Risk management, gifts and inheritance planning
By Nicole Wirick, CFP
An important element of financial planning analyzes a person’s ability to achieve financial independence by determining whether there is a high probability of achieving goals without depleting resources, based on spending goals and achievable savings. .
Once this is accomplished, careful planning dictates assessing the risks that could derail the plan, such as premature death, disability, or a long-term care-related event. Risk assessments are fluid and evolve based on your needs, life situation, and situations.
Life insurance is often used as a tool to mitigate the risk of premature death. Insurance replaces the income stream that the deceased would have earned over their lifetime to support loved ones.
Likewise, disability insurance is used as a tool to mitigate the risk of accident or illness that impedes the ability to earn income. Both risks are reduced or eliminated as retirement approaches, since there is no longer an income stream to protect.
At this point, the conversation often shifts to the risk of a long-term care event. With advances in medicine and an increased focus on health and wellness, Americans are generally living longer and have a desire to age in place whenever possible. A thoughtful plan models the possibility of a long-term care event and incorporates increasing costs over time.
Long-term care spending often grows at a faster rate than other goods and services. In fact, the average annual inflation rate for long-term care is around 3-5%. Whether one considers insurance or self-insurance, there should be a plan in place to deal with the possibility of such an event.
Give to the next generation
Once a financial independence analysis is completed and the aforementioned risks are properly assessed and mitigated, a great sense of comfort is often acquired. Attention can then shift to planning for the next generation.
The transition from wealth to children and grandchildren can be a complicated subject, but a simple and effective way to take advantage of the opportunity is to offer cash or valued stocks. An individual can donate $ 15,000 to another individual in 2021 without any tax implications. A husband and wife who file a joint tax return can each donate $ 15,000 for a total of $ 30,000, a so-called split donation.
Those with large estates, a high likelihood of financial success, and appropriately mitigated risk management may wish to transfer more than the $ 15,000 allowed per person per year. While there are several possible estate and wealth planning strategies to achieve this goal, these solutions can be time consuming and costly to implement.
There are a few easy ways to give to the next generation over and above the $ 15,000 per year limit. One such opportunity is Med-Ed exclusion. Section 2503 (e) of the Internal Revenue Code excludes direct payment of another person’s medical and educational expenses from federal donation taxes. This means that someone can pay for another person’s tuition fees, as long as they are paid directly to the institution, while still donating $ 15,000 per year in addition to the tuition fees. The same goes for qualifying medical expenses, as long as they are paid directly to the provider.
Another option to give over the $ 15,000 limit is to purchase a long term care policy where the parent owns and pays the premiums directly to the insurance company, and an adult child is l. ‘assured. Since the parent and child are related, the parent would have an insurable interest that would allow them to own the policy. When the parent dies, they can name the child as alternate owner to ensure the child takes control of the police and the police avoid probate.
It is important to understand the “why” behind this strategy:
- As we saw earlier in this article, long-term care swells at a faster rate than other goods and services. A monthly long-term care expense of $ 10,000 today will cost over $ 33,000 a month in 25 years, based on an annual inflation assumption of 5%.
- When offering money or securities, a parent often has less control over how funds are managed and spent.
- The opportunity to give more without paying taxes. No tax is triggered because the parent owns the policy and pays the premium. The parent can still give the child $ 15,000 on top of paying the premium.
- It’s usually easier to qualify for long-term care insurance when you’re younger and probably in better health.
For those who are in a financial position to consider transferring their wealth to the next generation, this might be a strategy to consider. Please meet with a qualified financial planner, insurance professional, and tax advisor to understand the specific implications for your situation.
About the author: Nicole Gopoian Wirick, JD, CFP®
Nicole Gopoian Wirick, JD, CFP®, is the Founder and President of Prosperity Wealth Strategies in Birmingham, Michigan. Nicole is a paid financial planner who believes that a successful counseling relationship involves compassionate conversations and planning tenacity.
The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to consult with a qualified financial advisor and / or tax professional first before implementing any strategy discussed here. Past performance is not representative of future performance.