LifeFocus.com T. Young info@lifefocus.com www.LifeFocus.com
Loss of Spouse
March 28, 2010
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Table of Contents Loss of a Spouse/Family Member .....................................................................................................................11 What is it? ................................................................................................................................................ 11 Planning a funeral .................................................................................................................................... 11 Getting organized .....................................................................................................................................11 Settling an estate ..................................................................................................................................... 11 Filing a claim for insurance and/or survivor's and death benefits ............................................................ 11 Finding competent advice ........................................................................................................................ 12 Planning a Funeral ............................................................................................................................................ 13 What is planning a funeral? ......................................................................................................................13 How to do it .............................................................................................................................................. 13 How to get good service ...........................................................................................................................14 Questions & Answers ...............................................................................................................................14 Paying for a Funeral ..........................................................................................................................................15 What is it? ................................................................................................................................................ 15 How expensive is a funeral? .................................................................................................................... 15 Keeping funeral costs down ..................................................................................................................... 15 Ways to pay for a funeral ......................................................................................................................... 16 Tax considerations ................................................................................................................................... 16 Questions & Answers ...............................................................................................................................17 Organizing Your Finances After Your Spouse Has Died .................................................................................. 18 What is it? ................................................................................................................................................ 18 Getting organized .....................................................................................................................................18 Things you should do right away ..............................................................................................................19 Things you can put off until later .............................................................................................................. 20 Securing your financial future ...................................................................................................................21 Tax considerations ................................................................................................................................... 22 Questions & Answers ...............................................................................................................................22
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Developing a Spending Plan .............................................................................................................................24 What is a spending plan? .........................................................................................................................24 What are the steps to develop a spending plan? ..................................................................................... 24 Create a spending diary ........................................................................................................................... 24 Identify out-of-pattern expenses ...............................................................................................................26 Estimate your income ...............................................................................................................................27 Develop your plan .................................................................................................................................... 27 Tips to keep in mind when creating your spending plan .......................................................................... 27 Credit Reports ................................................................................................................................................... 29 What is a credit report? ............................................................................................................................ 29 Why are credit reports important to you? ................................................................................................. 29 Life Insurance: Protection Planning .................................................................................................................. 30 What is life insurance? ............................................................................................................................. 30 How does it work? ....................................................................................................................................30 When can it be used? .............................................................................................................................. 31 How do you know what to buy? ............................................................................................................... 33 What are the potential life insurance mistakes? .......................................................................................33 Tax considerations applicable to all types of life insurance ..................................................................... 33 Does it matter from which insurance company you buy your policy? ...................................................... 34 Claiming Life Insurance Benefits .......................................................................................................................36 What is it? ................................................................................................................................................ 36 Claiming benefits from individually owned life insurance policies ............................................................ 36 Claiming benefits from group life insurance policies ................................................................................ 36 How to file a life insurance benefit claim .................................................................................................. 37 Receiving life insurance proceeds ........................................................................................................... 38 Questions & Answers ...............................................................................................................................38 Health Coverage ............................................................................................................................................... 40 What is it? ................................................................................................................................................ 40 Lay of the land ......................................................................................................................................... 40
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Long-Term Care Insurance (LTCI) ....................................................................................................................41 What is long-term care insurance (LTCI)? ............................................................................................... 41 How is it useful as a protection planning tool? ......................................................................................... 41 How much does it cost? ........................................................................................................................... 42 Who should purchase LTCI? ....................................................................................................................42 How much coverage is enough? ..............................................................................................................42 How do you compare policies and providers? ......................................................................................... 43 What are the tax ramifications? ................................................................................................................43 Inheriting an IRA or Employer-Sponsored Retirement Plan ..............................................................................44 What is it? ................................................................................................................................................ 44 Beneficiary designations .......................................................................................................................... 44 Final date for determining beneficiaries ................................................................................................... 45 Factors that determine post-death distribution options ............................................................................ 45 Post-death distribution options for designated beneficiaries ....................................................................46 Post-death distribution options for nondesignated beneficiaries ..............................................................47 Nonspouse rollover to an inherited IRA--The Pension Protection Act of 2006 ........................................ 47 Claiming Survivor's and Death Benefits ............................................................................................................50 What is it? ................................................................................................................................................ 50 Social Security benefits ............................................................................................................................50 Federal employees' survivor benefits .......................................................................................................51 Military servicemembers survivor's and death benefits ............................................................................52 Qualified benefit plans and IRAs ..............................................................................................................53 Questions & Answers ...............................................................................................................................54 Social Security Survivor's Benefits and the Lump-Sum Death Benefit ............................................................. 55 What is it? ................................................................................................................................................ 55 Who will be eligible to receive survivor's benefits after your death? ........................................................ 55 What benefits will your survivors receive after you die? .......................................................................... 56 Who is eligible to receive the Social Security lump-sum death benefit? .................................................. 57 Planning tips for Social Security survivor's benefits .................................................................................57
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Military Benefits .................................................................................................................................................59 What is it? ................................................................................................................................................ 59 Who is eligible for military benefits? .........................................................................................................59 Some of the benefits available to servicemembers and veterans ............................................................59 Some of the benefits available to survivors of servicemembers and veterans ........................................ 62 Introduction to Estate Planning ......................................................................................................................... 63 What is estate planning? ..........................................................................................................................63 Who needs estate planning? ....................................................................................................................63 How to do it .............................................................................................................................................. 64 How do you begin? .................................................................................................................................. 65 What other factors need to be considered? ............................................................................................. 65 What are your goals and objectives? ....................................................................................................... 67 What are estate planning strategies? .......................................................................................................68 Settling an Estate .............................................................................................................................................. 69 What is settling an estate? ....................................................................................................................... 69 How to do it .............................................................................................................................................. 69 Questions& Answers ................................................................................................................................72 Filing a Final Income Tax Return ...................................................................................................................... 74 Who should file the return? ...................................................................................................................... 74 Declaring income in the year of death ......................................................................................................74 Deductions, personal exemption, and credits .......................................................................................... 74 Headings and signing the forms ...............................................................................................................75 Documents needed to claim a refund ...................................................................................................... 76 Early filing .................................................................................................................................................76 Income in Respect of a Decedent ..................................................................................................................... 77 What is income in respect of a decedent (IRD)? ......................................................................................77 Examples of IRD ...................................................................................................................................... 77 Income tax deduction for estate taxes paid ..............................................................................................77 Filing an Estate Tax Return ...............................................................................................................................78
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What is an estate tax return? ................................................................................................................... 78 How do you calculate estate tax liability? .................................................................................................78 How do you file an estate tax return? .......................................................................................................79 Where can you get help filing an estate tax return? .................................................................................82 Organizing Your Finances When Your Spouse Has Died .................................................................................83 Notify others ............................................................................................................................................. 83 Get advice ................................................................................................................................................ 83 Locate important documents and financial records ..................................................................................83 Set up a filing system ............................................................................................................................... 83 Set up a phone and mail system ..............................................................................................................83 Evaluate short-term income and expenses ..............................................................................................84 Avoid hasty decisions ...............................................................................................................................84 Establishing a Budget ....................................................................................................................................... 85 Examine your financial goals ................................................................................................................... 85 Identify your current monthly income and expenses ................................................................................85 Evaluate your budget ............................................................................................................................... 85 Monitor your budget ................................................................................................................................. 85 Tips to help you stay on track .................................................................................................................. 85 Understanding Your Credit Report ....................................................................................................................87 You can see what they see: getting a copy of your credit report ............................................................. 87 What's it all about? ...................................................................................................................................87 Basing the future on the past ................................................................................................................... 88 Correcting errors on your credit report ..................................................................................................... 88 Social Security Survivor's Benefits ....................................................................................................................89 Your family may be entitled to receive survivor's benefits based on your work record ............................ 89 How much will your survivors receive? .................................................................................................... 89 Don't forget the lump-sum benefit ............................................................................................................ 90 If a loved one has died, contact the Social Security Administration immediately .....................................90 Health Insurance Made Simple ......................................................................................................................... 91
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Not part of a group? You may have to go it alone ....................................................................................91 Know what's out there ..............................................................................................................................91 Read your contract ...................................................................................................................................92 Should You Buy Long-Term Care Insurance? .................................................................................................. 93 Who needs it? .......................................................................................................................................... 93 But won't the government look out for me? ..............................................................................................93 Looking out for yourself ............................................................................................................................93 Claiming Life Insurance Benefits .......................................................................................................................95 Finding individually owned life insurance policies .................................................................................... 95 Finding group life insurance policies ........................................................................................................ 95 Employer-based group life insurance .......................................................................................................95 Accidental death and dismemberment policy ...........................................................................................95 Travel accident insurance ........................................................................................................................ 96 Mortgage life insurance ............................................................................................................................96 Credit life insurance ................................................................................................................................. 96 How do you file a life insurance benefit claim? ........................................................................................ 96 How should you receive the life insurance proceeds? ............................................................................. 97 Life Insurance Basics ........................................................................................................................................ 98 The many uses of life insurance .............................................................................................................. 98 How much life insurance do you need? ................................................................................................... 98 How much life insurance can you afford? ................................................................................................ 98 What's in a life insurance contract? ......................................................................................................... 98 Types of life insurance policies ................................................................................................................ 99 Your beneficiaries .................................................................................................................................... 99 Where can you buy life insurance? .......................................................................................................... 100 Life Insurance and Estate Planning .................................................................................................................. 101 Life insurance can protect your survivors financially by replacing your lost income ................................ 101 Life insurance can replace wealth that is lost due to expenses and taxes ...............................................101 Life insurance lets you give to charity, while your estate enjoys an estate tax deduction ........................101
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Life insurance won't increase estate taxes--if you plan ahead .................................................................101 Be like Frank, not like Dave ..................................................................................................................... 102 Designating a Beneficiary for Life Insurance .....................................................................................................103 Revocable and irrevocable beneficiaries ................................................................................................. 103 Primary and contingent beneficiaries ....................................................................................................... 103 Multiple beneficiaries ................................................................................................................................103 How do you name or change a beneficiary? ............................................................................................103 Why designating the proper beneficiary is important ............................................................................... 103 Other considerations when designating beneficiaries ..............................................................................104 If you're a minor ....................................................................................................................................... 104 Investment Planning: The Basics ......................................................................................................................105 Saving versus investing ........................................................................................................................... 105 Why invest? ..............................................................................................................................................105 What is the best way to invest? ................................................................................................................105 Before you start ........................................................................................................................................106 Understand the impact of time ................................................................................................................. 106 Consider working with a financial professional ........................................................................................ 106 Review your progress .............................................................................................................................. 106 Retirement Planning: The Basics ......................................................................................................................107 Determine your retirement income needs ................................................................................................ 107 Calculate the gap ..................................................................................................................................... 107 Figure out how much you'll need to save .................................................................................................107 Build your retirement fund: Save, save, save ...........................................................................................108 Understand your investment options ........................................................................................................108 Use the right savings tools ....................................................................................................................... 108 Estate Planning: An Introduction .......................................................................................................................109 Over 18 .................................................................................................................................................... 109 Young and single ..................................................................................................................................... 109 Unmarried couples ................................................................................................................................... 109
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Married couples ........................................................................................................................................109 Married with children ................................................................................................................................ 110 Comfortable and looking forward to retirement ........................................................................................ 110 Wealthy and worried ................................................................................................................................ 110 Elderly or ill ...............................................................................................................................................110 Gift and Estate Taxes ....................................................................................................................................... 111 Federal gift tax and federal estate tax--background .................................................................................111 Federal gift tax ......................................................................................................................................... 111 Federal estate tax .................................................................................................................................... 111 Federal generation-skipping transfer tax ..................................................................................................112 State death taxes ..................................................................................................................................... 112 Choosing an Income Tax Filing Status ............................................................................................................. 113 The five filing statuses and how they affect your tax liability ....................................................................113 You're unmarried if you're unmarried or legally separated from your spouse on the last day of the year 113 Married filing jointly often results in tax savings for married couples ....................................................... 113 You don't have to be separated to choose married filing separately ....................................................... 114 Head of household status offers certain income tax advantages .............................................................114 Qualifying widow(er) with dependent child offers the advantages of a joint return .................................. 114 Wills: The Cornerstone of Your Estate Plan ......................................................................................................116 Wills avoid intestacy .................................................................................................................................116 Wills distribute property according to your wishes ................................................................................... 116 Wills allow you to nominate a guardian for your minor children ............................................................... 116 Wills allow you to nominate an executor .................................................................................................. 116 Wills specify how to pay estate taxes and other expenses ...................................................................... 116 Wills can create a testamentary trust ....................................................................................................... 117 Wills can fund a living trust .......................................................................................................................117 Wills can help minimize taxes .................................................................................................................. 117 Assets disposed of through a will are subject to probate ......................................................................... 117 Will provisions can be challenged in court ............................................................................................... 117
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Am I liable for my spouse's debts? ................................................................................................................... 118 Do I have to accept a bequest I don't want? ..................................................................................................... 119 My husband just died. Should I accept my daughter's offer to move in with her? ............................................ 120 How can I find out whether my deceased husband owned any life insurance? ................................................121 My spouse just died. Who do I need to notify? ................................................................................................. 122 My spouse passed away this year. When I file my taxes, what filing status should I claim? ............................ 123
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Loss of a Spouse/Family Member What is it? When your spouse or a family member dies, you'll need to handle numerous financial and legal matters. Even if you've always handled your family's finances, you may be overwhelmed by the number of matters you have to settle in the weeks and months following your loved one's death. While you can put off some of these tasks, others require immediate attention. After planning the funeral, you'll need to get organized, determine what procedures to follow to settle the estate and claim survivor's and death benefits, and find competent advice to help you through this difficult time.
Planning a funeral A funeral allows the family and friends of the deceased to both celebrate that person's life and mourn their death. Funerals often take into account religious and social traditions. According to Christian tradition, funerals often include a visitation of the body (also called a viewing or a wake) and a ceremony performed by a clergy member, family member, or friend. There may be readings, music, and words spoken about the deceased person's life. However, they are personal--not legal--events and should reflect your own preferences, as well as those of the deceased and other family members. Although you aren't required to do so, you may wish to hire a funeral director to help you, particularly if you are planning a funeral on short notice. He or she can help you coordinate the details and help you apply for death certificates and certain survivor's benefits.
Getting organized To settle your loved one's estate or apply for insurance proceeds or survivor's benefits, you'll need to have a number of documents. Locating these documents (and applying for certified copies of some of them) should be your first step in getting your finances organized. You'll also need to set up files to keep track of important documents and paperwork, keep a phone and mail list to record important calls and correspondence, and evaluate your short-term and long-term finances.
Settling an estate Your spouse or family member may have named you executor of his or her estate. If so, you'll need to find out what procedures to follow. Settling an estate means following legal and administrative procedures to make sure that all debts of the estate are paid and that all assets are distributed to the rightful persons. If you are named executor in a will or if you are appointed as the personal representative or administrator of an estate, you will be responsible for carrying out the terms of the will and settling the estate directly or with the help of an attorney. Paying income and estate taxes You may have to file city, state, and federal tax returns, including Form 1040 (U.S. Individual Tax Return), Form 1041 (Fiduciary Income Tax Return), and, if the gross estate is large enough, Form 706 (U.S. Estate Tax Return). In addition, your state may impose a state death tax or an inheritance tax.
Filing a claim for insurance and/or survivor's and death benefits Life insurance benefits are not automatic; you have to file a claim for them. Ask your insurance agent to begin filing a life insurance claim. If you don't have an agent, contact the company directly. Although most claims take only a few days to process, contacting an insurance agent should be one of the first things you do if you are the beneficiary of your spouse's or family member's policy. You should also contact your spouse or ex-spouse's employer as well as the Social Security Administration (SSA) to see if you are eligible to file a claim for survivor's or death benefits.
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Tip: If your spouse was a federal, state, or local employee, then you are likely eligible for government-sponsored survivor's benefits. In addition, children under age 18 or parents who are dependent upon their children for financial support are sometimes eligible for Social Security survivor's benefits. Tip: Dependent children or dependent parents are sometimes eligible for benefits from employer-sponsored plans or Social Security.
Finding competent advice Getting expert advice is essential if you want to make good financial decisions. After all, you are probably doing many things for the first time, such as filing a life insurance claim or settling an estate. In fact, an attorney is one of the first people you might contact after your spouse or family member dies because this person can help you go over the will and start estate settlement procedures. Your funeral director can also be an excellent source of information and may help you get death certificate copies and apply for Social Security and veterans benefits, among other things. You may also wish to contact a financial professional, accountant, or tax advisor for help with your finances. And don't overlook the help of other widows and widowers; having been through it before, they may be able to provide you with valuable information and support.
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Planning a Funeral What is planning a funeral? A funeral is an event that allows the family and friends of someone who has died to both celebrate that person's life and mourn that person's death. Funerals are often planned by taking into account religious and social traditions. According to Western tradition, funerals usually include a visitation of the body (also called a viewing or a wake), as well as a ceremony performed by a clergy member, family member, or friend. There may be readings, music, and words spoken about the deceased person's life. However, funerals are personal--not legal--events and should reflect the preferences of the deceased individual or his or her family.
How to do it Talk to family and friends It's often said that funerals are not for the dead but for the living. For this reason, it's very important that you discuss your funeral preferences with your friends and family if you are preplanning your own funeral. What they want is important, because the funeral is really for them; after all, you won't be there to see it! On the other hand, you will want your funeral to reflect your style and individuality, so make sure that your friends and family know what you want your funeral to be like. If you are in charge of planning someone else's funeral, involving family and friends will ensure a more meaningful funeral and help the healing process. Select a funeral director Many people plan funerals with the help of a funeral director because of the vast knowledge and contacts he or she has. Often a funeral director is one of the first persons called after someone dies because the funeral director transports the body to the funeral home. A funeral director helps you make arrangements and sees that the funeral service goes as planned. In general, he or she assists you in the following ways: • Gives you information about burial and cremation • Plans when and where the funeral service or memorial service will take place • Helps you plan the funeral service and coordinates all participants and services • Helps you choose a casket or urn • Helps you choose a burial site (you may have to contact the cemetery directly, however, for information on gravesites, etc.) • Embalms or prepares the body • Arranges transportation to and from the burial site • Notifies your attorney if you need legal help • Discusses benefits to which you are entitled • Discusses options for paying for the funeral • Arranges for death certificates and notices Using the services of a funeral director is a legal requirement in some states. Still, there's no reason why you can't assume some of the planning responsibility yourself or delegate it to friends or family members. In addition,
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most funeral directors are willing to accommodate special requests and personal preferences. Organize the funeral service Many people organize funeral services based on social or religious traditions, but there's no right or wrong way to organize the service. No matter what form it takes, you can have a meaningful funeral service if you remember that it should honor an individual's life as well as mourn that individual's death. In addition, the funeral service gives people a chance to grieve together. Some people mistakenly believe that cremation rules out a funeral. However, funerals can be held before cremations, just as they are held before burials. In fact, if time is short or if you are too upset to arrange a funeral, you can arrange for the body to be buried or cremated, then hold a memorial service for the deceased person several days or weeks later. Arrange for burial, entombment, or cremation Choosing burial, entombment, or cremation is a personal decision, sometimes guided by religious or social tradition, sometimes by emotion, or even sometimes by financial factors. In the United States, cremation is a much less popular option than burial or entombment, chosen by fewer than one in four individuals. Burial, however, is usually much more expensive than cremation because of the costs involved in buying, opening, and maintaining a grave site, as well as the cost of paying for markers and sometimes a vault to house the casket.
How to get good service Choose a reliable funeral director A funeral director's reputation is an important indicator of the quality of service he will give you. If you don't know anything about the funeral directors or funeral homes in your area, ask a relative, friend, or clergy member for a recommendation instead of picking one out of the phone book. Also ask if the director is licensed and a member of a professional association such as the National Funeral Directors Association (NFDA) or National Selected Morticians (NSM), because their members must adhere to a code of ethics. If possible, visit the funeral home, look around, and get information about products and prices before you have to use the funeral home's services. Don't fall for a sales pitch Funeral directors are in an awkward position; they have to be both friendly, sympathetic counselors and salespeople. However, a scrupulous funeral director should be able to explain available options to you and let you make a decision without playing on your feelings of guilt or sorrow. If you feel that you're getting a sales pitch rather than good service, look for another funeral home before you're talked into buying a funeral that you don't really want or need or can afford. For information on the cost of a funeral and how to pay for it, see Paying for a Funeral. Complain if you must If you have a complaint about the service that you receive from your funeral director, try to resolve it with him or her directly first. Reputation is very important to a funeral director, and he or she is usually attentive to service. Explain what your problem is and what action you would like taken. Then, give him or her the chance to correct the situation. If you are not satisfied with the outcome, the Funeral Ethics Association may be able to help you. This association will help mediate a solution between you and the funeral director. You may also want to contact your state consumer protection agency if your complaints are not resolved to your satisfaction.
Questions & Answers How can you preplan a funeral? Start by writing down your wishes regarding burial or cremation, the type of funeral you want, and other relevant information. Then, fill out a funeral preplanning worksheet (ask your local funeral director for one) and keep it with your will or important papers.
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Paying for a Funeral What is it? When someone dies, you don't want to worry about how you're going to pay for the funeral. However, when it comes time to plan a service or choose a casket, you won't be able to escape the inevitable: Funerals cost a lot of money. How much a funeral costs depends upon what services and items you select, but even an inexpensive funeral can cost thousands of dollars. Whether you are planning your own funeral or someone else's, you'll be more satisfied with the result if you take measures to keep the funeral affordable and be aware of what payment options are available.
How expensive is a funeral? The most recent price survey conducted by the National Funeral Directors Association found that the average cost of an adult funeral is $7,323, not including burial costs (based on 2007 data). Of course, depending on the services and items selected, a funeral can cost much less or much more than this.
Keeping funeral costs down Ask for a price list To comply with Federal Trade Commission requirements, your funeral director must give you a general price list that itemizes the cost of all funeral arrangements. This list must be given to you at the time the funeral is planned or when you ask for information over the phone. The general price list should include the cost of transferring remains to the funeral home, preparation of the body, use of the funeral home facilities, transportation, and funeral-related merchandise such as urns, caskets, vaults, and clothing. Once you have planned the funeral, the funeral director must give you a signed statement summarizing your selections. If he or she does not give you such a statement or is reluctant to discuss prices, you may not be dealing with a reputable person. Don't rush When you're planning a funeral, even immediately after a loved one has died, you don't necessarily have to make a decision in a hurry. In most cases, funerals can be delayed if you need more time to plan or get advice. In addition, don't be afraid to look elsewhere if you are not satisfied with the service your funeral director is providing you. However, you should first give him or her the opportunity to correct the problem if possible. Don't buy what you don't want Get the funeral you want (and can afford) instead of being swayed into choosing expensive items or services you don't want by a funeral director who is, after all, a businessperson. Remember that many services or items provided by a funeral home are optional. For example, opting for cremation instead of burial will save you a lot of money; the cost of a funeral can be cut dramatically if you don't have to pay for a casket, vault, burial plot, or grave marker. In addition, you don't have to hold a visitation or ride to the cemetery in a limousine if that's not important to you. Determining what you want before talking to a funeral director will help you buy only what you can afford. Do it yourself Planning a funeral yourself is neither easy nor simple, but it can be done. Even if you don't want to plan the entire funeral yourself, you can save money by doing part of it yourself. For example, avoid commission charges by printing programs at a local copy shop, ordering flowers from the florist you usually use, and writing the obituary yourself. Also, many of your friends and family will probably offer to help you in your time of need. Let them. The funeral you plan will be more meaningful if you involve people you love. For example, instead of hiring the church organist, ask your cousin to sing your loved one's favorite song, or ask your artistic friend to arrange
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flowers for the funeral.
Ways to pay for a funeral Prepay through a regulated trust People who prepay their own funeral usually do so because they don't want their survivors to worry about money when they are grieving. One way to prepay your funeral is to establish a regulated trust contract between you and a funeral home that sets up a state-regulated trust account to pay for your funeral expenses. You sign a contract with a funeral home that outlines the amount of money you have paid into the trust account, the services those funds will pay for, and the funeral home's responsibilities. Your money is held in trust until your death, then is disbursed by the terms of the contract to pay for your funeral. If you are interested in establishing a trust to prepay your funeral expenses, talk to your attorney and your funeral home director. Take out a loan If you don't have the money to pay for a funeral, you or your survivors may be able to take out a secured or unsecured loan. You can use the loan proceeds to pay for the funeral, then pay it back in installments or in one lump sum, depending on the loan terms. Talk to your bank or other financial institution representative if you are interested in this option. Use your savings If you can afford it, using your savings is the easiest way to pay for a funeral. Savings earmarked for funeral costs can also help you qualify for Medicaid or Supplemental Security Income (SSI). Use life insurance The primary purpose of life insurance is to provide a death benefit. This benefit can be used, in part, to pay funeral and/or burial costs. Use government benefits Although your survivors won't be able to pay for your entire funeral with the $255 death benefit they may be eligible to receive from Social Security, they may receive Social Security survivor's benefits that may help them pay for your funeral. In addition, if you are a current or former member of the U.S. Armed Forces, upon your death your family members may be eligible to receive a survivor's benefit and/or a burial allowance. If you are preplanning your funeral, check with your funeral director or the Department of Veterans Affairs office to find out about other burial benefits for which you may be eligible, such as a flag, an honor guard, burial in a national cemetery, and a headstone or marker. Use employer-sponsored retirement plan funds If you participate in an employer-sponsored retirement plan such as a 401(k), you may be able to access funds that you can use to pay funeral costs. Your ability to access funds depends upon the terms of your plan. For instance, if you're still working, your plan may allow you to borrow funds or take a hardship distribution. Check with your plan administrator or your company's human resource administrator for information. In addition, if you are a federal employee covered under the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS), your survivors may be eligible for a lump-sum death benefit or an annuity that may defray the cost of your funeral expenses.
Tax considerations Certain burial costs may be deducted from your estate, thus reducing estate tax liability. For example, you may be able to deduct burial costs, costs for a burial lot, and costs for grave markers or headstones, among others.
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Questions & Answers If you prepay funeral expenses, how can you be sure that the funeral home is trustworthy? Before you sign any contract to prepay funeral expenses, make sure you understand it. In particular, determine whether the prepayment is refundable in any circumstances and what will happen if you move to another state or if the funeral home goes out of business or is sold. Going over the contract with your attorney would be wise. In addition, if you are placing money in a regulated trust account, make sure that the funeral director is licensed and that the trust complies with state regulations. And don't forget to tell a loved one about the contract and where you keep your copy. Is there a legal requirement that caskets be placed in vaults? There may not be a law that requires that caskets be placed in vaults prior to burial, but cemeteries may require this to prevent cave-ins. Check with the cemetery you have chosen for more information. If a vault is necessary, ask your funeral director to show you a less expensive version if you are uncomfortable with the price.
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Organizing Your Finances After Your Spouse Has Died What is it? Even if you've always handled your family's finances, you may be overwhelmed by the number of financial matters you have to settle in the weeks or months following your spouse's death. While you can put off some of these tasks, others require immediate attention. If you're uncertain where to start, begin by organizing. You'll have to find the records and paperwork you need to apply for benefits, set up systems to organize those records and other information you receive, and determine your short-term need for income. Afterwards, you'll be ready to start settling your financial affairs with the help of personal and professional advisors.
