your financial details.
When creating your personal retirement plan, there are a variety of tools you can use to fund your long-term savings goals. An employer-sponsored 401(k) is one of them while indexed universal life insurance (IUL) is another. A 401(k) allows you to invest money on a tax-deferred basis while also enjoying a tax deduction for contributions. Indexed universal life insurance allows you to secure a death benefit for your loved ones while accumulating cash value that you can borrow against. Understanding the differences and similarities between IUL vs. 401(k) matters for effective retirement planning. Working with a financial advisor can also make a substantial difference in the amount of money you’ll have when you retire.
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance coverage. When you buy a policy, you’re covered for the rest of your natural life as long as your premiums are paid. When you pass away, the policy pays out a death benefit to your beneficiaries.
During your lifetime, an IUL insurance policy can accumulate cash value. Part of the premiums you pay are allocated to a cash-value account. That account tracks the performance of an underlying stock index, such as the Nasdaq or S&P 500 Composite Price Index. As the index moves up or down, the insurance company credits the cash value portion of your policy each year with interest.
IUL is different from fixed universal life insurance or variable universal life insurance. With fixed universal life insurance your rate of return is guaranteed, making it the least risky of the three. With variable universal life insurance, your cash value account is invested in mutual funds and other securities so you’re exposed to more risk. An indexed universal life insurance policy fits in the middle of the risk spectrum.
Cash value that accumulates inside an IUL insurance policy grows tax-deferred. You can borrow against this cash value if necessary, though any loans left unpaid at the time you pass away are deducted from the death benefit.
What Is a 401(k)?
A 401(k) is a type of qualified retirement plan that allows you to set money aside for retirement on a tax-advantaged basis. Contributions are deducted from your paychecks via a salary deferral. Your employer can also offer a matching contribution. The IRS limits the amount you can and your employer can contribute each year.
With a traditional 401(k), contributions are made using pre-tax dollars. Any money you contribute is automatically deducted from your taxable income from the year. When you begin taking money out of your 401(k) in retirement, you’ll pay ordinary income tax on withdrawals. Any withdrawals made before age 59.5 may be subject to a 10% early withdrawal penalty as well as income tax.
Traditional 401(k) plans allow you to invest in a variety of securities, including mutual funds and exchange-traded funds. Target-date funds are also a popular option. These funds automatically adjust your asset allocation based on your target retirement date.
There’s no death benefit component with a 401(k). This is money you save during your working years that you can tap into in retirement. Unless you’re still working with the same employer, you’re required to begin taking minimum distributions from a 401(k) beginning at age 72. Failing to do so can trigger a tax penalty equivalent to 50% of the amount you were required to withdraw.
IUL vs. 401(k): Which Is Better for Retirement Savings?
Indexed universal life insurance and 401(k) plans can both be used as investment tools for retirement. But there are some important differences to note. With IUL, returns are tied to the performance of an underlying index. If the index performs well, then your policy earns a higher interest rate. If the index underperforms, on the other hand, your returns may shrink. Your insurance company can also cap the rate of return credited to your account each year, regardless of how well the underlying index does. For instance, you may have a cap rate of 3% or 4% annually.
In a 401(k) plan, you have the option to invest in index mutual funds or ETFs but you’re not locked in to just those investments. You can also choose actively managed funds, target-date funds and other securities, based on your time frame for investing, goals and risk tolerance. Your rate of return is still tied to how well those investments perform but there’s no cap. So, if you invest in an index fund that goes up by 20%, you’ll see that reflected in your 401(k) balance.
A 401(k) also affords the advantage of an employer matching contribution. This is essentially free money you can use to grow retirement wealth. With an indexed universal life insurance policy, you’re responsible for paying all of the premium costs.
Another big difference between the two centers on tax treatment and withdrawals. With an indexed universal life insurance policy, you can borrow against the cash value at any time. You’ll pay no capital gains tax on loans and no penalties unless you surrender the policy completely or fail to repay what you borrow. Death benefits pass to your beneficiaries tax-free.
With a 401(k), you generally can’t tap into this money penalty-free before the age of 59.5, even in the case of a hardship withdrawal. You may be able to avoid a tax penalty if you’re withdrawing money for qualified medical expenses but you’d still owe income tax on the distribution. You could take out a 401(k) loan instead but that also has tax implications. If you separate from your employer with an outstanding loan balance and fail to repay the loan in full, the entire amount can be treated as a taxable distribution.
