Investors working with The Cairns Murray Thomson Group of Baird. Components of a Comprehensive Estate Plan

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1 The Cairns Murray Thomson Group 2 nd Quarter 2016 Planning Points To: Investors working with The Cairns Murray Thomson Group of Baird From: Michael R. Murray, CFP, CRC Vice President Senior Investment Consultant Private Wealth Management Welcome to Planning Points, our quarterly newsletter designed to educate, entertain and Improve Your Financial Planning. IN THIS ISSUE Qualifying for Financial Aid The Lifecycle of Risk Management Components of a Comprehensive Estate Plan Robert W. Baird & Co. Inc. does not offer tax or legal advice. Main: (262) Securities offered through Robert W. Baird & Co. Inc. Toll Free: (800)

2 Quotes of the Quarter: Economists don t forecast because they know, they forecast because they are asked. John Kenneth Galbraith The bird of time has but a little way to flutter. And lo, the Bird is on the Wing. (from the Rubaiyat of Omar Khayyam) We are here on earth to do good unto others. What the others are here for, I have no idea. WH Auden This quarter I ve included educational articles for investors saving for college, wealth builders looking to incorporate appropriate defensive strategies into their plans and those looking for efficient and reduce stress while dealing with health care issues and financial matters at incapacity and/or death. Each of us falls into at least one of these categories so read on! In case you were wondering, Wisconsin is one of nine community property states. If you are not already working with a quality attorney on your estate planning, please reach out to Chuck, Michael or Greg for a referral tailored to your situation. Robert W. Baird & Co. Inc. does not offer tax or legal advice. Main: (262) Securities offered through Robert W. Baird & Co. Inc. Toll Free: (800)

3 Sincerely, The Cairns Murray Thomson Group Charles S. Cairns Michael R. Murray, CFP, CRC Gregory J. Thomson, CMT Senior Vice President Vice President Vice President Senior Investment Consultant Senior Investment Consultant Private Investment Manager Private Wealth Management Private Wealth Management Private Wealth Management Dee M. Warpechowski Client Specialist Chris A. Rossman Client Specialist Certified Financial Planner Board of Standards Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER and federally registered CFP (with flame design) in the U.S., which awards to individuals who successfully complete CFP Board s initial and ongoing certification requirements. Robert W. Baird & Co. Inc. does not offer tax or legal advice. Main: (262) Securities offered through Robert W. Baird & Co. Inc. Toll Free: (800)

4 Private Wealth Management Research, Products & Services Qualifying for Financial Aid Investors saving for college often wonder what effect saving may have on a student s chances of qualifying for financial aid. There are several types of financial aid (federal, state and institutional), but federal aid is the most widely dispersed, and a family seeking any financial aid must complete the Free Application for Federal Student Aid (FAFSA). There are three basic ingredients in determining how much need-based aid your child is eligible for. 1. The cost of the school your child will be attending or is attending otherwise known as the Cost of Attendance (COA). 2. The dollar amount provided to the student from outside sources. Scholarships would be considered an outside resource. Also payments made directly to the college by a grandparent for example. 3. The expected family contribution (EFC). This is the amount your family is expected to pay for college based on your finances. This figure is determined each school year you apply for the Free Application for Federal Student Aid (FAFSA). The calculation considers the student's income and assets and the parent's income and assets. Refer to the chart on the next page. Example: Let s assume your child will be attending an in-state public college costing $22,000 per year. Your expected family contribution is $10,000 based on your child s contribution of $1,000 and your contribution of $9,000. Your child received a private scholarship for $1,000. Your child s financial need is $11,000 computed as follows: (COA-EFC-Outside Resources = Financial Need) COA $22,000 EFC Student s contribution $1,000 Parents contribution $9,000 Total EFC $10,000 Outside Resources $1,000 Financial Need $11,000 After completing the FAFSA the schools financial aid office will provide you information of what type of student aid is available and what amount will be available to your child. Federal student aid includes grants, work-study and loans. A grant does not have to be repaid and are typically awarded to students with exceptional financial aid need. The Federal Work-Study program is a program where students while attending can earn money for college through an on-campus or off-campus job. A loan, either a subsidized or unsubsidized, must be repaid back with interest. Page 1 of 2

