the funeral arrangements. Most states have a five-day waiting period before you can begin any other work to settle the estate anyway.
Gather paperwork and documents you will need
To settle the estate, you will need to have the original or certified copies of some or all of the following documents: the decedent’s will, birth certificate, marriage certificate, death certificate, Social Security number or card, military discharge papers, and divorce papers. You will also need to make a list of assets (such as bank accounts, trusts, securities, real estate, insurance policies, retirement plans, business interests, and personal property) owned by the decedent at death, and find any paperwork that accompanies these assets (such as deeds, mortgages, titles, registrations, and loan paperwork).
Determine if probate will be necessary
To determine if probate is necessary, check with your attorney or your state’s probate court clerk (for the phone number, look in the government listing section of your telephone directory). One of these sources should be able to tell you how your state determines if probate is necessary or guide you to the necessary resources. Many states have simplified probate procedures or do not require formal probate of property worth less than a certain amount. In general, however, probate may be necessary if there are probate assets. A probate asset is a property that does not automatically pass to a beneficiary and is distributed by the terms of the will. Nonprobate property automatically passes to a beneficiary, either because the property is held jointly or because the beneficiary has been specifically designated as a beneficiary in another document (a life insurance policy or pension plan, for instance).
Example(s): When Hal died, he left his entire estate to his wife, Jane. His estate consisted of a house worth $150,000, a bank account worth $12,935.46, and a $50,000 life insurance policy. The house was held in the name of Hal and Jane as joint tenants with rights of survivorship. The bank account was held jointly by Hal and Jane. Jane was the named beneficiary of Hal’s life insurance policy. None of his estates was subject to probate because all of Hal’s property legally passed to Jane automatically.
Caution: Some bank accounts held jointly may not pass automatically to the other joint account holder. It depends on the wording of the account and the intent of the owners at the time the account was opened.
Apply for probate
If the estate is subject to probate, you must initiate proceedings by filing a petition to probate the will or administer the estate before the probate court. You can get this petition from the clerk of the court. You will then file the petition and the will with the court, along with a list of probate assets.
Notify all interested parties that probate has been initiated
You must locate and notify all interested parties (e.g., heirs at law and beneficiaries named in the will) that probate has been initiated. Even if you are the spouse of the decedent and sole beneficiary, many states require that you notify anyone who would benefit if there had been no will because they may have reason to challenge the will or they may have a more recent copy of the will. Since the length and type of notice you must give varies from state to state, check your state’s laws to determine what notification procedure you must follow.
Open a bank account in the name of the estate
You may need to open an estate checking account to pay any bills or accept money owed while the estate is being settled. You may also need to obtain court permission to do this. As executor, you can deposit checks made out to the decedent to this account, as long as you endorse them. If you have questions regarding this, talk to the bank or your attorney.
Apply for a Taxpayer Identification Number (TIN) and any state ID number required
Each TIN applicant must (1) applications using the revised Form W-7, Application for IRS Individual Taxpayer Identification Number, and (2) attach a federal income tax return to the Form W-7. Applicants who meet an exception to the requirement to file a tax return (see the instructions for Form W-7) must provide documentation to support the exception.
Send your Form W-7 and proof of identity documents to the Internal Revenue Service, Austin Service Center, ITIN Operation, P.O. Box 149342, Austin, TX 78714-9342. You may also apply using the services of an IRS-authorized Acceptance Agent or visit an IRS Taxpayer Assistance Center instead of emailing your information to the IRS in Austin.
Arrange notification of creditors
Depending on the laws of your state, you may need to publish a legal notice (usually in the local paper) to notify creditors (and other interested parties who may have received the notice personally) of the decedent’s death. Also, you may be required to mail a notice to each known creditor individually. Depending on your state’s laws, creditors may have as much as one year to file a claim against the estate.
Notify institutions and agencies
Send notices of the decedent’s death to the post office, banks, utility companies, the Social Security Administration, and other institutions that should be informed.
