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Pacific Advisors 01 2012 Newsletter

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Pacific Advisors monthly newsletter

Pacific Advisors monthly newsletter

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  • 1. Nuclear Family Financial Models,Extended Family Realities In This Issue… Look at this picture of the silver-haired couple. It is a stock photo, one that could beused as the advertising background for any number of products or services. But since this NUCLEAR FAMILYis a newsletter about personal financial issues, what topic is most likely associated with FINANCIAL MODELS,this image? EXTENDED FAMILY Can you say “Retirement Planning”? REALITIES You should, because that’s the tagline that appears with this photo on the homepage Pages 1-3for a prominent financial services company. And since a picture is worth a thousandwords, there’s a lot more being said in this image than just those two words. For instance,it would be easy to imagine… EXTENDED FAMILY The couple is married. While they are obviously older, they are healthy, attractive, ISSUE: Financingwell-dressed and self-confident. They are moderately wealthy, have led successful, happy Independent Livinglives and are optimistic about their future together. Arrangements Pages 3-4 With a bit more imagination, it would also be logical to assume… The couple’s two or three children are independent, successful adults who have EXTENDED FAMILYcareers and families of their own, and wonderful grandchildren that love to come and ISSUE: Special Needsvisit. With family, career and financial objectives completed, this wise, contented coupleis now ready to plan a rewarding and relaxing retirement. Planning Page 5 In summation, the unspoken message this photo presents is the picture-perfectfinancial conclusion for the ideal nuclear family. It’s the last snapshot in a social motifthat advertisers have been selling since the 1940s. The image sequence begins with boy RETIREMENT PLANmeets girl. Soon after, the photos show they are working, getting married, having kids, CONTRIBUTION LIMITSand buying a house (the order may vary). Then, for the next two decades, there’s a FOR 2012montage of raising children, establishing a career, and accumulating a nest egg. Finally,the sequence comes full circle, as the silver-haired boy and girl live happily ever after. Page 6It’s the American Dream. There’s a lot to like about this idealized version of nuclear family life in the UnitedStates. Who wouldn’t want to look and feel good after 60, have well-adjustedindependent© Copyright 2012 Page 1
  • 2. adult children, adorable grandchildren, and finish with both them in their old age, etc. One hundred and fifty years later,the money and companionship to enjoy a relaxed and most of us see this corporate model of social support simplyrewarding retirement? That’s not a bad life at all. as the way things are. But Greif points out that “providing In the financial services field, it’s no surprise that a lot of institutions through corporations is a novelty.”the marketing is designed to resonate with these nuclearfamily themes. Life insurance is often associated with The Persistence of Extended Familyprotecting your nuclear family. College funding plans tap into Connectionsthe parental desire to help your children become successfulnuclear family units of their own. Long-term care insurance is Even as industrialized modern society has mitigated muchthere so your nuclear family unit will not be a burden to other of the financial necessity for extended family connections, itfamily units, particularly your children. And most retirement has also brought forth other issues that create new financialplanning occurs within a nuclear family paradigm; the and social concerns between nuclear families and extendedcomputer models and portfolio analyses are focused on families.guaranteeing you and your spouse have enough to live on for Increased longevity makes for circumstances where adultthe rest of your lives. children must become caretakers for their parents, perhaps But ironically, when advertisers in the financial services even as these children are nearing retirement. Divorce, whilefield focus their marketing efforts on nuclear family success, no longer having a social stigma, often results in thethey may be making it harder to achieve it – and overlooking realignment of nuclear families through remarriage and cansome great opportunities. result in major shifts in financial obligations and inheritance. “Boomerang” children – those who leave only to returnThe Nuclear Family is an Anomaly in History because of a divorce, job loss or other disruption – can dramatically alter the nuclear family storyline. And because The concept of the the health of corporate extended family units is closely nuclear family unit – connected to the economy and demographics, many of the broadly defined as “a financial supports