Qualified distributions in retirement are taxable at your regular income tax rate. And if you pass away with a balance in your 401(k), the beneficiary who inherits the money will have to pay taxes on it. Talking with a tax professional or your financial advisor can help you come up with a plan for managing tax liability efficiently both prior to retirement and after.
The Bottom Line
Indexed universal life insurance and a 401(k) plan can both help you build wealth for retirement but they aren’t necessarily interchangeable. If you have a 401(k) at work, this may be the first place to start when creating a retirement savings plan. You can then decide if IUL or another type of life insurance is needed to supplement your workplace savings as well as the money you’re investing an IRA or brokerage account.
Tips for Investing
- When using a 401(k) to invest for retirement, pay close attention to fees. This includes the fees charged by the plan itself as well as the fees associated with individual investments. If a mutual fund has a higher expense ratio, for instance, consider whether that cost is justified by a consistently higher rate of return.
- Consider talking with a financial advisor about how to maximize your 401(k) plan at work and whether indexed universal life insurance is something you need. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to get personalized recommendations for professionals in your local area in just minutes. If you’re ready, get started now.
Photo credit: ©iStock.com/yongyuan, ©iStock.com/kupicoo, ©iStock.com/Piotrekswat
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Why Everyone Over 30 Should Start Thinking About Life Insurance
I don’t like to make generalizations too often, but I do feel that everyone over 30 should start thinking about the importance of life insurance. That is, if you’re 30 and over and don’t have any life insurance.
No one likes to think about their demise, but life insurance is an extraordinary product that can be used to reduce the financial burden you could leave behind for loved ones. Plus, different types of life insurance can even help you build wealth and diversify your assets.
Here are 4 important reasons why everyone over 30 should start thinking about life insurance.
The Insurance At Your Job is Probably Not Cutting It
By now you probably realize the life insurance coverage that your job offers is not enough. Some employers include life insurance in their list of benefits which is great, but the coverage amount often doesn’t come close to your insurable need.
Your insurable need represents how much life insurance you should hold depending on factors like your age, liabilities, health conditions, and so on. One common rule of thumb is that your average life insurance coverage amount should be 7 to 10 times your annual income.
So if you’re earning $60,000 per year, you might want to consider a policy of $420,000 to $600,000 depending on your needs. However, the average employee life insurance policy amount is only around $25,000 to $50,000 or one years’ salary. This is not nearly enough.
Plus, when you leave your job, you’ll lose your insurance benefits too. This is why it’s always important to consider having your own life insurance coverage independent of your employer. So many people are switching jobs every 2 to 3 years so you may not want your life insurance benefits to be tied to your employer anyway.
Term life insurance is pretty affordable and you can get a free quote in just a few minutes from Bestow.
Here are 4 important reasons why everyone over 30 should start thinking about life insurance. Click To Tweet
You Want to Protect Loved Ones From a Financial Burden
You don’t have to be married with kids and a house to want to consider life insurance. However, more people in their 30s do focus on settling down and working toward some of these milestones.
If you do have kids, a mortgage, etc. you’ll definitely want to consider how your partner would get by if anything did happen to you. Would the kids still be able to go to college? Would your spouse be able to keep the house? These are important questions that life insurance can help you answer.
Even if you’re single and at the height of your career. More people in their 30s are carrying debt like student loans and personal loans. Did you know that some types of student loan debt can not be forgiven even if you died? You probably don’t want to pass on any financial burdens to your parents or other loved ones who would have to fit the bill.
Life insurance provides a tax-free payment to your beneficiary which can help cover everything from debt payments, loss of household income, funeral arrangements, and more.
RELATED: How Much Life Insurance Do You Really Need
30 Is Still Young Enough to Lock in Affordable Rates For Whole Life Insurance
Let’s say you’re considering the importance of life insurance. Whole life insurance in particular. Whole life insurance is permanent insurance that builds cash value as you continue to pay your premiums.
Other types of insurance, like variable whole life, even allow you to invest some of the cash value and grow the amount faster. You can borrow from your cash value, use it to pay your life insurance premiums, or even withdraw it while you’re still alive and well.
While whole life insurance is cheaper than term life, costs increase around the board as you get older. If you’re considering whole life insurance, the best option is to get a policy while you’re younger. Thirty years old is not too old to still get a decent rate for your life insurance premiums. Plus, it allows you enough time to build cash value that could be put to use in the future.
Get Insured and Protected From Medical Issues
Yes, life insurance is geared toward providing financial relief for your loved ones. Depending on your policy, you may be able to obtain something called ‘living benefits’. Living benefits are an insurance rider (which means it’s an added on feature) that can be added to your term or whole life insurance policy.