Getting organized Gather records To settle your spouse's estate or to apply for insurance proceeds or government benefits, you'll need a number of documents. Locating these documents (and applying for certified copies of some of them) should be your first step in getting your finances organized. To apply for life insurance proceeds, you'll need a certified copy of your spouse's death certificate (and possibly his or her life insurance policy). To apply for Social Security benefits, you'll need to provide proof of death (a death certificate), proof of marital relationship (a marriage certificate), and proof of age (a birth certificate). Set up a phone and mail system After your spouse dies, you may have difficulty concentrating on tasks, partly because of grief and stress and partly because you simply have too much to do. To keep track of details, set up a phone and mail system to record incoming and outgoing calls and mail. For phone calls, keep a sheet of paper or a notebook by the phone and write down the date of the call, the name of the caller, and a brief description of what you talked about. For mail, write down who sent each piece, the date you received it, and the date you sent mail in return, if at all. Set up files You know the importance of setting up a filing system if you were ever frustrated because you couldn't find an important document when you needed it. You'll be organizing your financial affairs in many different areas, so set up a file for each topic you are working on. For instance, you may want to set up separate files for estate records, insurance, government benefits, tax information, important documents, child-care information, and credit accounts. Anytime you receive a letter or important document, put it in the appropriate file. If you can't keep the original, make a copy. In addition, remember to keep copies of any letters you send out. It might be a good idea to go to a copy center and mail things weekly to save time. Example(s): Mary Beth got a letter from her insurance company requesting more information on a claim she had filed for her spouse's hospital stay shortly before his death. She sent the company the information the next day. A few weeks later, she got a letter from the hospital demanding payment from her because her insurance company refused to pay the claim because of a lack of information. After calling her insurance company again, Mary Beth realized that they had never received the letter she had sent them regarding the claim. Fortunately, she had a copy in her insurance file and was able to fax it right away.
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Make a phone list If you don't already have one, you should make a list of the names and phone numbers of organizations, professional advisors, and friends, and post it near your phone. For example, the list may include the numbers of your health insurance company, your attorney, your financial advisor, your insurance agent, and friends who can give you advice. Evaluate short-term income and expenses You may have some immediate expenses to pay when your spouse dies, such as funeral costs, transportation costs, and regular bills. Start by making a list of all debts you will have to pay in the next 30 days. Then determine whether you have enough money to pay those debts. If you do not have sufficient emergency cash saved up, don't panic. If you know money will be coming in from insurance proceeds or an estate settlement, there are several ways to proceed. First, use credit cards to pay what you can, or consider taking a cash advance against the card, if necessary. You may be able to get life insurance proceeds within a few days, and you may be able to delay other expenses for 30 days or more by negotiating with creditors. This will give you the chance to apply for the benefits to which you are entitled and to find out when you will be likely to receive them. Tip: If you decide to use credit cards, use those with the lowest interest rate first, and watch out for cash advance fees or other charges.
Things you should do right away Get advice Getting expert advice when you need it is essential if you want to make good financial decisions. After all, you are probably doing many things for the first time, such as filing a life insurance claim or settling an estate. In fact, an attorney is one of the first people you might contact after your spouse dies because he or she can help you go over the will and start estate settlement procedures. Your funeral director can also be an excellent source of information and may help you get death certificate copies and apply for Social Security and veterans benefits, among other things. You may also wish to contact a financial planner, accountant, or tax advisor for help with your finances. And don't overlook the help of other widows or widowers; having been through it before, they may be able to provide you with valuable information and support. Notify others It's a personal decision who you notify when your spouse dies. You will probably want to contact first the people who are close to you and anyone who may help you with funeral preparations. Then you'll want to contact people or groups who will help you file for benefits to which you are entitled, such as your spouse's employer, life insurance companies, and government agencies. Finally, you may want to contact important financial advisors, then creditors. Remember, you don't necessarily have to notify everyone yourself; ask a friend or family member to help you. Use the suggestions in the following table as a guide, making modifications where you see fit: Notifying People When Your Spouse Dies Week One
Week Two
Week Three
Week Four
Close friends and family; funeral director; physician; clergy member; attorney; spouse's employer; health insurance company; life insurance agent or company
Your bank; not-so-close friends and family; Social Security Administration; Dept. of Veterans Affairs
Your financial planner; accountant; investment broker; or tax advisor
Social and professional organizations; creditors; utility company; dept. of motor vehicles
When you notify an individual or organization that your spouse has died, make sure you understand what to do
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next. For example, letting the Social Security Administration know that your spouse has died is not the same thing as applying for survivor's or parent's benefits. You'll still have to file a claim (in most cases) and provide supporting documentation. In addition, while you shouldn't feel pressured to notify others, some time limitations do exist. For more information, see Questions & Answers. Pay bills When you're grieving, it's easy to forget to pay bills. Whenever you receive one in the mail, put it in a safe (but visible) spot so that you won't forget to pay it. You may want to set up a log to record what bills you've received and what payments you've sent out. If you get any letters or phone calls from creditors asking for money, don't ignore them. Contact the creditor right away and arrange for payment. Caution: Be aware, however, that some con artists will contact the recently widowed and ask them to pay for items that their deceased spouse supposedly ordered before his or her death. Or they will send phony invoices for services that were supposedly rendered in connection with the spouse's death. Before sending money to any creditor, get a written statement of the charges and investigate the claim to make certain it's genuine. File insurance claims Life insurance benefits are not automatic; you have to file a claim for them. If you have an insurance agent, contact him or her to begin filing a life insurance claim. If you don't have an agent, contact the company directly. Although most claims take only a few days to process, contacting an insurance agent should be one of the first things you do if you are the beneficiary of your spouse's policy. Remember that your spouse may have owned other policies in addition to his or her primary individual life insurance policy. Check with your spouse's employer, look through his or her records, and contact creditors to see if your spouse owned any group life insurance policies. Begin settling your spouse's estate Locate your spouse's will as soon as possible, and make sure that you have the most recent copy of it. If your spouse named you as executor of the estate, you may want to contact your attorney for help. If someone else was named executor, you will want to oversee settlement of the estate because decisions made during settlement will affect your future. Settling an estate may be simple or may take months, but it is something you should begin doing right away. Arrange for child care If your spouse cared for your young children while you worked or if you need part-time care so you can begin settling your affairs, you may have to find reliable child care now. If you don't know where to start, look in your local yellow pages under child care or under social services. Most areas have information and referral centers that can give you information at little or no cost. They will evaluate your needs and refer you to day-care centers or family day-care homes that can care for your children. They don't make recommendations but will give you advice on state licensing regulations and choosing quality day care. An organization called Child Care Aware at (800) 424-2246 can help you locate the child-care resource and referral agency in your area.
Things you can put off until later Moving You may be tempted to move from the home you shared with your spouse. The home may be too large for you now, too expensive, or too filled with memories. However, you'll be wise to wait until you can make a rational decision rather than one based on emotional considerations. Buying things You may be tempted to buy things using the proceeds from life insurance policies. While some spending might make you feel good, don't spend money impulsively. When you are grieving, you may be especially vulnerable to
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sales tactics. When considering a large purchase, step back. Let a few days pass to see if you still want to purchase the item. Selling possessions or giving them away Selling or giving away your spouse's possessions can be emotionally difficult. However, there's no rush. Although others may be pressuring you to sell your husband's car, for example, or your children may be asking for favorite items that belonged to their father, don't sell or give away anything until you are ready. You may sell the possession for less than it is worth, or you may resent caving into the demands of others. Ask others to wait a few weeks or until you are ready so that you can make a clear-headed decision. Example(s): A week after Rosa's husband of 30 years died, her oldest son, Nick, asked if he could have his father's toolbox. Afraid that her other son, Jim, would resent her giving away his father's possessions without being consulted, Rosa wisely asked Nick to wait until she had some time to clear up other matters before she gave the toolbox to him. A few weeks later, she was less emotional and was able to sit down with both sons to calmly divide up her husband's possessions. Caution: Don't assume that everything your spouse left behind is yours to sell or give away. You are legally forbidden to sell or give away property until a court has awarded it to you because there may be claims against the estate or taking or an inventory may be necessary. Giving money away or making loans to others If you received a large life insurance settlement or were the beneficiary of a large estate, family members may ask you to give them money or loan it to them. While you probably want to help your family, don't act without reviewing your own financial state. What seems like a large sum of cash now may easily dwindle away in the future if your expenses exceed your income. Before giving away money or lending it to anyone, analyze your resources, income, debts, and future needs, either by yourself or with your financial advisor. Be as generous as you can, but don't neglect your own needs and obligations. Investing Your financial priority immediately after your spouse dies is not investing, but rather making sure you have enough money to pay your bills. Later, however, when you've had time to identify your financial objectives, you may want to invest part of your money. When you invest, you should look for ways to conserve your principal rather than spending it or letting inflation eat away at it. You may also want to invest to increase your principal so that you'll have more money for the future. A broker or financial advisor can help you invest wisely, but don't invest with someone you don't know well or until you have thoroughly checked out his or her references and credentials. See Questions & Answers.
Securing your financial future As a widow or widower, you may face financial challenges that didn't exist when your spouse was alive. You may now have less (or more) money than you had in the past or you may need to plan a new financial strategy to provide for your children. Estate planning After your spouse dies, it's time to discuss estate planning issues with your attorney or financial advisor. Start by updating your own will. You may need to rethink how you want your assets distributed at your death and to name a new executor (if your spouse was named in your original will). You may also need to name new beneficiaries and guardians for your children (if any). In addition, it would be wise to write new planning documents, such as a letter of instruction, a power of attorney, a health care proxy, or a living will. Retirement planning and investing If you were the beneficiary of any retirement plans owned by your spouse, you may have to choose new investment vehicles if you receive the distribution outright. If you had named your spouse beneficiary of any
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retirement plans that you own, request beneficiary change forms from your employer or the plan administrator. In addition, now that you're on your own, you may want to meet with your financial planner or advisor. He or she can help you project your retirement income requirements and formulate a new retirement-planning strategy. Insurance You'll have new insurance needs when your spouse dies. If your health insurance was provided through your spouse's employer, find out if you'll be covered automatically or if you'll receive continued coverage through Consolidated Omnibus Budget Reconciliation Act (COBRA). You may need to buy a new life insurance policy or designate a new beneficiary. Meet with your life insurance agent to discuss this. Caution: Since you may not receive bills for insurance under COBRA, make sure you know when, where, and how to make payments.
Tax considerations Filing taxes As a surviving spouse, you may have to file several tax returns, including federal and state final income tax returns, and fiduciary income tax returns. To do this, you may need to seek the advice of a tax professional. Filing status If you meet certain requirements (including remaining unmarried and maintaining a household for a dependent child), you can file your federal income tax return as a surviving spouse for two tax years following the year in which your spouse dies. This normally means you will pay less tax than if you filed either as single or head of household. In the year in which your spouse dies, you do not file a tax return as a surviving spouse but can instead file as married, filing jointly. This way, you'll file, and you and your spouse's executor will sign the return for your spouse, following Internal Revenue Service guidelines. Taxes on retirement plan distributions, insurance proceeds, and benefits You'll need to familiarize yourself with regulations on the taxation of some types of income you receive after your spouse dies. Retirement plan distributions are considered to be taxable income, while life insurance proceeds and government benefits (such as Social Security) are generally not considered taxable income. However, the tax consequences of survivor's benefits may depend, in part, on how you choose to take the distribution or proceeds (in the case of IRAs or life insurance) or on whether your income exceeds a certain level (in the case of Social Security). Consult your tax advisor.
Questions & Answers When you receive proceeds from a life insurance policy, how should you handle the money? First, ask your insurance company what settlement options you have. Do you have to take the money in a lump sum or can you receive it gradually? Will they deposit it in a checking account for you and let you withdraw it when you want, or will they be sending you a check? If you don't feel ready to handle the money now, you can deposit it in a simple interest-bearing account such as a savings account or a money market fund until you are able to make decisions about it. Is there a deadline for filing for Social Security survivor's benefits? Although the Social Security Administration suggests that you file for survivor's benefits in the month of your spouse's death, you can wait (but not too long). Only six months of retroactive benefits can be paid, so if you don't file within that time period, you may lose benefits to which you are entitled. And if you were already receiving (or were entitled to receive) retirement benefits at the time of your spouse's death, you may not need to file at all after you report your spouse's death. Your benefits may be automatically converted to widower's benefits. The best thing to do is to call the Social Security Administration at (800) 772-1213 and ask for help.
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Can you continue to use credit cards issued in your deceased spouse's name? It depends on the company. Some may allow you to continue using the cards, whereas others may cancel the account once you notify them of your spouse's death, so you may want to notify credit card companies slowly. If you no longer have access to any of your cards, try to get one in your own name. If you are denied because you have no credit history, ask your bank about getting a secured card whereby you deposit a certain amount of money (say $1,000) in an account, and, in return, you receive a credit card with a credit line equal to your deposit. After you use the card for awhile, you may be able to qualify for an unsecured card, assuming that you always pay your credit card bills on time.
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Developing a Spending Plan What is a spending plan? Your spending plan is your active strategy for getting where you want to go. Think of your spending plan as a road map that helps you reach your goals, as well as give you a sense of direction. Your spending plan not only puts you in charge of how your money is being spent on a weekly, monthly, and yearly basis, but it also gives you a sense of control.
What are the steps to develop a spending plan? It takes some time and effort to develop a spending plan that is right for you and your family. Of course, there are guidelines provided by experts that you can follow, but in the end, you need to develop a plan that you can follow. Here are the steps you can take to develop your own spending plan: • Create a spending diary • Identify out-of-pattern expenses • Estimate your income • Develop a plan
Create a spending diary In order to develop a spending plan that is appropriate for your lifestyle, you need to understand your own spending habits. First, start recording all your expenses--every cent you spend--for at least a month. You may record all your expenses in a notebook or use your computer. However you do it, it is important to remember that you include all expenses, no matter how trivial. You will find that just recording all your expenses may allow you to focus your attention on how, where, and how much money you are spending. Create categories It is important to understand the types of things you spend your money on, as well as the individual items. For this reason, you will want to make a list of categories under which you expect your expenses to fall. Try not to lump too many expenses in large categories, such as miscellaneous. Instead, create as many categories as you need. You need a precise picture of where your money goes. Create a list of categories and expand this list if you find it necessary. You might want to include the following categories in your list:
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Page 25 of 124 Food: • Groceries • Meals out • Coffee/snack s
Clothing: • You • Spouse • Children/othe r
Transportation: • Installment payments • Insurance • Fuel • Maintenance • Bus, cab, or subway fare • Other transportation costs
Other: • Phone • Household purchases • Housecleaning or household help • Education • Recreation/club membership • Personal care and improvements • Medical, dental, health, and disability insurance and expenses • Life insurance • Other insurance • Entertainment • Vacations/travel • Hobbies • Gifts • Support of relatives/others • Home improvements • Retirement plans • Taxes
Use a money management program One way to track your expenses is by using a cash management program. These computer programs are primarily designed to track your income and expenditures. They are really nothing but computerized ledgers that link all of your accounts--checking and savings accounts, credit cards, and loan balances. By using any of the money management programs available today, you can take some drudgery out of keeping records. Besides saving you time, these programs ensure that the information is more accurate, more comprehensive, as well as easier to read, store, and especially retrieve. An added advantage of these money management programs is that they can link all your accounts with each other so you can access and pull information from various accounts. They also keep track of your tax-deductible expenses so, at the end of the year, you do not have to go searching for them. The following list illustrates the benefits of using a money management program: • Saves time • Information is easy to retrieve • Less likely to misplace records • Lets you know when and where you have overspent • Can create graphs and pie charts of your expenses and investments • Links various accounts • Automatically totals each category • Can keep track of your business expenses
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• Keeps track of tax-deductible expenses • Can be linked for preparing taxes at the end of the year Most people find the biggest disadvantage of using a computer program is the amount of time it takes in the beginning. You need to learn how to use it, how to enter the data, and become familiar with the way it works. It can be quite frustrating, depending upon your level of familiarity with computers. Also, you have to keep in mind that even the best program will not help you if you don't enter the data or you enter it incorrectly. So, making sure that your data is correct and accurate is still your responsibility. Use paper and pen method You may choose to record all your expenses in a diary, which is also a good choice. In fact, the paper and pen method has a few advantages over using a computer program. What is important is the end result--that you record all your expenses for at least a month, maybe longer if possible, to track where your money is going. Advantages of paper and pen method: • Easily transportable--With paper and pen, you are free to take it with you to work or vacation and record all the expenses as they occur. • No learning curve--There is no time wasted in acquiring skills to make the system work. • Making changes is easy--All you need is an eraser or a new piece of paper to start anew if you find that you've made a mistake. There are also disadvantages of using this method. Your paper records can be easily misplaced and, once they are lost, cannot be accurately reproduced. And while the pen and paper method is easier to use, the results may not be as useful. What you end up with is a record of your expenses--nothing more. Any further analysis must be done on your own. Also, the convenience of making changes makes it easy to fall into the trap of "fudging" your entries. If you choose to use a paper and pen diary instead of a computer, here is what a day's entry might look like: Date
Amount spent Item
Category
1/1/09 $2.25
Coffee and bagel Coffee/snacks
1/1/09 $0.75
Newspaper
Miscellaneous
1/1/09 $12.00
Gasoline
Transportation/fuel
1/1/09 $40.00
Dinner
Meals out
1/1/09 $15.00
Flowers
Gifts
1/1/09 $75.00
Groceries
Groceries
Identify out-of-pattern expenses Once you have created categories and listed all your expenses for a month, your next step is to identify your out-of-pattern expenses. Your spending diary will only give you expenses that you made during that period. However, there are many expenses such as insurance payments, holiday gifts, or property taxes that occur annually, semiannually, or quarterly. Look at your canceled checks, your checkbook register, and any other receipts for the last year that can identify all of your out-of-pattern expenses. Add all your out-of-pattern expenses on a yearly basis and divide them into 12 so that you have a clear idea of how much you need on a monthly basis for your spending plan.
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Estimate your income If you are getting a regular salary, estimating your income is easy. Write down your monthly income minus federal and state taxes, Social Security taxes, and any other automatic deductions. Add other income such as dividends, interest, and child support. Make sure you include all types of income. Tip: If you get paid weekly, biweekly, or semimonthly, you will need to convert your periodic salary to a monthly figure. For weekly paychecks, multiply your weekly income by 4.3 to get an accurate indication of your monthly income. For biweekly paychecks, multiply your biweekly income by 2.16. And for semimonthly paychecks (i.e., those who get paid on the first and fifteenth of each month), multiply your semimonthly income by 2. If your income is irregular, you will have to start with the premise that your total income is somewhat predictable, but your paychecks come at uneven intervals. Look at your income over the last two years and project your income for the next 12 months. Divide that number by 12 and consider that to be your monthly income. Plan your spending with that income in mind. During months that you earn more than average, save the extra earnings for the months when you earn less.
Develop your plan Now you are ready to create a spending plan based on your income and your expenses. Here are some guidelines that experts suggest. Suggested spending plan percentages of your gross income: Housing and utilities
20%-30%
Taxes
20%
Transportation
15%
Food
10%
Clothing
5%
Savings
10%
Entertainment and vacation 5% Credit card payment
5%
Other expenses
5%
Look at your spending diary and see how your spending is distributed in terms of percentage of your income. You can see how your own spending habits compare with the guidelines above. You may choose to follow these guidelines closely, or you may decide to make changes so that the overall spending plan reflects your lifestyle. For example, if you love to travel, your vacation budget may be larger than the suggested average. To compensate for that extra spending, you will have to reduce some of your other expense categories. Also, keep your goals and priorities in mind and adjust your spending plan accordingly. For instance, if you are not saving any money right now but you want to save 10 percent of your income for retirement, find out from which categories the money will come.
Tips to keep in mind when creating your spending plan
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Keep your spending habits in mind People do not change overnight so don't create a spending plan that is totally inconsistent with your current spending habits. Otherwise, you are likely to break that budget before it has a chance to succeed. Any budget that changes your lifestyle completely will be very hard to follow. If you are used to eating out at least twice a week and you create a spending plan that allows you to eat out only once a month, you are more likely to cheat than if you create a plan that allows you to eat out once a week. Keep it flexible Any budget that is too rigid is likely to fail. In real life, unexpected things happen. Cars break down and in-laws drop by, so keep some flexibility in your budget to take care of small occurrences. Keep it easy Create a system that is easy to follow. After your initial monitoring period, you don't have to record every penny you spend. The less record keeping you have to do, the easier it is to monitor your spending plan. Keep some fun Keep a small amount of money available for activities that you enjoy. If you create a spending plan that takes away all your fun, you will have a hard time following the plan. Include all your categories separately When you create your spending plan, assign exact amounts to each category and make sure that you have included all the categories. Often, people make a mistake of lumping too many expenses in one category or not creating a category for occasional expenses. That makes it difficult to track your spending and pinpoint exactly where your money went. For example, instead of creating a category for medical bills, separate them into doctor, dentist, etc. Start with a six-month plan Often, it is helpful to reevaluate your plan after a few months to see how you are doing, instead of creating a plan for a full year and trying to stick with it. Squeeze money from several categories Instead of just trying to slash one category completely, say your dining out category, try to squeeze a little out of each category. This will make it easier to adjust to your new spending patterns.
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Credit Reports What is a credit report? Your credit report is a document prepared by a credit-reporting agency (or credit bureau). It contains certain information about your credit transactions with various merchants, information obtained from public records, and a list of parties that have made inquiries about you in recent months. Your credit report is primarily used to evaluate your creditworthiness for purposes of extending new credit. Lenders want to know if you have paid your debts in the past and whether you can be trusted in the future. Credit reports may also be used to evaluate your character. Potential employers may seek to examine whether you are trustworthy where financial matters are concerned. Similarly, insurers may want to know more about your history with finances (including whether you have ever been convicted on fraud charges) before taking on risk by issuing a life insurance policy. There are hundreds of credit-reporting agencies in the United States. The largest, and most important for the typical consumer, are Experian, Equifax, and Trans Union. Subscribers, such as commercial banks, credit card companies, and other lenders, purchase quick and ready access to the credit bureaus' files. They can check a potential borrower's credit report using an on-site terminal. The subscriber periodically provides the credit bureau with updated information about any account it is presently servicing. Credit bureaus also obtain information from public records, such as local registries and courts.
Why are credit reports important to you? To get credit, you need to have credit It is very difficult to get by without using credit of some kind during your lifetime. Almost everyone, at some time, needs to borrow money for a home, a car, a major retail purchase, education expenses, or emergencies. Typically, to qualify for credit, you need to have established credit. This means that information about you must be on file at one or more of the major credit-reporting agencies. If you have not established a credit record, you may find it difficult to get credit if and when you need it. People rely on the information in your credit report when making decisions that affect your life Your credit report should be important to you because lenders, landlords, insurers, and employers rely on it for information. If your credit report contains errors or misleading information, then those people may get the wrong impression. You could be denied credit or benefits that you deserve because of what appears on your credit report; therefore, you should take the time to regularly check your credit report and correct errors and misleading information before applying for credit or benefits. You have rights with respect to your credit report Federal law, and sometimes state laws, grant you specific rights with respect to the contents and circulation of your credit report. Many of these rights allow you to control issues that affect your life. For instance, you have a right to ensure that your credit report is accurate, and you can demand that errors be corrected. You also have the right to take your name off solicitation lists compiled from credit bureau files, thus reducing the number of solicitations you receive.
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Life Insurance: Protection Planning What is life insurance? Life insurance is a legal contract between an insurance company and a policyowner and is governed by state law. Under the terms of the policy contract, the policyowner pays premiums in exchange for the promise of payment of a specified amount of money to a named beneficiary when the insured dies. The policy itself contains provisions specifying the rights and obligations of the parties under the contract. The specific purpose of life insurance is to replace the economic loss resulting from a person's death using money from a pool of funds to which many people contributed a relatively small amount.
How does it work? The application The first step to obtaining life insurance is completing the written application. Insurance companies typically inquire about a proposed insured's age, place of birth, home and business addresses, Social Security number, occupation, salary, tobacco, drugs and alcohol usage, bankruptcy, driving record, dangerous hobbies, travel outside the United States, other life insurance owned, and personal and immediate family medical history. Today, insurers pool life insurance application and claims information in a database maintained by the Medical Information Bureau (MIB), a nonprofit membership organization of life insurance companies that operates an information clearinghouse on behalf of its members. When an application is submitted to a member life insurance company, the information on the application is compared to the MIB records from other companies' applications and claims information that the MIB has on the proposed insured. Insurance companies use this information to verify the information provided on the life insurance application as a means of preventing fraud. Omitting a pre-existing medical condition or making any type of material misstatement may be grounds for denial of coverage. If the omission is discovered after the policy is issued, the insurer may be able to revoke the policy or increase the policyholder's premiums, depending on the amount of time that has passed since the issue of the policy and the discovery of the misstatement. The medical exam Depending on the proposed insured's age, the amount of insurance the insured is buying, or other factors, a medical exam may be required after the application has been completed. The exam may include a physical exam, blood work, and EKG. Typically, the exam is performed by a licensed health professional that works for the insurance company. The insurance company usually pays for the exam and any lab work. The results are sent directly to the underwriter for review along with the proposed insured's application, although the proposed insured may request a copy. The underwriting process The job of an underwriter is to analyze the information provided by a proposed insured and the records and reports obtained regarding the proposed insured, decide whether the company should assume the risk of insuring that person, and if so, at what price. If an applicant is deemed a favorable risk, the application will be approved, the premiums will be set, and the policy will be issued. The premium pool When an insurance company collects premiums from its policyholders, fees, expenses, mortality costs, and taxes are deducted and the balance of the money is pooled and invested in an account based on the policy type (e.g., whole life, universal life), and the terms stated in the individual policies.
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When an insured person dies, a claim is filed with the insurance company that issued the policy. The insurance company pays the death benefit to the policy's beneficiary (there can be more than one), using money from the cash reserve of paid premiums and investment earnings.
When can it be used? Personal Uses--At Death Provide for final expenses Life insurance can provide cash for final expenses such as your funeral and burial costs (which normally averages between $5,000 and $10,000). As the following table shows, there are several ways to pay final expenses. Ways to Pay for Final Expenses Executor may borrow cash
Could end up costing more as the money borrowed plus interest may have to be repaid
Cash on hand
A great way to pay unless there's not enough cash to also pay other expenses and/or bequests
Sale of stock/investments
As assets receive a stepped-up basis under current tax law (except in 2010), this could be advantageous but only if the investments are easily traded and not illiquid
Liquidation of tangible assets
May be difficult if there isn't a ready market for the assets. Further, a sale under pressure could result in having to sell the assets at less than fair market value.
Life insurance proceeds
Excellent way to pay because proceeds are generally paid promptly, received free of income tax, and if the required criteria are met, may be free of estate taxes
Provide financial support for dependents A major reason for having life insurance is to provide financial protection for dependents that are left behind. When an individual dies, the financial support he or she provided to the family ends. However, the family's need for income continues. Most families will have an ongoing need for housing, transportation, medical care, food, clothing, and possibly education and day care. Pay off debt The proceeds from life insurance can be used to pay off a home mortgage, automobile loan, credit cards, or any other debt that may have accumulated, relieving family members of the financial burden. Even persons who are single with no dependents should consider whether they could be leaving behind college loans or other debts for which co-signers may be held liable. Unfortunately, death does not relieve an estate of the deceased's contractual debt obligations. Insurance can provide the means to pay debts that are left behind. Pay estate taxes Many people think that only wealthy people have estate tax concerns (e.g., those with sprawling mansions or vast corporate empires). The truth is, if your estate is large enough, it could be subject to federal and state estate taxes, depending on the applicable law at the time of your death. The following list contains some of the items that may make up your estate: • Home(s)
• Automobile(s)
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• Cash
• Investments
• Jewelry
• Personal property
• Assets owned with spouse, either as joint or community property
• Antiques, collectibles, etc.
