Why High Net-Worth Families Should Review Their Estate Plans Pre-Election

Why High Net-Worth Families Should Review Their Estate Plans Pre-Election

 

LUTZ BUSINESS INSIGHTS

 

Why High Net-Worth Families Should Review Their Estate Plans Pre-Election

why high net-worth families should review their estate plans pre-election

joe hefflinger, DIRECTOR & INVESTMENT adviser

 

Election day is fast approaching, and with it comes the potential for sweeping changes in our political landscape. While nobody can predict the outcome, those with a high net-worth (in this case, I’m referring to a net worth approaching $20 million) would be wise to start evaluating their current estate plans now.

2020 could be looked at in hindsight as the end of a golden era in estate planning. We have witnessed asset values depressed due to the impact of COVID, historically low interest rates, historically high estate and gift exemptions, and certain key estate planning techniques that are still viable. These all combine to create an ideal environment for the transfer of wealth to future generations in an extremely tax-favorable manner.

A change in our political climate, coupled with our country’s deteriorating fiscal position, could potentially change the estate tax laws. So, there is no time like the present to be considering all your options. And for those of you who may be hesitant about gifting assets now, know that some of these options may allow you to preserve some level of access to the assets you would be gifting.

 

The Estate & Gift Tax Laws – a Refresher on Where we are Now and Where We’ve Been

Currently, the federal estate and gift tax laws in our country work in tandem, which means you have a certain dollar amount which you can transfer to your heirs either while alive or at your passing, tax-free. The exemption amount in 2020 is $11.58 million per individual. This is effectively $23.16 million for married couples as portability allows a surviving spouse to use a deceased spouse’s unused exemption.

You are free to gift away assets up to the exemption amount during your lifetime with no gift tax owed. Still, every dollar you gift away during life has the corresponding effect of decreasing the amount of assets you can leave to your heirs at death estate-tax free, dollar for dollar. An important caveat to this is any gifts you make pursuant to the annual gift exclusion amount (currently $15,000 per individual, or $30,000 per couple, to any number of different beneficiaries per year) doesn’t count towards your lifetime gift exemption.

For any assets that become subject to federal gift or estate tax, the current tax rate is 40%.  This is down from 55% as recently as 2001. Without getting too deep, in addition to the estate and gift tax there is also a generation-skipping transfer (GST) tax that is levied when transfers are made to someone two or more generations below (e.g., to grandkids or below). Right now, the GST exemption levels and tax rate mirror those already discussed for the estate and gift tax.

You may be saying to yourself, “that seems like a really big exemption amount,” and you’d be right! To put how favorable the current exemption levels are in historical context, check out the following chart.

As you can see, going back to 2001, exemption amounts used to be substantially smaller, and the tax rates used to be higher. Note that the exemption levels doubled in 2018 pursuant to the Tax Cuts and Jobs Act of 2017, but also understand that these higher levels are scheduled to “sunset” in 2026. At this time, they will automatically revert back to their prior levels (adjusted for inflation; this is estimated to be around $6.5 million). However, if Congress and the President agree to change them, these exemption reductions could be much larger and could happen much sooner.

 

What a Biden Presidency / Democratic Controlled Congress Could Mean

It’s not my place to speak to the merits or validity of either political party’s policies, whether that’s in regard to tax rates, estate laws, or anything else. You don’t come to your financial advisor for political commentary, and I have no desire to provide any. That being said, as an advisor, it is my job to help clients understand what changes may be coming if the political climate turns and how they could be impacted personally. Note that it’s possible the following changes (if they occur) could be made retroactive to January 1, 2021.

Decrease in the Estate/GST and Gift Tax Exemption

Joe Biden has previously indicated that the exemption for estate and GST could be lowered to pre-Obama levels, which could be as low as $3.5 million per individual, with a gift exemption as low as $1 million (see 2009 in the chart above).

Increase in the Estate and Gift (and Capital gains) Tax Rates

It’s also possible we could see an increase in the estate and gift tax rates, which currently sit at 40%. It’s unclear at this point what that means, but a return to the 45-55% range we’ve seen in the past 10-20 years is possible. While we’re talking about tax rates, Biden has also suggested raising the rate on long-term capital gains to the rate imposed on ordinary income (at least for those with higher incomes, e.g., $1 million or more).

Change in the Basis Rules at Death

Under current law, your heirs will typically receive any assets you leave them upon your death with a “stepped-up basis,” meaning they get to hold those assets with a basis equal to their fair market value on the date of your death. At various times, Biden has floated the idea of eliminating the basis step up at death (meaning heirs would take a lower carryover basis instead) or alternatively the realization of capital gains at death (meaning the deceased individual’s estate would owe capital gains tax on appreciated assets at death). This could obviously be a big deal for your heirs if you hold assets with a large amount of appreciation.

Restrictions on Favorable Estate Planning Techniques

Based on recent Democratic proposals over the past few years, there is also speculation that they could seek to limit the use of valuation discounts and grantor retained annuity trusts (GRATs). It’s currently common when transferring an interest in a closely held business for estate purposes to discount the value based on a lack of control and a lack of marketability (which has the potential effect of increasing the amount of assets you can transfer estate and gift tax free). Similarly, GRATs are currently a popular estate tool and are used to potentially transfer the future appreciation of an asset free of estate and gift tax.

Note that regardless of the outcome of the upcoming election, the fiscal strain caused by COVID could itself be the catalyst for our elected officials to revisit the estate landscape as a source of additional revenue in a time when it may be sorely needed.

 

Estate Moves High Net-Worth Families Could Consider Before Year-End

Given the potential estate law changes that could be made effective as soon as the start of 2021, what estate updates should high net-worth families be considering now? Here are a few to consider:

Outright Gifts

If the estate and gift exemptions are reduced next year, you could miss out on a great opportunity to pass a large amount of wealth free of tax. To lock in the use of the current larger exemption this year, you’d need to be in a position to have at least one spouse transfer upwards of $11 million out of their estate. These types of outright gifts are commonly made to irrevocable trusts for the future benefit of your children and/or grandchildren. Treasury Regulations from 2019 indicate that transfers covered under an individual’s exemption in the year of transfer can’t be “clawed back” later at their death if the exemption has subsequently been reduced.

