Boomer Estate Planning

Boomer Estate Planning

By: Martin M. Shenkman, CPA, MBA, JD

Boomer estate planning has some special twists. For the record, we're referring to the cohort born between 1946 and 1964. While that includes Boomer Esiason (born April 17, 1961) the former Jet's quarterback, we're not limiting our planning to him.

Boomer Vagabonds: Andy of Mayberry never would have left Mayberry, but Boomers are less tied to any geographic area then prior generations. That means that documents relating to Boomers must be more flexible and contemplate relocating. Trusts should include a change in situs clause that enables the trust to be moved to a new state.

Home Sweet Boomer Home: For many Boomers a substantial portion of their wealth may be tied up in their homes. Thus, estate planning techniques like qualified personal residence trusts (QPRTs), while attractive for the wealthiest Boomers will be impractical for many as too much wealth would be put beyond their reach. Techniques like reverse mortgages are likely to become ubiquitous as more Boomers seek to tap that large home equity pot in retirement. When carrying costs become too high, sale and reinvestment in a smaller home, often in a lower cost area, will be a likely option. This is another reason that the need to address changing domiciles in planning is so important.

Redefine Retirement: Boomers are active much longer. This changes the nature of many plans and documents. 55 or 65 doesn't mean retirement, it means re-tooling. Estate plans and business legal documents need to address business succession, often in a different manner than what used to be used. Sale at an agreed retirement age often gives way to retained equity, but a reduced work load. Shareholder and operating agreements need to be renegotiated to address phased-in retirement. Often, a business owner will work part-time to help transition his clients to the new management. All this needs to be addressed long before target retirement or the Boomer won't have much negotiating clout.

Retirement Plan Funding: Boomers should keep funding retirement plans as increasing life expectancy increases the need for post retirement dollars. For example, Boomers age 50+ can contribute an extra $1,000, for a total of $5,000, to their IRAs, and up to $5,000 for 401(k)s. Considering the asset protection and other benefits, Boomers should max out their IRA contributions, and they can keep contributing up until the year prior to the year in which they turn 70.5, thereby ensuring that they will have enough funds to support their lifestyles during their retirement years. This is especially important for those Boomers who ransacked retirement funds for home purchases and other uses.

Investment Allocations: Many retiring Boomers are refocusing their investments on "income." Caution is in order. It's cash flow and not "income" that retiring boomers will require. Most significantly, shifting too large a proportion of a boomer's portfolio to income oriented investments based on an underestimation of life expectancy could have a boomer's portfolio loose its purchasing power in later years. That could be serious a financial problem. What should the asset allocation model be for a Boomer age 65, with a spouse age 72, entering "retirement"? Before heavily weighting the portfolio with bonds, consider that there is nearly a 50% chance that only one of them will be living 24 years from now! A predominant asset allocation to bonds could assure that inflation will wipe them out before global warming. If the Boomers are set on bonds, they may want to consider Church Bonds. These bonds are not only monetary investments but have collateral too. Often the bond owner will have a stake in the property and buildings owned by the church. There are also other types of investments that allow for greater cash flow.

Disability: Disability planning needs lots of attention. Nearly 20% of Americans have some type of disability. With Boomers working longer and living longer, disability planning doesn't stop at age 55 or 60. If Boomers will work well beyond what used to be retirement age, the need to replace lost income if disabled will also continue longer. For example, if a Boomer was planning on retiring at age 73, and by age 60 he is no longer able to work, he will lose out on 13 years of expected income. At older ages disability buy-out insurance won't solve business succession issues that it may have covered decades earlier. Alternatives need to be identified.

New Age Perspectives: Perhaps the most significant impact on boomer estate planning is not new laws, but the very different boomer mindset and paradigm for planning. The "traditional" approaches don't always apply. Boomers are more spiritual, philosophical and "fuzzy". It is far more common to address religious, lifestyle and other issues in planning documents to really carry out the wishes of boomers. In the Age of Aquarius a trust for a child is far more likely now, then 10 years ago for the boomer's parents, to include details on how the child should be raised, values, etc. This could take the form of a detailed distribution provision that not only addresses requisite tax lingo, but describes the types of education, travel and other expenses the Boomer parents want for their progeny. Boomers are more likely to draft an ethical will, a statement of their wishes, beliefs and philosophies, to leave to their children along side their "legal" will.

Sandwich Stress: Many Boomers are caught between providing for their children while still caring for their parents, so have been called the sandwich generation. The key for Boomers in this position is planning and modeling. Have your advisers model your current estate and financial picture. Challenge the projections with "what-if" scenarios to see how things turn out and identify possible actions to take. Too often Boomers worry about estate taxes (gee, might this have something to do with the evil death tax campaign?) when the real issue is the opposite, will they have sufficient wealth to sustain all the demands being made on them? Sometimes modest tweaks in when the Boomer retires (another year of work means more money saved to compound over the Boomer's future life expectancy, rather than a current reduction in resources), a slightly more aggressive investment allocation (less dependence on tax exempt bonds) may swing the financial pendulum into safe territory. Also, Boomers should be sure to meet with their financial advisors about their own retirement planning. Many Boomers, caught between the stress of dealing with both their parents' and children's financial needs, do not plan well enough for their own retirement. Your financial advisor is there to help plan for your retirement!

Non-Family Structure: It's been reported that 28.6% of boomers age 45-59 are single. That's quite an increase from the 18.8% of people that age that were single in 1980. So planning using the typical married couple paradigm is not sufficient for many boomers. Living trusts should become more common as single Boomers seek to establish a structure to protect them in the event of illness, disability and advanced age as nearly 1/3rd won't have a spouse to rely upon. While a larger number of Boomers are part of same-sex relationships than prior generations, federal law has not evolved. The 1996 Defense of Marriage Act mandates that only a marriage between opposite sex couples can be recognized, so for federal tax purposes, regardless of state law, no benefits are afforded to same-sex couples. The Social Security Administration is bound by the same law. So for these Boomers, yet additional planning is in order.

Different Laws: Boomers face more complexity then prior generations. A host of new laws affect boomer planning. HIPAA - Health Insurance Portability and Accountability Act has broad impact on any legal document addressing dissemination of medical information that affects powers of attorney, living wills, shareholders' agreements, trusts and more. Authorization needs to be included in these documents for physicians to disclose relevant medical information about Boomer patients.

The Principal and Income Act has a dramatic impact on how trusts established by parents of Boomers should be administered. Many of these old style trusts were written to pay out income. But for a Boomer entering retirement years that income alone may not be enough, or too variable. It's likely that as Boomers age the trusts established for them will, with increasing frequency, elect to be treated as total return trusts (when state law permits). These types of trusts can pay out a fixed percentage of value, e.g. 4% of the value of the trust, rather than payout income. The payout will grow as the trust assets grow in value. For Boomer trust beneficiaries, this will be an important method to provide greater and more secure cash flow in retirement.

Plan Early: As life expectancy increases, be prepared for the future. Many senior citizens live on a fixed income and rely on social security. Often, these do not provide enough to pay for nursing homes or live-in nurses. Boomers should consider purchasing a long-term care insurance policy while you are still eligible. These policies, which are not covered by Medicare, will ensure that if need be, you will be taken care of. If you do not end up entering an assisted living facility, some long term care insurance policies can double as life insurance policies. Also, be sure to discuss your financial situation with your heirs, before it is too late. Adult children will be happy to gain some insights into the world of financial planning, and you want to make sure that the wealth that you have accumulated throughout your life goes where you want it to go. Explain to your children how you want your finances handled, who should inherit the different percentages of your estate, and what you want your legacy to be.

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