• Business Estate taxes can quickly erode the value of a sizeable estate (by as much as 50 percent or more). However, using life insurance in an estate plan can allow family members to avoid liquidating assets to pay these taxes. Create an estate Life insurance can be used to create an estate when time or other circumstances have kept you from accumulating sufficient assets in excess of what is needed to provide day-to-day financial support for your family after your death. The premiums you pay for life insurance may be significantly less than the proceeds paid to your beneficiaries at death. The death benefit can be used to provide your beneficiaries with a larger legacy than might otherwise be possible. Personal Uses--During Lifetime Create retirement or college fund When you buy cash value life insurance, you can receive certain lifetime benefits. Cash value life insurance policies include a potential accumulation of funds that can be accessed during your lifetime (e.g., for retirement savings or education savings) through loans or withdrawals. In addition, the cash value grows tax deferred, meaning you don't pay taxes on the increased value until you actually access the cash value, and even then the distributions may be subject to favorable income tax treatment. Business Uses Employee benefit program Life insurance can be part of an employee benefit program, with coverage provided under a group plan. Many employers offer life insurance group coverage to employees at low or no cost to the employee. Often, the death benefit provided is a multiple of salary, such as two or three times annual gross salary. Caution: Employer-provided coverage over $50,000 has certain tax consequences to the covered employee. Key person coverage Some companies take out life insurance polices on certain key employees, such as officers or managers. The purpose of the policy is to protect the company from the loss of talent, goodwill, and profit that can occur at the death of certain high-level employees. In addition to the loss of the employee, the company may face recruiting and training costs arising from filling the vacancy caused by the employee's death. Fund a buy-sell agreement Life insurance can be used to fund a buy-sell agreement. Under a buy-sell agreement, life insurance can be used to provide cash for the purchase of a deceased owner's interest in the business, providing liquidity for the family of the deceased. If a cash value insurance policy is used, cash values may be accessed to help fund a buy out for a retiring partner's interest thereby creating a market for the retiring partner's interest.
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How do you know what to buy? Needs analysis The first step in determining what type or amount of insurance to buy is a "needs analysis." A financial professional can conduct a needs analysis to assess the financial impact on the family or business if the breadwinner or a key person in the business should die. The analysis will look at income-generating capability, current assets, debts, and ongoing expenses. Another consideration is your overall financial picture. This may include your goals for retirement, estate and tax planning, and education funding for any dependents, as well as your overall feelings about investments and risk. The results will indicate whether you have a need for insurance and how much insurance is appropriate. This picture will also direct you toward a specific life insurance policy type. Affordability As important as it is to know how much insurance you need, consideration must be given to what you can afford. If you are in a situation where you have a high insurance need but low cash flow, there may still be a policy type available for you (e.g., term insurance), and you may have more options than you think.
What are the potential life insurance mistakes? No insurance As difficult as it is to face your own mortality, don't put off buying the life insurance protection your family needs. The proceeds from a life insurance policy can help your loved ones continue to manage financially during the difficult weeks, months, and years after your death. Not enough insurance The second serious mistake is to not have enough life insurance. There are lots of ways this can occur, but there is an easy way to prevent the problem altogether. Periodically review your insurance coverage (e.g., every three years and at the occurrence of major lifetime events) to avoid (or correct) the situation of being underinsured. Too much insurance It is possible to have too much insurance. This could happen if you purchased a large policy during one point in your life and then didn't adjust your coverage when your insurance need was reduced. This is another good reason to periodically review your coverage with your financial planning professional. The wrong type of insurance There are two basic types of policies--term and cash value. Term insurance offers pure financial protection without a cash value component--the insurance company will only pay money if you die. On the other hand, cash value policies can provide both a death benefit and, after a set time period, the accumulated cash value if the policy is terminated. All other types of polices are some variation of these two basic types. Which type is the right type for you will depend on many factors including how long you need coverage and how much you can afford. Though it can be frustrating, you should take the time to understand the policy types and choose the one that will fulfill your particular needs.
Tax considerations applicable to all types of life insurance Tax code sets definition of life insurance In order to be considered life insurance and receive favorable treatment under the tax code, life insurance policies must fulfill certain criteria established by Congress. There are specific tests that must be met in order for
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a policy to be considered life insurance for tax purposes. Tests of life insurance Cash value accumulation test Cash surrender value must not at any time exceed the value of the net single premium that would have to be paid to fund future benefits under the contract Guideline premium test
The sum of premiums paid must not at any time exceed certain guideline levels
Death benefit corridor test
Contract death benefit must exceed a specified percentage of the cash surrender value at all times. The percentage varies according to the attained age of the insured.
• Life insurance premium payments are generally not tax-deductible expenses for individuals or businesses • Policy proceeds are generally received income tax free • Transfer of a policy for value (as opposed to gifting the policy) can subject proceeds (excluding purchase price and subsequent premiums) to income tax Gift and Estate Tax Policy proceeds not considered gift to beneficiary When the proceeds of your life insurance policy are paid to a beneficiary, they are not treated as a gift for gift tax purposes. However, the insurance proceeds are generally included in your gross estate and may be subject to federal estate taxes and state death taxes. Policy premium payments generally not subject to gift tax When you are the owner of a policy on your own life, with another party as the beneficiary, premium payments made by you are not considered a gift to the beneficiary for gift tax purposes. If, however, someone else pays the premiums on a policy you own, or you pay the premiums on a policy that is owned by someone other than you (e.g., a trust), the premium payments are considered gifts and may be subject to gift tax. Policy premiums that are considered gifts generally qualify for the annual gift tax exclusion. Policy proceeds included in estate value in most cases The proceeds of a life insurance policy on your own life are included in the value of your estate if you held any incidents of ownership at any time during the three years before your death, or if the proceeds are payable to your estate. Incidents of ownership include (but are not limited to) the right to change the beneficiary, take out policy loans, or surrender the policy for cash.
Does it matter from which insurance company you buy your policy? There are thousands of insurance companies in the marketplace and some are better than others in terms of financial strength and claims-paying ability. Premiums for similar amounts of coverage can also vary widely among companies. Your safest bet is to do some research before you pay money for a policy. Don't be afraid to ask questions. It's your money and your policy. Check the ratings Many individuals will maintain life insurance for quite some time before there is a benefit payout. Therefore, it is necessary to thoroughly research several life insurance companies before deciding. Look for a company with a strong financial position and track record. The claims-paying ability rating is an indicator of the company's financial strength and how well prepared it is to pay on policy claims. The best insurance companies are those that have strong financial reserves (to pay claims) and have a history of paying claims promptly.
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There are five major ratings services that monitor insurance companies: A. M. Best, Standard & Poor's, Fitch (formerly Duff & Phelps), Moody's, and The Street.com (formerly Weiss). Each company has a different rating system. Rating information is available in most public libraries (check the business reference section) as well as through various published sources, some of which may be found on the Internet. Look at service reputation Service is an important factor in determining customer satisfaction--even if no action is necessary. Find out how long the company takes to process and pay claims. Check with the consumer division of the department of insurance in your state to find out about complaints (and how they were resolved) or about disciplinary action against a particular agent, broker, or insurance company. And finally, ask friends and family members who they use and how they found out about the company.
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Claiming Life Insurance Benefits What is it? Life insurance benefits are not automatic. If you are the beneficiary of a life insurance policy (usually your spouse's or other family member's policy), you must file a claim to receive any money. This can be as simple as contacting your insurance agent and filling out some paperwork. However, if this is the only step you take, may miss out on other life insurance benefits to which you are entitled. Your spouse or family member may have owned one or more group policies that pay benefits depending on how the insured person died or in restricted amounts. If you spend time uncovering these hidden policies, you may end up with more money from life insurance than you expected. Example(s): Arnold knew that he was the beneficiary of his wife's $100,000 individual life insurance policy, and he filed a claim form with his insurance agent. He didn't know, however, that his wife had signed up for credit life insurance when she bought her new van. When he went to the bank to make his wife's monthly auto payment, he was surprised when the bank manager told him that the car loan would be paid off by the credit life insurance company and that he wouldn't owe any more money to the bank.
Claiming benefits from individually owned life insurance policies Finding individually owned life insurance policies Your spouse or family member may have owned one or more permanent (e.g., whole life) or term life insurance policies. Individually owned term or permanent policies are what most people think of as life insurance. These policies are purchased by one person (often through an insurance agent) and pay benefits when the insured person dies. If your spouse or family member owned one of these policies, he or she probably kept it with his or her important papers in a file or a safety-deposit box. However, if you know that your spouse or family member owned an individual policy and you can't find it, call his or her insurance agent or company to check. If you're not sure if your spouse or family member owned a policy and your agent can't find one, you can contact the American Council of Life Insurance. Its members can do a free search for you.
Claiming benefits from group life insurance policies Finding group life insurance policies Group life insurance policies provide coverage to many people under one policy. Group insurance policies may be issued through an employer, bank, credit agency, or other professional or social organizations, and they often pay benefits in specialized circumstances. Since the group holds the actual policy, the insured person receives a certificate of insurance as proof that he or she is insured. Look for these certificates in your spouse's or family member's personal papers, files, and safety-deposit box, if you can access it. However, even if you can't find any certificates, this doesn't mean your spouse wasn't insured. You should still check with your spouse's or family member's employer, bank, or credit agency, or study loan paperwork or purchase contracts. Read the following sections for a list of types of group policies your spouse or family member may have owned. Employer-based group life insurance If your spouse or family member was employed at the time of his or her death, you may be the beneficiary of a life insurance policy issued through his or her employer. Since some employers offer their employees a certain amount of life insurance at no cost (a common amount is one times the employee's base salary), you may not even be aware that your spouse or family member was insured by a group policy because the employer paid the premiums. Or your spouse or family member may have been able to purchase additional group life insurance through the employer by paying the extra premiums himself or herself. Thus, before assuming that your spouse
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or family member did not have group life insurance, check any pay stubs and call the employer. Example(s): When Mona began working at Leonardo's Art Institute, she enrolled in a group life insurance plan through her employer. Her employer provided her with $25,000 worth of life insurance at no cost. In addition, Mona purchased an additional $75,000 worth of life insurance, and the monthly premium was deducted from her salary. When she died, her husband received a total benefit of $100,000. Accidental death and dismemberment policy Your spouse or family member may have been offered an accidental death and dismemberment policy through an employer, credit card company or bank. These policies pay benefits if an insured individual dies accidentally. This is another type of life insurance you may be unaware that your spouse or family member had because occasionally these policies are offered as part of a loan package, issued as a free benefit by banks or as a rider to an employer-issued insurance policy. If your spouse or family member died accidentally, look for such a policy in his or her files, or contact his or her employer, bank, credit card issuer, or insurance company. Travel accident insurance If your spouse or family member was killed while traveling by air, boat or train, you may be eligible to receive the proceeds from a travel accident insurance policy he or she may have purchased when buying tickets. If your spouse or family member used a credit card to purchase travel tickets, you may be automatically entitled to a life insurance benefit payable if he or she died as a result of an accident when using those tickets. Some travel agencies and road and travel clubs also routinely issue travel accident insurance policies, and employers sometimes pay death benefits to employees who are killed while traveling on company business. Mortgage life insurance If your spouse or family member owned a house, he or she may have purchased mortgage life insurance. A mortgage life insurance policy pays off the balance of the policyholder's mortgage at his or her death. If you're not sure whether your spouse or family member purchased such a policy, check with the mortgage lender. Credit life insurance Banks and finance companies routinely offer credit life insurance when someone takes out a loan or is issued a line of credit. This insurance will pay off the outstanding balance of a loan or account if the insured individual dies. A few extra dollars (or less, depending on your loan balance) is added to the monthly loan payments to pay these premiums. Because it is so profitable for the bank or finance company, most institutions try to sell this type of policy when someone finances a purchase or signs up for a line of credit, and occasionally they add it to a contract before the individual signs it. Thus, it is likely that you won't find out that your spouse or family member owned such a policy unless you check with credit card companies, banks, or any lenders to whom your spouse or family member owed money at the time of his or her death.
How to file a life insurance benefit claim Notify the insurance company that the policyholder has died When your spouse or family member dies, you should notify his or her life insurance company as soon as possible. You can call the insurance company's policyholder services department directly, or if the life insurance policy was issued through an agent or an employer, you can ask them to notify the company for you to begin the claims process. File a claim form You'll begin the claims process by filling out and signing a proof of death form and then attaching to it an original or certified copy of the policyholder's death certificate. If you are too distraught to fill out the form yourself, your insurance agent may fill it out for you, although you'll still have to sign it. If there is another beneficiary named on the policy, that person must also fill out a claim form. You may also have to fill out Form W-9 (Request for
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Taxpayer Identification Number and Certification), which will enable the insurance company to notify the Internal Revenue Service of any interest it has paid to you on the value of your policy. To expedite your claim, follow the insurance company's instructions carefully. Wait for the company to process the claim Life insurance claims are usually paid quickly, often within a few days. First, however, the insurance company will ensure that you are the beneficiary of the policy, that the policy is current and in force, and that all conditions of the policy have been met. This is usually a simple matter and does not delay the claims process. Claims are more often delayed because the insurance company has not received a valid death certificate. The insurance company also has a right to challenge or deny a claim if it believes that a policy provision has been violated. Example(s): When Laurie died, her husband, Lou, filed a life insurance claim. The insurance company challenged his claim because Laurie had died of hepatitis that she contracted before she purchased the policy, and the policy contained a clause prohibiting payment in the case of death from a preexisting condition. However, Laurie's doctor submitted paperwork showing that although Laurie had contracted hepatitis before she purchased the life insurance, she didn't know she had a serious illness; her condition didn't become life-threatening until two weeks after she bought the policy. So, the insurance company paid the claim after all, six weeks after it had been submitted.
Receiving life insurance proceeds Lump-sum cash payment Life insurance proceeds are often paid as lump-sum cash payments. As the beneficiary, you will receive the full value of the policy in a lump sum. Most people elect this form of payment because it enables them to control how the insurance money is invested or spent. If you elect to receive a lump-sum payment, you generally will not owe income tax on the life insurance proceeds that you receive as a beneficiary. See Questions & Answers. Settlement options Settlement options are ways of paying the proceeds of a life insurance policy other than with a lump-sum cash payment. Many types of settlement options are available, but all are designed to ensure good money management in situations where the beneficiary is unable or unwilling to manage a lump sum of cash. When a settlement option is chosen, the insurance company keeps the policy proceeds, invests them, and pays interest to the beneficiary. Sometimes, the beneficiary is allowed to withdraw part of the proceeds, and sometimes periodic payments of both principal and interest are made. Either the policyowner chooses the settlement option at the time he or she purchases the policy, or the beneficiary chooses the option at the time the benefit becomes payable (unless the policyowner chooses an irrevocable option). Example(s): Maisie named her daughter Daisy as beneficiary of her $200,000 life insurance policy. When Maisie died, Daisy was only 17 and unprepared to handle a large lump sum of cash. Fortunately, Maisie had chosen an irrevocable settlement option at the time she had purchased her life insurance policy. Instead of receiving a lump-sum payment, Daisy received part of the principal and interest from the policy monthly until the insurance proceeds were exhausted. For more information, see Settlement Options.
Questions & Answers Do automobile insurance policies pay death benefits? Sometimes. Although automobile insurance is property and casualty insurance and not life insurance, it may pay a death benefit to a survivor to cover funeral expenses if the insured individual elected medical payment (MP) coverage as part of his or her automobile insurance coverage.
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If you are the named beneficiary of your ex-spouse's life insurance policy, will you be entitled to receive the proceeds of the policy if he or she dies? Possibly. If your ex-spouse intentionally or unintentionally neglected to change the beneficiary on his or her life insurance policy, then you may still be entitled to receive the proceeds, despite your divorce. This is true even if the policy states "my spouse" as the beneficiary because you were the spouse at the time the policy was written. Is there any way to get proceeds from a life insurance policy before the claim is finally settled in order to pay funeral expenses? Most insurance companies will advance you a small portion of the life insurance proceeds so that you can pay funeral costs. Another option is to assign part of the proceeds from the life insurance policy to the funeral home now if they won't wait for payment. The funeral home can give you an assignment form to do this. If a life insurance company delays paying a claim, does that cost the beneficiary money? Beneficiaries of life insurance policies often like to receive proceeds right away so that they can invest the money and begin earning interest. Even if a beneficiary has to wait to receive the proceeds, he or she will be entitled to receive with the proceeds the amount of interest that has accrued since the date of his or her spouse's death. However, the beneficiary might have earned more interest on his or her own than the insurance company is paying. Are lump-sum cash proceeds from a life insurance policy taxable? No. The entire amount of the cash payment generally will not be included in the beneficiary's income for tax purposes. However, if the beneficiary had elected a settlement option that paid the proceeds to him or her in installments, then the payment would have been partially taxable. The interest part of the payment would have been taxable because interest is considered as income. However, the principal part of the payment would have been nontaxable. All or a portion of the life insurance proceeds may be subject to income tax if the policyholder transferred the policy for value.
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Health Coverage What is it? The costs of medical care and treatment have soared to new heights in recent years and will only go up in the years to come. Even though we all know this, millions of us here in the United States still do not have enough health insurance. What's worse, many of us have none at all. In any case, health coverage should be one of your top priorities as a responsible individual. Many people rationalize not having insurance this way: I'm perfectly healthy and always have been, so why should I waste my money on insurance that I'll never need to use? Young adults, who make up the majority of the uninsured population, are especially prone to this kind of thinking. If you are part of the uninsured population, you are in a highly vulnerable position. Think for a moment about the enormous medical costs you will incur if you suffer a major injury tomorrow or are suddenly stricken with a life-threatening illness. Uninsured people have to live with that risk every day of their lives, but health insurance shields you from that risk. However, there may be cases where not having insurance is justifiable. For example, if you work three part-time jobs and are not eligible for health benefits through any of your employers, you simply may not be able to afford the cost of a private individual policy. If it's at all feasible, however, you should probably have health insurance. Simply put, health insurance is protection against medical costs. It may provide direct medical services, but more often it provides direct payment or reimbursement for expenses associated with illnesses and injuries. In exchange for the protection, you ordinarily pay your insurance carrier a fee (premium) based on a combination of factors and payable either in lump sum or in regular installments. The cost of and range of protection provided by your health coverage will depend on the particular policy you purchase. Your choice of policy, in turn, should depend on your medical and other circumstances. You can go with a single policy that fits you, or you can take out multiple separate policies that collectively match your situation.
Lay of the land What are some of the very basic things you should know about health insurance? First of all, you should know that, with a few exceptions, most people have private health coverage. The providers and delivery systems through which you can obtain private health coverage include health maintenance organizations (HMOs) and traditional insurance and health plans like Blue Cross/Blue Shield, which may offer coverage through preferred provider organizations (PPO) plans, point of service (POS) plans, and exclusive provider organizations (EPOs). Consult additional resources to determine which route you should take. Within the large area of private health coverage, there are numerous policy types and provisions. The major types of policies include individual, group, employer-sponsored, association, indemnity/reimbursement, and service provider plans. Although terms and provisions will vary widely from one policy to the next, there are certain common policy provisions that you will find in almost any health coverage contract. In addition, most will specify limitations and exclusions as to what is covered under the policy and what isn't. All of these considerations as well as tax issues (see Taxation and Health Insurance) will come into play when you sit down to do the work of evaluating and comparing policies. If you want to get the most suitable private health coverage you possibly can, a qualified professional may be able to help you make the right decisions. Outside of private health coverage, there are other options when it comes to health coverage. Among these options are government programs that provide health benefits to certain groups. If you are in a transitional period between jobs, you should consider your options for health insurance, including your rights under COBRA and the Health Insurance Portability and Accountability Act of 1996. The field of health insurance may seem like a vast and uncharted ocean, but with the right help and some research of your own, you can navigate those waters with confidence.
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Long-Term Care Insurance (LTCI) What is long-term care insurance (LTCI)? Long-term care insurance (LTCI) is a contractual arrangement that pays a selected dollar amount per day for a selected period of time for skilled, intermediate, or custodial care in nursing homes and other settings (such as home health care). Because Medicare and other forms of health insurance do not pay for custodial care, many nursing home residents have only three alternatives for paying their nursing home bills: their own assets (cash, investments), Medicaid, and LTCI. For information about Medicare and other government programs that cover only a limited amount of long-term care expenses, see Coordination with Government Benefits. For details about Medicaid, see Long-term Care Insurance (LTCI) as a Medicaid Planning Tool. In general, long-term care refers to a broad range of medical and personal services designed to provide ongoing care for people with chronic disabilities who have lost the ability to function independently. The need for this care arises when physical or mental impairments prevent one from performing certain basic activities, such as feeding, bathing, dressing, transferring, and toileting--activities known as ADLs ("activities of daily living"). For more information about these activities, see Long-term Care Insurance (LTCI) Provisions. For details about places where you might receive long-term care, see Types of Long-term Care. For information about different kinds of LTCI policies and places where you might purchase them, see Types of Long-term Care Policies. Long-term care may be divided into three levels: • Skilled care--continuous "around-the-clock" care designed to treat a medical condition. This care is ordered by a physician and performed by skilled medical personnel, such as registered nurses or professional therapists. A treatment plan is created, and it is usually contemplated that the patient will recover at some point. • Intermediate care--intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse's aides under the supervision of a physician. • Custodial care--care designed to help one perform the activities of daily living (such as bathing, eating, and dressing). It can be provided by someone without professional medical skills, but is supervised by a physician.
How is it useful as a protection planning tool? The risk of contracting a chronic debilitating illness (and the resulting catastrophic medical bills incurred) is considered by many to be one type of risk best passed on to an insurance company through the purchase of a LTCI policy. A number of factors can increase your risk of requiring long-term care in the future. Naturally, your health status affects your likelihood of incurring a long stay in a nursing home. Indeed, people with chronic or degenerative medical conditions (such as rheumatoid arthritis, Alzheimer's disease, or Parkinson's disease) are more likely than the average person to require long-term nursing home care. And because women usually outlive the men in their lives, women stand a greater chance of requiring long-term nursing home care. However, if you already have a primary caregiver (like a spouse or child), your likelihood of needing a long stay in a nursing home will be less, particularly if you're a man. Because the cost of long-term care can be astronomical and may exhaust your life savings, purchasing LTCI should be considered as part of your overall asset protection strategy. Example(s): Sue is a 75-year-old widow with two children, John and Jill. Sue owns her condominium apartment and has $200,000 in liquid assets. After enjoying independence much of her life, Sue suffered a stroke and now needs help with such things as bathing, dressing, and eating. John and Jill look into home health care and discover that it will cost $1,500 per week (or $78,000 per year). The money that Sue had hoped to pass on to her children will instead be spent
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on expenses that may otherwise have been covered by an LTCI policy.
How much does it cost? Although purchasing LTCI seems to be the easy answer to the problem of escalating long-term care costs, the premiums for LTCI can be, depending on benefit levels selected, quite expensive. Your yearly premium for an LTCI policy depends on a number of considerations, including your age when you purchase the policy, your health, the length of the coverage period (for instance, three years, five years, or lifetime benefits), the amount of the daily benefit provided, and whether you purchase inflation protection. When buying an LTCI policy, you must also consider not only whether you can afford to pay the premiums now but also whether you'll be able to continue paying premiums in the future, when your income may be substantially decreased. For more information about the cost of LTCI and examples regarding how Medicare and Medigap may help defray some of the costs, see Coordination with Government Benefits.
Who should purchase LTCI? During the "golden years," when income typically declines, the purchase of LTCI should be carefully considered. People with significant discretionary income and substantial resources to protect for spouses, children, and other loved ones should seriously consider purchasing LTCI. Individuals with modest resources (e.g., less than $50,000 net worth) may find the premiums unaffordable, and may qualify for Medicaid by spending down their assets and/or engaging in a little Medicaid planning.
How much coverage is enough? Insurance protects against an event that might happen in the future. Therefore, buying enough protection is important, but affordability must also be considered. In terms of cost, you need to consider the amount of the daily benefit you want to purchase and also the length of the benefit period. • Daily benefit--Most policies will let you choose your amount of coverage, typically running anywhere from $40 to $150 or more per day. Of course, the greater the daily benefit and the longer the benefit period, the more the policy will cost. Also, note that the cost of nursing home care varies greatly from one metropolitan area to another, so you need to know where you'll be living out the remainder of your years. Certainly, it wouldn't make sense to purchase a policy with a daily benefit of $40 if the average daily cost of nursing homes in your area is $250 per day--unless, of course, you have substantial resources and plan to use some of your own income to pay for care. Consumers should generally buy enough coverage to cover 50 to 100 percent of nursing home costs. If you don't plan on using your own income to supplement, you should buy enough insurance to cover 100 percent of the nursing home costs. • Length of benefit period--When purchasing LTCI, you'll be asked to select a benefit period. Benefit periods generally range from one to six years, with some policies offering a lifetime benefit. You'll want to choose the longest benefit period you can afford. If you can't afford a lifetime benefit, consider choosing a benefit period that coordinates with the look-back period for Medicaid (five years). For more information about ineligibility periods, see Look-Back Period for Medicaid. Tip: The Deficit Reduction Act of 2005 gave all states the option of enacting long-term care partnership programs that combine private LTCI with Medicaid coverage. Partnership programs enable individuals to pay for long-term care and preserve some of their wealth. Although state programs vary, individuals who purchase partnership-approved LTCI policies, then exhaust policy benefits on long-term care services, will generally qualify for Medicaid without having to first spend down all or part of their assets (assuming they meet income and other eligibility requirements). Although partnership programs are currently available in just a few states, it's likely that many more states will offer them in the future.
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How do you compare policies and providers? Unfortunately, LTCI policies are not standardized. Provisions contained in policies vary greatly, and premiums charged vary as well. Therefore, you should compare policies to obtain the best amount and combination of benefits for your premium dollars. • To compare policies, you should obtain sample policies and "Outlines of Coverage" from each carrier you are considering. The Outline of Coverage summarizes the policy's benefits and highlights the policy's important features. You need to read the policies carefully, ensuring that you understand each provision. There are a number of factors you should be concerned about, such as inflation protection, a full range of care (including home health care), exclusions for pre-existing conditions, and the amount of the daily benefit provided. For a description of the types of provisions typically contained in an LTCI contract, see Long-term Care Insurance (LTCI) Provisions. • To compare providers, you should check out the financial strength of the companies by reviewing their A. M. Best Company's ratings along with the opinions of other rating services. You can also review the company's financial statements. For more information, see Comparing and Replacing Long-term Care Insurance (LTCI) Policies.
What are the tax ramifications? If you purchase a "qualified" LTCI policy, part (or all) of the premiums you pay pursuant to the contract may be deductible on your federal income tax return. LTCI polices issued after January 1, 1997, must meet certain federal standards to be considered qualified. However, LTCI policies issued prior to January 1, 1997, that met the long-term care insurance requirements of the state in which the contract was issued are automatically considered qualified. For more information, see Taxation and Long-term Care Insurance (LTCI).
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Inheriting an IRA or Employer-Sponsored Retirement Plan What is it? When the account owner of a traditional individual retirement account (IRA) or employer-sponsored retirement plan dies, the remaining funds in the account pass to the named beneficiary (or beneficiaries). Unlike many other inherited assets, these IRA or plan funds typically pass directly to the beneficiary without having to go through probate. (Probate is the court-supervised process of administering a will and proving it to be valid.) These funds are usually subject to federal income tax, unlike some other inherited assets. For federal income tax purposes, post-death distributions from an IRA or plan account are treated the same as distributions that the account owner took during his or her lifetime (state income tax may also apply). In both cases, the portion of a distribution that represents pretax or tax-deductible contributions and investment earnings is taxed, while the portion that represents after-tax or nondeductible contributions is not. The difference, of course, is that the beneficiary is the one who must pay the taxes after the account owner has died. For more information, see Income in Respect of a Decedent. If you are an IRA or plan beneficiary, you might want to leave inherited funds in the account as long as you like. This would allow you to postpone taxable distributions indefinitely, while maximizing the tax-deferred growth potential of the funds. Unfortunately, you are not allowed to do this. You will generally be required to take distributions of the inherited funds at some point, possibly sooner than you would like. However, you may have more than one option for taking distributions, and the option you choose can be critical. Caution: While the same general rules apply to inherited Roth IRAs, Roth IRAs are unique in that qualified distributions are free from federal income tax. Caution: This discussion focuses on the general rules regarding options available to a beneficiary that inherits an IRA or employer-sponsored retirement plan. Your IRA or plan may specify the option(s) available to you.