Living benefits can allow you to use some of your life insurance coverage amount to pay medical expenses for a serious illness or condition. Of course, this will reduce the benefit provided to your beneficiary, but it can still be a helpful feature to help you cover medical bills that could otherwise be left for your loved ones to deal with anyway.
No one likes to think about getting sick or becoming terminally ill, but planning for the best and worst is just a part of adult life. As you get older, your health tends to decline but if you’re still healthy in your 30s, it’s the perfect time to lock in a life insurance policy and consider adding a living benefits rider.
RELATED: Should You Get Disability Insurance? 4 Ways to Decide
Summary
Life insurance should be apart of everyone’s financial plan. Knowing the importance of life insurance can be life-saving information. If you’re over 30 and still don’t have coverage. Consider all the reasons to get a term or whole life policy. Consider your current future needs and carefully weigh the pros and cons.
Remember, you can get a free no-obligation quote from Bestow in just two minutes.
Source: everythingfinanceblog.com
A seniorâs guide to medical expenses without going into debt – Lexington Law
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
When it comes to managing medical expenses, seniors often face significant financial challenges. Since retirement usually means living off of a fixed income, dealing with medical bills not covered by insurance can easily put seniors at risk of landing in debt.
According to the Consumer Financial Protection Bureau, nearly a third of American consumers have debt that’s been turned over to collections, with over half of that from medical bills. Even having a comprehensive retirement plan doesn’t guarantee that you’ll be able to avoid unforeseen (and expensive) health problems.
Thankfully, there are strategies to handle daunting medical debt and to prevent debt incurred from hurting your credit. This detailed guide offers helpful information and advice for navigating healthcare costs as a senior and dealing with medical bills and debt that can harm your credit score. Read on to learn more, or click through the menu below to find the information you need.
How to budget for senior healthcare costs
Why budgeting for medical costs matters
According to the Bureau of Labor Statistics, an average of $6,833 a year is spent on healthcare in households led by an individual who is 65 years or older. Underestimating potential medical expenses in retirement is the main mistake that leads to credit-damaging debt and the need for credit repair. The snowball effect of medical expenses is a large part of the reason why they’re important to keep under control as a senior.
Delaying healthcare bills without a plan and ignoring medical debt are surefire ways to cause financial distress, especially when you’re 65+ years old. Creating a budget for healthcare costs is the first step to minimizing the shock of medical expenses that can lead to crippling debt and a ruined credit score. There are plenty of steps you can take to keep your medical expenses under control before you have to negotiate with debt collectors and utilize credit repair software.
What to know when budgeting for senior healthcare
When it comes to routine healthcare expenses, seniors should take into account insurance premiums, out-of-pocket costs and possible expenses associated with paid long-term care. Developing the right medical budget as a senior doesn’t have to be a grueling task.
The key is to be realistic about the different types of costs you need to prepare for and being proactive about asking for help when needed. Account for everything (income, debt, benefits, etc.) and document every financial move so there is a paper trail that eliminates second-guessing and family conflicts.
Navigating the details of health insurance, medical bills, prescription costs and more can be overwhelming for anyone. As a senior preparing for your financial future, it’s wise to involve a trusted advocate who understands your situation and can help you make important decisions regarding medical expenses.
You may choose to give authority to trusted family members who are helping you, and remember you can still oversee all account activity. It’s recommended that you communicate often with your family about your finances and look into professional financial consulting and/or the need for a Power of Attorney.
How to choose the right medical insurance option
The best practices for deciding between the various insurance options as a senior aren’t always obvious. The average American Medicare beneficiary still spent well over $5,000 out-of-pocket per year for medical expenses according to one Kaiser Family Foundation study from 2019. How can you choose the coverage option that is the least likely to land you in debt?
When it comes to covering medical expenses, seniors in the United States have some options, including:
- Medicare: The federal health insurance program for 65+ individuals who have worked full-time for at least 10 years.
- Medicaid: The health insurance program run by states and partially funded by the federal government to help low-income families and individuals.
- Private insurance: Insurance not federally or state run—it can be purchased from either your employer, a state or federal marketplace or a private marketplace.
What to know about the cost of Medicare
To understand what expenses you need to cover yourself as a senior, it helps to know your two coverage options under Medicare, the most popular type of insurance for 65+ individuals.
There is original Medicare, which consists of parts A and B. Medicare part C, which is also known as Medicare Advantage plans, is offered by a private company that has a contract with Medicare.
