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Senior Finances

Q: What is your position regarding significant stock market investments during retirement.
A: If you are no longer working and have limited assets, you should not have a significant portion of your investments tied to the stock market. If the stocks or funds you hold drop significantly in value, you can easily lose the money that you need to fund your retirement or that you plan to leave to your heirs. After you are retired, you simply no longer have the time or the means to replace losses because you are no longer working.

Q: I am 70 years old and my financial advisor (my stock broker) has me significantly invested in the stock market, indicating that diversification will protect me and the fact that the market always comes back over time. Should I be worried?
A: Yes. At your age no more than 30% of your portfolio should be tied to the stock market and diversification can only take you so far. Diversification did not protect investors when the market dropped 22% between October 28th and 29th in 1929. It did not protect investors when over 2 months the market dropped 40% in the same year, or from the 90% drop that occurred betwen 1929 and 1932. More recently it did not protect investors when the stock market (DJIA) dropped 22.6% in one day on October 19, 1987 and it did not protect investors when the NASDAQ dropped 78% between March 2000 and October 2002. As an individual investor, you have no control of your money when it is invested in the stock market and you are at the very end of the food chain behind all the institutional investors. With regard to the market coming back, it may, but you may not have the time to recover your losses. It took individual investors 25 years to recover from the Crash of 1929. How long will it take for investors to recover from 911, from the next terrorist attack or the next global crisis. No one knows!

Q: What is the long term capital gains tax rate in 2009.
A: Long term capital gains taxes rates vary depending on the investment. For assets held more than one year, investments such as stocks and real estate, the maximum long term capital gains rate is at the lowest it has ever been - 15%. For taxpayers in marginal tax brackets (15% or less) the long term capital gains tax rate is 0% for 2009.

Q: What is the estate tax rate and current exemptions.
A:The estate tax rate is 46% in 2006. The rate drops to 45% between 2007 and 2009. The estate tax exemption is $2 million in 2006 to 2008, then jumps to $3.5 million in 2009. In 2010 there is no estate tax and in 2011 the estate tax returns to 55% with a $1 million exemption unless changed by legislation prior to 2011.

Q: My wife and I each have a $3.5 million estate tax exemption in 2009. If I pass away, will our combined $7 million exemption be preserved?
A: Not necessarily. Most husbands leave their assets to their wives. When this happens your exemption goes away and hers stays at $3.5 million for your combined assets. The way to avoid this problem is to establish a revocable living trust with an A/B provision.

Q: At what income are my social security benefits taxed?
A: In 2008 and prior years, if your adjusted gross income exceeds $32,000 if married and $25,000 if single, 50% of your social security benefits will be taxed. If your adjusted gross income exceeds $44,000 if married and $34,000 if single, up to 85% of your social security benefits will be taxed.

Q: How do I avoid paying taxes on social security income?
A: By reinvesting your assets in investments that defer taxation or are not taxed i.e. investments that do not generate a 1099 every year, requiring you to pay taxes.

Q: How much money can I gift "tax-free" each year and how does the gift tax work?
A:In 2009 you may gift up to $13,000/year to any person without incurring any tax liability. This means that a husband and wife could gift 5 people $13,000 each, thereby gifting a combined total of $130,000.

Should you gift more than $13,000 per person per year, you must include Form 709 with your tax return. You are allowed to gift up to a total of $1 million during your lifetime over and above the $13,000/person annual exemption. Please be aware that any gifting in excess of $13,000 per person per year continues to be considered an asset for the purpose of calculating estate tax liability as it applies to your estate tax exemption.

Example A: If you die in 2009 and you gave away $1 million in gifts over your lifetime (in excess of $13,000 per person per year) and the balance of your estate totals $1 million you will not owe any estate tax because your combined exemption is $2 million

Example B: If you die in 2009 and you gave away $1 million over your lifetime (in excess of $13,000 per person per year) and the balance of your estate is valued at $3.5 million, your will owe estate tax (45% in 2009) on $1 million.

Q: Is there a way to protect estates in excess of the estate tax exemption from significant taxation upon death?
A: One way is to use a charitable remainder trust (CRT). When using a CRT your assets are protected from capital gains tax and the trust can generate an income for yourself and your family while you are living. The only requirement of a CRT is that you must leave a minimum amount (currently 10% minimum in CA) to a qualifying charity when you die. A CRT can also provide a very nice tax deduction over a 5 year period of time.

*The above FAQs are for informational purposes only and should not be considered advice or counsel as to any particular individual or family's situation for estate or elder planning purposes.