Beneficiary designations Primary, secondary, and final beneficiaries Primary beneficiaries are the IRA owner's or plan participant's first choices to receive the funds. By contrast, secondary beneficiaries (also known as contingent beneficiaries) receive the funds only in the event that all of the primary beneficiaries die or disclaim (i.e., refuse to accept) the funds. Designated beneficiaries Designated beneficiaries get preferential income tax treatment after your death. Being named as a primary beneficiary is not necessarily the same as being a designated beneficiary. Designated beneficiaries are individuals (human beings) who (1) are named as beneficiaries in the IRA or plan documents, (2) do not share the same IRA or plan account with another beneficiary who is not an individual, and (3) are still beneficiaries as of the final beneficiary determination date (September 30 of the year following the year of the IRA owner's or plan participant's death--the "September 30 next-year date"). The distinction is important because designated beneficiaries generally have greater and more flexible post-death options. Tip: Are you a designated beneficiary? The answer depends on who the beneficiaries are on the "September 30 next-year date"--not who the beneficiaries are on the date of death. If you inherited an IRA or plan because the owner or participant named you as sole primary beneficiary, you are almost certainly a designated beneficiary. If you are one of several primary beneficiaries for the same IRA or plan account, you are probably a designated beneficiary if all of the other primary beneficiaries are individuals. However, if any of the other primary beneficiaries are nonindividuals (a
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charity, for example), you may not be a designated beneficiary. Also, if the IRA or plan funds are coming to you through the owner's or participant's estate, you are probably not a designated beneficiary. If the funds are coming to you from a trust that is receiving the IRA or plan dollars, special rules will apply. Consult a tax or estate planning professional.
Final date for determining beneficiaries Only beneficiaries remaining on September 30 of the year following the year of the IRA owner's or plan participant's death are considered as possible designated beneficiaries for purposes of post-death distributions from the IRA or plan account. The September 30 next-year date does two things. First, it allows the IRA owner or plan participant to change beneficiaries any time during his or her lifetime. Second, it creates the opportunity for post-death planning. For example, if an IRA owner dies and the primary beneficiary does not need the money, the primary beneficiary could make a disclaimer up until the September 30 next-year date (note, however, that to be valid for estate and gift tax purposes, a qualified disclaimer--refusal to accept benefits--must be signed by a beneficiary and meet other requirements no later than nine months after a death. Therefore, even though designated beneficiaries are determined on September 30 of the year following the year of a death, a disclaimer may need to be signed much earlier to meet the nine-months-after-death rule). This might allow the funds to pass to a secondary beneficiary with a greater financial need. Another possibility is that one or more primary beneficiaries could "cash out" their entire share of the inherited funds by the September 30 next-year date. If this is done by the September 30 next-year date, the "cashed out" beneficiaries are not considered as possible designated beneficiaries for purposes of calculating post-death distribution methods. For example, this strategy can be very effective in cases where the primary beneficiaries include both individuals and one or more charities. The charity (ineligible as a designated beneficiary) can take its entire share (income tax free) by the September 30 next-year date, leaving only the individuals as remaining beneficiaries who may qualify as designated beneficiaries. Caution: 2002 final regulations clarify that a designated beneficiary who dies after the death of the IRA owner or plan participant, but prior to the September 30 next-year determination date, is still treated as a designated beneficiary for purposes of calculating post-death distributions from the IRA or plan account. As discussed above, this is in contrast to situations where a designated beneficiary makes a qualified disclaimer prior to the September 30 next-year date.
Factors that determine post-death distribution options First, if you have inherited an employer-sponsored retirement plan account, the plan is generally allowed to specify the post-death distribution options available to you. These options may not be as flexible as the options permitted under the final IRS distribution rules. For example, depending on whether a plan participant died before or after his or her required beginning date, some plans may provide a different default payout method than the IRS rules. In such a case, you may not be able to elect another payout method as an alternative to the plan's default method. Your first step should be to consult the retirement plan administrator regarding your post-death options as a beneficiary. The other factor that determines post-death options is the type of beneficiary. Individual beneficiaries generally have more options and flexibility than nonindividual beneficiaries. For example, post-death options are severely limited if the IRA owner or plan participant dies with his or her estate as a beneficiary. This could occur if the estate is named as a beneficiary, or if there are no named beneficiaries (in which case the estate becomes the "default" beneficiary). The same limited options apply when one or more charities are named as beneficiary. Special rules apply when a trust is named as beneficiary. Under certain conditions, the underlying trust beneficiaries can be treated as the IRA or plan beneficiaries for distribution purposes. For individuals who qualify as designated beneficiaries, the options available further depend on whether the beneficiary is a spouse or another individual. Depending on plan provisions and other factors, nonspousal individuals will typically have several post-death options. These options generally include using the life expectancy method, receiving a lump-sum distribution, taking distributions under the five-year rule, or disclaiming
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the funds. (See below for a description of each.) The life expectancy method is usually the default payout method, and often the most favorable method in terms of providing the longest possible payout period (thereby spreading out income taxes and maximizing tax-deferred growth). A surviving spouse generally has all of the options available to other designated beneficiaries, plus two additional options. A surviving spouse beneficiary can elect to roll over inherited funds to his or her own IRA or plan account, providing income tax and estate planning benefits. A surviving spouse who is the sole beneficiary may also elect to leave the funds in an inherited IRA and treat that IRA as his or her own account. (This option does not apply to inherited retirement plans.) In most cases, it will be in a surviving spouse's best interest to exercise one of the two additional options. Tip: Nonspouse beneficiaries can not roll over inherited funds to their own IRA or plan. However, the Pension Protection Act of 2006 lets a nonspouse beneficiary make a direct rollover of certain death benefits from an employer-sponsored retirement plan to an inherited IRA. (See Nonspouse rollover to an inherited IRA--The Pension Protection Act of 2006, below.) Tip: If a participant died before beginning to take required minimum distributions, a surviving spouse can generally wait until the year the participant would have reached age 70½ to begin taking distributions from the account. Tip: Once a post-death payout method is in place, the IRA or plan beneficiary is usually allowed to take larger distributions than required (including, in most cases, a lump-sum distribution of the beneficiary's entire share). However, if the beneficiary receives less than required in any year, a 50 percent federal penalty tax will apply to the undistributed required amount. This penalty tax would be in addition to regular income tax.
Post-death distribution options for designated beneficiaries Remember, only individuals who meet certain requirements can be designated beneficiaries of an IRA or retirement plan account. The post-death distribution options available to designated beneficiaries generally include one or more of the following. Life expectancy method This method involves taking distributions over a beneficiary's single life expectancy (or, in some cases, over the deceased account owner's remaining single life expectancy). This is typically the "default" payout method for designated beneficiaries under the final rules, regardless of whether the IRA owner or plan participant died before or after the required beginning date for minimum distributions (unless plan provisions specify otherwise). The distributions must begin no later than December 31 of the year following the year of the IRA owner's or plan participant's death. For more information, see Life Expectancy Method. Five-year rule This method involves taking distributions in any amount and at any time within a five-year period. The five-year period ends on December 31 of the year during which the fifth anniversary of the IRA owner's or plan participant's death occurs. If there is no designated beneficiary and the death occurred before the required beginning date, the five-year rule is the default rule under the final regulations. In other cases, the life expectancy method is the default rule. However, a designated beneficiary can often still elect the five-year rule as an alternative payout method. From a tax standpoint, it is usually not as desirable as the life expectancy method. For more information, see Five-Year Rule. Lump-sum distribution This distribution method involves withdrawing a beneficiary's entire interest in an inherited IRA or retirement plan account within one tax year. This can take the form of a single distribution of the entire interest, or multiple distributions spread over the one-year period. In most cases, any designated beneficiary can elect a lump-sum distribution of his or her share of an inherited IRA or plan account. However, other post-death payout options are typically available, and will usually be more attractive from a tax standpoint. A lump-sum distribution can have
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very undesirable tax consequences. For more information, see Lump-Sum Distribution. Roll over the remaining interest This special post-death option is available only to surviving spouses who are designated beneficiaries. It involves "rolling over" the surviving spouse's interest in the inherited IRA or plan account to the spouse's own IRA or plan. A surviving spouse can generally elect this option regardless of whether the IRA owner or plan participant had begun taking lifetime required minimum distributions (RMDs). Once in the spouse's IRA or plan, the funds continue to grow tax deferred, and distributions need not begin until the spouse's own required beginning date. Also, the spouse can name beneficiaries of his or her choice. For more information, see Roll Over the Remaining Interest. Disclaim the inherited funds Any designated beneficiary can opt to disclaim his or her share of the inherited IRA or plan account. Disclaiming simply means refusing to accept the inherited funds, allowing them to pass to another individual or entity (i.e., a secondary beneficiary). A qualified disclaimer must be completed within nine months of the date of death. This nine-month deadline usually occurs before the September 30 next-year date. Disclaiming sometimes makes sense for tax and/or personal reasons. For more information, see Disclaim the Inherited Funds.
Post-death distribution options for nondesignated beneficiaries Charities and estates can be beneficiaries of an IRA or retirement plan account, but they cannot be designated beneficiaries because they are not individuals. In addition, individuals who are beneficiaries of an IRA or plan may not qualify as designated beneficiaries under certain conditions. The post-death distribution options available to nondesignated beneficiaries generally include one or more of the following. Five-year rule If an IRA owner or retirement plan participant dies before his or her required beginning date for lifetime RMDs, and there are no designated beneficiaries on the account, required post-death distributions generally must be taken according to the five-year rule. For more information, see Five-Year Rule. Distributions over the account owner's remaining life expectancy If an IRA owner or retirement plan participant dies on or after his or her required beginning date for lifetime RMDs, and there are no designated beneficiaries on the account, required post-death distributions generally must be taken over the account owner's remaining single life expectancy (calculated in the year of death according to IRS life expectancy tables, up to a maximum of 17 years). For more information, see Life Expectancy Method. Lump-sum distribution As an alternative to either of the above payout methods, a nondesignated beneficiary (just as a designated beneficiary) generally has the option of receiving a lump-sum distribution of the inherited IRA or plan funds. Again, though, this may not be advisable from a tax standpoint. For more information, see Lump-Sum Distribution. Disclaim the inherited funds As an alternative to any of the above payout methods, a nondesignated beneficiary (just as a designated beneficiary) generally has the option of disclaiming inherited IRA or retirement plan funds. For more information, see Disclaim the Inherited Funds.
Nonspouse rollover to an inherited IRA--The Pension Protection Act of 2006 A spouse beneficiary can roll over death benefits received from an employer-sponsored retirement plan to either
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the spouse's own IRA, or to an IRA established in the deceased's name with the spouse as beneficiary (an "inherited IRA"). In the past, neither of these options was available to nonspouse beneficiaries. While nonspouse beneficiaries still can not roll over inherited funds from an employer plan to their own IRA, the Pension Protection Act of 2006 lets a nonspouse beneficiary make a direct (trustee to trustee) rollover from a 401(k), 403(b), or governmental 457(b) plan to an inherited IRA, for distributions after 2006. If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution. The ability to make a rollover to an IRA is significant because employer plans often require faster payouts to nonspouse beneficiaries than the law requires, accelerating taxation for these individuals. IRAs on the other hand generally allow distributions to be spread over the maximum period permitted by law, permitting tax deferral for the longest period of time. The IRS has recently provided guidance on nonspouse rollovers from employer sponsored plans to IRAs. IRS Notice 2007-7 provides that: • The IRA must be established in a manner that identifies it as an inherited IRA, and also identifies the deceased employee and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.” • An indirect rollover--where the beneficiary receives the distribution and then rolls the funds over to an IRA within 60 days--is not allowed • A plan can make a direct rollover to an IRA on behalf of a trust where the trust is the deceased employee's named beneficiary, provided the beneficiaries of the trust can be treated as designated beneficiaries under IRS required minimum distribution (RMD) rules, and the trust is identified as the IRA beneficiary. • The nonspouse beneficiary can't roll over RMDs to the inherited IRA. The Notice provides complex rules for determining both the RMDs ineligible for rollover from the employer plan, and the RMDs required from the IRA after the rollover: 1. The employee dies before his or her required beginning date, and the 5 year rule applies. Under the 5-year rule, no amount has to be distributed by the retirement plan to the beneficiary until the end of the fifth calendar year following the year of the employee’s death. In that year, the entire remaining amount that the beneficiary is entitled to under the plan must be distributed. Notice 2007-7 provides that the beneficiary can directly roll over his or her entire benefit until the end of the fourth year. On or after January 1 of the fifth year following the year in which the employee died, no amount payable to the beneficiary is eligible for rollover. Most importantly, Notice 2007-7 provides that if the beneficiary was subject to the 5-year rule in the employer plan, the 5-year rule will continue to apply to for purposes of determining RMDs from the inherited IRA after the rollover. However, even where the 5-year rule applies, a special rule allows a nonspouse beneficiary to determine the RMD under the employer plan using the life expectancy rule, roll the balance over to an inherited IRA, and continue to take RMDs from the IRA using the life expectancy rule--which provides the maximum tax deferral for the beneficiary. To use this special rule the rollover must occur no later than the end of the year following the year in which the employee dies. Example(s): Sam, a participant in his employer's 401(k) plan, dies on June 1, 2007. The 401(k) plan provides that beneficiaries must receive their entire balance from the plan under the five year rule. Therefore June, Sam's beneficiary, must receive the entire balance no later than December 31, 2012. June would like to defer taxes on her inherited funds for as long as possible. If she makes a direct rollover to an inherited IRA by December 31, 2008, she will be able to use the life expectancy rule, rather than the 5-year rule, when calculating her RMDs from the IRA. Her rollover must be reduced by the amount of RMDs that would have been required under the employer plan using the life expectancy rule. If June fails to make her rollover by December 31, 2008, then she will still be able to make a rollover to an inherited IRA (no later than December 31, 2011), but will have to continue to use the five year rule when calculating her RMDs from the IRA. That is, she will still be required to receive all the funds in the inherited IRA no later than December 31, 2012. 2. The employee dies before his or her required beginning date, and the life expectancy rule applies. If the life expectancy rule applies, the amount ineligible for rollover includes all undistributed RMDs for the year in which the direct rollover occurs and any prior year. After the rollover, the life expectancy rule continues to apply in
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determining RMDs from the inherited IRA. RMDs are determined using the same applicable distribution period as would have been used under the employer plan if the direct rollover had not occurred. 3. The employee dies on or after his or her required beginning date. If an employee dies on or after his or her required beginning date, the amount ineligible for rollover includes all undistributed RMDs for the year in which the direct rollover occurs and any prior year, including years before the employee’s death. After the rollover, the life expectancy rule continues to apply in determining RMDs from the inherited IRA. The RMD under the IRA for any year after the employee's death must be determined using the same applicable distribution period as would have been used under the employer plan if the direct rollover had not occurred.
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Claiming Survivor's and Death Benefits What is it? After the death of your spouse, you may be eligible to receive survivor's benefits and death benefits from government sources, from your spouse's employer, and from retirement plans.
Social Security benefits Social Security survivor's benefits If your spouse (or former spouse) was self-employed or employed in a job where he or she paid Social Security payroll taxes, you may be eligible to receive Social Security survivor's benefits. The following table illustrates the eligibility requirements for survivor's benefits: Beneficiary
Age
Insured Status of Worker Conditions That Must Be Met
Spouse (no dependent child)
60 or over (50 or over if disabled)
Fully insured
Has not remarried before age 60 (age 50, if disabled) unless subsequent marriage ended, and must have been married to worker at least nine months just before worker died (unless death was accidental or military-related), or be the parent of the worker's natural or adopted child
Spouse of worker (with dependent child who is entitled to child's benefits)
Any age
Fully or currently insured
Has not remarried unless subsequent marriage ended, and is not already eligible to receive a larger benefit in another category
Divorced spouse of worker 60 or over (50 or over if (no dependent child) disabled)
Fully insured
Has not remarried before age 60 (or if disabled, before age 50), unless subsequent marriage ended, and was married to worker for at least 10 years
Divorced spouse of worker Any age (with dependent child entitled to child's benefits)
Fully or currently insured
Has not remarried (unless subsequent marriage ended) and is not already eligible for larger benefit in another category
How much you receive depends on your spouse's lifetime earnings, how many other members of your family are receiving benefits, and what beneficiary category you fit into. Tip: The amount of Social Security survivor's benefit you receive will be reduced (even to zero) if
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you have earnings over the annual exempt amount, unless you are disabled. If you are under normal retirement age, your Social Security benefit will be reduced by $1 for every $2 you earn over the annual exempt amount (currently $14,160). Social Security death benefit If you were living in the same household as your spouse at the time of his or her death and your spouse was fully or currently insured for Social Security benefits, you may be entitled to receive a $255 lump-sum death benefit from the Social Security Administration. Who to contact for more information Social Security benefits are not automatic; you must apply for them. Although the Social Security Administration (SSA) suggests that you apply for survivor's benefits in the month of your spouse's death, benefits may be paid retroactively. To apply for the death benefit, call the Social Security Administration (SSA) at (800) 772-1213 or contact your local SSA office.
Federal employees' survivor benefits Federal Employees Retirement System (FERS) benefits If your spouse or ex-spouse was a civilian federal employee covered by FERS, you may be eligible to receive a survivor's benefit. Benefits can be paid both to survivors of workers who die before retirement (whether employed by the government at the time of death or separated from government service but entitled to a deferred annuity) and to survivors of retirees (unless the retiree and his spouse elected not to pay for the survivor annuity). Benefits may be paid in the form of a monthly annuity, a lump-sum cash payment, or both, depending on how long the employee worked for the government and whether he or she was currently or formerly employed at the time of his or her death. The following table illustrates the eligibility requirements for FERS survivors' benefits: Beneficiary
Age
Conditions
Surviving spouse of worker employed at time of death
Any age Must have been married to employee for at least nine months or must be the parent of a child of the marriage, or employee's death must have been accidental
Surviving ex-spouse of worker employed at time of death
Any age Must have been married to the employee for at least nine months, have not been remarried before age 55, and have a court order or approved settlement agreement providing that survivor annuity will be paid
Surviving spouse of retired worker
Any age Must have been married to the employee for at least nine months or must be a parent of a child of the marriage, or the death of the retired employee was accidental and employee and spouse did not waive right to a survivor's annuity
Surviving ex-spouse of retired worker
Any age Must have been married to worker for at least nine months, have not been remarried before age 55, and have a court order or approved property settlement agreement. These conditions can be waived if worker elected to provide his or her former spouse with an insurable interest annuity at the time he or she retired
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Civil Service Retirement System (CSRS) benefits If your spouse or ex-spouse was covered under CSRS, you may be eligible to receive a survivor's annuity paid until you die or remarry (unless you remarry after age 55). In general, eligibility requirements are the same as those under FERS, with one notable exception. While a former spouse of a FERS employee separated from government service may be entitled to a survivor's annuity even if that employee dies before reaching retirement age, the former spouse of a CSRS employee will not be. Survivor's benefits for state government employees Some state employees are covered under retirement programs (similar to CSRS) that serve as alternatives to Social Security. Instead of paying Social Security taxes, they contribute a portion of their paychecks (matched by the government employer) to a money market fund or investment fund that grows until retirement and then is paid out in the form of an annuity. If your spouse was a state or local employee, check with his or her employer for information about survivor's benefits. Social Security benefits may affect your FERS or CSRS benefit Survivors' benefits you receive under FERS or CSRS may reduce (or be reduced by) benefits you receive from Social Security. Who to contact Contact the Office of Personnel Management (OPM), 1900 E Street NW, Washington DC 20415, or call (202) 606-1800 to locate your nearest regional office. You can also access information (including benefit handbooks) via the Internet at the OPM website ( www.opm.gov).
Military servicemembers survivor's and death benefits Death gratuity payments Survivors of members of the military who have been killed while on active duty may receive a $100,000 death gratuity payment fully tax free. Burial-related expenses Burial allowances are available to the survivors of servicemembers who die on active duty and to the survivors of some other veterans. The government provides free markers and headstones to some veterans, as well as some final honors such as flags, presidential certificates, and an honor guard. Almost all veterans are eligible for burial in a national cemetery. Dependency and Indemnity Compensation (DIC) Dependency and Indemnity Compensation (DIC) provides a monthly pension to widows, widowers, dependent children, and low-income parents of some deceased active duty servicemembers and some disabled veterans (if disability was service-related). Beneficiaries receive a fixed monthly benefit that usually increases annually with inflation. If you need nursing home care or are housebound, DIC will also pay you an extra benefit. Receiving money from DIC will decrease the amount that you receive from another benefit plan, the Survivor's Benefit Plan (SBP), but is not affected by (and does not affect) Social Security. The Survivor's Benefit Plan (SBP) The SBP provides a monthly lifetime annuity payment to qualified widows, widowers, dependent children, and some ex-spouses who are survivors of a retired military servicemember. A retired servicemember automatically is covered by the SBP when he or she retires after 20 years of service, but may elect reduced coverage or no coverage for his or her survivors, if his or her spouse concurs. The annuity you will receive as a survivor depends on the amount your spouse designated when he or she retired.
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Death pension Available to qualified survivors of low-income veterans, the death pension provides a fixed monthly benefit that usually increases annually with inflation. The amount of monthly benefit a survivor receives depends on the survivor's other income and whether other dependents reside with the survivor. Educational assistance Monthly educational assistance payments can be made to spouses and children of disabled veterans who die. These payments can help pay for college or university classes, secondary school programs, remedial education, apprenticeships, and other courses of study. Home loans The widow or widower of a servicemember who died on active duty or as a result of a service-connected illness or injury may qualify for a VA home loan to purchase a primary residence. The loan is issued by a financial institution but guaranteed by the federal government. The primary advantages of VA home loans are that they often require no down payment and, because the loan is partially guaranteed by the federal government, no mortgage insurance payments. Federal job preference Survivors of servicemembers who died on active duty or as a result of a service-connected disability may receive ten extra points on the results of a competitive examination for a federal job. Health insurance The spouse or dependent child of a veteran who died as a result of a service-connected disability or who died on active duty may purchase government-backed health insurance called CHAMPVA. This health insurance costs less than insurance available from private sources because it is government-subsidized. Who to contact to apply for benefits For information or to apply for benefits, call the Department of Veterans Affairs (VA) at (800) 827-1000 or contact your nearest VA office.
Qualified benefit plans and IRAs Qualified benefit plans When your spouse dies, call his or her employer or plan administrator to ask about what benefits may be payable to you. Your spouse may have contributed to one or more plans designed to provide retirement income, including profit-sharing plans, 401(k) plans, 403(b) plans, stock option plans, Keogh plans, and thrift/savings plans. He or she may also have assets in a traditional defined benefit pension plan that was funded entirely through employer contributions. Different rules surround different plans, but in general, qualified pension plans must provide both pre-retirement survivor annuities and post-retirement survivor annuities. This means that even if your spouse died before retirement and was not yet vested in a qualified pension plan, you may be entitled to receive a survivor annuity (or other payment form) unless you waived that right at some point. IRAs If your spouse owned an IRA and named you as the beneficiary, you have several options in taking funds from the IRA. Your options include taking the proceeds of the IRA as a lump-sum distribution or rolling them over to your own IRA. If you elect a lump-sum distribution of your spouse's IRA, you will not owe the normal 10 percent premature withdrawal penalty tax, even if you are under age 59½. However, if the funds come from a traditional IRA, the amount you receive will generally be included in your taxable income (qualifying distributions from Roth IRAs are tax free). Rolling over the IRA proceeds to your own IRA provides you with a great deal of flexibility and
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control. You can name your own beneficiary or beneficiaries, and can postpone taking distributions (distributions from traditional IRAs, though, generally must begin after age 70½). You should weigh your options carefully, using your income needs, expected return on investments, and tax consequences as a guide.
Questions & Answers Does the former spouse of a federal employee who died while employed under FERS have any claim to his or her pension benefits? Possibly. It depends on the terms of the divorce. A former spouse may have been awarded a court-ordered survivor's annuity or may have the rights to an insurable interest annuity if his or her former spouse elected to provide one. He or she may also be eligible for Social Security survivor's benefits based on the Social Security earnings record of his or her former spouse. What should you do if you receive Social Security checks in your spouse's name after his or her death? Don't cash them. The law requires that these checks be returned. Send them back to the Social Security Administration right away. For information on the procedure to follow, call the SSA at (800) 772-1213. If you are already receiving Social Security benefits and your spouse dies, how will your spouse's death affect your benefit? An individual entitled to Social Security benefits may be eligible to receive a greater benefit as a widow than he or she would as a retiree. If so, then his or her Social Security benefit may be adjusted automatically.
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Social Security Survivor's Benefits and the Lump-Sum Death Benefit What is it? When planning your estate, consider how much your survivors might receive from Social Security. Social Security survivor's benefits can provide much-needed income to your family and ensure that their financial life after your death is easier.
Who will be eligible to receive survivor's benefits after your death? Knowing your insured status is essential to determining who will be eligible to receive Social Security survivor's benefits based on your earnings record. If you were fully insured, meaning that you have 40 Social Security credits (quarters of coverage) at the time of your death, more of your survivors may be eligible for benefits than if you were currently insured (having 6 credits during the last 13 quarters prior to your death). For more information on insured status, see Determining Eligibility for Social Security Benefits. If you are fully insured If you are fully insured, survivor's benefits can protect those family members who are most dependent on you for financial support. If you are fully insured at the time of your death, benefits may be paid to the following family members: • Your spouse • Your divorced spouse • Your dependent child or children • Your dependent parents If you are currently insured If you are currently insured at the time of your death, benefits may be paid to these family members only: • Your spouse (only if caring for a dependent child) • Your divorced spouse (only if caring for a dependent child) • Your dependent child or children The following table illustrates who may be eligible to receive survivor's benefits and under what conditions: Beneficiary
Age
Insured Status of Worker Conditions
Spouse of worker (no dependent child)
Age 60 or over (or if disabled, age 50 or over)
Fully insured
Must have been married to the worker for nine months before worker died (certain exceptions exist) or be parent of worker's natural or adopted child.
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Fully or currently insured
Must be unmarried. Not already eligible for widow(er)'s benefits.
Divorced spouse of worker Age 60 or over (if (no dependent child) disabled, age 50-59)
Fully insured
Must have been married to the worker for at least 10 years.
Divorced spouse of worker Any age with dependent child
Fully or currently insured
Must be unmarried. Not already eligible for widow(er)'s benefits as a divorced spouse.
Dependent child of worker
Under age 18, or age 18 or 19 if a full-time elementary or secondary school student. If child is disabled, can be over age 18 if disability began before age 22.
Fully or currently insured
Must be unmarried.
Dependent parent(s) of worker
Age 62 or above
Fully insured
Fifty percent or more of the parent's support must have been furnished by worker.