SLATs

If the thought of transferring that amount of wealth outright this year makes you uneasy (and it probably does), talk to your estate attorney about a spousal limited access trust (SLAT). If structured correctly, SLATs can potentially allow for trust distributions of the transferred assets back to the transferor’s spouse during their lifetime. You wouldn’t go down this route if you expected to need the funds again in the future. But if there is some type of unexpected financial hardship down the road, it can be comforting to know that you have the ability to access the funds again (indirectly through your spouse) if needed.  Obviously, the possibility of a future divorce or the premature death of the spouse beneficiary needs to be considered.

Estate “Freeze” Techniques

If you aren’t comfortable making a large outright gift, an estate freeze may be a better fit for you. A freeze transaction has the net effect of removing the future appreciation of an asset (above a predefined “hurdle” rate established by the government) from your estate. There are several different structures to accomplish this, some of which involve transferring assets to a trust in exchange for a promissory note equal to the fair market value of the assets sold. The transfer to the trust can be structured as either a sale or a gift, depending on whether you want to use up some exemption (and if so, how much).

The use of a promissory note can provide added flexibility. If the potential estate law changes discussed above seem more certain at a later date, it may be possible to “forgive” the note, which would then be treated as a completed gift that would use up some exemption. On the other hand, if you later decide you don’t want to part with the asset, the trust may be able to pay back the note “in kind” by transferring the asset back to you.

Two of the more common freeze structures are intentionally defective grantor trusts (IDGTs) and GRATs (referenced above). Your estate attorney can highlight the key differences between each and which might be a better fit for your situation. Both IDGTs and GRATs can be powerful tools under current law, especially in our low interest rate environment, when the hurdle rate that the transferred asset has to beat is so low. These tools can also be leveraged even further if you have an asset to transfer whose value can be discounted when transferring for estate purposes (as discussed above). However, keep in mind that future estate law changes could impact the ability to use both discounts and GRATs.

 

Start the Planning Process Now

So, what does all of this mean to you? If your personal balance sheet is approaching the $20 million range, it means you should at least be reaching out to your estate attorney and other advisors now to discuss what impact these potential changes could have on your personal planning. If you are uncertain about what amount of assets you can transfer and still have enough left over to live on comfortably, we at Lutz Financial can do a cash flow analysis to help you better answer that question.

From a timing perspective, keep in mind that high-level estate planning of this nature usually takes some time to complete (and your attorney will likely get harder to book as year-end approaches). If appraisals may be needed, those take time as well, as can applying for a federal tax identification number for a newly formed trust. Also, consider that it’s entirely possible that we may not know the results of the presidential election (and other key congressional races) for some period of time after election night. So, waiting to start this discussion until after the election may not allow enough time to get it done before year-end. Whether you ultimately decide to make any estate updates before year-end or not, it’s essential that you at least talk to your advisors and understand your options.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jhefflinger@lutzfinancial.com

LINKEDIN

JOE HEFFLINGER, JD, CFP®, CAP® + DIRECTOR & INVESTMENT ADVISER

Joe Hefflinger is an Investment Adviser and Director at Lutz Financial. With 15+ years of relevant experience, he specializes in comprehensive financial planning and investment advisory services for professionals, business owners, and retirees. He lives in Omaha, NE, with his wife Kim, and daughters Lily and Jolie.

AREAS OF FOCUS
  • Retirement Cash Flow Planning
  • Insurance Planning
  • Estate Planning
  • Business Owner Exit Planning
  • Charitable Planning
  • Tax Planning
AFFILIATIONS AND CREDENTIALS
  • National Association of Personal  Financial Advisors, Member
  • Financial Planning Association, Member
  • Nebraska State Bar Association, Member
  • Omaha Estate Planning Council, Member
  • CERTIFIED FINANCIAL PLANNER™
  • Chartered Advisor in Philanthropy®
EDUCATIONAL BACKGROUND
  • JD, Creighton University School of Law, Omaha, NE
  • BS in Economics, Santa Clara University, Santa Clara, CA
COMMUNITY SERVICE
  • Partnership 4 Kids - Past Board Member
  • Omaha Venture Group, Member
  • Christ the King Sports Club, Member

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Portfolio Management for Retirees During a Financial Crisis

Portfolio Management for Retirees During a Financial Crisis

 

LUTZ BUSINESS INSIGHTS

 

portfolio management for retirees during a financial crisis

joe hefflinger, director and investment adviser

 

The impact of COVID-19 on the financial markets has been nothing short of dramatic. From its all-time high on February 19th, the S&P 500 fell 34% over just a few weeks before rallying off those lows recently. While the impact of the current crisis on our everyday lives is certainly unprecedented in many ways, market drops of this size and speed are not. Bear markets (drops of 20% or more from a recent peak) happen frequently enough (on average, once every six years) that their possibility should be considered in every financial plan.

Obviously, nobody enjoys seeing their net worth take such a hit in such a short period of time. However, for those with many years to go before retirement, they can generally keep adding to their retirement accounts (at discounted share prices) and remain aggressive with their investment allocation as they won’t be tapping into these funds for a long time. On the other hand, for those already in or approaching retirement, managing their portfolio during a financial crisis is far more complex. Times like these demonstrate the vital importance of having a comprehensive financial plan in place that is tailored to your personal needs. Part of any good plan is constructing your portfolio in a manner that takes into account that the markets can and will pull back materially at different points over any sizable period of time.