Parts A and B of Medicare include:
- Inpatient care
- Home healthcare
- Clinical research
- Ambulance services
- Hospice care
- Skilled nursing facility care
- Prescription drugs (limited)
- Medical supplies and equipment
Part C includes all of the following in addition to parts A and B:
- Special needs plans
- Private fee-for-service plans
- Preferred provider organizations
- Health maintenance organizations
- Medicare medical savings account plans
While Medicare covers a substantial amount, there are still quite a few common services among retirees that are not covered, including:
- Dentures
- Most dental care
- Acupuncture
- Routine foot care
- Cosmetic surgery
- Hearing aids and fitting exams
- Eye exams related to prescription glasses
- Long-term care
Ultimately, what seniors 65 and over will spend on healthcare each year will differ depending on age, gender and health status. Although there are countless scenarios that could increase or decrease an individual senior’s healthcare spending, the general trend remains that their healthcare costs are much greater than their younger counterparts.
Year after year, the US Department of Health and Human Services continues to show the drastic spike in medical expenses for the 65+ age group.
There are plenty of resources available for seniors looking for assistance in understanding the best insurance coverage for their situation. It’s important to keep in mind that senior advocacy centers offer helpful services when you aren’t sure how to make the best decision.
How to pay medical bills
When dealing with medical bills not covered by insurance, there are a few steps you can take to make sure you aren’t overcharged and to prioritize your payments. By following the steps below, you’ll prevent a bill from winding up in collections, which can ultimately hurt your credit score.
1) Don’t pay until you fully verify the bill
Sometimes the way that medical services are billed is confusing. Don’t rush to pay a bill before you thoroughly check it for errors. Educate yourself on how to identify and address the most common medical billing mistakes to save yourself headaches in the future.
2) Make sure insurance was applied to the bill
Ask for an itemized bill from your provider to make sure your bill is adjusted. If you don’t see an insurance payment or discount reflected on the bill, there is probably a mistake. Also, it’s helpful to have a second set of eyes to catch inaccuracies.
3) Check that the explanation of benefits matches the bill
Expect an Explanation of Benefits (EOB) document to arrive at about the same time as the corresponding medical bill. Confirm that there aren’t any discrepancies to avoid being overcharged.
4) Follow up and negotiate until an issue is resolved
A large component of ensuring you’re paying the right amount for your medical bills is persistence. Don’t shy away from calling your healthcare provider and your insurance company multiple times to clarify or negotiate, and record the names of the individuals you’re speaking with and the time. Your wallet will thank you.
5) Request a payment plan
If you can’t tackle medical bills in full, there are often opportunities for interest-free payment plans if you simply ask.
If you’ve done everything in your power to reduce and spread out the cost of medical bills and you’re still struggling, it’s time to ask for support. Reach out to trusted family members or consider enlisting the help of medical billing advocates.
If your medical debt has already been sent to a collection agency, don’t report the bill to credit agencies right away. You may be able to protect your credit score if you’re able to resolve your bill quickly, and it might not even appear on your credit report.
Take a look at the resources below to learn more about how to best manage your insurance costs when you’re 65+:
How to maximize deductible medical expenses
When you’re a senior, it’s important to understand best practices for advocating for yourself to get as much money back on medical expenses via tax deductions as possible. Seniors can benefit from deductible medical expenses that can help them avoid detrimental debt.
If you itemize your deductions, medical and dental expenses are deductible from your income taxes on Schedule A of your tax return as a senior. The limit is 7.5 percent of a taxpayer’s adjusted gross income (AGI) for 2019 and 2020—only expenses that exceed 7.5 percent of a taxpayer’s AGI are deductible.
For example, if someone’s AGI is $50,000, only medical and dental expenses above $3,750 (7.5% x $50,000 = $3,750) would be deductible.
There are clear guidelines laid out by the IRS when it comes to figuring out which costs do and don’t qualify for a tax deduction. Take a look at a quick overview of deductible medical expenses below.
Deductible medical expenses
- Premiums for health insurance and qualified long-term care insurance
- Medical fees from doctors, laboratories, dentists, assisted living residences, home healthcare and hospitals
- Cost of transportation to receive medical care, including ambulance service
- Home modifications costs, such as wheelchair ramps, porch lifts, grab bars and handrails
- Entrance fees for assisted living
- Room and board for assisted living if the resident is certified chronically ill by a healthcare professional and is following a prescribed plan of care
- Personal care items, such as disposable briefs, and foods/nutritional supplements for a special diet, as prescribed by a doctor to treat a medical condition
- Cost of prescription drugs
Expenses not eligible for deduction
- Medical expenses that are reimbursed by health insurance, Medicare or any other program
- Payments or distributions out of health savings accounts
- Life insurance premiums
- Non-medical care to enable the tax filer to be gainfully employed
Although deductible medical expenses shouldn’t be relied on as a primary source of funds for senior healthcare, they can still help cover the cost of care and limit potential debt. A reduced tax burden from medical and dental tax deductions can help retirees reallocate their resources where they matter the most.
