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Boomer Estate Planning
Boomer estate planning has some special twists. For the record, we’re
referring to the cohort born between 1946 and 1964. While that includes Boomer
Esiason (born April 17, 1961) the former Jet’s quarterback, we’re not limiting
our planning to him.
Boomer Vagabonds:
Andy of Mayberry never would have left Mayberry.
But Boomers are less tied to any geographic area then prior generations. That
means that documents must be more flexible and contemplate relocating. Trusts
should include a change in situs clause that
enables the trust to be moved to a new state.
Home Sweet Boomer
Home:
For many Boomers a
substantial portion of their wealth may be tied up in their homes. Thus, estate
planning techniques like qualified personal residence
trusts (QPRTs) while attractive for the wealthiest Boomers will be
impractical for many as too much wealth would be put beyond their reach.
Techniques like reverse mortgages are likely to
become ubiquitous as more Boomers seek to tap that large home equity pot in
retirement. When carrying costs become too high, sale and reinvestment in a
smaller home, often in a lower cost area, will be a likely option. This is
another reason that the need to address changing domiciles in planning is so
important.
Redefine Retirement:
Boomers are active much longer. This changes the
nature of many plans and documents. 55 or 65 doesn’t mean retirement, it means
re-tooling. Estate plans and business legal documents need to address business
succession, often in a different manner. Sale at an agreed retirement age often
gives way to retained equity, but a reduced work load. Shareholder and
operating agreements need to be renegotiated to address phased-in retirement. This
needs to be addressed long before target retirement or the Boomer won’t have
much negotiating clout.
Retirement Plan
Funding:
Boomers should
keep funding retirement plans as increasing life expectancy increases the need
for post retirement dollars. For example, Boomers age 50+ can contribute an
extra $1,000, for a total of $5,000, to their IRAs, and up to $5,000 for
401(k)s. Considering the asset protection and other benefits, Boomers should max
out their IRA contributions, and they can keep contributing up until the year
prior to the year in which they turn 70.5. This is especially important for those Boomers who ransacked
retirement funds for home purchases and other uses.
Investment
Allocations: Many retiring
Boomers are refocusing their investments on “income.” Caution is in order. It’s
cash flow and not “income” that retiring boomers will require. Most
significantly, shifting too large a proportion of a boomer’s portfolio to
income oriented investments based on an underestimation of life expectancy
could have a boomer’s portfolio loose its purchasing power in later years. That
could be serious a financial problem.
What should the asset allocation model be for a Boomer age 65, with a
spouse age 72, entering “retirement”? Before heavily weighting the portfolio
with bonds, consider that there is nearly a 50% chance that one of them will be
alive 24 years from now! A predominant asset allocation to bonds could assure
that inflation will wipe them out before global warming.
Disability: Disability planning needs lots of attention.
Nearly 20% of Americans have some type of disability. With Boomers working
longer and living longer, disability planning doesn’t stop at age 55 or 60. If
Boomers will often work well beyond what use to be retirement age, the need to
replace lost income if disabled will also continue longer. At older ages
disability buy-out insurance won’t solve business succession issues that it may
have covered decades earlier. Alternatives need to be identified.
New Age Perspectives: Perhaps the most significant impact on boomer estate
planning is not new laws, but the very different boomer mindset and paradigm
for planning. The “traditional” approaches don’t always apply. Boomers are more spiritual,
philosophical and “fuzzy”. It is far more common to address religious,
lifestyle and other issues in planning documents to really carry out the wishes
of boomers. In the Age of Aquarius a trust for a child is far more likely now,
then 10 years ago for the boomer’s parents, to include details on how the child
should be raised, values, etc. This could take the form of a detailed
distribution provision that not only addresses requisite tax lingo, but
describes the types of education, travel and other expenses the Boomer parents
want for their progeny. Boomers are more likely to draft an ethical will, a statement of their wishes, beliefs and
philosophies, to leave to their children along side their “legal” will.
Sandwich Stress: Many Boomers are caught between providing for
their children while still caring for their parents, the so-called sandwich
generation. The key for Boomers in this position is planning and modeling. Have
your advisers model your current estate and financial picture. Challenge the
projections with “what-if” scenarios to see how things turn out and identify
possible actions to take. Too often Boomers worry about estate taxes (gee,
might this have something to do with the evil death tax campaign?) when the
real issue is the opposite, will they have sufficient wealth to sustain all the
demands being made on that wealth? Sometimes modest tweaks in when the Boomer
retires (another year of work means more money saved to compound over the
Boomer’s future life expectancy, rather than a current reduction in resources),
a slightly more aggressive investment allocation (less dependence on tax exempt
bonds) may swing the financial pendulum into safe territory.
Non-Family Structure: It’s been reported that 28.6% of boomers age
45-59 are single. That’s quite an increase from the 18.8% of people that age
that were single in 1980. So planning using the typical married couple paradigm
is not sufficient for many boomers. Living trusts should become more common as
single Boomers seek to establish a structure to protect them in the event of
illness, disability and advanced age as nearly 1/3rd won’t have a
spouse to rely upon. While a larger number of Boomers are part of same-sex
relationships than prior generations, federal law has not evolved. The 1996
Defense of Marriage Act mandates that only a marriage between opposite sex
couples can be recognized, so for federal tax purposes, regardless of state
law, no benefits are afforded same-sex couples. The Social Security
Administration is bound by the same law. So for these Boomers, yet additional
planning is in order.
Different Laws: Boomers face more complexity then prior
generations. A host of new laws affect boomer planning. HIPAA – Health
Insurance Portability and Accountability Act has broad impact on any legal
document addressing dissemination of medical information that affects powers of
attorney, living wills, shareholders’ agreements, trusts and more.
Authorization needs to be included in these documents for physicians to
disclose relevant medical information about Boomer patients. The Principal and
Income Act has a dramatic impact on how trusts established by parents of
Boomers should be administered. Many of these old style trusts were written to
pay out income. But for a Boomer entering retirement years that income alone
may not be enough, or too variable. It’s likely that as Boomers age the trusts
established for them will, with increasing frequency, elect to be treated as total return trusts (when state law permits). These
types of trusts can pay out a fixed percentage of value, e.g. 4% of the value
of the trust, rather than payout income. The payout will grow as the trust
assets grow in value. For Boomer trust beneficiaries, this will be an important
method to provide greater and more secure cash flow in retirement.