Keep in mind, however, that retirees could have two to three decades in retirement to invest their money. So there needs to be the appropriate balance between the need for current cash flow and the need for additional growth to protect against outliving your assets.  One way to accomplish this is to hold some of your assets in conservative bonds and cash, which provide some cushion against the risk of falling stock prices.

For those approaching or in retirement, we advise following the three-bucket approach in constructing your portfolio. Figure out what you’d like to spend each year. Say this number is $150,000 a year all-in (including taxes, out-of-pocket healthcare costs, etc.). Now figure out what amount of non-portfolio income you have coming in each year (e.g., social security, any pension or deferred compensation, etc.). Say that totals $50,000. That tells us your annual need from the portfolio (your shortfall) is $100,000 a year.

Let’s further say your total portfolio (401k, IRAs, taxable accounts, etc.) is $3,000,000. We advise putting one year of your shortfall needs in cash at the bank ($100k here). We typically like to see another ten years or so of your shortfall needs ($1M here) outside of the stock market, with a large portion of that in a diversified bond portfolio.

The remainder of the portfolio ($1.9M here) could be allocated to equities or some mix of equities and bonds depending on your ultimate goals, objectives and comfort level. The resulting overall allocation, in this case, would land somewhere between 63-37 (stocks to bonds/cash) and say 50-50, again depending on the amount of cushion the client is most comfortable with.

An illustrative example of this three-bucket approach is set forth below.

 

 

In a sense, this model takes asset allocation from the theoretical to the practical. Refilling each bucket over time can be adjusted as necessary as conditions warrant. For example, as markets fluctuate, you can evaluate options to potentially re-balance the portfolio as needed to get back to your desired targets.

It’s important to analyze your specific situation within the confines of a comprehensive financial plan. If you run your numbers and you aren’t comfortable with the result, you may be faced with some of the following questions:

  • If I’m still working, do I need to push back the age I plan to retire or increase my savings rate?
  • Do I need to find ways to reduce the amount I plan on spending annually in retirement (at least until the markets have recovered)?
  • If you’re already retired and had planned on delaying social security benefits to age 70, should you consider starting benefits earlier to avoid having to sell stocks at depressed prices to fund your living expenses?
  • Do I need to accept more risk (meaning own more stocks) in order to achieve my financial goals?

Some of these adjustments could make sense for you, but it depends on your facts and circumstances. It’s advisable to work with an experienced financial planner to help you analyze the specifics of your situation.

The benefit of the three-bucket model is that you wouldn’t need to touch the funds you have in stocks for over ten years. It’s easier to emotionally handle market pullbacks like we’ve seen when you can look at your portfolio through this lens, making it far more likely that you will stay the course. The key to all of this is not having to sell your stocks at an inopportune time. Currently, for clients that need funds from their portfolio, we will typically be selling their bonds and holding onto their stocks so they can participate in the ultimate recovery. And while it’s true that bonds can be volatile at times as well, historically they have been much less so than stocks. In times like these, having a solid financial plan in place (and sticking to it) is essential to maintaining a successful portfolio over the entirety of your retirement years.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jhefflinger@lutzfinancial.com

LINKEDIN

JOE HEFFLINGER, JD, CFP®, CAP® + DIRECTOR & INVESTMENT ADVISER

Joe Hefflinger is an Investment Adviser and Director at Lutz Financial. With 15+ years of relevant experience, he specializes in comprehensive financial planning and investment advisory services for professionals, business owners, and retirees. He lives in Omaha, NE, with his wife Kim, and daughters Lily and Jolie.

AREAS OF FOCUS
  • Retirement Cash Flow Planning
  • Insurance Planning
  • Estate Planning
  • Business Owner Exit Planning
  • Charitable Planning
  • Tax Planning
AFFILIATIONS AND CREDENTIALS
  • National Association of Personal  Financial Advisors, Member
  • Financial Planning Association, Member
  • Nebraska State Bar Association, Member
  • Omaha Estate Planning Council, Member
  • CERTIFIED FINANCIAL PLANNER™
  • Chartered Advisor in Philanthropy®
EDUCATIONAL BACKGROUND
  • JD, Creighton University School of Law, Omaha, NE
  • BS in Economics, Santa Clara University, Santa Clara, CA
COMMUNITY SERVICE
  • Partnership 4 Kids - Past Board Member
  • Omaha Venture Group, Member
  • Christ the King Sports Club, Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Personal Finances: Focusing on What You Can Control

Personal Finances: Focusing on What You Can Control

 

LUTZ BUSINESS INSIGHTS

 

personal finances: focusing on what you can control

justin vossen, cfp®, napfa, investment adviser & principal

 

Like many of us, you may feel a bit disoriented, fearful, and anxious. Not only has your life been dramatically altered in the past few weeks, but the market continues to drastically swing every day. The uncertainty of it all is perhaps the most difficult thing to comprehend. While nobody has answers, we can be sure of one thing; mankind has focused all of its resources on one problem. One can hope that with a dedicated effort, positive change is on the horizon.

The disruption to the financial markets and economy is a difficult thing to gauge. Globally, many governmental programs are focused on mitigating the damage in the near term by stimulating their economy in various ways. This stimulus will provide a lubricant for the financial system in order to continue to function as normally as it can.

There is little question that there will be a recession. We have already dipped into a bear market as fast as we have seen in history. Since 1926, the average bear market lasted 22 months, while the longest bull market lasted 9 years.  Bull markets follow bear markets, and much of the recovery typically comes in the front end of the bull market.

One could argue that the markets are like a rubber band, the further you pull it back the quicker and harder it snaps back. As a result, in this particular environment, we recommend that we hold steady and make sure we have enough cash to get us through the coming quarters. That way we can effectively tune out the noise, focus on long-term goals, and let the benefits of diversification play out.

To conclude, if the best advice we can provide is to hold steady and ride through these coming weeks/months, what can we be doing proactively to help our mental and financial state?