5 Qualifying for Financial Aid, continued. The chart below shows the ranges of parent, student and grandparent income and assets used to calculate an annual Expected Family Contribution (EFC) for a student. Once EFC is determined, an institution s financial aid officer subtracts it from the institution s cost of attendance to determine annual financial need. The chart below shows income is more heavily factored than assets. PARENT STUDENT NON-PARENT INCOME 22% - 47% of available income 50% of student income (after certain allowances) Not included 0% of assets Retirement Accounts such as IRAs 1 or 401(k) 0% of assets Retirement Accounts such as IRAs 1 or 401(k) 0% of assets Retirement Accounts such as IRAs 1 or 401(k) ASSETS Equity in your primary home, a family-owned business, insurance policies and annuities 0% - 5.6% of assets 529 savings plan (where parent is owner) 2 Prepaid tuition plans (where parent is owner) Coverdell ESA (where parent is owner) 2 Securities Mutual Funds Bank accounts, CDs 0% - 5.6% of assets 529 savings plan (where student is owner) 2 Coverdell ESA (where student is owner) 2 20% of assets held in student s name UGMA/UTMA accounts Minor trusts Savings bonds (in student s name) Money, investments, business interests and real estate 529 savings plan (where a non-parent is owner) - Simply owning a 529 account for a child will not affect that child s financial aid eligibility 3 Coverdell ESA (where a non-parent is owner) Word of caution: Financial aid offices are required to treat distributions from non-parent owned 529s as aid to the student that will count as income the following year (remember 50% of a student s income counts towards the EFC). Therefore when the nonparent takes a distribution to pay for higher education it will negatively affect the beneficiary s financial aid eligibility the next year they apply for Financial Aid. 1 Though the tax law now permits penalty-free withdrawals from traditional or Roth IRAs to pay for qualified college costs, doing so could jeopardize financial aid in the following year. The entire withdrawal, principal and earnings, counts as income on the following year s aid application. 2 Withdrawals from a 529 plan and an ESA are treated advantageously. Such withdrawals when used for college are excluded from your federal income tax return, and according to the U.S. Department of Education are not required to be added back when reporting your family income on the student s federal financial aid application. 3 Most financial aid offices interpret the rules as requiring distributions from grandparent-owned and other non-parent owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free). Note that some colleges will calculate financial need using a different formula when offering their own grants and tuition discounts. The "institutional methodology" used by many of these colleges may count home equity, sibling assets, and certain investment accounts in a manner that differs from the federal methodology Robert W. Baird & Co. Incorporated. Member SIPC. Robert W. Baird & Co. 777 East Wisconsin Avenue, Milwaukee, Wisconsin RW-BAIRD. First Use: 04/2015. Reference Number: Page 2 of 2

6 The Lifecycle of Risk Management Considering and Insuring for Health Risks Throughout Your Lifetime By Blake Panosh, Senior Vice President, Insurance and Annuity Manager, Baird Building wealth is a disciplined process of careful planning, saving and investing. Success is often achieved through a lifelong commitment to a diversified and comprehensive plan with wealth growing over an extended period of time. Despite years of effort, these best-laid plans can be undermined at key points throughout a lifetime. Risks to wealth can include death, disability or even the need to step back from work to care for an aging parent. Later in life, many fail to plan for long-term care expenses despite the fact that an estimated 70% of people over the age of 65 will require some form of long-term care services and support during their lives. 1 Planning for these unanticipated threats to your wealth will vary depending on the phase of life. We like to refer to this as the lifecycle of risk management. Below, we identify some of the unexpected challenges that can occur during one s lifetime and the steps you can take to prevent these risks from threatening your family s wealth. The early years: post-college life into early career For many young people just beginning their career, earnings, savings and assets are low. Most are single and childless and own few possessions. At this point, there is little wealth and low levels of risk. However, a catastrophic accident, illness or loss of life could leave family members responsible for medical bills, funeral expenses and possibly outstanding debt (including, in certain circumstances, student loans). Given that many of today s health insurance plans carry high deductibles and out-of-pocket costs, it is not uncommon for final medical expenses to reach upward of $5,000 $10,