once provided by corporate entities may no household consisting of longer be available; there are no lifetime employment a father, a mother and guarantees, government assistance programs may be slashed, their children” – didn’t and pensions may diminish or disappear. In short, even in exist before the 20th “modern” society, it is difficult for a nuclear family to remain century. (The Merriam- unaffected by its extended family connections. To make Modern ideas of a smaller, “nuclear” Webster dictionary first financial plans without considering one’s extended family is family may be deceiving – as often the listed the term in 1947.) extended family still affects the nuclear short-sighted and unrealistic. one and can even offer benefits. Nuclear families have certainly existed, but in The Reality of Extended Family Connectionsthe past, they were typically identified as components ofextended families. One’s true family unit included parents, In some ways, the idealized nuclear family financialsiblings, grandparents, grandchildren, and other close scenario is unrealistic. In order for a nuclear family to succeedrelations. To a great extent, the well-being and obligations of “on its own,” every nuclear family with a connection to it hasany nuclear family units were intimately connected to the to succeed as well – the parents need to be self-sufficient andwell-being and obligations of the extended family. The so do the kids. It really helps if there’s no divorce, noextended family owned property, provided a structure for unemployment, no disease or disability, and no untimelytransferring wealth to successive generations, and offered deaths among the three generations – and it helps if theprotection and support. In fact, prior to the Industrial nuclear family plan consists of an only child, so there aren’tRevolution, it was almost impossible for nuclear family units any siblings who might have issues. That’s a lot of variablesto be financially viable – a single family couldn’t own enough that have to go right, and many are beyond individual control.property or provide enough labor or protection to function Consider just three statistics:independently.  In 2008, data compiled by the National Alliance for In Western societies, the Industrial Revolution freed Caregiving from the U.S. Health and Retirementnuclear family units from the need to remain connected to an Study found that 28% of women in the United Statesextended family. Factory workers didn’t need land to make a were providing care for an aging parent.living, didn’t need to become apprentices to find work, and  A 2005 report from the Census Bureau on disabilitydidn’t need to stay in their hometowns. Instead, nuclear determined that 2 in every 7 families reported at leastfamilies found they could derive extended family benefits one member with a disability.from what Stanford professor Avner Greif calls “corporate”  The same report stated that one in 26 Americaninstitutions, such as fraternal organizations, unions, large families is raising children with a disability.employers and governments. Since the end of the 19 th century, Bottom line: The numbers say it is likely that yourthese corporate entities have provided many of the financial world will be impacted by your extended family.institutional benefits that once could only be found in thecontext of an extended family. These developments allowed The Value of Extended Family Connectionsnuclear family units some freedom to determine how they will In this era where the cultural focus is on the nuclearconstruct an extended family – who would assist in childcare, family, it’s easy to downplay extended family connections.protect their employment rights, provide a retirement, care for© Copyright 2012 Page 2
  • 3. It’s the stereotypical mother-in-law who always interferes, the Extended Family Issue: Financingne’er-do-well brother who hits you up for a loan that willnever be repaid, or the crazy uncle who says the most Independent Living Arrangementsembarrassing things at family gatherings. But even today, As they have at every juncture in theirextended family connections can be valuable assets in making lives, the demographics of the Americana better financial life – for everyone involved. Baby Boom generation are once again There may not be the same binding sociological factors of changing cultural norms. This time, the200 years ago, but kinship allegiances still matter. Most change is a “silver tsunami” encapsulatedpeople have a keen interest in the well-being of family in the term “Senior Living.”members, and given the right circumstances, have great Generally classified as the populationincentive to help, even to sacrifice. Successful grandparents born between 1946 and 1964, the first ofmay be sources of financial wisdom and capital, perhaps the Baby Boomers turned 65 in 2011. Notassisting children and grandchildren with the costs of only are many of them retiring and collecting