We will be contacting Lutz Financial clients to discuss a variety of the following topics:

  • Gather tax filing items. This will help provide some level of certainty on payments/estimates and wrap up last year. In addition, it will allow you to plan for this coming year, as well to get closure.
  • Review your home budget. Are there things you don’t need immediately? Do you have unnecessary subscriptions or payments that don’t need to be made?
  • Look at tax-loss harvesting and asset location. Are there any tax plays now when the market has pulled back that you couldn’t do when greater gains were built-in?
  • Should you consider a Roth IRA conversion?
  • Should you reconsider you required minimum distributions for this year?
  • Revisit healthcare proxies, living wills and other advanced directives.
  • Make 2020 Roth/IRA contributions.

If you have immediate questions or concerns, please contact Lutz Financial today at 402.827.2300.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL

 Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.

AREAS OF FOCUS
  • Investment Advisory Services
  • Comprehensive Financial Planning
  • Business Owner Planning & Succession
  • High Net Worth Families
AFFILIATIONS AND CREDENTIALS
  • CERTIFIED FINANCIAL PLANNER™
  • National Association of Personal Financial Advisors, Member
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • Mount Michael Booster Club Board
  • Lutz Gives Back, Committee Chair
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Planning For College Pragmatically

Planning For College Pragmatically

 

LUTZ BUSINESS INSIGHTS

 

planning for college pragmatically

justin vossen, cfp®, napfa + Investment adviser, principal

 

Many parents have a goal of encouraging their kids to go to college. The dream of higher education is often a large driver in most parental decisions for their children. Financially it makes sense; the average college graduate with a bachelor’s degree makes $71,155, according to the U.S. Census Bureau for workers 18- and older in 2018. This is 83% higher than a high school graduate’s average annual earnings¹.

If you annualize the difference in earnings, the investment in college is clearly worth it monetarily over someone’s lifetime.  Thus, it makes sense that the demand for college continues to increase.  With that, the competition has increased as applications are up by more than 95% in 2018-19 compared to just 15 years ago².

This has obviously had an impact on the cost of education.  Since 1983, the cost of tuition has risen at a rate of 6.3% per year.  To put that in cumulative terms, the cost of tuition has almost risen eight-fold (798%) over the last 35 years.  Compare that to housing, where costs have only risen about 169% over that same period of time³.

The meteoric rise of college costs scares most and confounds parents when they are trying to think about the future — so what is the best way to plan for college?

Acknowledge the Uncertainty

The problem with planning for college when children are young is that there is so much uncertainty surrounding it. Will your child go to college? Where will they go? How many years will they attend? How much will it cost? How much of tuition am I willing to pay? Will they get a scholarship? What will financials look like at the time they enroll?

You can be paralyzed by variables to place into the equation.  This generally causes willy-nilly decision making and even causes some to ignore the situation completely.  Admit you don’t know exactly what is going to happen but try to apply some current reality to the situation by establishing a concrete starting point.

Pick a school and a number to quantify your goal

It’s probably best to begin by quantifying the situation from the beginning. Generally, when we advise folks, we take a specific approach to their location. For example, since we are located in Nebraska, we use the cost of its largest University, The University of Nebraska. The cost of tuition, fees, housing and meal plans in 2019-20 is $21,286.

Obviously, this tuition amount is in today’s dollars.  Based on your child’s age and an assumed tuition inflation rate, you can come up with a four-year undergrad cost need in the future (going for more than four years is a behavioral event which we will not solve for).  Then you can begin to do the math around how much is needed to fund college depending on the time horizon of your child.

When you have the numbers, you can solve for age. Below is an example of what an estimated cost of tuition will be (assuming 5% tuition inflation each year) for the University of Nebraska Lincoln. (Note: This does not include the effect of tax on any earnings/growth)

1. S. Census Bureau – Current Population Survey 2018; 2. National Center for Education Statistics; 3. BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represent cumulative percentage price change from 12/31/82 to 12/31/2018

How much of college tuition are you willing to help pay for your child?

The right columns show how much you would need to save per month in order to pay for those future amounts assuming a 6% return on the assets invested monthly over the time from the beginning age.  With this information, we can estimate the cost of paying for 75% of University Nebraska tuition for a current newborn would require an estimated monthly savings of $425.

To make a plan, one needs to quantify how much they would like to pay for their children’s college and then acknowledge their ability to do so. The ability to contribute to their children’s future education must be contemplated concurrently with other income, savings, liquidity and planning for retirement. We always solve for retirement first because college is easier to fund, and frankly, it is not a necessity but a desire.

The combination of the ability to pay and the amount parents are willing to pay is what still needs to be solved for. Parents need to ask themselves if they want their children to have “skin-in-the-game” and what sacrifices they will need to make to go to college. What, then, are the parents willing to sacrifice to get them there?

The shortfall amounts can be filled with scholarships, grants and loans.  Financing college and paying back debt is another topic we will write about as a follow-up, but we want to give you some context.  According to Savingforcollege.com, the class of 2019 will have debt totaling roughly $29,900 when they graduate.  Their parents will acquire more than $37,200 in debt in addition to the children.  Whatever shortfall people haven’t saved for or haven’t paid for will generally get borrowed in some fashion.

Okay, I get it, I need to start saving now.  But to what vehicle?

Deciding what vehicle to use to save is determinant on the ability to have assets grow, tax efficiency, control and time. In our opinion, 529 plans offer the best way to plan for college.  While there are multiple 529 options out there sponsored by each state, the one that is best for you comes down to three things.

  1. Do I get a tax deduction for contributions?
  2. Is this plan low-cost?
  3. Does it have low-cost and diversified investment options?

All 529 plans have the ability to defer taxes on growth and potentially have the ability to shield growth from all taxes if used for a qualified educational expense. However, each plan has a different tax treatment on contributions determined by state laws. For example, Nebraska allows for a state income tax deduction on contributions up to $10,000 annually in totality. This could save someone up to $650 annually, depending on your income tax rate. However, it is important to note that some states offer no state tax breaks on contributions such as Minnesota.