Along with other strategies to lower your overall healthcare tab, these deductions might help make the difference in being able to afford home care without going into debt, which can hurt your credit.
Be cognizant of the fact that deductible medical expenses should not be confused with Dependent Care Tax Credit—which is meant for dependent care expenses the primary taxpayer incurs to enable them to work, or look for work, rather than caring for their dependent.
How to minimize the negative effects of debt on credit
Not only can seniors’ credit scores suffer the damage of debt, but their health can be compromised by delaying medical care they need. According to one Consumer Reports survey, 41 percent of people said they put off a doctor’s visit because of cost.
It’s important for seniors to realize that not only are there medical debt forgiveness programs, like RIP Medical Debt, but there are also several encouraging changes occurring.
For example, one recent development is that major credit reporting agencies have agreed not to report medical debts until 180 days after they were incurred in order to give patients more time to resolve them. Here are a couple additional new developments that can prove hopeful for seniors grappling with medical expenses:
- FICO released a new scoring model, FICO 9, which gives medical debt less weight than ever before.
- Overdue or delinquent bills that have gone to medical collection accounts no longer count as unpaid bills once they’ve been settled.
- VantageScore 3.0 has followed suit with a credit scoring model that is more forgiving of unpaid medical bills than it has been in the past.
Here are three main ways seniors can reduce the impact of medical debt on their credit:
1) Finalize payment arrangements right away
Start asking about payment arrangements as soon as you receive medical bills you know you can’t cover. Being proactive to figure out if your provider can give you a payment schedule option will help you minimize the detrimental effects or discount portions of your bill if you pay in advance.
2) Request to make monthly payments on medical bills
As long as you have documented proof that your healthcare provider or collector has agreed to this payment plan, you could buy yourself time by asking to make monthly payments. If they report a negative item on your credit report, you can dispute it by showing they agreed to the payments you’re making.
3) Avoid paying medical debt with credit cards
Think twice before paying for a huge bill with your credit card. Keep in mind that you lose new protections offered by credit scoring companies if you pay your medical costs with a credit card and then can’t pay off the credit card. This type of credit card debt from medical expenses will be treated like any other debt. As a result, it will hurt your payment history and your credit utilization ratio regardless.
When you’re 65+ years of age and struggling to cover medical expenses, it’s easy to feel overburdened. Thankfully, the tactics we’ve shared and the changes in the credit scoring and credit reporting industries can give hope to seniors dealing with outstanding medical bills.
High healthcare costs coupled with a relatively low fixed income could lead to seniors getting into debt and struggling with credit. Even if medical bills compromise your progress, there are plenty of ways to get back on the right track to reach your financial goals in retirement.
Whether you ask a family member for help or consider using a professional service, prioritizing your financial well-being pays off in the end. If you’re concerned about your credit health while handling medical expenses, reach out to the credit consultants at Lexington Law. Our team can help you learn more about your credit report and strategize ways to improve your credit.
Source: lexingtonlaw.com
How to Get or Replace Your Medicare Card
When you need to get a Medicare card or replace one, you can easily request it online or by phone. Whether you’re enrolling in Medicare for the first time or replacing a lost, stolen or damaged card, obtaining the traditional red, white and blue Medicare card shouldn’t be an obstacle to receiving and paying for health care.
The card includes your name and Medicare number, and if you’re an Original Medicare beneficiary, it will show if you have Part A (hospital coverage), Part B (medical coverage) or both. You’ll use this card to get your Medicare-covered services. If you have a Medicare Advantage Plan or Part D prescription drug plan, you’ll get a card from the provider when you enroll.
If you signed up for Medicare or Social Security, your card will be mailed
If you’re already receiving Social Security benefits as your 65th birthday approaches, you’ll automatically be enrolled in Medicare, and your card will be sent by mail to you.
Otherwise, soon after you sign up for Medicare, you’ll be mailed a “Welcome to Medicare” package that will include your card.