Social Security,education, or subsidizing the purchase of a home. Siblings can these Boomers are also looking for long-term residentialoften become great business partners. Specialized living living options better suited to their lifestyle changes. Thisarrangements for elderly family members may offer them a swell in demand is creating many different choices, as well aslevel of care and dignity that could never be obtained a new financial question: how will we pay for this?elsewhere. The term “Senior Living” covers the spectrum of living Including extended family considerations in financial options available to retirees, and can be broadly categorizedprograms is not the prevailing mindset today, but historically, in three types of facilities:extended families have been powerhouses for wealthaccumulation because there are strong incentives for long-  Nursing homes;term, multi-generational planning. Unlike a nuclear family  Assisted care facilities;perspective, an accumulation plan isn’t intended simply for  Independent living communities.consumption in retirement. Rather, the extended familyperspective is often about building, accumulating and passing These three facilities reflect differing levels of care andwealth, as well as enjoying some of it today. If that mindset is independence.maintained over several generations, the cumulative financial Nursing homes are more commonly referred to asbenefits can be tremendous. skilled nursing and rehab centers. Nursing care is typically Of course, there can be challenges to extended family provided for people who need long-term care, orfinancial arrangements; one of the attractions of keeping your rehabilitation from surgery or recovery from a severe medicalfinancial program “nuclear” is that you don’t have to worry condition like a stroke.about anyone else’s behavior. But considering how much Long-term care in a nursing home is for older adults whomight be accomplished when the finances of extended need around-the-clock nursing care. These residents need helpfamilies are coordinated instead of separated, the possibilities not only with basic ADLs (activities of daily living) but needare worth exploring. For example… the supervision of staff to maintain their safety. Residents typically live in private or shared accommodations, often with  Could you borrow from extended family at terms bathrooms shared between patients or even between two more favorable than a bank? rooms.  Could you lend to extended family and receive a Nursing home care is usually the most expensive type of higher return than a financial institution is paying? care due to the personnel and equipment required to maintain  Could pooling assets make it possible to acquire and patient care. According to Chris Orestis, in an April 2011 enjoy a long-term asset (like a vacation property) that article for the Life Care Funding Group, the national average you can’t afford on your own? cost for a nursing home is currently around $6,000/mo. For  Could a small amount invested today on behalf of long-term care residents, private funds, Medicaid, and long- your children and grandchildren be a legacy that reaps term care insurance are the typical methods of payment. huge dividends long after you are gone? Assisted care facilities are a residential option for seniors who want or need help with some of the activities of The modern perspective may have changed a lot of our daily living, but are still able to manage most aspects of lifesocial and financial arrangements, but it hasn’t eliminated the on their own. A typical assisted living facility will provideimpact of extended family. Given today’s nuclear family three meals a day served in a common dining area,focus, we may see most extended family incidents as housekeeping services, transportation, access to health andimpediments to our financial well-being. However, it would medical services, and security, as well as exercise andbe misguided to overlook the opportunities that might come wellness programs and social and recreational activities.from planning and operating with one’s extended family in The cost for assisted care facilities is a monthly rent, plusmind – particularly one’s children. additional fees based on the level of individual attention the resident requires. According to the American Elder CareDO YOUR FINANCIAL PLANS EXTEND Research Organization, the 2011 national monthly averageBEYOND YOUR NUCLEAR FAMILY? cost of assisted care was $3,477/mo. with a range of $2,156 to_________________________________________________ $5,757. Depending on the definition of terms and a resident’s condition, a long-term care insurance policy may cover some© Copyright 2012 Page 3