You also have the ability to maintain control of the funds and distributions that occur throughout the lifetime of your child/beneficiary.  These are considered the assets of the owner (parent), not the beneficiary (student).  However, these accounts can be opened up by grandparents or others on behalf of a student.  These are subject to gifting limits, so please consult your tax advisor prior to opening one up.

After you decide what tax treatment you get in your state, you can narrow down the plan offerings based on cost and investment options.  The types of costs you need to look at within the 529 plan are the following:

  1. Program manager fee (what financial institution sponsors the plan)
  2. Investment advisor fee (what your financial advisor collects, if anything)
  3. Mutual Fund expenses (underlying costs of the investments)
  4. State administration fees (what the state charges to sponsor the plan)

Other options are Coverdell ESAs, which are limited to $2,000 a year in contributions and are phased out based on your income levels. These are tax-deferred and tax-free if used for education. They do offer a wider array of investment options since it is a personal account. However, you also are required to move the assets to another beneficiary by age 30, or take out the assets and pay the taxes.

UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts for minors have a few pitfalls. The first of which is children can have full control of the assets at the age of majority in the state in which they live. In Nebraska, children have sole control at age 21.  These assets are also subject to income taxes and capital gains annually. Who is responsible for those taxes is based on the income level of the minor and in some cases their parents.

What if my kid gets a full ride scholarship?

Congratulations, you just won the lottery! You may have several options for their savings, depending on the account type. If it is a UTMA, it’s their money for good. If it is a 529 you can switch it to another beneficiary, do nothing and see if grad school funds are needed, take the money out (pay income tax on the growth), or distribute it to the beneficiary for other non-qualified educational needs (they pay income tax on the growth).

Just do it!

Planning for college is just that: planning. Like all plans, sometimes they will change. However, we believe it is important to at least quantify and begin saving as early as possible. You will have peace of mind and, more importantly, assets you can use to help aid in one of the most important decisions you and your child will ever make.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL

 Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.

AREAS OF FOCUS
  • Investment Advisory Services
  • Comprehensive Financial Planning
  • Business Owner Planning & Succession
  • High Net Worth Families
AFFILIATIONS AND CREDENTIALS
  • CERTIFIED FINANCIAL PLANNER™
  • National Association of Personal Financial Advisors, Member
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • Mount Michael Booster Club Board
  • Lutz Gives Back, Committee Chair
  • March of Dimes Nebraska, Past Board Member

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OMAHA

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Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

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Lincoln, NE 68508

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GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

The SECURE Act + Planning Considerations for Individual Investors/Taxpayers

The SECURE Act + Planning Considerations for Individual Investors/Taxpayers

 

LUTZ BUSINESS INSIGHTS

 

the secure act + planning considerations for individual investors/taxpayers

nick hall, investment adviser

 

As often happens in Washington, speculation is just that and Congress acts on its own timeline. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was introduced earlier in the summer of 2019 and passed through the House of Representatives at that time. The bill, which proposed several changes to retirement plans and other tax legislation, appeared to be stuck in the Senate and seemed to be something that would not be given life until 2020, if ever.

 However, at the eleventh hour just before Christmas, there was a final push that got the SECURE Act slipped into an appropriations bill. This appropriations bill was required to be passed by Congress to avoid another government shutdown. The bill was quickly passed through Congress and then ultimately signed by President Trump on December 20.

The SECURE Act affects both individual taxpayers and business owners. There are substantial changes to 401(k) plans and other small business retirement plans as a part of this Act. For purposes of this article, I will focus the attention on the major changes made by this bill that will affect individual retirement plans and other planning items for individual taxpayers.

 

IRA Stretch Provisions Eliminated (for most beneficiaries) in Favor of New 10-Year Distribution Rule

One of the most significant changes as part of the SECURE Act is the elimination of the previous law allowing  beneficiaries to “stretch” IRAs. The previous law allowed beneficiaries of retirement plans and IRAs to stretch distributions over their life expectancy, or over the oldest applicable trust beneficiary’s life expectancy if a trust was named. The new law mandates most non-spouse beneficiaries who inherit retirement plans or IRAs after January 1, 2020, to draw down the account now over a 10-year period.

Under this new 10-year rule, there are no mandated distributions annually. Rather, the law simply states that the entire account must be emptied by the end of the tenth year following the year of inheritance. While this offers some flexibility to beneficiaries as to timing of distributions during that 10-year period, it is, in essence, a tax increase on IRAs. Considering many beneficiaries are often much younger than the original account owners, the new 10-year rule is much harsher than the old standard of stretching over one’s remaining life expectancy.

It is important to note the exceptions to this law—certain designated eligible beneficiaries who are not subject to the new 10-year rule. The list of those beneficiaries include:

  1. Spousal Beneficiaries (Most Common)
  2. Disabled Beneficiaries
  3. Chronically Ill Beneficiaries
  4. Individuals who are not more than ten years younger than the decedent
  5. Certain minor children until they reach the age of majority

The most common class of people from this list is spousal beneficiaries. Spouses will still have the ability  for a spousal rollover, allowing them to stretch distributions over their own life expectancy versus a much stricter 10-year period.

The 10-year rule exception for minor children applies only to a child of a retirement plan or IRA owner. Meaning, a retirement account inherited from a grandparent, aunt, uncle, or other relative would still follow the 10-year distribution rule. The old stretch rule only applies until the minor child reaches the applicable age of majority in his/her state of residence, and then the new 10-year distribution rule goes into effect.

Consequences and Considerations Due to Death of Stretch/New 10-Year Distribution Window

It is important to remember that any retirement plan or IRA beneficiary designation trumps what is indicated in a will or trust. Thus, an essential part of estate planning is ensuring designated beneficiaries on retirement plans and/or life insurance coordinate with the rest of the estate plan.