7 Add in an average funeral cost of roughly $10,000, and it is easy to see the wisdom in purchasing a small life insurance policy, at the very least, to safeguard against an unexpected death. Furthermore, disability income insurance is a must to safeguard against the loss of your earning capacity should you become disabled and unable to earn an income. For many, accepting the basic coverages in both short-term and long-term disability income policies that may be offered through your employer is an excellent starting point. As individuals move into their late 20s and early 30s, earnings begin to ramp up. For many, the most significant change will come once they start a family. At that point, life and disability income insurance becomes imperative to support your family in case of an untimely death or disability. These will likely be more substantial policies, as you now have a family that is dependent on your income and the services you provide to them. In addition, life insurance may help repay outstanding debts, provide for your children s future educational needs and support heirs with special needs. Your disability income protection will likely include a supplemental disability income policy that builds onto your group coverage through your employer. By working with your financial advisor and the numerous tools and calculators available to assist you in determining the right level of coverage, customized solutions can be tailored to meet your unique needs and objectives. Peak earning years: mid-30s to mid-50s Life and disability income insurance to support a family remains critically important at this phase, and it is during these peak earning years when many complete a thorough review with their financial advisor to ensure their policies are keeping pace with their changing needs. It is important to note that being unable to work during peak earning years is about more than protecting your income. A disability will likely result in retirement savings also coming to a halt at a time when most can finally afford to put significant dollars away. This is also when you should begin to think about your parents and the future care they may need. It s important to take steps to establish an open dialogue with aging parents about their circumstances before any serious issues occur. Many may be surprised at this point to learn that their parents have not planned ahead. If parents lack long-term care insurance or enough assets to afford quality care, who will care for them? Many mistakenly assume that Medicare or Medicaid will cover long-term care needs. Medicare may only provide coverage for up to 100 days of skilled nursing care after a qualified hospital stay for an acute issue. A long-term care event requires unskilled care and may be provided in places other than a nursing home facility, such as at home, assisted living facilities or adult day cares

8 Medicaid is only available to those with very low asset and income levels, and not all care facilities will accept Medicaid patients. The costs of caring for a parent can be significant and vary substantially by home, community and facilitybased care. The national median rate for home care is $20/hour while median rates for facility care range from $45,000 (assisted living facility) to $90,000 (private nursing home facility) annually. 2 Caring for parents who haven t made their own arrangements may mean that a family member will need to provide the necessary care. If the caretaker must leave a job to do this, it not only takes away his or her income, it often takes away this income during peak earning and savings years. And the impact can be far-reaching due to the physical and emotional toll of providing care to a loved one. Tragically the issue of caring for uninsured parents can tear a family apart yet another unintended consequence of not planning for a long-term care event. Family members may disagree over how care will be provided, who will pay for it and from what source, or try to decide who will sacrifice their time to care for mom or dad. We strongly recommend that all adult children sit down with their parents to discuss plans well in advance of the need. Make it clear to everyone that the discussion isn t about an inheritance but rather the well-being of the entire family. Once the need is defined, sit down with a financial advisor to discuss the various planning options available to your family. Pre-Retirement Many people reach their peak savings and begin to think seriously about retirement in their late 50s or early 60s. This is also a good time to begin thinking about your own long-term care needs. When is the best time to buy a policy? Underwriting for longterm care can be tricky, especially as you age. While life insurance underwrites for mortality, long-term care underwrites for morbidity conditions that will debilitate you but still keep you alive. In general, it is best to purchase insurance when you are still young and healthy. Therefore, purchasing a policy in your early 50s or even late 40s is optimal. The longer you wait, the more expensive long-term care insurance becomes. And while we don t hesitate to pay auto or homeowner s insurance premiums even if we never have a claim, many don t feel the same way about the use-it-or-lose-it nature of long-term care insurance. Some simply choose to forego this coverage due to its perceived steep annual costs with premiums often subject to rate increases. There are alternatives to traditional long-term care insurance policies. Nowadays it has become commonplace for insurance companies to offer hybrid products combining the benefits and features of life insurance policies with a - 3 -