What benefits will your survivors receive after you die? Your eligible surviving family member will receive a monthly benefit based on your primary insurance amount (PIA) unless the survivor is eligible for a greater benefit based on his or her own PIA. Survivor's benefits are expressed as a percentage of your PIA: Beneficiary
Percentage of deceased worker's PIA that beneficiary is entitled to
Surviving spouse (widow(er)'s benefit)
100% (at normal retirement age)
Surviving spouse when caring for dependent child (parent's benefit)
75% minimum (before normal retirement age)
Surviving divorced spouse
100% (at normal retirement age)
Surviving divorced spouse when caring for dependent child
75% minimum (before normal retirement age)
Dependent child
75%
Dependent parent (1)
82.5%
Dependent parent (2)
75% (each)
Survivor's benefits may be reduced for one or more of the following reasons: Beneficiary is younger than normal retirement age when he or she elects to receive benefits This factor affects the surviving spouse or the surviving divorced spouse of the worker. If the surviving spouse is at least normal retirement age, the benefit payable is 100 percent of the deceased worker's PIA. However, if the surviving spouse elects to receive benefits early (as early as age 60 or age 50 if disabled), the benefit payable will be reduced by .475 percent for each month between the month benefits begin and the month in which the
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spouse will reach normal retirement age. So, a surviving spouse born in 1938 (and thus with a normal retirement age of 65 and two months) who is age 60 and two months will receive 71.5 percent of the deceased spouse's PIA instead of 100 percent (60 months x .475 = 28.5 percent reduction). If the surviving spouse is disabled, the benefit will never drop below 71.5 percent of the deceased spouse's PIA, even if the disabled spouse elects benefits at age 50. Example(s): After Peter died at age 60, his wife, Patty, applied for survivor's benefits. She was 61. Because she elected to receive benefits 48 months before her normal retirement age, she was entitled to receive 77.2 percent of her deceased husband's PIA (48 months x .475 = 22.8 percent reduction). Benefit is subject to the family maximum Survivor's benefits may also be reduced if they exceed the family maximum benefit. This commonly happens when benefits to children are payable along with a benefit to a surviving spouse. Because the family maximum benefit generally ranges from 150 to 180 percent of the worker's PIA, a spouse's benefit combined with the benefits for two children could easily exceed the family maximum. In this case, the benefit for each family member will be reduced accordingly. The survivor's earnings are more than the annual exempt amount Benefits may be reduced when a surviving spouse's earned income exceeds the annual earnings exempt amount. For an in-depth discussion of earned income limits, see Optimizing Your Social Security Benefits. Benefits to eligible family members end when: • A surviving spouse entitled to parent's benefits remarries (unless the new spouse is another benefit-eligible individual). • A surviving spouse entitled to parent's benefits loses eligibility because the child attains age 16 or loses disability status. • A surviving divorced spouse remarries prior to age 60 (or age 50 if disabled). If the subsequent marriage ends, however, the spouse will again be eligible for benefits based on the deceased ex-spouse's earnings. • A dependent child turns 18 and is no longer enrolled in school. (If the child is enrolled full-time in secondary school, benefits may be payable to age 19.) • A dependent child marries (unless the child is over 18 and disabled and marries another benefit-eligible individual). • A dependent parent marries (unless parent marries another benefit-eligible individual). • The beneficiary dies.
Who is eligible to receive the Social Security lump-sum death benefit? Upon your death, your surviving spouse living in the same household with you at the time of your death will receive a $255 lump-sum death benefit. If there is no surviving spouse, the death benefit will be split among your children who are eligible for benefits based on your PIA. In the event you have no surviving spouse or children, the benefit will not be paid.
Planning tips for Social Security survivor's benefits
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When you have dependent children If you have dependent children, check your Social Security record to make sure you are at least currently insured. If you die currently insured, your family might receive some income from survivor's benefits. If you are not currently insured, consider working to obtain the required credits. When you have no dependent children but are married If you have no dependent children and are nearing retirement, check your Social Security record to make sure you are fully insured. If you die fully insured, your spouse may receive some income from survivor's benefits when he or she turns age 60 (or age 50, if disabled). When you have any family members who may be eligible for benefits on your Social Security record Make sure your family members know your Social Security number and what benefits they may be entitled to when you die. To apply for benefits, your spouse may also need proof of marriage or divorce and copies of children's birth certificates.
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Military Benefits What is it? As a current member or veteran of the U.S. armed forces, you may be entitled to a number of military benefits. The term benefits, as used here, includes military pay as well as other programs set up to improve the lives of military personnel. Because the scope of military benefits is enormous and ever-changing, this is intended only to be a broad overview of the subject. Servicemembers and veterans seeking more specific information should consult the appropriate government source.
Who is eligible for military benefits? Active duty servicemembers are eligible to receive many benefits from the military including base pay, special duty pay, allowances for housing costs and food, money for education, medical care, insurance, and a variety of other benefits. Members of the armed forces are eligible to voluntarily separate or retire after serving in the military for a certain number of years. Retirees receive retirement pay and often have access to military facilities and programs, including medical care, insurance benefits, and VA housing loans. Servicemembers who separate from the military may or may not receive separation pay and are eligible for limited, yet valuable benefits.
Some of the benefits available to servicemembers and veterans Military pay Military base pay received by active duty servicemembers is based on rank and the number of years of service the individual has completed. Pay may be supplemented by such allowances as the Basic Allowance for Housing (BAH), the Basic Allowance for Quarters (BAQ), the Basic Allowance for Subsistence (BAS), and Cost-of-Living Allowances (COLAs). Retirement pay Military retirement pay is based on the servicemember's base pay (of the highest rank the servicemember held) and the number of years of service the servicemember completed. In general, no retirement annuity is payable unless the servicemember has completed 20 years of service. The longer an individual stays on active duty, the higher his or her retirement pay will be. Specific information on how retirement pay is calculated can be found at the Department of Defense website, www.defenselink.mil. Pensions for low-income veterans Pensions may be paid to low-income veterans who are discharged under conditions other than dishonorable. Three types exist: the Improved Pension, the Section 306 Pension, and the Old-Law Pension. Eligible veterans must have had 90 days of service with at least one day occurring during a period of war. Currently, only the improved pension is open to new applicants. Disability benefits Veterans are entitled to disability compensation for service-connected health problems. Several programs are available; some are sponsored by the Department of Defense (DoD), others by the Department of Veterans Affairs (VA), formerly known as the Veterans Administration. Military-sponsored programs include disability retirement, temporary disability retirement, and disability severance pay. VA benefits include disability compensation, vocational rehabilitation, and pensions. The rules surrounding these benefits can be complex and change often; it's best to check with your military personnel office or local VA office if you have questions about any of these benefits.
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Health-care benefits All veterans who were discharged under conditions other than dishonorable are eligible for VA hospital and outpatient care, but some veterans may not have access to it. This is because the resources of the VA are strained and VA health care is dependent on congressional appropriations. To ensure that as many veterans as possible who need health care have access to it, a VA health-care eligibility reform was signed into law in October 1996. The law requires the VA to manage veterans' access to VA care. Under the law, veterans apply for enrollment and are assigned to one of seven priority groups. As many veterans as possible from each of the groups will be enrolled for VA health care. Any veteran who has received VA health care since October 1996 doesn't need to apply, since the VA is automatically processing an application for this veteran. Veterans can apply for enrollment at any time. Veterans who enroll will have access to health care at approximately 1,100 service sites. For more information, veterans should contact the nearest VA health-care facility or access information via the Internet at the VA website, www.va.gov. Active duty servicemembers, retired servicemembers, their qualified family members and certain survivors receive health-care coverage through TRICARE, the medical program for the U.S. military. Depending upon their status, availability of medical care at military facilities and the TRICARE option they choose, military members may receive care either through military or civilian providers. For more information see the TRICARE website, www.tricare.osd.mil. Long-term care benefits Veterans are eligible for inpatient care in VA nursing homes, private nursing homes subsidized by the VA, and other long-term-care facilities. Many outpatient care programs are also available. Veterans may receive home health care services, adult day care services, or other services that can help them remain in their homes for as long as possible. Education and training Servicemembers and veterans may be eligible for education benefits under several programs. The newest program, the Post-9/11 GI Bill, is available to active duty servicemembers and veterans who have served on active duty on or after September 11, 2001. Other benefit programs include the Montgomery GI Bill, the Reserve Educational Assistance Program (REAP), and the Veterans Educational Assistance Program (VEAP). Many other programs are also available to help servicemembers and veterans pay educational costs. These include loan repayment and tuition assistance programs, scholarships, work-study programs, and tutorial assistance programs. For more information about education benefits, visit www.gibill.va.gov. Vocational counseling Servicemembers who are 180 days or less away from their planned discharge and veterans within one year after discharge are eligible for many educational and vocational counseling programs. Home loan guarantees The VA guarantees loans to servicemembers, veterans, and reservists who want to purchase a home, condominium, or manufactured home. The loan is issued by a financial institution but guaranteed by the federal government. The primary advantages of VA home loans are that they often require no down payment and, because the loan is partially guaranteed by the federal government, no mortgage insurance payments. For more information on VA loans, visit www.homeloans.va.gov. Mortgage foreclosure protections The Housing and Economic Recovery Act of 2008 (the Act) amends the Servicemembers Civil Relief Act (SCRA) by: • Offering nine months of protection (formerly 90 days) from mortgage foreclosures for returning servicemembers after they separate from active duty. This provision remains in effect until December
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31, 2010. • Extending the SCRA's six percent interest rate cap for one year (formerly 180 days) beyond the period of military service if the debt is a mortgage, trust deed, or other security in the nature of a mortgage. The Act also requires the Department of Defense to implement a foreclosure-prevention counseling program for servicemembers returning from active duty abroad. Life, disability, and long-term care insurance There are three major types of life insurance available to servicemembers and veterans. Active duty members of the military are eligible for coverage under Servicemen's Group Life Insurance (SGLI). Servicemembers are automatically insured for $400,000 but can elect a lesser amount or decline coverage. The amount they contribute to pay for their coverage depends upon the level of coverage they select. Spouses or next of kin must be notified if a servicemember elects not to be covered, to be covered in an amount less than the maximum available, or whenever the servicemember changes the amount of life insurance he or she has. Veterans' Group Life Insurance (VGLI) is available to reservists and to individuals who have coverage under SGLI at the time they are released from active duty or from the reserves. Individuals with part-time SGLI coverage who become disabled or aggravate a pre-existing disability during a reserve period and who are uninsurable at standard premium rates are also eligible. Members of the Individual Ready Reserves or the Inactive National Guard are eligible for coverage as well. Under VGLI, eligible veterans can only be issued the same amount of SGLI they had in the service or less. Service Disabled Veterans Insurance is available to veterans who have a service-connected disability. Veterans who left the service after April 24, 1951, are eligible for up to $10,000 in life insurance unless they are found to be totally disabled and eligible for waiver of premiums. In this case they can receive up to $20,000 of additional coverage (premiums for additional coverage are not waived). Effective December 1, 2005, servicemembers who have SGLI also have disability coverage through the Traumatic Injury Protection Insurance Program (T-SGLI). T-SGLI is a rider that is attached to SGLI and provides disability insurance payments ranging from $25,000 to $100,000 to servicemembers who suffer traumatic injuries. Although T-SGLI coverage is automatic, servicemembers have the option of declining this coverage if they wish. Finally, servicemembers, veterans, and family members can help protect themselves against the financial burden of long-term care by applying for coverage under the Federal Long-Term Care Insurance Program. This program helps covered individuals pay for the ongoing care they need due to an illness, injury, or cognitive disorder. For more information, visit www.ltcfeds.com or call 800-582-3337. Burial benefits Burial allowances are available to the survivors of servicemembers who die on active duty and to the survivors of some other veterans. The government also provides free markers and headstones to some veterans, as well as some final honors such as flags, presidential certificates, and an honor guard. In addition, almost all veterans are eligible for burial in a national cemetery. Hiring preference Some veterans receive preference over other candidates when they look for employment with the federal government. Qualified veterans who have honorable discharges receive an extra 5 points for any competitive examinations if they earned a campaign ribbon or spent time on active duty during certain periods. Qualified disabled veterans and veterans who were awarded a Purple Heart can receive an extra 10 points on examinations. This means that the hiring preference for veterans doesn't guarantee a job to the veteran; it just gives the veteran a slight advantage. Other benefits Servicemembers and veterans are eligible for benefits available to the general population as well, such as unemployment compensation and Social Security benefits. The Social Security Administration (SSA) publishes a
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special booklet for military personnel that explains how military service affects Social Security benefits. To receive this booklet, contact your local Social Security office (call (800) 772-1213 for the location nearest you), or view the information on-line at the SSA website ( www.ssa.gov).
Some of the benefits available to survivors of servicemembers and veterans Survivors of servicemembers and veterans are eligible for some of the same benefits available to their sponsor, such as VA home loan guarantees and educational assistance. In addition, they're eligible for the following benefits as well. Survivor's Benefit Plan The Survivor's Benefit Plan (SBP) provides a monthly lifetime annuity payment to qualified widows, widowers, dependent children, and some ex-spouses who are survivors of retired military servicemembers. SBP benefits may be offset by Social Security benefits the survivor receives. Dependency and Indemnity Compensation Dependency and Indemnity Compensation (DIC) provides a monthly pension to widows, widowers, dependent children, and low-income parents of some deceased active duty servicemembers and some disabled veterans (if disability was service related). Beneficiaries receive a fixed monthly benefit that usually increases annually due to inflation. Death pension Available to qualified survivors of low-income veterans, the death pension provides a fixed monthly benefit that usually increases annually with inflation. The amount of monthly benefit a survivor receives depends upon the survivor's other income and whether other dependents reside with the survivor. Health insurance The spouse or dependent children of disabled veterans, veterans who died as a result of a service-connected disability, or veterans who died on active duty may purchase low-cost government-backed health insurance called CHAMPVA. Survivors and spouses and dependent children of active duty servicemembers and retirees may also receive health care through TRICARE, the medical program for the U.S. military. Proving eligibility for benefits While the active duty servicemember's identification card is his or her best friend, the veteran will rely upon his or her DD Form 214, or military discharge papers, to apply for benefits (if retired, he or she will also have an ID card). You will receive your DD Form 214 upon discharge, or you can apply for duplicates free of charge from VA offices and veterans organizations. When you apply for veterans benefits, you (or your surviving spouse) will be asked for a copy of your DD Form 214.
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Introduction to Estate Planning What is estate planning? Simply stated, estate planning is a method for determining how to distribute your property during your life and at your death. It is the process of developing and implementing a master plan that facilitates the distribution of your property after your death and according to your goals and objectives. At your death, you leave behind the people that you love and all your worldly goods. Without advance planning, you have no say about who gets what, and more of your property may go to others, like the federal government, instead of your loved ones. If you care about (1) how and to whom your property is distributed, and (2) ensuring that your property is preserved for your loved ones, you need to know more about estate planning. As a process, estate planning requires a little effort on your part. First, you'll want to come to terms with dying, at least to a degree that you can deal with the necessary planning. Understandably, your death can be a very uncomfortable subject, but unfortunately, the discussions in this area are full of references to your death, so it really can't be avoided. Some statements may seem too businesslike and unfeeling, but tiptoeing around the subject of dying will only make the planning process more difficult. You will understand the process more easily and implement a more successful master plan if you approach it in a straightforward manner.
Who needs estate planning? Not just for the wealthy Estate planning may be important to individuals with a wide range of financial situations. In fact, it may be more important if you have a smaller estate because the final expenses will have a much greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from a lack of financial resources. Your master plan can consist of strategies that are simple and inexpensive to implement (e.g., a will or life insurance). If your estate is larger, the estate planning process can be more complex and expensive. Implementing most strategies will probably require you to hire professional help of some kind, an attorney, an accountant, a trust officer, or an insurance agent, for example. If your estate is large or complex, you should consult with an estate planning expert such as a tax attorney or financial planner for advice before the implementation stage. In deciding on your course of action, you should always consider whether the benefit of the strategy outweighs the cost of its implementation. May be especially needed under certain circumstances You may need to plan your estate especially if: • Your estate is valued at more than the federal estate tax applicable exclusion amount (formerly known as the unified credit) (see tip below) or your state's death death exclusion amount • Your income tax bracket is in excess of 10 percent • You have children who are minors or who have special needs • Your spouse is uncomfortable with or incapable of handling financial matters • You're a business owner
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• You have property in more than one state • You intend to contribute to charity • You have special property, such as artwork or collectibles • You have strong feelings about health-care decisions You have privacy concerns or want to avoid probate Tip: The federal estate tax is repealed for 2010, unless Congress acts to reinstate the tax retroactively. In 2011 the tax will return with an applicable exclusion amount of $1 million. So, estates over $1 million may actually want to make appropriate plans to be on the safe side.
How to do it Designing a plan is a process that is unique to each estate owner. Don't be intimidated or overwhelmed at the prospect. Even the most complex plan can be achieved if you proceed step by step. Remember, the peace of mind that comes with developing a successful estate plan is worth the time, trouble, and expense. Understand your particular circumstances Begin the estate planning process by understanding your particular circumstances, such as your age, health, wealth, etc. Understand the factors that will affect your estate You will also need to have some understanding of the factors that may affect the distribution of your estate, such as taxes, probate, liquidity, and incapacity. Clarify your goals and objectives When your particular circumstances and the factors that may affect your estate are clear, your goals and objectives should come into focus. Understand the strategies that are available With these goals and objectives now clear, you can begin to consider the different estate planning strategies that are available to you. Seek professional help Seeking professional help (an attorney or financial advisor) will help you understand the strategies that are available and formulate and implement your master plan. Formulate and implement a plan Finally, after following these steps, you can formulate and implement a plan that works for you. Here are a few basic tips: (1) make sure you understand your plan, (2) rely on people you trust, and (3) keep your documents and information organized and within easy reach. Perform periodic reviews When you have implemented your master plan, be sure to perform a periodic review and, if necessary, make revisions that reflect any changing circumstances and tax laws.
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How do you begin? There are many estate planning strategies, including some that are implemented inter vivos (during life), such as making gifts, and others post-mortem (after death), such as disclaimers. Before you choose which strategies are right for you, you need to understand your particular circumstances. Gather and analyze the facts Understanding your particular circumstances results from gathering and analyzing the facts. The following questions may help you to accomplish this. If they are not easy to answer, you may have to make some estimates based on reasonable assumptions and expectations. Information regarding your financial condition • What is your current income? • What is your income likely to be in the future? • How much do you spend each year? • What are your expenses likely to be in the future? • What are your current assets and debts? • Are your assets currently owned solely or jointly? • What estate planning strategies have you already implemented? Family information • Who are the family members you intend to benefit? • What are the needs of each family member?
What other factors need to be considered? Decide what your goals and objectives are in light of your particular circumstances and in light of the factors that may affect your estate. The primary factors that may affect your estate are your beneficiaries, taxes, probate, liquidity, and incapacity. Taxes One of the largest potential expenses your estate may have to pay is taxes, which may include federal transfer taxes, state death taxes, and federal income taxes. Federal transfer taxes--The federal transfer taxes include (1) the federal gift tax and federal estate tax and (2) the federal generation-skipping transfer tax (GSTT). • Federal gift tax--Gift tax is imposed on property you transfer to others while you are living. You need a basic understanding of how the gift tax system works to minimize gift tax liability. Under the gift tax system, you are allowed a $1 million lifetime gift tax applicable exclusion amount that reduces your gift tax liability (any gift tax applicable exclusion amount you use during life effectively reduces the applicable exclusion amount that will be available at your death). Also, you are currently allowed to give $13,000 per donee gift tax free under the annual gift tax exclusion. Further, certain other types of transfers can be made gift tax free. You need to understand what these types of transfer are and how they work to take full advantage of them.
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• Federal estate tax--Generally speaking, estate tax is imposed on property you transfer to others at the time of your death. You need a basic understanding of how the estate tax system works for several reasons:Saving your property for your beneficiaries--Estate tax rates could reach as high as 55 percent in 2011, which means that an enormous chunk of your estate may go to the federal government instead of your beneficiaries. If you want to preserve your estate for your beneficiaries, you'll need to know how to minimize estate tax with respect to your property. • Reducing estate tax liability--Under the estate tax system, you are allowed an applicable exclusion amount (formerly referred to as the unified credit) that reduces your estate tax liability. Also, there are exclusions, deductions, and other credits available that allow you to pass a certain amount of your estate tax free. You need to understand what these exclusions, deductions, and credits are and how they work to take full advantage of them. • Providing for the payment of estate tax--Generally, estate tax must be paid within nine months after your death. To avoid depriving your beneficiaries of what you intend for them to receive, you should provide that specific and sufficient assets be set aside and used for this purpose. In addition, these assets should be sufficiently liquid to pay these expenses when they are due. • Planning for estate tax expense--Although calculating estate tax can be complex, you should estimate what the amount of your estate tax may be (if any), so that you can arrange to replace that wealth. • GSTT--Another federal transfer you need to understand is the federal generation-skipping transfer tax (GSTT). The GSTT is imposed on property you transfer to an individual who is two or more generations below you (e.g., a grandchild or great-nephew). Not surprisingly, the IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep individuals from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax then in effect is imposed on every generation-skipping transfer you make over a certain amount. Currently, some states also impose their own GSTT. Check with an attorney or your state to find out what may be subject to your state's GSTT, and how and when to file a state GSTT return. State death taxes--States also impose their own death taxes. You should be aware of what the death tax laws are in your state and how they may affect your estate. There are three types of state death taxes: (1) estate tax, (2) inheritance tax, and (3) credit estate tax (also called a sponge tax or pickup tax). Some states also impose their own gift tax and/or generation skipping transfer tax. • Estate tax--State estate tax is imposed on property you transfer to others at your death, much like federal estate tax. The state estate tax calculation for most states is similar to the federal calculation. • Inheritance tax--Unlike estate tax, the inheritance tax is imposed on your beneficiary's right to receive your property. Tax is due on each beneficiary's share of your estate. Beneficiaries are grouped into classes (generally based upon their familial relationship to you) and are taxed accordingly. Although inheritance tax is due on each heir's share of your estate, it's your personal representative who writes the check from your estate to pay it. • Credit estate tax--Some states impose a credit estate tax (also referred to as a sponge tax or pickup tax). Tip: Most states that imposed a credit estate tax have "decoupled" from the federal system (i.e., they're imposing some form of stand-alone estate tax.) Tip: The federal system allows a deduction for state death taxes for the estates of persons dying in 2005 through 2009. Prior to 2005, a credit was available, which will be reinstated in 2011. Federal income taxes--In the estate planning context, you should be aware of three federal income tax considerations: 1. Income taxation of trusts --If your estate plan includes the use of a trust, you need to know that a trust may be an income tax-paying entity. The trustee may be required to file an annual return and
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pay income taxes on trust income. 2. Decedent's final income tax return --Your personal representative or surviving spouse has the duty of filing your last income tax return that covers the tax year ending on the date of your death. 3. Income taxation of your estate --Your estate is considered a separate income taxpaying entity. Your personal representative must file and pay income taxes on any income your estate receives (e.g., interest from bonds, or dividends from stock). Probate Probate is the court-supervised process of proving, allowing, and administering your will. The probate process can be time-consuming, expensive, and open to public scrutiny. Avoiding probate may be one of your most important goals. To develop a successful avoidance strategy, you'll need to understand how the probate process works, how to estimate probate costs, and what is subject to probate. Liquidity Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death from cash and cash alternatives. If your property is mostly nonliquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due. This could result in an economic loss, or your family selling assets that you intended for them to keep. Therefore, planning for estate liquidity should be one of your most important estate planning objectives. Incapacity Planning for incapacity is a vital yet often overlooked aspect of estate planning. Who will manage your property and make health-care decisions for you when you can no longer handle these responsibilities? You need to ask and answer this question because the consequences of being unprepared may have a devastating effect on your estate and loved ones. You should include plans for incapacity as a part of your overall estate plan.
What are your goals and objectives? Your goals and objectives are personal, but you can't formulate a successful plan without a clear and precise understanding of what they are. They can be based on your particular circumstances and the factors that may affect your estate, as discussed earlier, but your feelings and desires are just as important. The following are some goals and objectives you might consider: • Provide financial security for your family • Ensure that your property is preserved and passed on to your beneficiaries • Avoid disputes among family members, business owners, or with third parties (such as the IRS) • Provide for your children's or grandchildren's education • Provide for your favorite charity • Maintain control over or ensure the competent management of your property in case of incapacity • Minimize estate taxes and other costs • Avoid probate • Provide adequate liquidity for the settlement of your estate • Transfer ownership of your business to your beneficiaries
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What are estate planning strategies? An estate planning strategy is any method that facilitates the distribution of your assets and the settlement of your estate according to your wishes. There are several estate planning strategies available to you. Intestate succession Intestate succession is a strategy by default and is a means of transferring your property to your heirs if you have failed to make other plans such as a will or trust. State law controls how and to whom your property is distributed, who administers your estate, and who takes care of your minor children. Without directions, your opinions and feelings are not considered. Indeed, one of your primary goals in planning your estate may be to avoid intestate succession. Last will and testament A will is a legal document that lets you state how you want your property distributed after you die, who shall administer your estate, and who will care for your minor children. This is probably the most important tool available to you. Anyone with property or minor children should have a will. Will substitutes A will substitute, for example, Totten Trust and payable on death bank accounts, allows you to designate a beneficiary of certain property that will automatically pass to that beneficiary after you die and avoids passing through probate. Trusts A trust is a separate legal entity that holds your assets that are then used for the benefit of one or more people (e.g., you, your spouse, or your children). There are different types of trusts, each serving a different purpose, and include marital trusts and charitable trusts. You will need an attorney to create a trust. Joint ownership Joint ownership is holding property in concert with one or more persons or entities. There are different types of joint ownership, such as tenancy in common and community property, each with different legal definitions, requirements, and consequences. Life insurance Life insurance is a contract under which proceeds are paid to a designated beneficiary at your death. Life insurance plays a part in most estate plans. Gifts A gift is a transfer of property, not a bona fide sale, that you make during your life to family, friends, or charity. Making gifts can be personally gratifying as well as an effective estate planning tool. Tax exclusions, deductions, and credits There are several important estate planning tools you can use that are offered by the federal government. These include the annual gift tax exclusion, the applicable exclusion amount, the unlimited marital deduction, split gifts, and the charitable deduction.
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Settling an Estate What is settling an estate? Definition of estate When people die, they usually leave behind money and other things of value (assets). In addition, they may have auto loans, mortgages, and other outstanding debts (liabilities). Together, the assets and liabilities left by a decedent are known as the estate. Settling an estate means that someone follows the legal and administrative procedures set up to pay the liabilities of the estate and distribute the remaining assets to the rightful beneficiaries. Who settles an estate? An estate is settled by the executor named in the decedent's will. Typically, the executor is the spouse or a close family member of the decedent, but may be another party. If the decedent left no valid will or the named executor fails to serve, the probate court will name an administrator to fulfill those duties. If you have been named executor in a will or appointed as the administrator of an estate, you are responsible for carrying out the terms of the will (if there is one) and settling the estate, either alone or with the help of an attorney. Is settling an estate complicated? Settling an estate may be tedious and time-consuming, but not necessarily complicated. It depends on the value of the estate, the state in which the decedent lived, and whether you must go through probate. Probate is the court-supervised process of proving the authenticity of the will and executing its terms. Formal probate may not be required if the decedent's property is worth less than a certain amount, or if all the assets are nonprobate assets. If minimal probate proceedings are required and there is no challenge to the will, settling an estate can be a relatively simple matter. Do you need an attorney to help you? If you are the executor, you aren't required to hire an attorney to help settle the estate, but you might consider it if the estate is complex or if you don't have the time, energy, or expertise to handle it yourself. If you hire an attorney, remember that he or she works for you, not for the estate, and that you are still the fiduciary. Be sure that you trust him or her to do a good job, and that you understand how the fees will be paid. In general, attorneys charge either by the hour or a lump sum, and the estate pays their fee. However, some states allow attorneys to take a percentage of the estate, an arrangement that can be quite expensive. If you feel that you can settle the estate without much help, you should consider hiring an attorney as an advisor only. He or she will look over documents you prepare, give you specific advice in certain areas, and charge you an hourly rate for those limited services.