Commonly, individuals designate a trust as the primary or contingent beneficiary of a retirement plan for greater control or an extra layer of protection for a spouse, children, or grandchildren. These trusts must have language in them to allow them to qualify as a “see through” or “tax qualified” trust to preserve the old stretch provision. Some of these trusts are restrictive in that only applicable RMDs from Inherited IRAs are allowed to be distributed each year. In the case of the new 10-year rule, the only year that technically has a RMD is the tenth year following the death of the owner.

Having the whole IRA or retirement plan distributed in the tenth year could have adverse consequences from a tax standpoint, especially for large retirement accounts and beneficiaries in higher tax brackets. Secondarily, other “see-through” trusts are set up to keep any distributions from Inherited IRAs inside the trust. This result may be undesirable given that trust tax rates are much more compressed than individuals’ tax rates, hitting the top tax bracket at around $13,000 of taxable income.

The challenges mentioned above around the 10-year rule should lead many to reevaluate their retirement beneficiary designations. In light of the new rule, I would recommend those who are charitably inclined to consider naming a charity or multiple charities as a beneficiary to receive a portion or all of certain retirement accounts. The 10-year draw down rule will adversely impact beneficiary children who are in a very high tax bracket themselves. In some cases, it will mean losing 50% of the RMD to Federal and state taxes.

One planning opportunity that may arise due to the new 10-year rule is the option to name a charitable remainder trust (CRAT) as a beneficiary of a retirement plan. A CRAT is an irrevocable trust that makes fixed income payments to annuitants/beneficiaries for an established length of time. These fixed payments are based on a percentage of the assets in the trust, and the current maximum length of time is 20 years. The caveat is that any assets remaining in the trust after 20 years, or the specified length of time, must then be transferred to the charity or charities indicated within the trust document.

Because the SECURE Act is so new, there is no precedence on this strategy. I would recommend consulting with an experienced estate planning attorney. Regardless, I expect to see people giving charities much greater consideration to naming them as beneficiaries of retirement plans and IRAs going forward.

 

Required Minimum Distributions (RMDs) to Begin at Age 72

The previous rule stated RMDs from a retirement plan (retired workers) or IRA must begin at age 70 ½. This arbitrary age caused confusion relating to the timing of the first distribution and life expectancy factor used in calculating one’s annual RMD. The new law will now push the first RMD to age 72 for anyone turning 70 ½ on or after January 1, 2020. It’s important to note that individuals who turned 70 ½ or 71 in December 2019 are grandfathered in under the old rules and are still required to take an RMD in 2020. The new RMD rule will match the old rule in that the first distribution technically does not have to be made until April 1 following the year an individual turns 72. However, if the first RMD is delayed until that following year, a subsequent second RMD must also be taken before December 31 of an individual’s 73rd birthday year.

For many of our clients, this is welcome news because it delays taxes associated with the RMD. We often talk to individuals about the “retirement income gap”. Otherwise known as the time between one’s retirement and taking Social Security retirement benefits and RMDs. Upon retiring, many individuals see a dramatic drop in income for a period until they begin Social Security and mandated distributions from pre-tax retirement accounts. A popular recommendation is to maximize lower tax brackets during this period by converting funds from a pre-tax to a Roth IRA. The new RMD age of 72 helps lengthens that “retirement income gap” for many people and allows for a greater period of tax planning.

 

Qualified Charitable Distributions Still Permissible at Age 70 ½

Interestingly, even though the RMD age was pushed back to age 72, Qualified Charitable Distributions (QCDs) remain permissible once an individual turns age 70 ½. Individuals may still take up to $100,000 annually from an IRA and gift it to a 501©3 charity(s). Although it will not offset mandated income the first year and a half, QCDs taken before age 72 will lower the future RMD for an individual by reducing the IRA account balance. Starting at age 72, the QCD will reduce the then-necessary RMD.

 

Traditional IRA Contributions Allowed Beyond Age 70 ½

The old rule disallowed Traditional IRA contributions due to old age, restricting individuals from making contributions after turning age 70 ½. Beginning this year, individuals who remain working or have spouses who have earned income through wages and/or self-employment are permitted to make Traditional IRA contributions beyond age 70 ½. There is little benefit to individuals making traditional IRA contributions after age 70 ½, given the income limit to deduct contributions is still fairly low (AGI of $75,000 for Singles and $124,000 for Married Joint Filers in 2020) and individuals have to begin taking RMDs at age 72 anyway.

However, one advantage of this new law applies to potential backdoor Roth IRA contributions for high-income earners. Individuals who still have earned income and high AGI, are now allowed to make backdoor Roth IRA contributions. This is done by making non-deductible Traditional IRA contributions that were previously exempt in the year someone turned 70 ½. One caveat is that post-age 70 ½ deductible Traditional IRA contributions will reduce any QCDs by the amount of cumulative deductible Traditional IRA contributions.

 

Other Miscellaneous Provisions of SECURE Act

  • 529 plans can now be used for apprenticeship programs. This includes books, fees, supplies, and other required equipment of the program.
  • 529 plans are now permitted to be used for up to $10,000 of qualified loan repayment of student loans. Additionally, $10,000 can be used to pay debt on each of the 529 plan beneficiaries’ siblings. This change is retroactive to 2019.
  • The Kiddie Tax reverts back to previous laws before 2018. Per the kiddie tax, unearned income for children above $2,200 (like Social Security survivor benefits) will again be taxed at the parents’ tax rate and not subject to the compressed trust tax rates like it was in 2018 and 2019.
  • Deduction of qualified tuition and related expenses remains effective through 2020.
  • The AGI hurdle rate to deduct qualified medical expenses remains at 7.5%–extended for tax years 2019 and 2020.
  • Individuals who receive taxable stipends or non-tuition fellowship income may make IRA or Roth IRA contributions beginning in 2020.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

nhall@lutz.us

LINKEDIN

NICK HALL, CFP® + INVESTMENT ADVISER

Nick Hall is an Investment Adviser at Lutz Financial. With 10+ years of relevant experience, he specializes in creating thorough, adaptive financial plans and investment management strategies for high net-worth families. He lives in Omaha, NE, with his wife Kiley, and daughter Amelia.