  • 4. or all of the costs, but most long-term residents pay for eligibility to receive benefits, particularly Medicaid, isassisted living from personal assets. dependent on one’s assets, or lack of assets. Attempting to Independent living communities may be retirement preserve assets for heirs and qualify sooner for Medicaid,communities, retirement homes, senior housing or senior some individuals reposition, gift or liquidate assets inapartments. These housing arrangements, from apartment- anticipation of going to a nursing home. While Medicaidstyle living to freestanding homes, are designed exclusively allows a spouse to keep some assets, the agency also has thefor seniors, generally those age 55 and over. The physical authority to “claw back” assets it feels were removed orarrangement is friendlier to older adults, often being more transferred incorrectly. To find out how these rules apply, youcompact, with easier navigation, little or no maintenance or a family member may need to consult an informedresponsibilities, and security. While some care counselor or a qualified elder law attorney.services may be available, residents must have Some of the payment programs offered bythe ability to live independently, according to Continuing Care Retirement Communities areterms defined by the facility. essentially “housing annuities.” For a lump- The costs for independent living facilities sum and a fixed monthly cost, housing (and inwill vary, from government-subsidized rental some cases, long-term care) are guaranteed forunits for low-income seniors to retirement life. Similar to purchasing a regular annuity,homes requiring an initial investment as well the individual is exchanging control over one’sas monthly fees. In some instances, a portion assets for a certain outcome, and must weighof the initial investment may be refunded to the costs and benefits of surrendering controlthe resident when he/she leaves the facility. and receiving a guarantee. And just like an For seniors considering an independent living retirement annuity, the options for revoking a senior living agreementcommunity, all of the funds will come from personal assets; are limited once the program has begun.neither government programs like Medicaid or individual Other assets may be in play as well. Owners of lifeinsurance coverage will apply. insurance policies may have the option of exchanging them Continuing Care Retirement Communities (CCRC) for long term care benefit plans. In a January 5, 2011, articleare all-in-one facilities that provide a continuum of care from (“Funding Long Term Care with Life Insurance,”independent living to assisted living to skilled nursing, lifehealthpro.com), Orestis notes that several states havetypically as a complex of buildings on one campus. CCRCs passed laws in which…are designed to enable seniors to remain in a single residential “life insurance companies are legally required tolocation, which is attractive for seniors with declining health inform policy owners older than 60, or if they have aconditions, or couples in mixed health. While CCRCs offer terminal or chronic condition, that they have eightmuch for seniors, they are the most expensive senior living alternative options to consider before lapsing orsolution available. The typical CCRC requires a one-time surrendering a policy - and one of them is converting aentrance fee and monthly maintenance fees. Entrance fees life insurance policy into a long term care benefit plan.”range from $60,000-$120,000 and monthly maintenance feesfrom $400 to $2,500. Some facilities offer return-of-capital This arrangement is similar to a life settlement, and isguarantees and long-term insurance as part of their pricing brokered by a “senior care company.” Orestis states that thisstructures. These options guarantee some assets will be left to agreement “will convert any form of life insurance to paythe resident’s estate, and make future medical expenses a directly for the costs of long term care in a nursing home,fixed cost. assisted living facility and home healthcare. (The) option also A common funding paradigm for independent living allows the owner to preserve a portion of the death benefitcommunities is to sell one’s existing home, then use the throughout the spend down period, protecting it fromproceeds to pay for the initial buy-in purchase. Monthly Medicaid Recovery legal action against the estate.”facility expenses are structured to equal a retiree’s Social If you or your parents are considering entering into aSecurity income, leaving other needs and wants to be paid senior living arrangement, it is strongly recommended thatfrom savings. Many facilities will offer the option of you seek input from your team of financial professionals. Afinancing the initial fee through a short-term bridge loan 2009 paper published by J. Carl Holowaty declared thatdrawn against the equity in the applicant’s residence. When “moving into an institutional care facility is possibly thethe house sells, the facility is repaid from the proceeds. single most disruptive event to patterns of social engagement that a person could experience (ranking maybe even higherNavigating the Funding Maze of Senior Living