Collect debts owed to the estate and pay creditors
The executor or administrator will have to both collect money owed to the decedent or the decedent’s estate and pay any bills or debts of the estate. Money owed to the estate might include unpaid salary, insurance benefits, employee benefits, government benefits, or pensions. Bills or debts of the estate might include credit card bills, funeral expenses, medical bills, advisors’ fees, and loan payments. If you are the spouse of the decedent, you may need help from your advisor to determine what debt is yours alone, what is joint debt, and what is your spouse’s debt.
Caution: If you are the spouse of the decedent, don’t pay any bill unless you are certain it is legitimate. When the death notice appears in the newspaper, you may be targeted by con artists who will ask you to pay phony expenses. Before paying any creditor, ask to see a copy of the original invoice and check it thoroughly. Be particularly wary of any request made by the telephone. Never give out any personal or financial information over the phone (including your Social Security number or credit card numbers).
File any insurance claims on the decedent’s life
File any insurance claims on the decedent’s life.
Periodically check in with the court
You may occasionally need to obtain the probate court’s permission to spend estate funds. You may also be required to file reports with the court regarding how estate funds are spent. Also, you may need the court’s permission to sell estate property.
You may have to file state and federal tax returns, including Form 1040 (U.S. Individual Income Tax Return), Form 1041 (Fiduciary Income Tax Return), and, if the gross estate is large enough, Form 706 (U.S. Estate Tax Return). Also, your state may impose state death taxes (e.g., an inheritance tax).
Make estimated tax payments
You may need to make estimated tax payments for the estate for any tax year ending two or more years after the decedent’s death.
File papers to finalize the estate
You may need to file a final account with the court that details all estate income, expenses, and administration costs. The court approves this final accounting. This finalization may take place a year or more after probate is initiated because of the length of the probate process.
Distribute assets to the beneficiaries
Non probate assets pass automatically to the beneficiaries, but probate assets can only be distributed after all claims, debts, and taxes are paid, and the probate process is complete. When distributing the assets to the beneficiaries, you must follow instructions given in the will as well as those required by the probate court. Once the estate is distributed, the court closes the estate and discharges you as executor.
Caution: If you are the spouse of the decedent, be aware that until the court has officially awarded the property to you, you are forbidden to sell or gift your spouse’s property, even if you feel that you are now the rightful owner. You can’t even give the property to your children until the estate settlement process is complete because there may be challenges to the will of an inventory that might need to be taken.
Questions & Answers
If one spouse dies without a will, how does the surviving spouse settle his or her estate?
You can settle an estate without a will, but the laws of your state will determine how your spouse’s property is distributed. These laws are called statutes of descent and distribution. You may be appointed as administrator of the estate, but the courts can appoint someone else, which will give you less control over estate management. For advice and information, consult an attorney.
If you are named as executor, can you decline to serve?
No one can be forced to serve as executor. You can simply decline the responsibility. An alternate executor named in the will may take over or the court will appoint someone.
Does a relative name as executor get paid?
An executor is entitled to a fee equal to an amount determined by state law or whatever the probate court determines is a reasonable amount. Typically, relatives of the decedent usually decline payment for their services, even though they are not obligated to do so.
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Choosing a Nursing Home
What is a nursing home?
A nursing home is a state-licensed facility that may provide skilled nursing care, intermediate care, and/or custodial care. You may need to enter a nursing home on a short-term basis (for example, after a major illness or injury), or on a long-term basis (if you become physically or mentally incapacitated and cannot care for yourself). Although you may prefer in-home care, you may need to enter a nursing home if you require round-the-clock care, especially if you don’t have a family to help you at home or if the services of an in-home caregiver are inadequate or unavailable.
How to choose a nursing home
Like many people, you may fear to enter a nursing home because you have heard horror stories about the quality of care. However, there are good nursing homes as well as bad ones. Getting into a good nursing home takes a combination of research, forethought, and financial planning. Ideally, you should research nursing home care before an emergency arises because many homes have long waiting lists. The following sections explain what to consider when choosing a nursing home.