Replace a lost, stolen or damaged Medicare card
If you can’t find your Medicare card or it’s damaged (it’s printed on paper, not plastic), there are a few ways to replace it. You can get a replacement almost instantly by logging in to your secure account on Medicare.gov to print an official copy of your card at home, at a public library or wherever you have secure access to a printer. You can log in to or create your online account on Medicare.gov.
Alternatively, you can call Medicare at (800) 633-4227 to request that a new card be sent by mail. You can also call or visit your local Social Security office to apply for a replacement card. The downside of requesting a card through these agencies? You won’t receive it for about 30 days.
If you’re at a medical facility and realize you don’t have your card, ask the provider to look up your Medicare number online, which they often can. It’s also a good idea to make a copy of your Medicare card and keep it on your phone or in another safe place.
Medicare Advantage enrollees get a separate card
If you have Medicare Advantage, you’ll need your plan’s card to receive services. That card will be mailed to you automatically soon after you enroll. If you need to replace it, call your plan provider. Likewise, if you need a card for your prescription drug plan (Medicare Part D), contact your provider.
In any case, always keep your Medicare card and Medicare number in a safe place. Medicare fraud is a big problem, and it will be a hassle if your card or number is stolen. If you believe that someone is using your Medicare number, call (800) 633-4227 to report it.
Source: nerdwallet.com
SBI plans big push for home loans, eyes doubling of portfolio in 5 years – The New Indian Express
Express News Service
NEW DELHI: State Bank of India (SBI), the country’s largest lender, is looking to scale up its home loan business in a big way, cashing in on the demand from the younger population and leveraging its low-cost borrowing. The public sector bank, which took a decade to grow its mortgage portfolio to Rs. 5 lakh crore from Rs. 89,000 crore in 2011, is now aiming to cross the Rs.10-lakh-crore-mark over the next five years.
“The home loan book is now the single-largest portfolio in the asset base of SBI. When it comes to demand, every third borrower happens to be from SBI.
We have seen that 42 per cent of our customers are under the age of 40 or below and we expect to see a much greater shift in this direction,” said Dinesh Kumar Khara, chairman, SBI.
Currently, SBI dominates the home loan segment with 34 per cent market share and its portfolio stood at Rs. 4.84 lakh crore as on December 31, 2020. It is also looking to increase its share of retail in the overall loan book to 45 per cent in one year from 39 per cent now.
SBI offers home loans at an external benchmark rate of 6.65 per cent, the cheapest in the industry. Loans in the range of Rs. 30-32 lakh are popular and the bank has seen more demand coming from places other than the top eight cities, Khara said, adding that almost 23 per cent of the Rs 5 lakh crore home loan portfolio comprised takeover loans.
He also added that very few of its home loan customers, hit by the pandemic, opted for a one-time restructuring scheme.
“About 72 per cent of our borrowers are salaried and we do not see any stress in the home loan portfolio. Of the 39 lakh borrowers who were eligible for loan restructuring under the RBI-approved scheme that was allowed after the six-month moratorium facility got over in August, only 10,000 have availed the option, which is aggregating to about Rs. 2,500 crore,” Khara said. The gross non-performing assets (NPA) in the home loan division are 0.68 per cent of the total loan book.
The greater push for the home loan business comes at a time when the industry is betting on mortgage lending as the next big boom. For a bank with SBI’s size and reach, ramping up real estate financing will be relatively easy.
With its historically low interest rates, SBI has already been able to acquire customers from rival banks and non-banking lenders including housing finance companies. Khara added that a new retail loan management system is also being put in place which would reduce the time taken for turnaround of loans. In the home loan segment, the turnaround time is currently about 10-12 days.
Meanwhile, the bank on Wednesday also said that it is gearing up to start a co-lending model for home loans to strengthen footprints in the unorganised sector. To make loans accessible, the bank has waived the processing fee on home loans till March 31, 2021.
Last year in November, the Reserve Bank of India had come out with a co-lending model aims to improve the flow of credit to the unserved and underserved sectors of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFCs. Under this, SBI can co-lend with all registered NBFCs. The co-lending banks will take their share of the individual loans on a back-to-back basis in their books. However, the RBI said that NBFCs shall be required to retain a minimum of 20 percent share of the individual loans on their books. This means, if the loan size is Rs 10 crore between the bank and NBFC, the NBFC needs to retain at least Rs 2 crore on its book.
Source: newindianexpress.com
A seniorâs guide to medical expenses without going into debt
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
When it comes to managing medical expenses, seniors often face significant financial challenges. Since retirement usually means living off of a fixed income, dealing with medical bills not covered by insurance can easily put seniors at risk of landing in debt.