than the death of a spouse).” Knowing how to best use assets and quantify costs can go a long way toward making a good The type of senior living arrangements, the amount of the decision, for you or your extended family.individual’s assets, and the availability of insurance all figureprominently in determining how to pay for senior living IF YOU OR AN EXTENDED FAMILY MEMBER AREarrangements. And many of these decisions can have CONTEMPLATING A SENIOR LIVING ARRANGE-significant financial ramifications, so each step should be MENT, A GOOD PLACE TO START IS A REVIEW OFcarefully considered, with input from family members and YOUR ASSETS, AND HOW THEY MIGHT BE USEDtrusted advisers. FOR MAXIMUM BENEFIT. While almost all seniors are covered by the federal _________________________________________________government’s Medicare and Medicaid programs, one’s© Copyright 2012 Page 4
  • 5. Extended Family Issue: receives a settlement from a personal injury lawsuit). This arrangement is called a Self-Settled Special Needs Trust. Special Needs Planning Funding the Trust Raising a family is challenging under any circumstances, but for parents with Parents of a special needs child face some daunting special needs children the stakes are financial challenges. From the moment the special need is dramatically higher because the recognized, all the financial metrics change. Not only is there parenting responsibilities may last the a compelling desire for the parents to provide an estate at their child’s entire life. This reality can be deaths, but there is also the consideration that other aspects of overwhelming, both emotionally and their financial life must be altered, such as:financially. One of the best ways to face these long-term  If the parents’ diminishing health affects their abilitychallenges is to systematically establish a long-term plan, one to provide care, someone else must take their place.that considers both the emotional and financial issues likely to  With continuing parental duties, the dynamics (andbe encountered. costs) of retirement will be different.Immediate Concerns  Besides providing immediate protection, a life insurance program might be constructed to provide Many special needs children may qualify for government guaranteed funding for a special needs trust.assistance through the Social Security Administration, fromeither the Supplemental Security Income program (SSI), or Extended Family Considerationsthe Social Security Disability Income program (SSDI). The time and financial resourcesEligibility for either of these programs can be complex, as devoted to a special needs child can createboth involve some means-testing to determine the extent of imbalance and stress for other familyaid; financial decisions by the parents (such as investing in a members, particularly siblings. Becausetax-qualified retirement account or buying a home) can brothers and sisters will be a part of aimpact the amount of assistance received. This factor means special needs child’s life longer thanparents must consistently monitor and review their financial anyone, the Sibling Support Projectplans. (siblingsupport.org) states that “Early inLong-term Issues life, many brothers and sisters worry about what obligations they will have toward their sibling in In addition to handling the details that every-day parenting the days to come.” And in many instances, one or more of therequires, parents who have special needs children usually siblings will assume guardian and care responsibilities afterhave two primary long-term concerns: the parents have passed away. 1. Who will be around to ensure the welfare of their The immediate realities of receiving less attention and thechildren or make decisions for them if they are unable to future possibility of having to care for a special needs child –care for themselves? perhaps at significant emotional and financial cost – can lead 2. How will they pay for it? to resentment. Extended family planning can mitigate these Answering these two questions is usually an feelings and help reshape the discussion. Experts in specialinterconnected process. If there is no money set aside for care, needs care recommend that parents involve other children ineven the most qualified and trustworthy guardians (such as the decision-making process as early as possible, because insiblings) may not be up to the task. A good special needs care the long run, this is not just a nuclear family issue. Inplan addresses both questions. Typically, this is accomplished addition, establishing an estate plan that provides an equitablethrough the establishment of a trust. inheritance for the rest of the family can help the extended The trust will specify guardians, trustees and beneficiaries, family members support the special needs program, because itas well as defining which assets should be placed in the trust. is seen as part of a larger financial plan made for the purposeTwo common types