Quality of medical care
Since medical care is an integral part of nursing home care, you should find out what level of care the nursing home provides. For example, some homes provide mainly custodial care while others may provide skilled nursing care. Many nursing homes provide both. If you think you may need skilled nursing care in the future, don’t choose a home that offers only custodial care because it might be difficult to find another good home later on. Also, determine how often you will receive basic health care such as physicals. Can you see your doctor or the staff physician? Will you have access to dentists, eye doctors, or other specialists? In a medical emergency, what procedure does the nursing home follow?
Cost of care
Nursing home care is generally very expensive, but you will pay less at some facilities than at others. If you are concerned about the cost of nursing home care (and you probably are), you should compare the cost of each facility you are considering with the quality of care you will receive there and the services you receive for your money. For example, some nursing homes charge extra for certain types of care (such as assistance with meals). Besides, if you plan on using Medicaid to pay for your nursing home care, make sure that the facility you select accepts Medicaid; not all nursing homes do. Many others restrict the number of Medicaid “beds” in the nursing home (some states, however, prohibit this). If you need only short-term skilled nursing care in a nursing home, your care may be covered by Medicare if the facility participates in Medicare and has a Medicare bed available. Other ways to pay for nursing home care include using private funds or benefits from a long-term care insurance policy.
The appearance of grounds and facilities
The nursing home facility should be clean and well maintained. One sign of a poor-quality nursing home is a bad smell, indicating that the staff is too busy to help the residents to the bathroom or change their clothing. Although rooms and public areas are often not luxurious, they should be comfortable. Notice whether residents are allowed to decorate their rooms and if private rooms are available. Outside, the grounds should be maintained neatly; if being outside is important to you, check the nursing home’s policy regarding this. Besides, pay close attention to the dining room. You’ll have to eat there; does it seem clean, and does the food seem appetizing?
Safety and security
When you visit a nursing home, ask when the facility was built, and when it was last updated. In general, the newer the building, the more fire-resistant it will be due to changes in building codes. Look for safety features. Resident rooms should have windows, and room doors should unlock from the inside and open onto wide hallways. Hallways should have handrails, and bathrooms should have grab bars and toilets that are accessible to residents in wheelchairs. Also, ask what kind of precautions the nursing home takes to make sure that patients do not wander off, or that unauthorized individuals do not wander in.
Resident/staff ratio and interaction
Ask each nursing home you consider how many staff members are assigned to each unit per shift, and determine if the patient/staff ratio meets or exceeds state/federal requirements. Also, ask how the nursing home is complying with other federal government regulations regarding staff training and resident care. Notice how staff members treat residents. Are they generally caring and concerned, or do they seem hurried and distracted? Are a lot of residents sitting around in common areas doing nothing, or are they involved in activities? Do residents appear well cared for?
Consider whether the nursing home organizes trips or outside activities for its residents or provides in-house recreational activities. Do residents have the opportunity to exercise? Look around; does the environment seem stimulating or dull? Is the nursing home a place where you (no matter what your condition) will enjoy living?
Questions & Answers
Private rooms are available at many nursing homes, but they cost extra. If you are paying for your care, make sure that you find out how much more private rooms cost. If Medicaid will be paying for your nursing home care, however, you will not be entitled to a private room. When you choose a nursing home, find out whether private rooms are commonly available, and, just in case, ask about how the nursing home decides who will share a room. If you end up with a roommate and you are unhappy with him or her, will you be able to move to a different room? If the nursing home wants to transfer you to a different room or unit, what procedures will it follow?
Even seemingly good nursing homes have complaints lodged against them. Why?
Nursing homes are, for some people, difficult and lonely places to live, and complaints against even the good ones are common. So, how can you tell the difference between a complaint that is justified and one that is not? For one thing, ask the nursing home administrator to explain how the home resolves problems and resident complaints. Do many of the complaints center around one issue? If so, the nursing home may have a serious problem in this area. Trust your instincts. Do the nursing home residents, in general, seem well cared for, or do you see signs that the home may be poorly managed or even abusive?
What’s the best way to resolve a complaint with a nursing home?