AREAS OF FOCUS
  • Comprehensive Financial Planning
  • Investment Advisory Services
  • Retirement Planning
  • Income Tax Planning
  • Social Security and Medicare Planning
  • Investment Project Research
  • High Net Worth Families 
AFFILIATIONS AND CREDENTIALS
  • Financial Planning Association, Member
  • CERTIFIED FINANCIAL PLANNER™
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Business Management, Eller College of Management - University of Arizona, Tuscon, AZ
COMMUNITY SERVICE
  • Mount Michael Benedictine, Alumni Board President
  • Lutz Gives Back, Committee member
  • United Way, Volunteer
  • Salvation Army, Volunteer
  • Omaha Home For Boys, Volunteer

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

It’s Time to Review Your Personal Umbrella Policy

It’s Time to Review Your Personal Umbrella Policy

 

LUTZ BUSINESS INSIGHTS

 

it’s time to review your personal umbrella policy

joe hefflinger, director and investment adviser

 

Don’t just think, “that will never happen to me.” That’s how one of my new clients recently responded when I asked the amount of her personal umbrella coverage. She sighed and then proceeded to tell me how a few years back, her college-aged daughter had returned home during a school break and got into a car accident that injured the driver of the other car. While the wreck was her daughter’s fault, she hadn’t been drinking or speeding. It was just an accident, something that could happen to anyone.

Over the next 18 months, the injured party required over ten operations, which produced hospital bills alone of over $1 million. My client’s jaw dropped when the plaintiff’s attorney brought a lawsuit against her (the owner of the car) for over $6 million! After months of back and forth between each side’s attorneys, they finally reached a settlement for a little under $2.5 million (with about 1/3 going for medical bills, 1/3 going to the injured party and 1/3 going to the plaintiff’s attorney). The whole ordeal took almost two years to finalize from the time of the accident.

Thankfully, my client had met with an insurance advisor a few years before this event, who had strongly encouraged her to increase her existing personal umbrella policy from $1 million to $5 million, which she did. So, my client didn’t have to pay one cent of her own money towards legal defense costs or the final settlement amount. It was all handled by her insurance carrier. Her only expense was to cover the small deductible on her auto policy.

That being said, it was still an extremely stressful time period for my client and her family. But, can you imagine how much more stressful this would have been for my client had she not bumped up her insurance coverage?

 

What is a Personal Umbrella Policy?

How an umbrella liability policy worksA personal umbrella policy (PUP) is an extension to the liability protection offered by your existing auto and homeowner’s policies (or condo, renter’s, etc.). The diagram to the left illustrates how your PUP comes into play. Keep in mind the deductible on your PUP would be satisfied by your underlying home/auto coverage.

In addition to increasing the limits of those other policies, your PUP may also add additional liability coverage or do away with exclusions in the underlying policies. However, there can be substantial variation in policies, so be sure to read the fine print. Don’t just assume that a particular situation is covered. If it’s important to you, confirm with your insurance advisor. Also, keep in mind this is separate from any malpractice insurance you may have, as your PUP won’t cover damages you may cause in your professional work.

Before I go any further, I feel compelled to point out that our firm doesn’t currently sell insurance of any kind. So, my only motive in writing this is to make you more informed about your potential umbrella needs, not to sell you a policy. Also, the following advice is informed in part by recent discussions I’ve had with some of the top personal injury lawyers, estate lawyers and insurance advisors who serve clients in Omaha, NE.

 

How Personal Injury Damages are Calculated

In Nebraska, there are four elements that make up the potential damages in a personal injury lawsuit: (i) medical bills; (ii) economic damages (e.g., lost wages); (iii) pain and suffering; and (iv) permanency.  Other states have similar elements, although there is some variation. For example, some states also allow for punitive damages (although these wouldn’t be common in a typical accident scenario).

Compared to other states (e.g., CA, FL, NY, OH), Nebraska isn’t known for producing large awards for personal injury cases. However, awards or settlements in the $3-5 million range do happen in Nebraska, and there’s nothing preventing even higher awards if the right fact pattern is present.

One of the advisors I spoke to, for purposes of this article, indicated there had been a personal injury settlement in Nebraska of nearly $10 million. Keep in mind that Nebraska law will only apply if the action which caused the injury occurred in Nebraska.  If the claim arises in another state, that state’s laws will apply.  If that injury happens to be in a more litigation-friendly state, then you could potentially be subject to an even larger lawsuit.

 

Examples of Potential Claims

I find that most people have a hard time giving this topic the attention it deserves unless you can paint a picture for them of how these types of scenarios could play out. So, I asked two local attorneys to do just that (one a personal injury plaintiff’s attorney and the other an insurance defense attorney). Here are two scenarios that have the potential to create large claims against you:

  • You cause injury to a high-income individual. Think of a Neurosurgeon in his early 40’s making well over $1M a year. He’d have to try to mitigate his damages, but if afterward, he can only earn $100k a year. He’d have a very large potential claim for economic damages (lost wages) alone.
  • You cause injury to someone who now requires 24-hour care for the rest of their life, particularly if the inured person is younger with a long-life expectancy. Regardless of their income, this could create a large potential claim for medical bills, pain and suffering, and permanency.

In addition to a car accident, here are a few other scenarios that could lead to an injury where you could be deemed liable:

  • Boating/jet ski/wave-runner accident
  • ATV accident
  • Injury at your home pool, hot tub or lake house
  • Deck collapses
  • Trampoline accident
  • You make an inflammatory comment on social media
  • Your dog bites someone
  • A contractor is injured while working at your home
  • You have a party at your house and a guest drives home under the influence of alcohol and injures someone, or that happens when your teenager has a party at your house when you’re out of town

The list goes on.