9 long-term care rider. These policies lack some of the flexibility of traditional long-term care insurance, but they provide the comfort of knowing that you or your family will receive something of value from the policy. If you die before receiving long-term care benefits from the policy, your heirs will receive the life insurance proceeds income tax-free. If you need long-term care, you will be able to draw funds from the policy income tax-free on a monthly basis to help pay for your care. Finally, some of these policies offer a return of premium option, allowing you to terminate the policy and walk away with up to 100% of your premiums paid (less any claims paid, withdrawals or other distributions from the policy). Finally, these hybrid solutions are not subject to potential rate increases provided you pay your premiums as scheduled and on time. Retirement Once in retirement, individuals try to maximize income and minimize expenses. For those who previously purchased cash value life insurance, a re-evaluation of their life insurance needs in retirement is a must. The possibility of converting that cash value into an income stream for retirement or taking it as a lump sum can be meaningful in accomplishing income goals in retirement, especially if the death benefit need has been reduced or eliminated. For some, transferring wealth to their heirs or their favorite charity becomes a key consideration. Being able to segment existing assets into liveon and leave-on assets will go a long way toward determining the best planning methods for effectively and efficiently transferring wealth to heirs or a charity. In many cases, life insurance can be used as a tax-efficient means to leverage existing leave-on assets into a more meaningful benefit for the named beneficiary because of the income tax-free nature of the death benefit. Furthermore, when properly structured, life insurance proceeds can also pass free of estate and transfer taxes. Conclusion With careful planning, a combination of life, disability and long-term care insurance can protect your family s wealth. Planning for care for yourself and your parents can be overwhelming, so it s important to start early and understand the scope of the potential need. Working with your financial advisor, consider all wealth planning protection strategies available to you and your family to gain the upper hand over the inherent risks that can significantly undermine your family s wealth Medicare & You, National Medicare Handbook, Centers for Medicare & Medicaid Services, September Genworth 2015 Cost of Care Survey. Robert W. Baird & Co. does not provide legal services Robert W. Baird & Co. Incorporated. Member SIPC. rwbaird.com 800-RW-BAIRD. MC First use: 10/

10 Private Wealth Management Products & Services April 2016 Items of a Comprehensive Estate Plan For a Married Couple in a Community Property State Last Will and Testaments (1 for each spouse) Name Personal Representative initial and successors/alternates to close out the estate Make specific bequests, e.g., of tangible personal property Do you want to pour over the balance into your Revocable Living Trust? Alternatively, your Will can contain the dispositive provisions described below Revocable Living Trust (1) Optional Name Trustee initial and successors/alternates to administer the trust Fund during lifetime to bypass probate at both the first and second deaths Define the Marital Deduction amount by formula (automatic) or disclaimer (flexible) Do you want to leave assets to your spouse outright or in trust? Do you want to leave assets to your other beneficiaries outright or in trust? Immediately or staggered? Controlled by third party and/or beneficiary? Note: It is important to coordinate the disposition of assets that pass outside of the trust and outside of probate, e.g., IRAs Community Property Agreement (1) Identify separate and community property Transfer assets to your spouse or Revocable Living Trust outside of probate (in some states) Advance Directives General Durable Powers of Attorney (1 for each spouse) Name Agent(s) to manage your property and financial affairs Grant decision-making authority immediately or upon your disability ( springing ) Health Care Powers of Attorney (1 for each spouse) Name Agent(s) to make medical decisions on your behalf in the event of your incapacity Living Wills (1 for each spouse) May be included in the Health Care Powers of Attorney Specify your wishes for the application of medical treatment near the end of life HIPAA Authorizations (1 for each spouse) May be included in the Health Care Powers of Attorney Name individuals with whom providers may share your medical records Ancillary Documents Authorizations for Final Disposition (1 for each spouse) Specify your wishes regarding final arrangements, e.g., funeral services, burial/cremation Authorizations for and Consent to Release of Electronically Stored Information (1 for each spouse) Name individuals permitted access to your digital records, including password-protected accounts Robert W. Baird & Co. does not provide legal or tax advice. Please consult with your legal and tax advisor Robert W. Baird & Co. Incorporated. Member NYSE & SIPC. Robert W. Baird & Co. 777 East Wisconsin Avenue, Milwaukee, Wisconsin RW-BAIRD. First Use: 4/2016 Page 1 of 1