You’ll probably be satisfied with the nursing home you choose. However, if you do have complaints about the quality of care you receive or the environment, don’t remain silent. You can talk to the nursing home administrator, or, if you prefer, to the nursing home’s ombudsman, a trained volunteer who monitors nursing home care or other long-term care facilities. Each state also has at least one full-time state ombudsman, and some cities and counties have local ombudsmen. If you have a complaint about the quality of long-term care, you can contact the ombudsman through the nursing home or care facility, through the area agency on aging, (call the Eldercare Locator at (800) 677-1116 for help in locating your area agency on aging), or through your state’s department of aging.
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What would you do with an extra $10,000? Maybe you’d pay off some debt, get rid of some college loans, or take a much-needed vacation. What if you suddenly had an extra million or 10 million or more? Now that you’ve come into a windfall, you have some issues to deal with. You’ll need to evaluate your new financial position and consider how your sudden wealth will affect your financial goals.
Evaluate your new financial position
Just how wealthy are you? You’ll want to figure that out before you make any major life decisions. Your first impulse may be to go out and buy things, but that may not be in your best interest. Even if you’re used to handling your finances, now’s the time to watch your spending habits carefully. Sudden wealth can turn even the most cautious person into an impulse buyer. Of course, you’ll want your current wealth to last, so you’ll need to consider your future needs, not just your current desires.
Answering these questions may help you evaluate your short- and long-term needs and goals:
- Do you have an outstanding debt that you’d like to pay off?
- Do you need more current income?
- Do you plan to pay for your children’s education?
- Do you need to bolster your retirement savings?
- Are you planning to buy a first or second home?
- Are you considering giving to loved ones or a favorite charity?
- Are there ways to minimize any upcoming income and estate taxes?
The answers to these questions may help you begin to formulate a plan. Remember, though, there’s no rush. You can put your funds in an accessible interest-bearing account such as a savings account, money market account, or short-term certificate of deposit until you have time to plan and think things through.
Once you’ve taken care of these basics, set aside some money to treat yourself to something you wouldn’t have bought or done before, It’s OK to have fun with some of your new money!
Note: Experts are available to help you with all of your planning needs, and guide you through this new experience.
Impact on insurance
It’s sad to say, but being wealthy may make you more vulnerable to lawsuits. Although you may be able to pay for any damage (to yourself or others) that you cause, you may want to re-evaluate your current insurance policies and consider purchasing an umbrella liability policy. If you plan on buying expensive items such as jewelry or artwork, you may need more property/casualty insurance to cover these items in case of loss or theft. Finally, it may be the right time to re-examine your life insurance needs. More life insurance may be necessary to cover your estate tax bill so your beneficiaries receive more of your estate after taxes.
Impact on estate planning
Now that your wealth has increased, it’s time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.
Is your will up to date? A will is a document that determines how your worldly possessions will be distributed after your death. You’ll want to make sure that your current will accurately reflect your wishes. If your newfound wealth is significant, you should meet with your attorney as soon as possible. You may want to make a new will and destroy the old one instead of simply making changes by adding a codicil.
Carefully consider whether the beneficiaries of your estate are capable of managing the inheritance on their own. For instance, if you have minor children, you should consider setting up a trust to protect their interests and control the age at which they receive their funds.
It’s probably also a good idea to consult a tax attorney or financial professional to look into the amount of federal estate tax and state death taxes that your estate may have to pay upon your death; if necessary, discuss ways to minimize them.
Giving it all away — or maybe just some of it
Is the gift-giving part of your overall plan? You may want to give gifts of cash or property to your loved ones or your favorite charities. It’s a good idea to wait until you’ve come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:
- If you forgive a debt owed by a family member, you may owe gift tax on the transaction
- You can make individual gifts of up to $15,000 (2018 limit) each calendar year without incurring any gift tax liability ($30,000 for 2018 if you are married, and you and your spouse can split the gift)
- If you pay the school directly, you can give an unlimited amount to pay for someone’s education without having to pay gift tax (you can do the same with medical bills)
- If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income
Note: Because the tax implications are complex, you should consult a tax professional for more information before making sizable gifts.