 

How Much does a PUP Cost?

The good news is that a PUP is typically one of the cheapest forms of insurance. While these types of claims do happen, they are still extremely rare, and the coverage is priced accordingly. That being said, pricing can vary based in part on the following:

  • Your personal risk profile. If you have youthful drivers, multiple properties, a home pool, boats, ATVs, etc. then your premium will be higher.
  • Your insurance score. This is a combination of your exposures, loss history and credit rating.
  • Where you live. Carriers must file rates in each state they do business, and some rates are higher than others due to the legal climate in that state.

Just to give you a general sense of what potential costs can look like (at least in Nebraska), here is a sample of recent PUP pricing I’ve seen:

  • $1 million: $200-$400 per year
  • $2 million: $350-$500 per year
  • $3 million: $450-$650 per year
  • $5 million: $600-$750 per year
  • $10 million: $1,500-$1,900 per year

Bottom line: bumping up your coverage isn’t going to break the bank. Also, it’s usually best to bundle your PUP with your home and auto coverage to receive the best pricing.

 

Don’t Forget Uninsured/Underinsured Motorist Coverage

If you were to include extra umbrella coverage for uninsured/underinsured motorists (UM/UIM), it’s likely your pricing would be higher (e.g., an additional $200-$400) than the costs quoted above. This covers you in the event you are injured by someone else in an auto accident, and their insurance and available assets are inadequate to cover your damages.

All the experts I spoke with agreed that this was important coverage to add. Be sure to ask about this coverage as not all carriers offer it, and it’s capped at certain amounts by others. Also, if you’re a high-income earner and your family relies on you for support, it’s essential to have appropriate amounts of life and long-term disability insurance.

A related (though rare) type of coverage is for Third Party Liability. It’s like UM/UIM, but responds to events other than auto accidents where you are injured, and the other party can’t satisfy your claim.

 

How Much Coverage Do I Need?

A common answer you will hear is to insure up to the amount of your assets. However, your exposure to liability is not limited to your net worth. For example, if you have $1 million in assets and only get $1 million in insurance coverage, that doesn’t stop someone from suing you for $2 million (or more), especially if the plaintiff’s attorney thinks they have a very strong case. Keep in mind it’s not just your current assets that are at risk but also your future earnings (or future inheritance) because a large award may stay with you until it is satisfied.

Here are factors, in addition to your net worth, that place you at a higher risk of liability warranting the purchase of a larger PUP:

  • Youthful drivers
  • Home pool or house on a lake
  • Boat or ATV
  • Second home/other property (particularly in a more litigious state)
  • Serving on multiple non-profit boards
  • Higher profile in the community (doctor, lawyer, athlete, entertainer, politician, etc.)

Based on the discussions I’ve had with other experts in this area, I’ve developed a few suggestions. At a minimum, if your net worth is under $5 million, make sure you insure at least the amount of your assets plus an extra $1 million buffer above that amount. If you have a higher net worth or one or more of the factors above that place you at a higher risk, bump up your amount accordingly.

We have lots of clients with at least $5 million of coverage, and some who have at least $10 million. Some of the insurance advisors I spoke with have clients with up to $50 million of coverage (though this is very rare).  With respect to UM/UIM umbrella coverage, the insurance professionals I spoke to agreed that $1 million was a fair amount in this area.

 

Work with Your Team of Advisors and Make an Informed Decision

If you are someone with a higher net worth, I encourage you to work with an independent insurance professional who can help you evaluate your needs, shop around for the best options, and give you access to the top insurance carriers. Certain carriers specialize in providing coverage at higher amounts with enhanced policy options (e.g., Chubb and PURE). I find that most new clients I meet with are arguably under-insured when it comes to their PUP. This may be due, at least in some situations, to their working with insurance agents who primarily serve a lower net worth clientele.

Case in point: I’ve recently met with two different doctors, both with a net worth near $10 million, each with a house on a lake, boats, and multiple teen drivers. Each of these doctors had a PUP of only $1 million. I doubt that would have been the case had they been working with an insurance advisor who regularly works with higher net worth clients.

While you’re at it, if you have a higher net worth, I also suggest you discuss all of this with your estate attorney to get their input. They might have additional ideas on asset titling or other advice to better protect your assets. Your financial planner should be able to provide input in this area as well.

 

Why Take the Risk?

The types of claims described in this article are rare, but they do happen. The good news is that the coverage to protect yourself from these low probability events is relatively inexpensive. When the cost to materially increase your coverage in many cases is only a few hundred dollars a year, why take the risk?

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.  A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jhefflinger@lutzfinancial.com

LINKEDIN

JOE HEFFLINGER, JD, CFP®, CAP® + DIRECTOR & INVESTMENT ADVISER

Joe Hefflinger is an Investment Adviser and Director at Lutz Financial. With 15+ years of relevant experience, he specializes in comprehensive financial planning and investment advisory services for professionals, business owners, and retirees. He lives in Omaha, NE, with his wife Kim, and daughters Lily and Jolie.

AREAS OF FOCUS
  • Retirement Cash Flow Planning
  • Insurance Planning
  • Estate Planning
  • Business Owner Exit Planning
  • Charitable Planning
  • Tax Planning
AFFILIATIONS AND CREDENTIALS
  • National Association of Personal  Financial Advisors, Member
  • Financial Planning Association, Member
  • Nebraska State Bar Association, Member
  • Omaha Estate Planning Council, Member
  • CERTIFIED FINANCIAL PLANNER™
  • Chartered Advisor in Philanthropy®
EDUCATIONAL BACKGROUND
  • JD, Creighton University School of Law, Omaha, NE
  • BS in Economics, Santa Clara University, Santa Clara, CA
COMMUNITY SERVICE
  • Partnership 4 Kids - Past Board Member
  • Omaha Venture Group, Member
  • Christ the King Sports Club, Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850