are Support Trusts and Special Needs of benefiting all children.Trusts. Support Trusts require the trustee to make Don’t Go It Alonedistributions for the childs support in areas like food, shelter, These plans, and the details they involve, require expertclothing, medical care, and educational services. It is assistance. Integrating government regulations, legalimportant to note that beneficiaries of Support Trusts may not designations and funding combinations is not a do-it-yourselfbe eligible for SSI or Medicaid. If the special needs child will project. Finding competent financial professionals andrely on government benefits for a significant portion of care, maintaining regular communication with them will go a longit may be best to avoid a Support Trust. way toward maximizing the benefits of a special needs plan. For many parents, a Special Needs Trust is the mosteffective way to help their child with a disability. A Special IF YOU HAVE CHILDREN OR GRAND-Needs Trust manages resources while also maintaining the CHILDREN WITH SPECIAL NEEDS, PLANNINGchilds eligibility for public assistance benefits. When the trust IS ESSENTIAL TO THEIR LONG-TERM WELL-is funded by the parents’ assets, it is called a Third-Party BEING. NEED ASSISTANCE? WE CANSpecial Needs Trust*. In some instances, the trust may be PROVIDE PRODUCTS, RESOURCES, ANDfunded by the child’s assets (for example, when the child FINANCIAL KNOWLEDGE. (See footnote on next page)© Copyright 2012 Page 5
  • 6. * From website of the Learning Disabilities of America organization: Self-Settled Special Needs Trusts are much more complicated than their third-party equivalents. Usually (but not always), a Self-Settled Special Needs Trust must comply with a federal law first enacted in 1993. That law requires that most Self-Settled Special Needs Trusts actually be established by a judge, a court-appointed guardian, or the parents or grandparents of the beneficiary (Social Security regulations may limit creation of trusts to the first two categories in most circumstances). In addition most Self-Settled Special Needs Trusts will have to include a provision repaying state Medicaid agencies for any benefits, payable at the death of the beneficiary. Such a provision is often called a "pay-back" provision." ______________________________________________________________________________________________________________________________________________________ 2012 CHANGES IN RETIREMENT PLAN CONTRIBUTION LIMITS deduct their full IRA contribution regardless of income.) For 2012, these thresholds have increased. Every year, the Internal Revenue Service announces changes in the amounts individuals can deposit to qualified retirement  While Roth IRAs don’t offer tax deductible plans. Here are some of the notable changes for 2012: contributions, the amount that can be deposited is also conditional upon AGI. Single filers and heads of  The maximum employee contribution for 401(k), household can make the maximum Roth IRA 403(b), most 457 plans or the federal government’s contribution of $5,000 if their adjusted gross income Thrift Savings Plan is $17,000 (the limit was $16,500 is less than $110,000 in 2012. in 2011).  Workers who will reach age 50 anytime in 2012 can Those five bullet points are just the tip of the iceberg make “catch-up” contributions of up to when it comes to assessing the criteria for an extra $5,500 for the year (the same participation in qualified retirement plans. And amount as in 2011). while tax deductibility can provide some extra  The maximum IRA contribution limit for saving incentive, it is prudent to consider these 2012 remains unchanged at $5,000. An deductions (and restrictions) within the context additional $1,000 can be added as of your larger financial picture. “catch-up” if you are age 50 or older by the end of the year. WHEN IS THE LAST TIME YOU  Not all IRA contributions are deductible. If you (or a ASSESSED YOUR RETIREMENT PLAN spouse) have a workplace retirement plan, the SAVINGS? START 2012 WITH A CLEAR IDEA deductibility of contributions is dependent on your OF YOUR “BIG PICTURE” BEFORE YOU ADD adjusted gross income. (Individuals who do not (OR SUBTRACT) FROM YOUR RETIREMENT participate in a workplace retirement savings plan can CONTRIBUTIONS.This newsletter is prepared by an independent third party for distribution by your Representative(s). Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Links to other sites arefor your convenience in locating related information and services. The Representative(s) does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. The Representative(s) expressly disclaims any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. The Representative(s) does not recommend or endorse these organizations or their products or services in any way. We have not reviewed or approved the above referenced publications nor recommend or endorse them in any way. © Copyright 2012 Page 6