Breaking Tradition: Planning Strategies For Today's Family
February 20, 2015 | Home and Family
Many of today's American families look different than the 1950s picture of a husband, wife and 2.3 children. That's why it's critical, especially for "non-traditional" families, to have a comprehensive financial plan designed for their unique circumstances and needs.
Plan Carefully to Be Sure Your Plan Will Deliver
The term “family” means different things to different people: single or married, children or not, step-family, blended family, foster family, domestic partnership, or family made up of multiple generations.
Whatever your family looks like, to provide for loved ones you’ll need a comprehensive financial plan that addresses your specific goals and priorities.
If your family doesn’t fit the “traditional” definitions protected under law, such as a married husband and wife, you’ll need to plan accordingly.
If you have a “non-traditional” family, your plan is more likely to deliver the results you need if you have proper estate and retirement planning and keep in mind the following key areas:
- Beneficiary Designations-Consider not only whom you’ll name as beneficiaries for insurance or retirement accounts, but the tax implications they may face. For example, a married person who inherits a spouse’s retirement funds can roll them into his or her own individual retirement account and choose not to begin withdrawing the funds until age 70½, thus deferring the income tax liability on that money. Any other heir, including an adult child or domestic partner, is required to begin taking distributions much earlier and paying the corresponding income tax. One possible solution is to plan on paying such taxes with the death benefit from permanent life insurance, which is income tax-free.
- Blended Family Bequests-Be clear on state inheritance rules, and document your legacy wishes in a will or trust. Having proper estate planning documents is particularly important for marriages with children from multiple relationships, when caring for people with special needs, or where you want to support individuals who would not typically be considered legal heirs.
- Domestic Partner Rights-Understand that without appropriate documentation, people who are not married have no legal claim to a partner’s assets. Even in a long-term domestic partnership, if an unmarried person dies without estate documents, in many states all of his or her assets would go to the deceased’s surviving family members. If you want a non-related person to inherit assets upon your death, make these wishes legally binding in a will, trust or by beneficiary designation.
- Employee Benefits-Be aware of the steps required for non-related family members to receive employee benefits. You may need to register and document a domestic partnership with the state, or provide proof of the parent-child relationship for adult children, to receive employer-paid benefits.
- Estate Taxes and Gifting Strategies-Understand gifting and estate tax rules, and adjust your financial plan where needed. For example, there are unlimited federal gift and estate tax exemptions for assets transferred to a U.S. citizen spouse. For all other beneficiaries (including adult children or non-related heirs), there is a maximum gift and estate tax exemption amount. Prior to making large gifts, or if you have a significant estate, be sure to work with your tax advisor.
- Health Care Access-Be sure you are clear on federal privacy regulations related to health care. Unless you have documented permission, even if you are a spouse or family member, you may not be able to legally access medical records or make medical decisions for anyone over 18. To ensure the right person(s) have access in case of emergency, you and anyone who might need this kind of help from you – including single adult children (college students are in this category) and other loved ones – should complete a health care power of attorney.
- Pension and Social Security Benefits- Plan around limited survivor benefits if necessary. Many pension plans allow retirees to choose a lifetime income option so their surviving spouse receives a monthly benefit for life. Unfortunately, this provision generally applies only to couples who are considered married under federal law. Social Security survivor benefits also are paid only to spouses married under federal law. You can overcome these limitations by planning early to replace that survivor income through life insurance.
- Powers of Attorney-Recognize that you have no control over a partner’s decision making or individual assets unless permission is given through a legal document. A durable power of attorney provides authority to make personal and financial decisions if a person becomes incapacitated, and a health care power of attorney allows for making medical decisions. Work with your attorney to obtain or update these documents for you and your loved ones.
- Retirement Strategies-You may need to get creative and adjust your retirement plan to adapt to concerns such as limited survivor benefits or tax impacts from a non-spouse inheriting qualified retirement assets. Depending on your household income, you may want to consider saving for retirement in after-tax vehicles such as a Roth IRA, a non-qualified mutual fund, stock portfolio or annuity in addition to or in place of a tax-deferred qualified retirement fund.
- Same-Sex Partnerships-The June 2013 U.S. Supreme Court decision granting same-sex married couples the same federal status as opposite-sex married couples has financial implications in areas including federal tax, retirement, estate and employee benefits. However, since detailed rules are still pending and state laws vary, consulting with your financial professional or estate planning attorney is critical to understanding and planning for the opportunities now available.
Today’s American families may look different than years ago, but some things remain the same. Every family needs a comprehensive financial plan to help them meet their goals, appropriately provide for loved ones and manage their unique circumstances. A financial professional can help you review your priorities, connect with other experts as needed and create the right plan for you.