The Prosperity Blog

One of Those Details That Needs Regular Attention

Perhaps you noticed an item from the week of December 3, 2007 that appeared in the major wire services…

A wealthy London widow who had outlived both her husband and lone son, repaid the kindness shown to her by a family that owned a Chinese restaurant by leaving them a $21million inheritance. The woman, Golda Bechal, had stated in a 1994 will that she wanted Kim Sing Man and his wife, Bee Lian to be the beneficiaries of her estate upon her death.

Sad and alone following the deaths of her husband and son, Ms. Bechal became close friends with the couple that operated a Chinese restaurant in her neighborhood. The three of them not only met regularly at the restaurant and Ms. Bechal’s apartment, but also traveled together on vacations to other countries. When Ms. Bechal died at age 88 in January 2004, her five nephews and nieces contested the will, asking the British courts to declare it invalid, claiming Ms. Bechal suffered from dementia. However, after more than three years of deliberations the court awarded the inheritance to Kim Sing Man and his wife, saying, “it was not irrational to leave the bulk of her estate to Mrs. Man, the daughter she would dearly wished to have had, and her husband.”

You may never have $21 million to pass on, but the above story illustrates the challenges of settling an estate, especially when significant assets are involved. While it is possible to contest almost every will, there are several things you can do to make it less contestable.

Have it drafted by a professional. A hand-written will, although it may be valid, is not recommended. A handwritten will is called a “holographic will.” It is valid in about 25 states so long as all material provisions and clauses are entirely handwritten. However, because most handwritten wills are not as in-depth as a professionally drafted will and because they are oftentimes not properly written, they are not recommended. Courts can be unusually strict in determining whether a holographic will is authentic.

Have all changes and updates prepared by a professional. A will may often contain a provision or schedule, listing specific assets and their intended beneficiaries. Some people may try to amend this section by hand at a later date. In general, any handwritten annotation is much easier to challenge, even if witness signatures are present. Revisions (generally called codicils or amendments) should be made with the same care and attention to procedure as was given the original document.

Make a will review a regular part of your financial check-up. If it’s on the list, you’ll get used to doing it. If you do it regularly, it won’t take much time.

Checklist:

  • Have your will drafted by a professional.
  • Have all changes and updates prepared by a professional.
  • Make a will review a regular part of your financial check-up.
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Outside-the-box Idea: Using 72(t) to make an "asset transfer"

For those who have most of their savings in tax-deferred retirement accounts, but are intrigued by the idea of buying a retirement home now, there may be a tax-effective way to execute the transaction. Internal Revenue Code IRC Section 72(t) allows individuals to access their IRA accounts penalty-free at any time if the withdrawals are taken as a series of substantially equal periodic payments over the life of the participant. This means you can begin drawing a regular stream of “retirement income” from your IRA at any age. While the income received is taxable, no additional penalty tax is applied.

In order to be considered “substantially equal periodic payments,” the distributions must meet the following criteria:

  • Withdrawals must be on a regular basis, most often monthly, and at least annually.
  • Withdrawals must conform to one of three IRS approved calculation methods.
  • Withdrawals must continue for at least five years or until you reach 59½, whichever is longer.

Depending on the size of your IRA and the cost of the property, these monthly distributions could be used to make the mortgage payment on the vacation home. For many individuals, the additional IRA income may largely be offset by the tax deduction for the additional mortgage interest paid, especially in the early years of the mortgage. The end tax result: more taxable income to report, but also more tax deductions.  By spending some of the IRA now, you lose the growth that could have occurred if the money had stayed in the account. But in this example, the IRA distributions are being used to build equity in the new home. Overall, your net worth is still growing, only the growth is in home equity instead of the IRA. And instead of delaying gratification, there’s some immediate enjoyment.

Note: Not all tax-deferred retirement plans allow for 72(t)-type distributions. Additionally, the calculations required to be sure this “early retirement income” conforms to the law are complex. Do not attempt a distribution of this type without seeking some expert assistance.

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Using a Reverse Mortgage to Stop Foreclosure

Reverse mortgages are touted as a way for elderly retirees to create additional income by
borrowing against the equity in their homes without having to take on another payment.

Instead, the amount borrowed by the homeowner is due only when the home is sold, or the borrower dies. Since the terms of a reverse mortgage are based in part on the age of the borrower (the older the borrower, the more favorable the deal), a reverse mortgage can be a profitable strategy for supplementing one’s retirement lifestyle.

But a December 26, 2007 Wall Street Journal article turned up another use for reverse mortgages: Staving off foreclosures for senior citizens, especially those whipsawed by declining or fixed incomes and rising payments from adjustable rate mortgages. The strategy, used by an increasing number of legal-aid advocates, isn’t suitable for everyone. But in the right circumstances, it can be a financial life-saver. A typical scenario: A senior couple with significant home equity needs cash. Attracted to the favorable terms of an adjustable-rate mortgage (low initial interest rate, minimum payment options), they take on a new mortgage, one they can theoretically afford. Over the next few years, interest rates increase and so do monthly payments. Perhaps because of health issues, increased living costs, or decreased income, the seniors find themselves unable to meet the mortgage obligation, and facing foreclosure. Even though they cannot meet their monthly mortgage obligation, the couple still has substantial equity in their home. With the assistance of a reverse-mortgage expert, the couple uses the remaining equity to negotiate a settlement on the existing mortgage. While they receive no cash out from this arrangement, the settlement eliminates the monthly mortgage payment, and keeps them in their home.

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