How to do it Hire an attorney or other advisors You may want to hire an attorney to help settle the estate, but other professionals such as accountants or financial advisors can also help with specialized issues. Such issues may include paying income and estate taxes, accounting for estate debts and expenses, and collecting insurance and pension benefits. Locate and read the will Finding the will should be relatively easy. You may already know where it is located. Otherwise, you may be able to look in the decedent's safe-deposit box, a file cabinet, or with the decedent's attorney or other family members.
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When you have found the will, read it to make sure who the executor is, as well as who the beneficiaries are. In addition, try to determine if the will you've found is the most recent version since more than one version may exist. Tip: If your spouse left no will or if the will is invalid, he or she is said to have died intestate. The probate court will establish who the legal heirs are under your state's intestate succession laws and may appoint you as administrator. Caution: If the decedent has a safe-deposit box, his or her bank may seal it at the time of death and may deny entry, even if you are the decedent's spouse. However, an exception might be made if you are a joint or cosigner for the box and have a key. To open the safe-deposit box, you may have to get court authorization. For this reason, either don't store your will in a safe-deposit box or have another copy stored someplace else, for example with your attorney. Carry out funeral arrangements Complete the funeral arrangements. Most states have a five-day waiting period before you can begin any other work to settle the estate anyway. Gather paperwork and documents you will need To settle the estate, you will need to have the original or certified copies of some or all of the following documents: the decedent's will, birth certificate, marriage certificate, death certificate, Social Security number or card, military discharge papers, and divorce papers. You will also need to make a list of assets (such as bank accounts, trusts, securities, real estate, insurance policies, retirement plans, business interests, and personal property) owned by the decedent at death, and find any paperwork that accompanies these assets (such as deeds, mortgages, titles, registrations, and loan paperwork). Determine if probate will be necessary To determine if probate is necessary, check with your attorney or your state's probate court clerk (for the phone number, look in the government listing section of your telephone directory). One of these sources should be able to tell you how your state determines if probate is necessary or guide you to the necessary resources. Many states have simplified probate procedures or do not require formal probate of property worth less than a certain amount. In general, however, probate may be necessary if there are probate assets. A probate asset is property that does not automatically pass to a beneficiary and is distributed by the terms of the will. Nonprobate property automatically passes to a beneficiary, either because the property is held jointly or because the beneficiary has been specifically designated as beneficiary in another document (a life insurance policy or pension plan, for instance). Example(s): When Hal died, he left his entire estate to his wife, Jane. His estate consisted of a house worth $150,000, a bank account worth $12,935.46, and a $50,000 life insurance policy. The house was held in the name of Hal and Jane as joint tenants with rights of survivorship. The bank account was held jointly by Hal and Jane. Jane was the named beneficiary of Hal's life insurance policy. None of his estate was subject to probate because all of Hal's property legally passed to Jane automatically. Caution: Some bank accounts held jointly may not pass automatically to the other joint account holder. It depends on the wording of the account and the intent of the owners at the time the account was opened. Apply for probate If the estate is subject to probate, you must initiate proceedings by filing a petition to probate the will or administer the estate before the probate court. You can get this petition from the clerk of the court. You will then file the petition and the will with the court, along with a list of probate assets.
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Notify all interested parties that probate has been initiated You must locate and notify all interested parties (e.g., heirs at law and beneficiaries named in the will) that probate has been initiated. Even if you are the spouse of the decedent and sole beneficiary, many states require that you notify anyone who would benefit if there had been no will because they may have reason to challenge the will or they may have a more recent copy of the will. Since the length and type of notice you must give varies from state to state, check your state's laws to determine what notification procedure you must follow. Open a bank account in the name of the estate You may need to open an estate checking account to pay any bills or accept money owed while the estate is being settled. You may also need to obtain court permission to do this. As executor, you can deposit checks made out to the decedent to this account, as long as you endorse them. If you have questions regarding this, talk to the bank or your attorney. Apply for a Taxpayer Identification Number (TIN) and any state ID number required Each TIN applicant must (1) apply using the revised Form W-7, Application for IRS Individual Taxpayer Identification Number, and (2) attach a federal income tax return to the Form W-7. Applicants who meet an exception to the requirement to file a tax return (see the instructions for Form W-7) must provide documentation to support the exception. Send your Form W-7 and proof of identity documents to Internal Revenue Service, Austin Service Center, ITIN Operation, P.O. Box 149342, Austin, TX 78714-9342. You may also apply using the services of an IRS-authorized Acceptance Agent or visit an IRS Taxpayer Assistance Center in lieu of mailing your information to the IRS in Austin. Arrange notification of creditors Depending on the laws of your state, you may need to publish a legal notice (usually in the local paper) to notify creditors (and other interested parties who may have received the notice personally) of the decedent's death. In addition, you may be required to mail a notice to each known creditor individually. Depending on your state's laws, creditors may have as much as one year to file a claim against the estate. Notify institutions and agencies Send notices of the decedent's death to the post office, banks, utility companies, the Social Security Administration, and other institutions that should be informed. Collect debts owed to the estate and pay creditors The executor or administrator will have to both collect money owed to the decedent or the decedent's estate and pay any bills or debts of the estate. Money owed to the estate might include unpaid salary, insurance benefits, employee benefits, government benefits, or pensions. Bills or debts of the estate might include credit card bills, funeral expenses, medical bills, advisors' fees, and loan payments. If you are the spouse of the decedent, you may need help from your advisor to determine what debt is yours alone, what is joint debt, and what is your spouse's debt. Caution: If you are the spouse of the decedent, don't pay any bill unless you are certain it is legitimate. When the death notice appears in the newspaper, you may be targeted by con artists who will ask you to pay phony expenses. Before paying any creditor, ask to see a copy of the original invoice and check it thoroughly. Be particularly wary of any request made by telephone. Never give out any personal or financial information over the phone (including your Social Security number or credit card numbers).
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File any insurance claims on the decedent's life File any insurance claims on the decedent's life. Periodically check in with the court You may occasionally need to obtain the probate court's permission to spend estate funds. You may also be required to file reports with the court regarding how estate funds are spent. Also, you may need the court's permission to sell estate property. File tax returns You may have to file state and federal tax returns, including Form 1040 (U.S. Individual Income Tax Return), Form 1041 (Fiduciary Income Tax Return), and, if the gross estate is large enough, Form 706 (U.S. Estate Tax Return). In addition, your state may impose state death taxes (e.g., an inheritance tax). Make estimated tax payments You may need to make estimated tax payments for the estate for any tax year ending two or more years after the decedent's death. File papers to finalize the estate You may need to file a final account with the court that details all estate income, expenses, and administration costs. The court approves this final accounting. This finalization may take place a year or more after probate is initiated because of the length of the probate process. Distribute assets to the beneficiaries Nonprobate assets pass automatically to the beneficiaries, but probate assets can only be distributed after all claims, debts, and taxes are paid, and the probate process is complete. When distributing the assets to the beneficiaries, you must follow instructions given in the will as well as those required by the probate court. Once the estate is distributed, the court closes the estate and discharges you as executor. Caution: If you are the spouse of the decedent, be aware that until the court has officially awarded the property to you, you are forbidden to sell or gift your spouse's property, even if you feel that you are now the rightful owner. You can't even give the property to your children until the estate settlement process is complete because there may be challenges to the will or an inventory might need to be taken.
Questions& Answers If one spouse dies without a will, how does the surviving spouse settle his or her estate? You can settle an estate without a will, but the laws of your state will determine how your spouse's property is distributed. These laws are called statutes of descent and distribution. You may be appointed as administrator of the estate, but it's possible for the courts to appoint someone else, which will give you less control over estate management. For advice and information, consult an attorney. If you are named as executor, can you decline to serve? No one can be forced to serve as executor. You can simply decline the responsibility. An alternate executor named in the will may take over or the court will appoint someone.
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Does a relative named as executor get paid? An executor is entitled to a fee equal to an amount determined by state law or whatever the probate court determines is a reasonable amount. Typically, relatives of the decedent usually decline payment for their services, even though they are not obligated to do so.
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Filing a Final Income Tax Return Who should file the return? Estate representative If a court has appointed a personal representative or other estate administrator, that individual is required to file returns for the decedent. If the decedent was married at the time of death, the representative and surviving spouse, if they both agree, may file a joint tax return. If the surviving spouse remarries before the end of the tax year, however, the representative must file for the decedent as married filing separately. Surviving spouse If a court hasn't appointed an estate representative by the deadline for the return, the surviving spouse alone can file a joint return as long as he or she hasn't remarried before the end of the tax year. A spouse can file a joint return even if the appointment of an estate representative is expected. The representative may, once appointed, revoke the election to file jointly, though. Technical Note: If the surviving spouse is appointed representative, he or she files for the decedent as representative and not as surviving spouse. Person in charge of decedent's property If there is no court-appointed representative and no surviving spouse, a "person in charge of the decedent's property" must file the return. This "person" may be anyone in actual or constructive possession of the decedent's property. Generally, the heirs informally designate one person among the beneficiaries to act in this capacity. A person in charge of the decedent's property should only file the return if the estate won't require probate. If the return shows a refund, the person is required to verify on Form 1310 that a court hasn't and won't appoint a representative.
Declaring income in the year of death The items you include in the final federal income tax return depend on whether the decedent was a cash or accrual method taxpayer. If the decedent used the cash method of accounting, you include items of income received before death, and deduct those expenses that the decedent paid before death. If he or she used the accrual method, then you include items accrued before death. You report any income after death on the estate's income tax return or on the tax return of the beneficiary who received it directly. An incorrect Form 1099 If the decedent's Form 1099 reflects income both prior to and after death, you should request and obtain a corrected 1099. If you cannot obtain one, report the income as nominee interest or dividends. List the entire income from the 1099 on Schedule B. On a separate line, subtract the amount attributable to the estate or other beneficiary. Label this subtraction "Nominee Distribution." Then, issue a Form 1099-INT or 1099-DIV to the estate or beneficiaries. Also, file Forms 1099 and 1096 with the IRS.
Deductions, personal exemption, and credits Itemized deductions The general rule is that you handle deductions for a decedent the same way you handle them for living individuals. Deductions are allowed for items paid before the decedent's death that would have been deductible by the decedent as of the date of death (accrued before death for accrual method taxpayers). The following exceptions apply:
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• Medical costs paid by decedent's estate within one year of death--These medical costs can be deducted either on Schedule A of the decedent's Form 1040 or on the estate tax return. If they are to be deducted on the decedent's Form 1040, the deductions aren't automatically on the final 1040. Rather, you deduct each expense on the Form 1040 in the year the expense was incurred. This may require the filing of an amended federal income tax return on Form 1040X to deduct expenses incurred in an earlier taxable year. When such expenses are taken on Form 1040, you must attach a statement to the return stating that the expenses have not been and will not be claimed on an estate tax return. Tip: A taxpayer who paid medical expenses for a deceased spouse or dependent can deduct the expenses in the year paid without attaching an election statement. • Pension or annuity without a surviving annuitant--If the decedent was receiving a pension or annuity and some investment was lost because there was no surviving annuitant, you can deduct the lost investment as a miscellaneous itemized deduction not subject to the 2 percent adjusted gross income (AGI) limitation. Technical Note: Funeral, probate, and other estate expenses may be deductible on one of the estate returns, but aren't deductible on the decedent's final Form 1040. Standard deduction and personal exemption The standard deduction and personal exemption generally can be claimed in full as if death hadn't occurred. A decedent can't use the standard deduction if the surviving spouse files separately and itemizes. In addition, a decedent can't claim the personal exemption if someone else can claim the decedent as a dependent. Credits You can claim, on the decedent's return, any credits that the decedent was eligible for before death. You may claim an earned income credit on behalf of a decedent, even if the decedent's return covers only part of a year and he or she wouldn't have qualified with a full year's income. A decedent's earned income credit is refundable if it exceeds the decedent's tax liability for the year.
Headings and signing the forms Headings Regardless of whether you file a joint return or a separate return for the decedent, you should write the following across the top of the tax return: • "DECEASED" • The decedent's name • The date of death If you file a joint return, write the names, address, and Social Security numbers of the decedent and surviving spouse in the space provided. If you file a separate return for the decedent, write the decedent's name in care of the person filing the form and that person's address. Signing the forms The following are the procedures for an estate representative, a surviving spouse, and a person in charge of a decedent's property: • Estate representative--A court-appointed representative must sign the return and include his or her title. In the case of a joint return, the representative signs for the decedent and the surviving spouse signs, as usual, in the space for his or her signature. If the spouse is serving as the representative, he
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or she should sign the return twice. Note that the surviving spouse shouldn't, in this circumstance, write the words "Filing as Surviving Spouse" on the signature line. • Surviving spouse--A surviving spouse should first write "Filing as Surviving Spouse" in the space for the decedent's signature. He or she then signs in the space for his or her signature. • Person in charge of a decedent's property--That person should sign his or her name followed by the words "Personal Representative."
Documents needed to claim a refund If the tax return shows a refund, Form 1310 or other documentation may be required, depending on who files and signs the return. The following table outlines the required documentation in various circumstances: Returns/Documents Required for Filing If the return is filed and signed by:
Then these documents are required to claim refund:
Court-Appointed Representative Surviving Spouse Form 1310 Court Certificate Death Certificate Yes
Yes
No
Yes
No
Yes
No
No
Yes
No
No
Yes
No
No
No
No
No
Yes
No
Yes
Early filing A decedent's Form 1040 must be filed on forms for the appropriate tax year and is due at the same time that the decedent's income tax return would have been due had death not occurred. The return can't be filed early so that the personal representative can be discharged and the probate estate closed.
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Income in Respect of a Decedent What is income in respect of a decedent (IRD)? Income in respect of a decedent (IRD) is the gross income a deceased individual would have received had he or she not died and that has not been included on the deceased individual's final income tax return. If, like most people, the deceased individual was a cash basis taxpayer, IRD is income that the decedent earned but did not receive prior to death. IRD is reported on the recipient's income tax return in the year received. If IRD is paid to the decedent's estate, it is reported on the fiduciary return. If IRD is paid directly to a beneficiary, it is reported on the beneficiary's tax return.
Examples of IRD IRD may include: • The uncollected salaries, wages, bonuses, commissions, vacation pay, and sick pay of a cash basis employee • Distributions from certain deferred compensation and stock option plans • Taxable distributions from employer-sponsored retirement plans, including pension plans, profit-sharing plans, simplified employee pension plans (SEPs), and Keoghs • Taxable distributions from individual retirement accounts (IRAs) • Accounts receivable of a cash basis sole proprietor • Interest and dividends accrued but unpaid at death of a cash basis taxpayer • Gain from the sale of property if the sale is deemed to occur before death, but proceeds are not collected until after death • Difference between the face amount and the decedent's basis in an installment sales obligation • Distributive share of partnership items for the period before death for a partnership tax year that ends after death, unless the death causes the partner's tax year to close • Death benefits received under a deferred annuity contract that are in excess of the owner-annuitant's investment in the annuity (if the owner-annuitant dies before the annuity start date)
Income tax deduction for estate taxes paid IRD is included in the decedent's gross estate on Form 706 and may be subject to estate tax. As previously mentioned, income tax is also due on IRD when received by the estate or beneficiary. If estate tax is paid on IRD, however, an income tax deduction is allowed for the federal estate tax paid on the income. Example(s): Horatio's traditional IRA is valued at $200,000 at his death and consists entirely of deductible contributions. The $200,000 value of the IRA is included in his gross estate and subject to estate tax. With his other assets, Horatio's taxable estate exceeds the federal death tax exclusion amount. Horatio's daughter Guinevere is the designated beneficiary of his IRA and receives the IRA funds after his death. Distributions of the funds from Horatio's IRA are treated as income in respect of a decedent. Guinevere must report this income on her federal income tax return. Guinevere is allowed an income tax deduction for the estate taxes attributable to the IRA.
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Filing an Estate Tax Return What is an estate tax return? When you die, you will leave behind all your property (everything you own) and debts (everything you owe). All this is called your estate. After the debts have been paid, the various items left in your estate will be transferred to your heirs and beneficiaries, but first the federal government will take its share through estate taxes. The personal representative of your estate must file an estate tax return with the IRS if the value of your gross estate at death together with the value of all taxable gifts you made during life is more than a certain amount ($3.5 million in 2009). The federal estate tax return (Form 706) lets the IRS know how the estate taxes are calculated and how much tax is owed. Generally, the estate tax return must be filed within nine months after your death, but an automatic six-month extension is available if Form 4768 is filed on or before the due date for filing Form 706. An additional six months may be granted for good cause shown. The late filing penalty is 5 percent of the taxes due per month, up to 25 percent. This is in addition to any late payment penalty. An estate tax return may also need to be filed with your state. This discussion focuses on the federal return only. Contact your state for information regarding its state death taxes. Tip: If you are the owner of a closely held business, your personal representative may be able to defer payment of estate taxes owed on that interest for up to 15 years.
How do you calculate estate tax liability? Calculating estate taxes is similar to calculating income taxes. It is basically a four-step process: • Determine what is taxable • Determine what isn't taxable • Calculate the tentative estate tax • Subtract allowable credits from the tentative tax The calculation looks something like this: Gross Estate -
Funeral and administration expenses, claims and losses, charitable transfers, and marital transfers
= Taxable estate + Adjusted taxable gifts = Total transfers subject to taxes Tentative Taxes on Total Transfers Subject to Taxes -
Gift tax payable on post-1976 gifts, credit for state death taxes, applicable exclusion amount (formerly known as the unified credit), pre-1977 gift tax credit, foreign death tax credit, and credit for tax on prior transfers
= Final estate taxes payable
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How do you file an estate tax return? The following explains how to fill out Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and the various attachments. Caution: This discussion here is for information purposes only. Do not attempt to complete an estate tax return based solely on the information provided here. Please consult Form 706 and the instructions to Form 706 for further information. You may also wish to consult an attorney or tax professional before filing an estate tax return. Part 1--Decedent and Executor This section is looking for identifying information about the decedent, including name, Social Security number, domicile at time of death, year domicile was established, date of birth, and date of death. The executor's or administrator's name, address, and Social Security number must also be supplied. Additional questions ask whether the decedent left a will, the name and location of the court where the will was probated or the estate was administered, and the case number. Part 2--Tax Computation This section is completed last as it contains information from other sections of the return and the applicable Schedules. After adding adjusted taxable gifts and subtracting allowable deductions from the gross estate, you will calculate the tentative tax. The estate taxes will then be reduced by applicable credits. When all the calculations are complete, the number on the bottom line of this section is what the estate owes the IRS. Part 3--Elections by the Executor Generally, the value of your gross estate is the fair market value of all property on the date of your death. However, if your estate qualifies, your personal representative may elect the alternate valuation date that allows the gross estate to be valued six months after the date of death or on the date an asset is disposed of, whichever is earlier. The purpose of the alternate valuation date is to permit a reduction of the tax liability if the value of the estate's property has decreased since the date of death. Special use valuation may also be available for certain farm and closely held business real property. This election allows the property to be valued at its actual value, rather than at its fair market value. Certain other elections may be made on this part of the form as well. Part 4--General Information This section includes information about the decedent's occupation and marital status, along with information about the surviving spouse and the beneficiaries of the estate, such as children and grandchildren. There are also questions about whether gift tax returns have been filed and what types of property were owned by the decedent. Part 5--Recapitulation This is the section where the gross estate and allowable deductions are calculated. Totals from various schedules are entered to make this calculation. Every line must be filled in, even if the entry is 0. Do not enter anything in the Alternate Value column unless the alternate valuation date is elected. Attach the appropriate Schedule for each item in Part 5. Schedule A--Real Estate Provide the address and legal description of all real estate owned by the decedent. If the estate is liable for a mortgage, report the full value of the property in the value column without subtracting the mortgage liability. Show the amount of the mortgage in the description column. The amount of the unpaid mortgage is subtracted on Schedule K.
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Schedule B--Stocks and Bonds Report all stocks and bonds owned by the decedent, including the face amount of bonds, number of shares of stock, unit value, and value as of the date of death (or alternate valuation date, if elected). Schedule C--Mortgages, Notes, and Cash Use Schedule C to report mortgages, promissory notes, and cash items held by the decedent at the time of death. Include a description of each item (e.g., the amount of a mortgage, its unpaid balance and the origination date, the borrower and the lender, the location of the mortgaged property, the interest rate, etc.). Cash on hand should be reported, as well as the balances of any checking or savings accounts held by the decedent. Schedule D--Insurance on the Decedent's Life Schedule D must be completed if there is insurance on the decedent's life, regardless of whether it is included in the gross estate. If the decedent possessed any incidents of ownership at death, those policies must be reported, whether the proceeds are payable to the estate (or for the benefit of the estate) or to any other beneficiary. Schedule E--Jointly Owned Property All jointly owned property must be reported on Schedule E, regardless of whether the property is included in the gross estate. For the purposes of this form, jointly owned property includes property of any type in which the decedent held an interest as a joint tenant with right of survivorship or as a tenant by the entirety. Schedule F--Other Miscellaneous Property Schedule F covers all property included in the gross estate that is not listed elsewhere, such as tangible personal property, business interests, and insurance on the life of another. This schedule must be attached, even if there is no miscellaneous property to report, because it contains questions that must be answered about art, collectibles, bonuses, awards, and safe deposit boxes. Schedule G--Transfers during Decedent's Life The following transfers should be reported on Schedule G: • Gift taxes paid on gifts made by the decedent or the decedent's spouse within three years before death • Transfer of life insurance policies made within three years before death • Transfer of life estate, reversionary interest, or power to revoke within three years before death • Transfers with retained life estate where the decedent retains the right to designate a beneficiary of the property transferred • Transfers taking effect at death • Revocable transfers Schedule H--Powers of Appointment If the decedent possessed any powers of appointment, Schedule H must be completed. A power of appointment means that you have the power to determine who will own or enjoy the property subject to the power. The power must be created by someone other than the decedent. If you answered Yes to line 13 of Part 4, then General Information, Schedule H must also be completed.
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Schedule I--Annuities Annuities owned by the decedent are reported on Schedule I. Any annuity must be included in the gross estate if it meets the following requirements: • It is receivable by a beneficiary following the death of the decedent by virtue of surviving the decedent • It is under contract or agreement entered into after March 3, 1931 • It was payable to the decedent, either alone or in conjunction with another, for the decedent's life, or a period not ascertainable without reference to the decedent's death, or for a period that did not end before the decedent's death • The contract or agreement is not an insurance policy on the life of the decedent Many retirement plan benefits constitute annuities, and Schedule I is the proper place to list these benefits. Schedule J--Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims Various deductible expenses and fees associated with managing the estate are itemized on Schedule J. Items to be reported on this form include funeral expenses, executor's fees, attorney's fees, certain interest expenses incurred after the decedent's death, and miscellaneous expenses incurred in preserving and administering the estate. Schedule K--Debts of the Decedent, and Mortgages and Liens Debts of the decedent on the date of death are deducted on Schedule K. Debts of the estate incurred after the date of death are not reported on Schedule K. Schedule L--Net Losses during Administration and Expenses Incurred in Administering Property Not Subject to Claims Losses that will not be claimed on a federal income tax return are itemized on Schedule L. These items include losses from thefts, fires, storms, shipwrecks, or other casualties that occurred during the settlement of the estate. Expenses other than those listed on Schedule J are also reported on Schedule L, whether these expenses are estimated, agreed upon, or paid. Schedule M--Bequests, etc., to Surviving Spouse Property interests passing to the surviving spouse are reported on Schedule M. This item includes property interests the spouse receives by any of the following methods. • As the decedent's heir, donee, legatee, or devisee • As the decedent's surviving joint tenant or tenant by the entirety • As beneficiary of life insurance on the decedent's life • Under dower or curtesy or similar statute • As a transferee of a transfer made by the decedent at any time • As beneficiary of a trust created and funded by the decedent, provided the trust contains certain specified provisions for the spouse Only property that is included in the decedent's gross estate can be claimed as a deduction using Schedule M.
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Schedule O--Charitable, Public, and Similar Gifts and Bequests Charitable gifts deducted from the gross estate are itemized on Schedule O. You must also provide a statement that shows the values of all legacies and devises for both charitable and noncharitable use, the date of birth of all life tenants or annuitants, a statement showing the value of all property that is included in the gross estate but does not pass under the will, and any other important information. Schedule P--Credit for Foreign Death Taxes If death taxes are being paid to any foreign country, these amounts must be reported on Schedule P to claim a credit against the gross estate. All amounts paid or to be paid for foreign death taxes must be entered in United States currency. Schedule Q--Credit for Tax on Prior Transfers If the decedent received property from a transferor who died within 10 years before or 2 years after the decedent, a partial credit is allowable for the taxes paid by the transferor's estate. This credit is calculated using Schedule Q. Schedule R--Generation-Skipping Transfer Tax Schedule R is used to calculate the generation-skipping transfer tax (GSTT) that is payable by the estate. GSTT is typically imposed on property transferred to an individual who is two or more generations below the decedent. For purposes of Form 706, property interests being transferred must be includable in the gross estate before they are subject to the GSTT. Schedule U--Qualified Conservation Easement Exclusion A portion of the value of land that is subject to a qualified conservation easement may be excluded from a decedent's gross estate. Schedule U is used to make this election.
Where can you get help filing an estate tax return? There are many professionals who can assist you in filing an estate tax return, including your attorney, your tax professional, or your financial advisor. In addition, there are now software products designed to guide you through the process of filling out an estate tax return.
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Organizing Your Finances When Your Spouse Has Died Losing a spouse is a stressful transition. And the added pressure of having to settle the estate and organize finances can be overwhelming. Fortunately, there are steps you can take to make dealing with these matters less difficult.
Notify others When your spouse dies, your first step should be to contact anyone who is close to you and your spouse, and anyone who may help you with funeral preparations. Next, you should contact your attorney and other financial professionals. You'll also want to contact life insurance companies, government agencies, and your spouse's employer for information on how you can file for benefits.
Get advice Getting expert advice when you need it is essential. An attorney can help you go over your spouse's will and start estate settlement procedures. Your funeral director can also be an excellent source of information and may help you obtain copies of the death certificate and applications for Social Security and veterans benefits. Your life insurance agent can assist you with the claims process, or you can contact the company's policyholder service department directly. You may also wish to consult with a financial professional, accountant, or tax advisor to help you organize your finances.
Locate important documents and financial records Before you can begin to settle your spouse's estate or apply for insurance proceeds or government benefits, you'll need to locate important documents and financial records (e.g., birth certificates, marriage certificates, life insurance policies). Keep in mind that you may need to obtain certified copies of certain documents. For example, you'll need a certified copy of your spouse's death certificate to apply for life insurance proceeds. And to apply for Social Security benefits, you'll need to provide birth, marriage, and death certificates.
Set up a filing system If you've ever felt frustrated because you couldn't find an important document, you already know the importance of setting up a filing system. Start by reviewing all important documents and organizing them by topic area. Next, set up a file for each topic area. For example, you may want to set up separate files for estate records, insurance, government benefits, tax information, and so on. Finally, be sure to store your files in a safe but readily accessible place. That way, you'll be able to locate the information when you need it.
Set up a phone and mail system During this stressful time, you probably have a lot on your mind. To help you keep track of certain tasks and details, set up a phone and mail system to record incoming and outgoing calls and mail. For phone calls, keep a sheet of paper or notebook by the phone and write down the date of the call, the caller's name, and a description of what you talked about. For mail, write down whom the mail came from, the date you received it, and, if you sent a response, the date it was sent. Also, if you don't already have one, make a list of the names and phone numbers of organizations and people you might need to contact, and post it near your phone. For example, the list may include the phone numbers of your attorney, insurance agent, financial professionals, and friends--all of whom you can contact for advice.
