Planning for Life's Curveballs

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Spring 2013


It’s been said the only two certainties in life are death and taxes.

 

The third certainty is that life will always present us with curveballs — unexpected events that may surprise us.

 

Although the timing of these events is unknown, we can take simple steps to prepare for them. Learning how to change a tire, for example, can help you when you’re stuck on the side of the road with a flat one.

 

Similarly, it’s important to prepare for life-changing events, such as health issues and divorce, that can affect your financial stability. As stewards of their family’s wealth, high net worth individuals should work with their tax and legal advisors to prepare for challenges that may come down the pike, says Sally Mullen, our Chief Fiduciary Officer.

 

“The reason that it’s important to plan for life’s curveballs now is that there are estate planning opportunities that may help ensure that you’ll have financial stability regardless of what happens, and help you ensure that you’ll be able to pass money down to your heirs and charities of your choice,” Mullen says.

 

U.S. Bank and U.S. Bancorp Investments, Inc. cannot provide tax and legal advice, but here are some tips that you may want to discuss with your advisors to manage your wealth amid some of life’s most common curveballs.

Photo by Duane Osborn

Disability

To help protect yourself against income loss during a potential debilitating injury or illness, you may want to consider disability insurance. Should you have a policy, it’s important to understand how the coverage works in the event you need to exercise benefits. Given each person’s unique situation, you could consult with one of our insurance affiliates who will help you better understand the benefits of your coverage.

 

A disability insurance policy may replace up to 65 percent of your annual income if you become disabled, says Carol Goetsch, Senior Group Product Manager for U.S. Bancorp Investments, Inc., an affiliate of U.S. Bank. A person with an annual salary of $300,000 might consider maintaining a policy in which he or she would receive a maximum benefit of $195,000, for instance.

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Spring 2013


For high limit disability income, clients might consider additional coverage that allows in excess of 65 percent of annual income coverage, understanding that monthly capped benefits vary up to a maximum of $30,000. For clients who earn more than $300,000, or are business owners, special planning should be considered with your advisor.

 

Keep in mind that once you qualify as disabled under the terms of your policy, there’s usually a waiting period before you can begin receiving benefits. “Disability insurance policies usually have elimination periods. This is the period of time in which you must continue to be disabled prior to the policy paying benefits,” Goetsch says. “Once you have met this elimination period, you can begin to receive benefits under the terms of the policy.”

 

To help weather the elimination period, maintaining an emergency fund in a liquid account may make sense. Since elimination periods can last up to six months, it’s generally a good idea to keep funds set aside that will cover the period of time during the elimination period.

 

An emergency fund may also help protect your investments from what Goetsch calls “portfolio turmoil” — the result of liquidating assets unexpectedly in a market that might not be conducive to liquidation. For example, an individual might borrow against a retirement plan or cash out investments. “Because you’re liquidating when

you may still want to accumulate, it may impede your ability to enjoy your retirement down the road,” she says.

 

Two Things You Can Do Today

 

Divorce

While divorce isn’t necessarily a curveball that can be anticipated, there are some simple steps you can take after a divorce that may protect you if you realize your joint venture might dissolve, Goetsch says.

 

Update the key documents and policies that the dissolution of your marriage will affect, such as life insurance policies and retirement accounts. One of the most important — and easy — things you can do is review and potentially change the beneficiary of any asset you have designated for an ex-spouse, assuming the divorce decree does not call for you to maintain it as is. It’s a simple process of letting your financial professional know you’d like to update the beneficiary. Your financial professional can assist you in obtaining and filing the appropriate paperwork.

 

“Failure to change the beneficiary designation may result in the ex-spouse receiving the assets or proceeds at death, which may not be your intention,” Goetsch says. “While there may be resolution via the courts, it can take considerable time and expense.”

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Spring 2013


Death

Thanks to estate taxes, death can potentially be the single most expensive life event for high net worth individuals.

 

Attempting to mitigate the expenses associated with death requires a strategy that matches your goals. “It’s the basics of financial planning,” Goetsch says. “What do you have? Who do you want it to go to? It’s preparing for the unknown.”

 

As you put together your strategy, start by considering two main buckets:

 

1. Your assets, including the money and estate you’ll leave behind.

 

2. The key people who will make decisions on your behalf should you become incapacitated or die.

 

With proper planning, it may be possible to avoid unnecessary costs due to estate taxes, says John Kitzke, an attorney with Kitzke & Associates in Grafton, WI.

 

“It’s the basics of financial planning. What do you have? Who do you want it to go to? It’s preparing for the unknown.”

— Carol Goetsch

 

“You need a comprehensive game plan,” Kitzke says. “Make sure you have good transition planning in place: Review your investment program, make sure that your investments are tax-efficient and consistent with their long-term planning — and that they have the right mix of investment philosophies.”

 

Likewise, review your gifting strategy with your tax and legal advisors to potentially lower your

estate taxes. “Consider the value of various charitable gifting techniques: charitable remainder trusts, donor-advised funds and foundations,” he says.

 

Current estate tax law states that a husband and wife each can pass on $5.25 million to their children without paying taxes on that transfer. Anything above that rate becomes taxable. If your estate is larger than $10.5 million, your financial professional can work with your tax and legal advisors to help develop strategies that may minimize taxes.

 

It’s also essential to have a will and keep it up to date, says Mullen. (In addition, a living will can help determine the course of your medical care if you’re incapacitated.)

 

Goetsch suggests identifying one or two key people to serve as health power of attorney and financial power of attorney, and to execute your wishes in your place. Your financial power of attorney should have a clear understanding of your finances and investment strategy.

 

Don’t overlook the importance of having your team of advisors work together, specifically your accountant, lawyer and financial professional. “Consider integrating your estate plan with tax planning and your portfolio,” Goetsch says.

 

A Changing Landscape

From a new marriage to an unexpected divorce, and from a sudden loss of income to a changing tax landscape, life’s curveballs don’t have to throw you off course.

 

“People have to make decisions today based upon what’s in front of them, knowing that it can and most likely will change in the future,” Goetsch says. “If plans are flexible enough, they should be able to accommodate those changes.”

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Financial Planning