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Kevin Taylor

Divorce Playbook: Remember inflation and accountant for it

It is important to remember that all goods and services inflate over time, but they don’t inflate at the same rate. Healthcare and Education have been, by far, the most inflationary elements of financial life for decades. The rising costs of education and healthcare are seemingly limitless. So, if your divorce settlement is going to require you to account for healthcare costs or provide education to a child or spouse, then use a more aggressive strategy for inflation expectations.  It’s also important to remember that inflation is hyperbolic, no longer. So the younger a child is, the more exposure they have to the effects of education inflation. A good lawyer will have some expectations for the rising costs of goods and services and should account for that in a settlement. But a great lawyer will make special considerations for parts of the inflation landscape that will uniquely impact you in a post-divorce world. It is unlikely, you will be able to redress these calculations in post-divorce negotiations, so it is especially important to understand your inflation exposure now, and get accommodations made in writing during the divorce. The Complete Playbook

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Boulder Financial Planning, Financial Expertise
Articles
Peter Locke

What is an Estate Plan?

Estate planning is one of the most skipped parts of peoples’ financial lives. Whether you’ve put it off because you didn’t know anything about it, it’s boring, expensive, or because you don’t think you have enough assets, I hope this guide will help you understand why you need a plan, common terms, and how to get started. What is an Estate Plan? Your estate is everything you own. It ranges from your business, house, money, and any other personal belongings. Even if you don’t own a lot of stuff, you still need a plan for where all of these things will go. However, your estate plan is more than just a map of where all your possessions will go. It helps dictate where your kids will go, who will take care of you if you’re unable to, who will handle all your affairs if you can’t, who will take your loved pets, etc. It’s a combination of how to pass down assets, to how the end of your life will be managed, and who will handle everything. Documents Included In An Estate Plan Everyone’s estate plan is slightly different, but there are a few specific documents that most have in common. Last Will & Testament – The goal of a will is to lay out your wishes for who will receive what after you pass away. Designation of Guardianship – This document designates who will look after and care for your children in the event you’re unable to. Living Trust – Very similar to a will where you outline the instructions of who gets what. The difference with a trust is that these assets are placed in there while you are still alive. Once you pass away, these assets will be moved without needing probate. Living Will – This document focuses on your preferences concerning medical treatment if you develop a terminal illness or injury that causes you to lose brain activity. Includes things like, feeding tube, assisted breathing, resuscitation, etc. It may also outline your religious or philosophical beliefs and how you would like your life to end. A living will is only valid if you are unable to communicate your wishes Financial Power Of Attorney* – The financial POA is a document that allows an individual to manage your business and financial affairs, such as signing checks, filing tax returns, and managing investment accounts when and if the latter becomes unable to understand or make decisions. Healthcare Power of Attorney* – Designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. *Power of Attorney’s can be divided into several different categories. General power POA (gives the agent the power to act on behalf of any matters), Limited POA (gives the agent the power to act on behalf of specific matters or events for a specific amount of time) and Durable POA (remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated.). What actually happens to an estate after you die? Most people have no idea what the process looks like after someone passes away. Those that do, typically understand why these documents are so important. So let’s dive into this so you get a real-life understanding. Everything you own at the time of your death is part of your estate. Your estate then goes through probate. Probate is the process where the court decides what happens to your assets now that you are gone. This is where having estate planning documents becomes so helpful. If you have a will, the court uses this as their guide to splitting up your estate. If for some reason you don’t have one, you are considered to have died intestate and the court uses local laws to decide who gets your assets. Honestly, you don’t want them deciding who gets your stuff! Not only that, probate can cost anywhere from 2-5% of the value of your estate so having a will helps ensure everything goes to the right people. The best way to avoid probate is by naming beneficiaries on all your important accounts like life insurance, retirement accounts, transfer on death accounts (investment accounts), Payable on Death (bank accounts), beneficiary deeds (real estate). Who handles your estate? When you create your will, you get to name someone as the executor of your estate. This person manages your estate through the probate process. They handle unpaid bills, taxes, debt, and anything else that relates to your estate. They also help distribute your estate to all the right people. Typically, people pick their kids, spouse, or siblings to do this for them as it is not a quick and easy job. You definitely want someone you trust to be your executor. If you do not name someone before you die, the judge will choose someone as your administrator (usually spouse then parent or next in kin) Taxes On Your Estate Many people worry about estate taxes, but it only really applies to people with significant wealth. In 2023, the first $12.06 million of your estate is exempt from federal taxes. The only way you have taxes is if you have more wealth than that or if you live in one of the 12 states that have a state estate tax. These states are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington. Some of these states have a lower exemption than the federal one so you may have to pay state tax even if none is due federally. You definitely want to be aware of this and plan for it! Your executor is the one who will help handle all the tax bills that could be due. They will use money in the estate to help pay these bills and if they need to liquidate to help pay for taxes, they will. When Do I Need A Trust? Most people have heard

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Taxmageddon
Articles
Kevin Taylor

What about ‘Taxmageddon’ should you be worried about?

What about ‘Taxmageddon’ should you be worried about? For years, the common belief has been that taxes, particularly income taxes, will be lower in the future for workers. That differing tax into the future almost always meant keeping more money in your pocket. But now, maybe not. The lower individual federal income tax rates ushered in by the Tax Cuts and Jobs Act (TCJA) are already scheduled to expire at the end of 2025. But with Biden’s November victory that looks to change sooner rather than later. We think the most likely and probably the best-case scenario would be a return to the pre-TCJA deal starting in 2021. This means a reversion for most earners to pay the same rates they were in 2016 and the decade prior. For many, this means about 2-3% higher taxes in their effective tax rate. The worst-case scenario we anticipate would include higher rates on ordinary income. And higher rates on dividends and long-term capital gains too, which are currently taxed at 0%, 15%, 18.8%, 20%, and 23.8%. These rates, often criticized as being far lower than the income rate, are likely to see some changes. Both in the top-line rates, with Bidens’ opening bid raising that to the ordinary income rate. It’s very likely to see the benefits of such a low tax threshold become a source of change.  The next, worst-case scenario will be if Washington includes eliminating more write-offs for individual taxpayers, while simultaneously subjecting all wages and self-employment income to the dreaded Social Security tax. This would be 6.2% withheld from employee paychecks but 12.4% from self-employment income. A major change for independent contractors and the self-employed.   The absolute worst-case scenario that we can imagine for investors and workers, is that most or all of these changes, and more, are imposed retroactively. Meaning that the damage has already been done and that the proposed changes could be from as early as the start of 2021 (unlikely but possible) or from the proposal of the legislation which could mean the changes are in effect as early as May of 2021. What should we be doing if ‘Taxmageddon’ is real? First, make some assumptions for what your income is going to be over the next 3-5 years. This will help you uncover some of the tax issues for those in the highest two tax brackets. If you are individually making more than $207,000 or jointly making $414,700 you should be reworking your assets today, to be able to handle the coming changes.  One of the oddest recommendations, as alluded to above, is that if you’re traditionally differing taxes, is to realize some gains sooner rather than later. This might be a first for many investors who have not seen a tax increase, particularly one that affects the capital gains process. Additional Resources for ‘Taxmageddon’ Tax Mitigation Playbook Download Opportunity ZoneOverview

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