According to the Consumer Financial Protection Bureau, nearly a third of American consumers have debt that’s been turned over to collections, with over half of that from medical bills. Even having a comprehensive retirement plan doesn’t guarantee that you’ll be able to avoid unforeseen (and expensive) health problems.
Thankfully, there are strategies to handle daunting medical debt and to prevent debt incurred from hurting your credit. This detailed guide offers helpful information and advice for navigating healthcare costs as a senior and dealing with medical bills and debt that can harm your credit score. Read on to learn more, or click through the menu below to find the information you need.
- How to Budget for Senior Healthcare Costs
- How to Choose the Right Medical Insurance Option
- How to Pay Medical Bills
- How to Maximize Deductible Medical Expenses
- How to Minimize the Negative Effects of Debt on Credit
How to budget for senior healthcare costs
Why budgeting for medical costs matters
According to the Bureau of Labor Statistics, an average of $6,833 a year is spent on healthcare in households led by an individual who is 65 years or older. Underestimating potential medical expenses in retirement is the main mistake that leads to credit-damaging debt and the need for credit repair. The snowball effect of medical expenses is a large part of the reason why they’re important to keep under control as a senior.
Delaying healthcare bills without a plan and ignoring medical debt are surefire ways to cause financial distress, especially when you’re 65+ years old. Creating a budget for healthcare costs is the first step to minimizing the shock of medical expenses that can lead to crippling debt and a ruined credit score. There are plenty of steps you can take to keep your medical expenses under control before you have to negotiate with debt collectors and utilize credit repair software.
What to know when budgeting for senior healthcare
When it comes to routine healthcare expenses, seniors should take into account insurance premiums, out-of-pocket costs and possible expenses associated with paid long-term care. Developing the right medical budget as a senior doesn’t have to be a grueling task.
The key is to be realistic about the different types of costs you need to prepare for and being proactive about asking for help when needed. Account for everything (income, debt, benefits, etc.) and document every financial move so there is a paper trail that eliminates second-guessing and family conflicts.
Navigating the details of health insurance, medical bills, prescription costs and more can be overwhelming for anyone. As a senior preparing for your financial future, it’s wise to involve a trusted advocate who understands your situation and can help you make important decisions regarding medical expenses.
You may choose to give authority to trusted family members who are helping you, and remember you can still oversee all account activity. It’s recommended that you communicate often with your family about your finances and look into professional financial consulting and/or the need for a Power of Attorney.
How to choose the right medical insurance option
The best practices for deciding between the various insurance options as a senior aren’t always obvious. The average American Medicare beneficiary still spent well over $5,000 out-of-pocket per year for medical expenses according to one Kaiser Family Foundation study from 2019. How can you choose the coverage option that is the least likely to land you in debt?
When it comes to covering medical expenses, seniors in the United States have some options, including:
- Medicare: The federal health insurance program for 65+ individuals who have worked full-time for at least 10 years.
- Medicaid: The health insurance program run by states and partially funded by the federal government to help low-income families and individuals.
- Private insurance: Insurance not federally or state run—it can be purchased from either your employer, a state or federal marketplace or a private marketplace.
What to know about the cost of Medicare
To understand what expenses you need to cover yourself as a senior, it helps to know your two coverage options under Medicare, the most popular type of insurance for 65+ individuals.
There is original Medicare, which consists of parts A and B. Medicare part C, which is also known as Medicare Advantage plans, is offered by a private company that has a contract with Medicare.
Parts A and B of Medicare include:
- Inpatient care
- Home healthcare
- Clinical research
- Ambulance services
- Hospice care
- Skilled nursing facility care
- Prescription drugs (limited)
- Medical supplies and equipment
Part C includes all of the following in addition to parts A and B:
- Special needs plans
- Private fee-for-service plans
- Preferred provider organizations
- Health maintenance organizations
- Medicare medical savings account plans
While Medicare covers a substantial amount, there are still quite a few common services among retirees that are not covered, including:
- Dentures
- Most dental care
- Acupuncture
- Routine foot care
- Cosmetic surgery
- Hearing aids and fitting exams
- Eye exams related to prescription glasses
- Long-term care
Ultimately, what seniors 65 and over will spend on healthcare each year will differ depending on age, gender and health status. Although there are countless scenarios that could increase or decrease an individual senior’s healthcare spending, the general trend remains that their healthcare costs are much greater than their younger counterparts.