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Evaluate short-term income and expenses When your spouse dies, you may have some immediate expenses to take care of, such as funeral costs and any outstanding debts that your spouse may have incurred (e.g., credit cards, car loan). Even if you are expecting money from an insurance or estate settlement, you may lack the funds to pay for those expenses right away. If that is the case, don't panic--you have several options. If your spouse had a life insurance policy that named you as the beneficiary, you may be able to get the life insurance proceeds within a few days after you file. And you can always ask the insurance company if they'll give you an advance. In the meantime, you can use credit cards for certain expenses. Or, if you need the cash, you can take out a cash advance against a credit card. Also, you can try to negotiate with creditors to allow you to postpone payment of certain debts for 30 days or more, if necessary.
Avoid hasty decisions • Don't think about moving from your current home until you can make a decision based on reason rather than emotion. • Don't spend money impulsively. When you're grieving, you may be especially vulnerable to pressure from salespeople. • Don't cave in to pressure to sell or give away your spouse's possessions. Wait until you can make clear-headed decisions. • Don't give or loan money to others without reviewing your finances first, taking into account your present and future needs and obligations.
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Establishing a Budget Do you ever wonder where your money goes each month? Does it seem like you're never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.
Examine your financial goals Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child's college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.
Identify your current monthly income and expenses To develop a budget that is appropriate for your lifestyle, you'll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose. Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you're not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.
Evaluate your budget Once you've added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you're on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you'll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don't worry! All it will take is some determination and a little self-discipline, and you'll eventually get it right.
Monitor your budget You'll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don't have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).
Tips to help you stay on track • Involve the entire family: Agree on a budget up front and meet regularly to check your progress • Stay disciplined: Try to make budgeting a part of your daily routine • Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the
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beginning of the year, as opposed to right before the holidays) • Find a budgeting system that fits your needs (e.g., budgeting software) • Distinguish between expenses that are "wants" (e.g., designer shoes) and expenses that are "needs" (e.g., groceries) • Build rewards into your budget (e.g., eat out every other week) • Avoid using credit cards to pay for everyday expenses: It may seem like you're spending less, but your credit card debt will continue to increase
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Understanding Your Credit Report Your credit report contains information about your past and present credit transactions. It's used primarily by potential lenders to evaluate your creditworthiness. So if you're about to apply for credit, especially for something significant like a mortgage, you'll want to get and review a copy of your credit report.
You can see what they see: getting a copy of your credit report Every consumer is entitled to a free credit report every 12 months from each of the three credit bureaus. To get your free annual report, you can contact each of the three credit bureaus individually, or you can contact one centralized source that has been created for this purpose. Besides the annual report, you are also entitled to a free report under the following circumstances: • A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action) • You're unemployed and plan to look for a job within the next 60 days • You're on welfare • Your report is inaccurate because of fraud, including identity theft You can order your free annual report online at www.annualcreditreport.com, by calling 877-322-8228, or by completing an Annual Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Alternatively, you can contact each of the three credit bureaus: • Experian National Consumer Assistance Center, www.experian.com, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742 • Trans Union LLC, Consumer Disclosure Center, www.transunion.com, 1000, Chester, PA 19022, (800) 916-8800 • Equifax, Inc., www.equifax.com, P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111 If you make your request online, you should get access to your report immediately. If you request your report by phone or mail, you should receive it within 15 days.
What's it all about? Your credit report usually starts off with your personal information: your name, address, Social Security number, telephone number, employer, past address and past employer, and (if applicable) your spouse's name. Check this information for accuracy; if any of it is wrong, correct it with the credit bureau that issued the report. The bulk of the information in your credit report is account information. For each creditor, you'll find the lender's name, account number, and type of account; the opening date, high balance, present balance, loan terms, and your payment history; and the current status of the account. You'll also see status indicators that provide information about your payment performance over the past 12 to 24 months. They'll show whether the account is or has been past due, and if past due, they'll show how far (e.g., 30 days, 60 days). They'll also indicate charge-offs or repossessions. Because credit bureaus collect information from courthouse and registry records, you may find notations of bankruptcies, tax liens, judgments, or even criminal proceedings in your file. At the end of your credit report, you'll find notations on who has requested your information in the past 24
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months. When you apply for credit, the lender requests your credit report--that will show up as an inquiry. Other inquiries indicate that your name has been included in a creditor's prescreen program. If so, you'll probably get a credit card offer in the mail. You may be surprised at how many accounts show up on your report. If you find inactive accounts (e.g., a retailer you no longer do business with), you should contact the credit card company, close the account, and ask for a letter confirming that the account was closed at the customer's request.
Basing the future on the past What all this information means in terms of your creditworthiness depends on the lender's criteria. Generally speaking, a lender feels safer assuming that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. A history of late payments or bad debts will hurt you. Based on your track record, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate if your credit report indicates that you are a poor risk. Too many inquiries on your credit report in a short time can also make lenders suspicious. Loan officers may assume that you're being turned down repeatedly for credit or that you're up to something--going on a shopping spree, financing a bad habit, or borrowing to pay off other debts. Either way, the lenders may not want to take a chance on you. Your credit report may also indicate that you have good credit, but not enough of it. For instance, if you're applying for a car loan, the lender may be reviewing your credit report to determine if you're capable of handling monthly payments over a period of years. The lender sees that you've always paid your charge cards on time, but your total balances due and monthly payments have been small. Because the lender can't predict from this information whether you'll be able to handle a regular car payment, your loan is approved only on the condition that you supply an acceptable cosigner.
Correcting errors on your credit report Under federal and some state laws, you have a right to dispute incorrect or misleading information on your credit report. Typically, you'll receive with your report either a form to complete or a telephone number to call about the information that you wish to dispute. Once the credit bureau receives your request, it generally has 30 days to complete a reinvestigation by checking any item you dispute with the party that submitted it. One of four things should then happen: • The credit bureau reinvestigates, the party submitting the information agrees it's incorrect, and the information is corrected • The credit bureau reinvestigates, the party submitting the information maintains it's correct, and your credit report goes unchanged • The credit bureau doesn't reinvestigate, and so the disputed information must be removed from your report • The credit bureau reinvestigates, but the party submitting the information doesn't respond, and so the disputed information must be removed from your report You should be provided with a report on the reinvestigation within five days of its conclusion. If the reinvestigation resulted in a change to your credit report, you should also get an updated copy. You have the right to add to your credit report a statement of 100 words or less that explains your side of the story with respect to any disputed but unchanged information. A summary of your statement will go out with every copy of your credit report in the future, and you can have the statement sent to anyone who has gotten your credit report in the past six months. Unfortunately, though, this may not help you much--creditors often ignore or dismiss these statements.
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Social Security Survivor's Benefits When you think of Social Security, you probably think of retirement. However, Social Security can also provide much-needed income to your family members when you die, making their financial lives easier.
Your family may be entitled to receive survivor's benefits based on your work record When you die, certain members of your family may be eligible to receive survivor's benefits (based on your earnings record) if you worked, paid Social Security taxes, and earned enough work credits. The number of credits you need depends on your age when you die. The younger you are when you die, the fewer credits you'll need for survivor's benefits. However, no one needs more than 40 credits (10 years of work) to be "fully insured" for benefits. And under a special rule, if you're only "currently insured" at the time of your death (i.e., you have 6 credits in the 13 quarters prior to your death), your children and your spouse who is caring for them can still receive benefits. Survivor's benefits may be paid to: • Your spouse age 60 or older (50 or older if disabled) • Your spouse at any age, if caring for your child who is under age 16 or disabled • Your ex-spouse age 60 or over (50 or older if disabled) who was married to you for at least 10 years • Your ex-spouse at any age, if caring for your child who is under age 16 or disabled • Your unmarried children under 18 • Your unmarried children under 19, if attending school full time (up to grade 12) • Your dependent parents age 62 or older This is a general overview--the rules are more complex. For more information on eligibility requirements, contact the Social Security Administration (SSA) at (800) 772-1213.
How much will your survivors receive? An eligible family member will receive a monthly survivor's benefit based on your average lifetime earnings. The higher your earnings, the higher the benefit. This monthly benefit is equal to a percentage of your basic Social Security benefit. The percentage depends on your survivor's age and relationship to you. For example, at full retirement age or older, your spouse may receive a survivor's benefit equal to 100 percent of your basic Social Security benefit. However, if your spouse has not yet reached full retirement age at the time of your death, he or she will receive a reduced benefit, generally 71 to 94 percent of your basic benefit (75 percent if your spouse is caring for a child under age 16). Your dependent child may also receive 75 percent of your basic benefit. A maximum family benefit rate caps the total amount of money your survivors can get each month. The total benefit your family can receive based on your earnings record is about 150 to 180 percent of your basic benefit amount. If the total family benefit exceeds this limit, each family member's benefit will be reduced proportionately. You can get an estimate of how much your survivors might be eligible to receive by filling out a request form at your local Social Security office or by visiting the SSA website. You can also find this information on your Social Security Statement, which the SSA mails annually to every worker over age 25. You will receive this statement
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about three months before your birthday. Call the SSA at (800) 772-1213 for more information.
Don't forget the lump-sum benefit If you've accumulated enough work credits, your spouse may receive a lump-sum benefit of $255. Your spouse must have been living with you at the time of your death or have been receiving benefits based on your earnings record if living apart from you. If you're not married at the time of your death, the death benefit may be split among any children you have who are eligible for benefits based on your earnings record.
If a loved one has died, contact the Social Security Administration immediately If a loved one has died and you are eligible for survivor's benefits, you should contact the SSA right away. If you're already receiving benefits based on your spouse's earnings record, the SSA will change your payments to survivor's benefits (if your children are receiving benefits, their benefits will be changed, too). But if you're not yet receiving any Social Security benefits or if you're receiving benefits based on your own earnings record, you'll have to fill out an application for survivor's benefits. It's helpful to have the following documents when you apply, but if you don't have all the information required, the SSA can help you get it: • Proof of death (a death certificate or funeral home notice) • Your Social Security number, as well as the deceased worker's number • Your birth certificate • Your marriage certificate, if you're a widow or widower • Your divorce papers, if applicable • Dependent children's Social Security numbers, if available • Deceased worker's W-2 forms, or federal self-employment tax return, for the most recent year • The name of your bank, as well as your account numbers, for direct deposit Visit your local SSA office or call (800) 772-1213 for more information on survivor's benefits and how to apply for them.
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Health Insurance Made Simple Let's face it--in today's world, health insurance is a necessity. The cost of medical care is soaring higher every year, and it's becoming increasingly difficult (and in some cases, impossible) to pay medical costs out of pocket. Whether you already have health insurance or want to get it, here's some basic information to help you understand it.
Not part of a group? You may have to go it alone You may have group health insurance or be able to buy it through your employer. Group insurance is most commonly offered through employers. It is also offered through some civic groups and other organizations (e.g., auto clubs, chambers of commerce). A single policy covers the medical expenses of a group of people. All eligible members of the group can be covered by a group policy regardless of age or physical condition. The premium for group insurance is calculated based on characteristics of the group as a whole, such as average age and degree of occupational hazard. It's generally less expensive than individual insurance. If you can't join a group, consider buying individual insurance. Unlike group insurance, individual insurance is purchased directly from an insurance company or agent. When you apply, you are evaluated in terms of how much risk you present to the insurance company. Your risk potential will determine whether you qualify for insurance and how much it will cost, depending on state laws. You must pay the full premiums yourself.
Know what's out there The cost and range of protection that your health insurance provides will depend on your insurance provider and the particular policy you purchase. You may have comprehensive health insurance that involves several types of coverage, or basic coverage that includes hospital, surgical, and physicians' expenses. In addition, major medical coverage is necessary in the event of a catastrophic accident or illness. Many plans also cover prescriptions, mental health services, and other health-related activities (e.g., health-club memberships). When it comes to health insurance, HMO, PPO, and POS are more than just letters. You need to know the types of health plans available so that you can make an informed decision. You can obtain health insurance through traditional insurers like Blue Cross/Blue Shield, health maintenance organizations (HMOs), preferred provider organizations (PPOs), point of service (POS) plans, and exclusive provider organizations (EPOs). • Traditional insurers: These plans usually allow you flexibility regarding choice of doctors and other health-care providers. Some policies reimburse you for covered expenses, while others make payments directly to medical providers. You will pay a deductible and a percentage of each bill, known as coinsurance. • HMOs: Health maintenance organizations cover only medical treatment provided by physicians and facilities within their networks. You must choose a primary care physician, who will either approve or deny any requests to see a specialist. You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription). • PPOs: Preferred provider organizations do not require members to seek care from PPO physicians and hospitals, but there is usually strong financial incentive to do so (in terms of percentage of reimbursement). You usually pay a fixed monthly fee for health-care coverage, as well as small co-payments (e.g., $10 for each office visit and prescription). • POSs: Point of service plans combine characteristics of the HMO and PPO. You must choose a primary care physician to be responsible for all of your referrals within the POS network. Although you can choose to go outside the network with this type of plan, your health care will be covered at a lower level.
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• EPOs: Exclusive provider organizations are basically PPOs with one important difference: EPOs provide no coverage for non-network care.
Read your contract You should have a basic understanding of what your policy does and does not cover. This may help you prevent an unexpected medical bill from arriving in your mailbox, because you'll know ahead of time, for instance, whether or not liposuction is covered. You must read your policy carefully, particularly the section on limitations and exclusions. The specifics will vary from policy to policy. In general, though, most policies will at least mention the following: • Pre-existing conditions: An illness or injury that began or occurred before you obtained coverage under the policy. These conditions are often excluded from coverage for a time period, depending on state laws. • Nonduplication of benefits: Benefits will not be paid for amounts reimbursed by other insurance companies. Your health insurance policy should also address the following issues: • Deductible: The amount that you must pay before insurance coverage begins (usually an annual figure • • Coinsurance: The portion of each medical bill for which you are responsible • Co-payment: The fixed fee that you pay for each doctor visit or prescription • Family coverage: Many group plans allow you to cover your spouse and dependents for an increased premium • Out-of-pocket maximum: This provision is designed to limit your liability for medical expenses in the calendar year; you won't have to make coinsurance payments in excess of this figure • Benefit ceiling: The maximum lifetime payout under the insurance policy, usually at least $1 million
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Should You Buy Long-Term Care Insurance? The longer you live, the greater the chances you'll need some form of long-term care. If you're concerned about protecting your assets and maintaining your financial independence in your later years, long-term care insurance (LTCI) may be for you.
Who needs it? Approximately 40 percent of Americans age 65 or older will need long-term care at some point during their lives. (Source: The National Clearinghouse for Long-Term Care Information, 2008.) And with life expectancies increasing at a steady rate, this figure can be expected to grow in the years to come.
But won't the government look out for me? Medicare pays nothing for nursing home care unless you've first been in the hospital for 3 consecutive days. After that, it will pay only if you enter a certified nursing home within 30 days of your discharge from the hospital. For the first 20 days, Medicare pays 100 percent of your nursing home care costs. After that, you'll pay $137.50 per day (in 2010) for your care through day 100, and Medicare will pick up the balance. Beyond day 100 in a nursing home, you're on your own--Medicare doesn't pay anything. If you're at home, Medicare provides minimal short-term coverage for intermediate care (e.g., intravenous feeding or the treatment of dressings), but only if you're confined to your home and the treatments are ordered by a doctor. Medicare provides nothing for custodial care, such as help with feeding, bathing, or preparing meals. Medicaid covers long-term nursing home costs (including both intermediate and custodial care costs) but only for individuals who have low income and few assets (eligibility guidelines vary from state to state). You will have to use up most of your savings before you qualify for Medicaid, and aside from a small personal needs allowance (typically $30 to $60 dollars a month), you will have to use all of your retirement income, including Social Security and pension payments, to pay for your care before Medicaid pays anything. And once you qualify for Medicaid, you'll have little or no choice regarding where you receive care. Only facilities with Medicaid-approved beds can accept you, and your chances of staying in your own home are slimmer, because currently most states' Medicaid programs only cover limited home health care services.
Looking out for yourself If you want to retain your independence, protect your assets, and maintain your standard of living while at the same time guaranteeing your access to a range of long-term care options, you may want to purchase LTCI. This insurance might be right for you if you meet the following criteria: • You're between the ages of 40 and 84 • You have significant assets that you would want to preserve as an inheritance for others or gift to charity • You have an income from employment or investments in addition to Social Security • You can afford LTCI premiums (now and in the future) without changing your lifestyle Once you purchase an LTCI policy, your premiums can go up over time, but the rates can only rise for an entire class of policyholders in your state (i.e., all policyholders who bought a particular policy series, or who were within certain age groups when they bought the policy). Any increase must be justified and approved by your state's insurance division. Several factors affect the cost of your long-term care policy. The most significant factors are your age, your
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health, the amount of benefit, and the benefit period. The younger and healthier you are when you buy LTCI, the less your premium rate will be each year. The greater your daily benefit (choices typically range from $50 to $350) and the longer the benefit period (generally 1 to 6 years, with some policies offering a lifetime benefit), the greater the premium.
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Claiming Life Insurance Benefits Life insurance benefits are not paid automatically. If you are the beneficiary of a life insurance policy, you must file a claim in order to receive any money. Often, this is as simple as contacting your insurance agent and the deceased's employer and filling out some paperwork. You will need to provide each insurance company with a certified copy of the death certificate. However, if this is the only step you take, you may be missing out on other life insurance benefits to which you are entitled if you fail to locate all of the life insurance benefits that the deceased was entitled to. If you spend time uncovering these hidden policies, you may end up with a great deal more money from life insurance than you expected.
Finding individually owned life insurance policies Your spouse or family member may have owned one or more permanent or term life insurance policies. Individually owned term or permanent policies are what most people think of as life insurance. These policies are purchased by one person and pay benefits when the insured person dies. If your spouse or family member owned one of these policies, he or she probably kept it with his or her important papers in a file or in a safe-deposit box. However, if you know that your spouse or family member owned an individual policy and you can't find it, call his or her insurance agent or company to check. It may be wise to review canceled checks to see if you can locate any premium payments to insurance companies. If you know that there was a policy but you can't find it, check the Internet or call your state insurance department for the names of companies that may, for a fee, help you locate a policy.
Finding group life insurance policies Group life insurance policies provide coverage to many people under one policy. Group insurance policies may be issued through an employer, bank, credit agency, or other professional or social organizations, and they often pay benefits in specialized circumstances. Because the group holds the actual policy, the insured person receives a certificate of insurance as proof that he or she is insured. Look for these certificates in your spouse's or family member's personal papers, files, and safe-deposit box. If you can't find any certificates, this doesn't mean that your spouse wasn't insured. You should still check with your spouse's or family member's employer, bank, or credit agency, or study loan paperwork or purchase contracts. Read the following sections for information about types of group policies that your spouse or family member may have owned.
Employer-based group life insurance If your spouse or family member was employed at the time of his or her death, you may be the beneficiary of a life insurance policy issued through his or her employer. Because some employers offer their employees a certain amount of life insurance at no cost, you may not even be aware that your spouse or family member was insured by a group policy because he or she did not pay his or her own premiums. What's more, your spouse or family member may have had the option of purchasing additional group life insurance through his or her employer, paying the extra premiums himself or herself. So, before assuming that your spouse or family member did not have group life insurance, you should check his or her pay stubs and call his or her employer.
Accidental death and dismemberment policy Your spouse or family member may have been offered an accidental death and dismemberment policy through an employer, credit card, or bank. These policies pay benefits if an insured individual dies accidentally. This is another type of life insurance you may be unaware that your spouse or family member had because, occasionally, these policies are offered as part of a loan package or even issued as a free benefit by banks or as
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a rider to an employer-issued insurance policy. If your spouse or family member died accidentally, look for such a policy in his or her files, or contact his or her employer, bank, credit card issuer, or insurance company.
Travel accident insurance If your spouse or family member was killed while traveling by air, boat, or train, you may be eligible to receive the proceeds from a travel accident insurance policy that he or she may have purchased when buying tickets. In addition, if your spouse or family member used a credit card to purchase travel tickets, you may be automatically entitled to a life insurance benefit payable if he or she dies as a result of an accident when using those tickets. Some travel agencies and road and travel clubs also routinely issue travel accident insurance policies, and employers sometimes pay death benefits to employees who are killed while traveling on company business.
Mortgage life insurance If your spouse or family member owned a house, he or she may have purchased mortgage life insurance. A mortgage life insurance policy pays off the balance of the policyholder's mortgage upon his or her death. If you're not sure whether your spouse or family member purchased such a policy, check with the mortgage lender.
Credit life insurance Banks and finance companies routinely offer credit life insurance when someone takes out a loan or is issued a line of credit. This insurance will pay off the outstanding balance of a loan or account if the insured individual dies. A few extra dollars are added to the monthly loan payments to pay the premiums. Because this type of policy is so profitable for the bank or finance company, most institutions try to sell it when someone finances a purchase or signs up for a line of credit, and occasionally they add it to a contract before the individual signs the contract. So, it's likely that you won't find out that your spouse or family member owned such a policy unless you check with credit card companies, banks, or any lenders to whom your spouse or family member owed money at the time of his or her death.
How do you file a life insurance benefit claim? • Notify the insurance company that the policyholder has died: You should contact the insurance company as soon as possible. Call the policyholder services department directly. Or, if the life insurance policy was issued through an agent or an employer, ask them to notify the company for you to begin the claims process. • File a claim form: You'll begin the claims process by filling out and signing a claimant's statement, and then attaching to it an original or certified copy of the policyholder's death certificate. If you are too distraught to fill out the form yourself, your insurance agent may fill it out for you, although you'll still have to sign it. If another beneficiary is named on the policy, that person must also fill out a claim form. You may also have to fill out IRS Form W-9 (Request for Taxpayer Identification Number and Certification), which will enable the insurance company to notify the IRS of any interest it has paid to you on the value of the policy. To expedite your claim, follow the insurance company's instructions carefully. • Wait for the company to process the claim: Life insurance claims are usually paid quickly, often within a few days. First, however, the insurance company will ensure that you are the beneficiary of the policy, that the policy is current and in force, and that all conditions of the policy have been met. This is usually a simple matter and does not delay the claims process. Claims are more often delayed because the insurance company has not received a valid death certificate. The insurance company also has a right to contest (and perhaps deny) a claim if the insured died within two years following the purchase of the policy and the insurance company believes that there was fraud or a material misstatement made on the application.
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How should you receive the life insurance proceeds? Life insurance proceeds are often paid as lump-sum cash payments. Most people elect this form of payment because it enables them to control how the insurance money is invested or spent. In addition, if you elect to receive a lump-sum payment, you will not owe income tax on the life insurance proceeds. Another way of receiving the proceeds of a life insurance policy is through a settlement option. Many types of settlement options are available for a beneficiary who is unable or unwilling to manage a lump sum of cash. Either the policyowner chooses the settlement option at the time he or she purchases the policy, or the beneficiary chooses the option at the time the benefit becomes payable (unless the policyowner had chosen an irrevocable option). You will find the available settlement options in the insurance policy. Note: Some settlement option choices, such as payment as a life annuity, are irreversible. It may be best to take a lump-sum cash payment, put the money in the bank, and contact a qualified financial advisor.
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Life Insurance Basics Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.
The many uses of life insurance One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.
How much life insurance do you need? Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases. There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions: • What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death? • How much of your salary is devoted to current expenses and future needs? • How long would your dependents need support if you were to die tomorrow? • How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children? Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.
How much life insurance can you afford? How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.
What's in a life insurance contract? A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.
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Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses). The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits. The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.
Types of life insurance policies The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods. Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories: • Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer. • Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time. • Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested. • Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts. Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.
Your beneficiaries You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of
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your beneficiary designations to ensure that your wishes are carried out as you intend. Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.
Where can you buy life insurance? You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company. Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.
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Life Insurance and Estate Planning Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors, provide for your children's education, pay off your mortgage, and simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death, and to make gifts to charity at relatively little cost to you. To illustrate how life insurance can help you plan your estate wisely, let's compare what happened upon the death of two friends: Frank, who bought life insurance, and Dave, who did not. (Please note that these illustrations are hypothetical.)
Life insurance can protect your survivors financially by replacing your lost income Frank bought life insurance to help ensure that his survivors wouldn't suffer financially when he died. When Frank died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come. And since Frank's life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don't pass through the process of probate, so Frank's family didn't have to wait until his estate was settled to get the money they needed to pay bills. But Dave didn't buy life insurance, so his family wasn't so lucky. Even though Dave left his assets to his family in his will, those assets couldn't be distributed until after the probate of his estate was complete. Since probate typically takes six months or longer, Dave's survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.
Life insurance can replace wealth that is lost due to expenses and taxes Frank planned ahead and bought enough life insurance to cover the potential costs of settling his estate, including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Dave's estate, which had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.
Life insurance lets you give to charity, while your estate enjoys an estate tax deduction Using life insurance, Frank was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Dave always dreamed of leaving money to his alma mater, but his family couldn't afford to give any money away when he died.
Life insurance won't increase estate taxes--if you plan ahead Before buying life insurance, Frank talked to his attorney about the potential tax consequences. Frank's attorney told him that if he was leaving behind a taxable estate worth less than a certain amount ($3.5 million in 2009, under the applicable exclusion amount), his survivors generally wouldn't owe estate taxes on a life insurance policy left to them. Since Frank's estate was larger than that, Frank and his attorney put a plan in place that helped minimize the estate tax burden on his family.
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Be like Frank, not like Dave Throughout his life, Dave worked hard to support his family. Frank did, too, but went one step further--he bought life insurance to protect his family after his death. Here's how you can be like Frank: • Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs • Plan ahead--buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren't less than you intended • Consider using life insurance to give to charity • Consult an experienced attorney about income and estate tax consequences before purchasing life insurance
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Designating a Beneficiary for Life Insurance A beneficiary is the person or entity you name (i.e., designate) to receive the death benefits of a life insurance policy. Some states require that your beneficiary have an insurable interest in your life or be related to you (at least at the time the contract is initiated), while others have no such restriction. If you do not want to name an individual or entity as your beneficiary, you can name your own estate. The proceeds will then be distributed with your other assets according to your will. You should note, however, that naming your estate as beneficiary may have disadvantages. For example, in many states, life insurance proceeds are exempt from the claims of your creditors when there is a named beneficiary, but not when your estate is your named beneficiary.
Revocable and irrevocable beneficiaries The beneficiary can be either revocable or irrevocable. A revocable beneficiary can be changed at any time. Once named, an irrevocable beneficiary cannot be changed without his or her consent.
Primary and contingent beneficiaries You can name as many beneficiaries as you want, subject to procedures set in the policy. The beneficiary to whom the proceeds go first is called the primary beneficiary. Secondary or contingent beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary. It's important to name a contingent beneficiary because if you and your primary beneficiary die simultaneously, the Uniform Simultaneous Death Act provides that the beneficiary will be presumed to have died first. By naming a contingent beneficiary, you avoid having the proceeds flow to your estate.
Multiple beneficiaries You may name multiple beneficiaries if you choose. There are no legal restrictions (and few company restrictions) on the number of beneficiaries you can designate. If you name multiple beneficiaries, you must also specify how much each beneficiary will receive. You may not want to give each beneficiary an equal share, so you must state how the proceeds should be divided. Because of the numerous interest and dividend adjustments that the insurance company must make, the death benefit check often does not equal the policy's face value. So, it's wise to distribute percentage shares to your beneficiaries, or to designate one beneficiary to receive any leftover balance.
