2009 ended without congress completing legislation on the estate tax. That means that for right now there is no estate tax in 2010 and the tax is set to revert back to the $1 million exemption next year.   Some believe that Congress will act quickly to reinstate the tax, but we really don't know what will happen.  There's also a question regarding the constitutionality of making any reinstated tax retroactive to January 1.

 

On the surface, it might seem like not having an estate tax is beneficial for the families of those that die in 2010.  Unfortunately, that's only true for about 2% of the population (based on 2009 exemption levels) who are subject to the federal estate tax.  The other 98% will actually be negatively affected by lack of legislation because the inherited assets will not receive a step up in basis.  A "step up" in basis means that any assets passed to heirs will be valued based on the date of death versus the original purchase price.  The step-up usually results in significantly lower taxes if the heir sells the asset because it makes the taxable gain much smaller. Not receiving the step-up can also create a significant record-keeping challenge -- figuring out how much your grandparents or parents paid for something purchased years ago may be all but impossible.

 

This uncertainty presents a challenge for planning purposes.  For most people right now, taking a wait-and-see approach makes the most sense.  It doesn't mean that you should delay updating wills and other planning documents if they don't reflect your current wishes or family situation -- keeping your documents and beneficiary designations up to date is always important.  But it does mean that updates for tax planning purposes are best postponed in all but the most urgent situations.  Stay tuned!

If you've been out of work for a period of time, it's a huge relief when the paychecks start rolling in again.  Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
 
But here's the good news.  While you were unemployed, you and your family probably got used to spending less.  Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
 
To make this work, you need to resist the status quo expectation that your spending "should" return to former levels.  This doesn't mean you can't celebrate the new job or enjoy a few small additional luxuries.  But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild.  With the cash you're saving, here's a 6-item priority list to tackle:
 
1)     If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month's expenses).   See my blog post on 10 tools to build an emergency fund for tips on this.

 

2)     If debt has been accumulated, create the typical debt "snowball" program by paying off highest interest rate debt first.   See my December 2008 newsletter for details on this strategy.  See my December 2008 newsletter for details on this strategy.

 

3)     If you borrowed from retirement plans, be mindful of the plan's rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts.  These rules could trump the ideal strategy of paying back the highest interest debt first.

 

4)     If you let critical insurance lapse, get your insurance back to the needed levels.  This is also a good time to re-assess your insurance needs.  It's possible to be over-insured, and there may be some policies you let lapse that you're better off without.

 

5)     As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months' expenses while paying off the last of the debt.

 

6)     Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.

Once you've accomplished these 6 priorities, you will be well on your way to creating your desired financial future.  You'll probably be used to living on less by this point.  And you'll have created the freedom to choose when you'll indulge in a splurge that you'll really enjoy, as opposed to feeling trapped with a high level of fixed expenses. 

If you're near retirement and have a pension, you may be considering a pension max strategy.  With all the variables involved, it can be challenging to determine if it's really in your best interest. 

 

Pension max is used by married couples to increase their net retirement income while still protecting the surviving spouse's income in the event the pension recipient dies first.  Basically, the pension recipient elects a single life pension instead of one with a survivor benefit for their spouse.  This results in a higher monthly pension benefit.  Then the pension recipient purchases life insurance to allow the surviving spouse to replace the pension income in the event that the pension recipient dies first.  In some situations, this approach can result in a higher net retirement income if the cost of the needed life insurance is less than the increased pension benefits.

 

 

First - at the risk of stating the obvious - if you're not married, there's no reason to consider it.  Depending on your estate goals and health, there may be other strategies that make sense.

Second - the health and age of the pension recipient matters a great deal.  If the pension recipient is in excellent health and can likely qualify for preferred life insurance rates, pension max has a lot better chance of being a good idea.

Third - you need to determine how much and what kind of life insurance is needed to replace the income.  As the pension recipient gets older, less life insurance death benefit will be required to replace the pension income.  Usually some combination of tiered term-life policies and a small amount of permanent insurance fit the bill.

 

Fourth - the surviving spouse should have an idea of how they will use the life insurance death benefit to replace the pension income.  For many, a single-premium immediate annuity makes the most sense, however other draw-down investment scenarios can also be considered.  

 

Fifth - you need to consider taxes in your calculations on both the life insurance benefit and the increased pension benefit.  

Sixth - consider the convenience factor.  If there's just a very small financial benefit to using a pension max strategy in your situation, it may still make sense to forego it.  You need to weigh the simplicity of just taking the pension against the extra effort of going through life insurance underwriting and paying the premiums ongoing.

If you're seriously considering using a pension max strategy, it's a good idea to have an uninterested third party talk through the analysis with you.  A fee-only financial advisor who doesn't have a big insurance commission at stake based on your decision will be able to offer objective advice.  And even though you spend some money on the advice, it may help you save much more over the long term and at very least feel confident that you made the right decision based on your unique situation.