How do you name or change a beneficiary? When you buy life insurance, you will indicate your beneficiaries on the application. When changing a beneficiary, the insurer will provide you with a beneficiary designation form. Unless one or more of the beneficiaries is irrevocable, you only need to list the names of the beneficiaries, sign the form, and date it. This will automatically revoke any previous designations by writing this in on the change-of-beneficiary form. Be sure to check and update your beneficiary designations upon certain life events (e.g., divorce, remarriage, the birth of children). Don't make the mistake of thinking that you can change your beneficiary in your will. A change of beneficiary made in your will does not override the beneficiary designation of your life insurance policy. If you want to change the beneficiary of your life insurance, execute a change-of-beneficiary form. Do not rely on your will to do so.
Why designating the proper beneficiary is important You should name both primary and contingent beneficiaries. If you have not named one or more beneficiaries,
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the proceeds pass to your estate at your death. Proceeds paid to your estate are subject to probate and will incur all of the expenses and delays associated with settling an estate. But named beneficiaries receive proceeds almost immediately after your death, and probate is bypassed. In addition, proceeds passing to your estate are subject to the claims of creditors. Most states exempt life insurance proceeds from creditors when there's a named beneficiary.
Other considerations when designating beneficiaries If you become incompetent, you cannot name or change a beneficiary. And you're incompetent only if you are legally declared to be so. The test is similar to the test regarding the making of wills or any other legal contract (i.e., do you have the capacity to understand your actions?). Do not name a minor as a beneficiary unless you also appoint a guardian in your will or use a trust. If you do name a minor as a beneficiary, and you do not appoint a guardian or use a trust, the probate court will appoint a guardian for you. In states that have adopted the Uniform Transfers to Minors Act, it's possible to create a custodial account of the minor after the death of the insured to receive the child's share of the death proceeds. Your right to change a beneficiary may be limited by a divorce decree or settlement agreement. In some cases, divorce allows a policyowner to change the beneficiary, even if the beneficiary is irrevocable. In other cases, the policyowner may be prohibited from changing the beneficiary or may be required to name a divorced spouse or children as irrevocable beneficiaries.
If you're a minor In some states, if you (the insured) are a minor, you can name only a certain class of persons as beneficiaries. That class generally includes your spouse, parents, grandparents, and brothers or sisters. Your parents or legal guardians will also have to sign the application for life insurance.
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Investment Planning: The Basics Why do so many people never obtain the financial independence that they desire? Often it's because they just don't take that first step--getting started. Besides procrastination, other excuses people make are that investing is too risky, too complicated, too time consuming, and only for the rich. The fact is, there's nothing complicated about common investing techniques, and it usually doesn't take much time to understand the basics. The biggest risk you face is not educating yourself about which investments may be able to help you achieve your financial goals and how to approach the investing process.
Saving versus investing Both saving and investing have a place in your finances. However, don't confuse the two. With savings, your principal typically remains constant and earns interest or dividends. Savings are kept in certificates of deposit (CDs), checking accounts, and savings accounts. By comparison, investments can go up or down in value and may or may not pay interest or dividends. Examples of investments include stocks, bonds, mutual funds, collectibles, precious metals, and real estate.
Why invest? You invest for the future, and the future is expensive. For example, college expenses are increasing more rapidly than the rate of overall inflation. And because people are living longer, retirement costs are often higher than many people expect. You have to take responsibility for your own finances, even if you need expert help to do so. Government programs such as Social Security will probably play a less significant role for you than they did for previous generations. Corporations are switching from guaranteed pensions to plans that require you to make contributions and choose investments. The better you manage your dollars, the more likely it is that you'll have the money to make the future what you want it to be. Because everyone has different goals and expectations, everyone has different reasons for investing. Understanding how to match those reasons with your investments is simply one aspect of managing your money to provide a comfortable life and financial security for you and your family.
What is the best way to invest? • Get in the habit of saving. Set aside a portion of your income regularly. • Invest in financial markets so your money can grow at a meaningful rate. • Don't put all your eggs in one basket. Though it doesn't guarantee a profit or ensure against the possibility of loss, having multiple types of investments may help reduce the impact of a loss on any single investment. • Focus on long-term potential rather than short-term price fluctuations. • Ask questions and become educated before making any investment. • Invest with your head, not with your stomach or heart. Avoid the urge to invest based on how you feel about an investment.
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Before you start Organize your finances to help manage your money more efficiently. Remember, investing is just one component of your overall financial plan. Get a clear picture of where you are today. What's your net worth? Compare your assets with your liabilities. Look at your cash flow. Be clear on where your income is going each month. List your expenses. You can typically identify enough expenses to account for at least 95 percent of your income. If not, go back and look again. You could use those lost dollars for investing. Are you drowning in credit card debt? If so, pay it off as quickly as possible before you start investing. Every dollar that you save in interest charges is one more dollar that you can invest for your future. Establish a solid financial base: Make sure you have an adequate emergency fund, sufficient insurance coverage, and a realistic budget. Also, take full advantage of benefits and retirement plans that your employer offers.
Understand the impact of time Take advantage of the power of compounding. Compounding is the earning of interest on interest, or the reinvestment of income. For instance, if you invest $1,000 and get a return of 8 percent, you will earn $80. By reinvesting the earnings and assuming the same rate of return, the following year you will earn $86.40 on your $1,080 investment. The following year, $1,166.40 will earn $93.31. (This hypothetical example is intended as an illustration and does not reflect the performance of a specific investment). Use the Rule of 72 to judge an investment's potential. Divide the projected return into 72. The answer is the number of years that it will take for the investment to double in value. For example, an investment that earns 8 percent per year will double in 9 years.
Consider working with a financial professional Whether you need a financial professional depends on your own comfort level. If you have the time and energy to educate yourself, you may not feel you need assistance. However, don't underestimate the value of the experience and knowledge that a financial professional can offer in helping you define your goals and objectives, creating a net worth statement and spending plan, determining the level and type of risk that's right for you, and working with you to create a comprehensive financial plan. For many, working with a professional is the single most important investment that they make.
Review your progress Financial management is an ongoing process. Keep good records and recalculate your net worth annually. This will help you for tax purposes, and show you how your investments are doing over time. Once you take that first step of getting started, you will be better able to manage your money to pay for today's needs and pursue tomorrow's goals.
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Retirement Planning: The Basics You may have a very idealistic vision of retirement--doing all of the things that you never seem to have time to do now. But how do you pursue that vision? Social Security may be around when you retire, but the benefit that you get from Uncle Sam may not provide enough income for your retirement years. To make matters worse, few employers today offer a traditional company pension plan that guarantees you a specific income at retirement. On top of that, people are living longer and must find ways to fund those additional years of retirement. Such eye-opening facts mean that today, sound retirement planning is critical. But there's good news: Retirement planning is easier than it used to be, thanks to the many tools and resources available. Here are some basic steps to get you started.
Determine your retirement income needs It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity. The problem, however, is that it doesn't account for your specific situation. To determine your specific needs, you may want to estimate your annual retirement expenses. Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. If you're nearing retirement, the gap between your current expenses and your retirement expenses may be small. If retirement is many years away, the gap may be significant, and projecting your future expenses may be more difficult. Remember to take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 3 percent. (Source: Consumer price index (CPI-U) data published annually by the U.S. Department of Labor, 2009.) And keep in mind that your annual expenses may fluctuate throughout retirement. For instance, if you own a home and are paying a mortgage, your expenses will drop if the mortgage is paid off by the time you retire. Other expenses, such as health-related expenses, may increase in your later retirement years. A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.
Calculate the gap Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.
Figure out how much you'll need to save By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer: • At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it. • What is your life expectancy? The longer you live, the more years of retirement you'll have to fund. • What rate of growth can you expect from your savings now and during retirement? Be conservative when projecting rates of return. • Do you expect to dip into your principal? If so, you may deplete your savings faster than if you just live off investment earnings. Build in a cushion to guard against these risks.
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Build your retirement fund: Save, save, save When you know roughly how much money you'll need, your next goal is to save that amount. First, you'll have to map out a savings plan that works for you. Assume a conservative rate of return (e.g., 5 to 6 percent), and then determine approximately how much you'll need to save every year between now and your retirement to reach your goal. The next step is to put your savings plan into action. It's never too early to get started (ideally, begin saving in your 20s). To the extent possible, you may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice (e.g., 401(k) plans, payroll deduction savings). This arrangement reduces the risk of impulsive or unwise spending that will threaten your savings plan--out of sight, out of mind. If possible, save more than you think you'll need to provide a cushion.
Understand your investment options You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon.
Use the right savings tools The following are among the most common retirement savings tools, but others are also available. Employer-sponsored retirement plans that allow employee deferrals (like 401(k), 403(b), SIMPLE, and 457(b) plans) are powerful savings tools. Your contributions come out of your salary as pretax contributions (reducing your current taxable income) and any investment earnings are tax deferred until withdrawn. These plans often include employer-matching contributions and should be your first choice when it comes to saving for retirement. Both 401(k) and 403(b) plans can also allow after-tax Roth contributions. While Roth contributions don’t offer an immediate tax benefit, qualified distributions from your Roth account are federal income tax free. IRAs, like employer-sponsored retirement plans, feature tax deferral of earnings. If you are eligible, traditional IRAs may enable you to lower your current taxable income through deductible contributions. Withdrawals, however, are taxable as ordinary income (unless you've made nondeductible contributions, in which case a portion of the withdrawals will not be taxable). Roth IRAs don't permit tax-deductible contributions but allow you to make completely tax-free withdrawals under certain conditions. With both types, you can typically choose from a wide range of investments to fund your IRA. Annuities are generally funded with after-tax dollars, but their earnings are tax deferred (you pay tax on the portion of distributions that represents earnings). There is generally no annual limit on contributions to an annuity. A typical annuity provides income payments beginning at some future time, usually retirement. The payments may last for your life, for the joint life of you and a beneficiary, or for a specified number of years (guarantees are subject to the claims-paying ability of the issuing insurance company). Note: In addition to any income taxes owed, a 10 percent premature distribution penalty tax may apply to distributions made from employer-sponsored retirement plans, IRAs, and annuities prior to age 59½ (prior to age 55 for employer-sponsored retirement plans in some circumstances).
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Estate Planning: An Introduction By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust. To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.
Over 18 Since incapacity can strike anyone at anytime, all adults over 18 should consider having: • A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so. • An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.
Young and single If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).
Unmarried couples You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.
Married couples Married couples have unique estate planning challenges and opportunities. On the one hand, you can transfer your entire estate to your spouse gift and estate tax free under the unlimited marital deduction. This will postpone taxation until the death of the surviving spouse. While this may be a good outcome for couples with smaller estates, couples with combined assets in excess of the estate tax exemption amount ($3.5 million per person in 2009) may wind up paying more in estate taxes than is necessary because they've wasted the exemption of the first spouse to die. Couples in this situation need to plan in advance to avoid this result (perhaps by using a "credit shelter" or "bypass" trust, or some combination of marital trusts, often referred as an "A/B or A/B/C trust arrangement"). Note: Funding a bypass trust with funds from a retirement plan could have adverse income tax consequences.
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Note: In the states that have "decoupled" their death tax systems from the federal system, using a formula provision to fund a bypass trust may increase the chance of having to pay state death taxes. Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (although a $133,000 annual exclusion, for 2009, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.
Married with children If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time. Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.
Comfortable and looking forward to retirement If you're in your 30s, you're probably feeling comfortable. You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).
Wealthy and worried Depending on the size of your estate when you die, you may need to be concerned about estate taxes. Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent. There is uncertainty about the exact form the federal estate tax system will take in future years. However, it appears that individuals with estates valued at under $1 million need not worry too much about federal estate taxes, those with estates between $1 million and $3.5 million should have some flexibility built into their plans, and those with over $3.5 million need to implement plans now to avoid having to pay federal estate tax. TWhether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.
Elderly or ill If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.
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Gift and Estate Taxes If you give away money or property during your life, those transfers may be subject to federal gift tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal estate taxes and some form of state death tax. You should understand these taxes and when they do and do not apply, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act). This law contains several changes that are complicated and uncertain, making estate planning all the more difficult.
Federal gift tax and federal estate tax--background Under pre-2001 Tax Act law, no gift tax or estate taxes were imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one--that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift). The law substantially changed this tax regime.
Federal gift tax The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million. The top gift tax rate is 45 percent in 2009 and 35 percent in 2010 (the top marginal income tax rate in 2010 under the 2001 Tax Act). In 2011, the gift tax rates revert to pre-2001 Tax Act levels. The carryover basis rules remain in effect. However, many gifts can still be made tax free, including: • Gifts to your U.S. citizen spouse (you may give up to $133,000 in 2009 tax free to your noncitizen spouse) • Gifts to qualified charities • Gifts totaling up to $13,000 (in 2009) to any one person or entity during the tax year, or $26,000 if the gift is made by both you and your spouse (and you are both U.S. citizens) • Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual State gift tax may also be owed if you are a resident of Connecticut, Louisiana, North Carolina, Tennessee, or Puerto Rico.
Federal estate tax Under the 2001 Tax Act, the applicable exclusion amount for estate tax purposes is $3.5 million in 2009 (the applicable exclusion amount for gift tax purposes remains fixed at $1 million). The top estate tax rate is 45 percent in 2009. The estate tax (but not the gift tax) is repealed in 2010, but the estate tax applicable exclusion amount and rates revert to pre-2001 Tax Act levels in 2011. When the estate tax is repealed in 2010, the basis rules will be changed to those similar to the gift tax basis rules. The step-up in basis rules return in 2011.
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Federal generation-skipping transfer tax The federal generation-skipping transfer tax (GSTT) taxes transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GSTT is imposed in addition to, not instead of, federal gift tax or federal estate tax. You need to be aware of the GSTT if you make cumulative generation-skipping transfers in excess of the GSTT exemption, which is $3.5 million (in 2009). A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer is imposed on every transfer you make after your exemption has been exhausted. Some states also impose their own GSTT. Note: The GSTT exemption is the same amount as the applicable exclusion amount for estate tax purposes.
State death taxes The three types of state death taxes are estate tax, inheritance tax, and credit estate tax, which is also known as a sponge tax or pickup tax.
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Choosing an Income Tax Filing Status Selecting a filing status is one of the first decisions you'll make when you fill out your federal income tax return, so it's important to know the rules. And because you may have more than one option, you need to know the advantages and disadvantages of each. Making the right decision about your filing status can save money and prevent problems with the IRS down the road.
The five filing statuses and how they affect your tax liability Your filing status is especially important because it determines, in part, the tax rate applied to your taxable income, the amount of your standard deduction, and the types of deductions and credits available. By choosing the right filing status, you can minimize your taxes. The five filing statuses are unmarried, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. There are six income tax brackets. Your tax rate depends on your filing status and the amount of your taxable income. For example, if you're unmarried and your taxable income is more than $8,375 but not more than $34,000 (in 2010), it's taxed at 15 percent. If you're a head of household filer, though, your taxable income can climb to $45,550 and still be taxed at 15 percent. So, it's clear that some filing statuses are more beneficial than others. Although you'll generally want to choose whichever filing status minimizes your taxes, other considerations (such as a pending divorce) may also come into play.
You're unmarried if you're unmarried or legally separated from your spouse on the last day of the year This one's pretty straightforward. And, depending on your circumstances, it may be your only option. Your filing status is determined as of the last day of the tax year (December 31). To use the unmarried status, you must be unmarried or separated from your spouse by either divorce or a written separate maintenance decree on the last day of the year. Unfortunately, you jump into a higher tax bracket more quickly with the unmarried status than with some of the other filing statuses.
Married filing jointly often results in tax savings for married couples You may file jointly if, on the last day of the tax year, you are: • Married and living together as husband and wife • Married and living apart, but not legally separated under a divorce decree or separate maintenance agreement, or • Separated under an interlocutory (i.e., not final) decree of divorce Also, you are considered married for the entire tax year for filing status purposes if your spouse died during the tax year. When filing jointly, you and your spouse combine your income, exemptions, deductions, and credits. Filing jointly generally offers the most tax savings for married couples. For one thing, there are many credits that you can take if you file a joint return that you can't take if you file married filing separately. These include the child and dependent care credit, the adoption expense credit, the Hope credit (renamed the American Opportunity credit for 2009 and 2010), and the Lifetime Learning credit. Still, this filing status is not always the most advantageous. If your spouse owes certain debts (including
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defaulted student loans and unpaid child support), the IRS may divert any refund due on your joint tax return to the appropriate agency. To get your share of the refund, you'll have to file an injured spouse claim and probably have to jump through hoops. You can avoid the hassle by filing a separate return.
You don't have to be separated to choose married filing separately You and your spouse can choose to file separately if you're married as of the last day of the tax year. Here, you'd report only your own income and claim only your own deductions and credits. Filing separately may be wise if you want to be responsible only for your own tax. With a joint return, by comparison, each spouse is jointly and individually liable for the full amount of the tax due. So, if your spouse skips town, you'd be left holding the tax bag unless you qualified as an innocent spouse. Filing separately might also be the best tax move if one spouse has significant medical expenses or miscellaneous itemized deductions. Your ability to take these deductions is tied in to the level of your adjusted gross income (AGI). For example, medical expenses are deductible only if they exceed 7.5 percent of AGI. By filing separately, the AGI for each spouse is reduced. Keep in mind that if you and your spouse file separately and your spouse itemizes deductions, you'll have to do the same. Remember, though, that you won't qualify for certain credits (such as the child and dependent care tax credit) and can't take certain deductions if you file separately. For example, you cannot deduct qualified education loan interest if you're married, unless you file a joint return.
Head of household status offers certain income tax advantages Those who qualify for the head of household filing status get special tax treatment. Not only are the tax rates lower for head of household filers than for unmarried filers and married filing separately filers, but the standard deduction is larger as well. However, you'll have to satisfy the following requirements: • Generally, you should be unmarried at the end of the year (unless you live apart from your spouse and meet certain tests) • You must maintain a household for your child, dependent parent, or other qualifying dependent relative • The household must be your home and generally must also be the main home of a qualifying relative for more than half of the year • You must provide more than half the cost of maintaining the household • You must be a U.S. citizen or resident alien for the entire tax year
Qualifying widow(er) with dependent child offers the advantages of a joint return You may be able to select the qualifying widow(er) with dependent child filing status if your spouse died recently. This status allows you to use joint tax rates and offers the highest possible standard deduction, the one applicable to joint tax returns. To qualify, you must satisfy all of the following conditions: • Your spouse died either last tax year or the tax year before that • You qualified to file a joint return with your spouse for the year he or she died • You have not remarried before the end of the tax year • You have a qualifying dependent child • You provide over half the cost of keeping up a home for yourself and your qualifying child
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As you can see, choosing the correct filing status is not always easy. You might want to speak with a professional tax preparer or consult IRS Publication 17 for more information.
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Wills: The Cornerstone of Your Estate Plan If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn't have to be drafted by an attorney to be valid, seeking an attorney's help can ensure that your will accomplishes what you intend.
Wills avoid intestacy Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state's distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.
Wills distribute property according to your wishes Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will. Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other gifts.
Wills allow you to nominate a guardian for your minor children In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.
Wills allow you to nominate an executor A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.
Wills specify how to pay estate taxes and other expenses The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.
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Wills can create a testamentary trust You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.
Wills can fund a living trust A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will "pours over" your estate to your living trust.
Wills can help minimize taxes Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.
Assets disposed of through a will are subject to probate Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.
Will provisions can be challenged in court Although it doesn't happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include: • You lacked testamentary capacity when you signed the will • You were unduly influenced by another individual when you drew up the will • The will was forged or was otherwise improperly executed • The will was revoked
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Am I liable for my spouse's debts? Question: Am I liable for my spouse's debts?
Answer: The general rule is that spouses are not responsible for each other's debts, but there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, community property states will hold one spouse responsible for the other's debts because both spouses have equal rights to each other's income. Also, you are both responsible for any debt that you have in both names (e.g., mortgage, home equity loan, credit card).
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Do I have to accept a bequest I don't want? Question: Do I have to accept a bequest I don't want?
Answer: No, you don't. A bequest is a gift left to you in a decedent's will. You may not want the gift for a variety of reasons. For example, it may be a burden on you, or it may result in adverse tax consequences for you. Whatever your reason for not wanting the bequest, you can refuse it by disclaiming it. The bequest then goes to the recipient who is next in line under the will. But if you just say "No, thanks" to the bequest, you may be seen by the IRS as making a gift to the next recipient! This could cause federal and state gift tax consequences to you. To avoid these consequences, you must refuse the bequest by making a valid disclaimer. You must satisfy the following requirements for a disclaimer to be valid for federal gift tax purposes: • Your refusal must be irrevocable and unqualified. • The refusal must be in writing and signed. • The disclaimer must be received by the decedent's personal representative no later than nine months from the date of the decedent's death. • You must disclaim before receiving any benefit or interest in the bequest. • The disclaimed bequest must pass to the next recipient without any direction from you. • The disclaimer must be valid under state law. Check with your state to determine the requirements for a valid disclaimer.
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My husband just died. Should I accept my daughter's offer to move in with her? Question: My husband just died. Should I accept my daughter's offer to move in with her?
Answer: Maybe. The death of a spouse is a traumatic life event. Perhaps you've never lived alone before and the idea frightens you. Or maybe your husband's salary paid the mortgage and you're concerned about your financial outlook. Moving in with your daughter may seem like the perfect solution right now, but you want to be sure you'll feel that way a year from now. Keep in mind that this may be a temporary situation while you adjust to your new circumstances. Consider the possibilities. Sit down with your daughter (and son-in-law, if she's married) and have a frank discussion about what living together means. Chances are you've not lived together in many years and are each accustomed to doing things in your own way. You'll need to consider what your presence will do to the family dynamic. Will you have your own space or will you be right in the mix? Can you refrain from giving unsolicited parental advice? If the answer is no, moving in may not be a good idea. Your presence could strain your relationship with your daughter and create tension in the household. If financial difficulty lies ahead, you may want to consider your daughter's offer. With daily living expenses on the rise, knowing that Mom will be taken care of may bring peace of mind to you and your daughter. However, you'll want to be sure that moving in won't seriously strain your daughter's finances. What will you do with your home? Perhaps you can use it to contribute to the family finances. Consult a financial advisor for help. Another consideration is whether your daughter lives close enough so that you can keep your current friends and activities. If the move is long-distance and you would have to start over, you'll need to think about that, also. Are you physically independent? If not, living alone may require you to get day or live-in assistance. This may be costly and is often impersonal. Living with your daughter and allowing her to oversee your care can reduce the costs associated with long-term care. And as you age, you may find it comforting to be surrounded by family.
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How can I find out whether my deceased husband owned any life insurance? Question: How can I find out whether my deceased husband owned any life insurance?
Answer: If your husband left a letter of instruction, read it carefully. It may help you determine whether he had life insurance. A letter of instruction is simply a letter written by or on behalf of the deceased. It enables a surviving spouse or other person to locate important documents such as bank accounts, life insurance policies, safe deposits, or collectibles. If your husband died without such a letter and you are trying to discover whether he had life insurance, there are several things you can do: • Contact any family members whom your husband may have confided in. They may know if he had life insurance and from whom it was purchased. • Ask your husband's lawyer, estate executor, banker, accountant, or financial planner whether they know of a life insurance policy. • Talk to your husband's auto and home insurance agents. Often, consumers purchase one or more insurance products through the same agent. They may have sold your husband a policy or referred him to someone who did. • Has your husband's estate been probated? If it has, check the court records for details of the estate. Sometimes, the life insurance policy will show up as an asset. • Did your husband have group life insurance through an employer? Speak to his former employers to make this determination. • Perhaps your husband had a safe-deposit box. You may want to contact some of your local banks to see if there is a safe-deposit box account in your husband's name. • Look at any canceled checks, bank accounts, and credit card statements to see if your husband made any premium payments to an insurance company. Next, follow up with each company to see what the payment was for. Remember, the insurance company is not obliged to notify you about the life insurance policy even if you are the spouse. Typically, the insurance company does nothing until someone notifies it and files a death benefit claim. This is usually done by the owner (if not the insured), the beneficiary, or the estate of the insured. Although the above is no guarantee of success, some investigation will give you at least a chance of locating an existing policy.
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My spouse just died. Who do I need to notify? Question: My spouse just died. Who do I need to notify?
Answer: As a recent widow or widower, you'll face many personal and financial challenges in the following months. You should contact a number of people and agencies to help secure the financial future of you and your family. If your spouse had a will (or even absent a will), it's important to discuss your immediate options with your family financial advisor or attorney regarding the estate. One of the first matters to resolve is how the death benefit of your spouse's life insurance policy, if any, will be paid out. Life insurance benefits are not paid automatically, so you'll need to contact your insurance agent or company to file a claim. Most people these days request that the death benefits be paid in a lump sum, which is not considered taxable income to you. Typically, the insurance company sets up a money market account and sends you a checkbook. You can then decide what to do with the proceeds. The other option is to have the company pay you in installments. Any interest that is earned and paid is considered taxable income. The same is true for any retirement plan in which your spouse participated. If he or she was part of a profit-sharing plan, 401(k) plan, Keogh plan (for self-employed workers), or some other plan, you must consider how the benefits will be distributed to you. The most advantageous strategy with an IRA or 401(k) is to roll over the account into a new account in your own name. This keeps the funds tax sheltered until you retire and begin withdrawals. Contact the plan administrator. You may be eligible to receive Social Security survivor's benefits for yourself or your children. If you qualify, six months of retroactive benefits are available. However, you must file within a specified time period. You may also be entitled to the $255 lump-sum death benefit. Contact the Social Security Administration at (800) 772-1213 or on the Internet at www.ssa.gov. In addition, if your spouse ever served in the military or in some other form of government employment, you and your children may qualify for a separate survivor's benefit. The Department of Veterans Affairs, formerly known as the Veterans Administration, may even provide educational assistance, home loans, federal job preference, or other assistance. If you are the widow or widower of a former federal, state, or local government worker, contact the Federal Employees Retirement System (FERS) or the local organization that coordinates benefits for state, county, or municipal employees. During this difficult time, you'll also want to stay in close touch with friends and family members and accept their support and assistance. Books, websites, and local support groups are available to help you cope with your recent widow(er)hood. After you have settled your spouse's affairs, you will need to review your plans. If you have your own will, you probably need to name a new estate executor and a new guardian for your children. You'll also need to have documents rewritten, such as a power of attorney, letter of instruction, or living will.
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My spouse passed away this year. When I file my taxes, what filing status should I claim? Question: My spouse passed away this year. When I file my taxes, what filing status should I claim?
Answer: As the surviving spouse, you have several filing choices that may be appropriate. You may be able to choose married filing jointly, married filing separately, qualifying widow(er), or head of household. • Married filing jointly: You can usually file a joint return for the year your spouse died. Generally, you'll have to file in cooperation with the executor or administrator of your spouse's estate. If you remarry before year-end, you cannot file a joint return with your deceased spouse for that year. • Married filing separately: To determine the most advantageous approach, you should figure taxes according to both the married filing jointly status and the married filing separately status. • Qualifying widow(er): If you meet certain requirements (e.g., you support a dependent child for whom you can claim a tax exemption, and you have not remarried), you can file as a qualifying widow(er) in each of the two years following the year of your spouse's death. This status allows you to use the married filing jointly tax rates. • Head of household: If you are ineligible to file jointly or as a qualifying widow(er), the head of household filing status may be possible. To qualify, you must provide support for a relative and meet several conditions. Regardless of whether you file a joint return or a separate return for your spouse, you must write "DECEASED" across the top of the return, along with your spouse's name and date of death. If you file a joint return and no personal representative has been appointed, write your (and your spouse's) name, address, and Social Security number in the regular name/address space at the top of the return. To sign the return, write "Filing as Surviving Spouse" in the space for your spouse's signature, then sign in the space for your own signature. If you are not filing a joint return, write your spouse's name at the top of the return and the personal representative's name and address in the remaining space. If a personal representative has been appointed, he or she must sign the return. Again, you must also sign if it is a joint return. For additional details, consult a tax professional.
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