Year after year, the US Department of Health and Human Services continues to show the drastic spike in medical expenses for the 65+ age group.
There are plenty of resources available for seniors looking for assistance in understanding the best insurance coverage for their situation. It’s important to keep in mind that senior advocacy centers offer helpful services when you aren’t sure how to make the best decision.
How to pay medical bills
When dealing with medical bills not covered by insurance, there are a few steps you can take to make sure you aren’t overcharged and to prioritize your payments. By following the steps below, you’ll prevent a bill from winding up in collections, which can ultimately hurt your credit score.
1) Don’t pay until you fully verify the bill
Sometimes the way that medical services are billed is confusing. Don’t rush to pay a bill before you thoroughly check it for errors. Educate yourself on how to identify and address the most common medical billing mistakes to save yourself headaches in the future.
2) Make sure insurance was applied to the bill
Ask for an itemized bill from your provider to make sure your bill is adjusted. If you don’t see an insurance payment or discount reflected on the bill, there is probably a mistake. Also, it’s helpful to have a second set of eyes to catch inaccuracies.
3) Check that the explanation of benefits matches the bill
Expect an Explanation of Benefits (EOB) document to arrive at about the same time as the corresponding medical bill. Confirm that there aren’t any discrepancies to avoid being overcharged.
4) Follow up and negotiate until an issue is resolved
A large component of ensuring you’re paying the right amount for your medical bills is persistence. Don’t shy away from calling your healthcare provider and your insurance company multiple times to clarify or negotiate, and record the names of the individuals you’re speaking with and the time. Your wallet will thank you.
5) Request a payment plan
If you can’t tackle medical bills in full, there are often opportunities for interest-free payment plans if you simply ask.
If you’ve done everything in your power to reduce and spread out the cost of medical bills and you’re still struggling, it’s time to ask for support. Reach out to trusted family members or consider enlisting the help of medical billing advocates.
If your medical debt has already been sent to a collection agency, don’t report the bill to credit agencies right away. You may be able to protect your credit score if you’re able to resolve your bill quickly, and it might not even appear on your credit report.
Take a look at the resources below to learn more about how to best manage your insurance costs when you’re 65+:
How to maximize deductible medical expenses
When you’re a senior, it’s important to understand best practices for advocating for yourself to get as much money back on medical expenses via tax deductions as possible. Seniors can benefit from deductible medical expenses that can help them avoid detrimental debt.
If you itemize your deductions, medical and dental expenses are deductible from your income taxes on Schedule A of your tax return as a senior. The limit is 7.5 percent of a taxpayer’s adjusted gross income (AGI) for 2019 and 2020—only expenses that exceed 7.5 percent of a taxpayer’s AGI are deductible.
For example, if someone’s AGI is $50,000, only medical and dental expenses above $3,750 (7.5% x $50,000 = $3,750) would be deductible.
There are clear guidelines laid out by the IRS when it comes to figuring out which costs do and don’t qualify for a tax deduction. Take a look at a quick overview of deductible medical expenses below.
Deductible medical expenses
- Premiums for health insurance and qualified long-term care insurance
- Medical fees from doctors, laboratories, dentists, assisted living residences, home healthcare and hospitals
- Cost of transportation to receive medical care, including ambulance service
- Home modifications costs, such as wheelchair ramps, porch lifts, grab bars and handrails
- Entrance fees for assisted living
- Room and board for assisted living if the resident is certified chronically ill by a healthcare professional and is following a prescribed plan of care
- Personal care items, such as disposable briefs, and foods/nutritional supplements for a special diet, as prescribed by a doctor to treat a medical condition
- Cost of prescription drugs
Expenses not eligible for deduction
- Medical expenses that are reimbursed by health insurance, Medicare or any other program
- Payments or distributions out of health savings accounts
- Life insurance premiums
- Non-medical care to enable the tax filer to be gainfully employed
Although deductible medical expenses shouldn’t be relied on as a primary source of funds for senior healthcare, they can still help cover the cost of care and limit potential debt. A reduced tax burden from medical and dental tax deductions can help retirees reallocate their resources where they matter the most.
Along with other strategies to lower your overall healthcare tab, these deductions might help make the difference in being able to afford home care without going into debt, which can hurt your credit.
Be cognizant of the fact that deductible medical expenses should not be confused with Dependent Care Tax Credit—which is meant for dependent care expenses the primary taxpayer incurs to enable them to work, or look for work, rather than caring for their dependent.
How to minimize the negative effects of debt on credit
Not only can seniors’ credit scores suffer the damage of debt, but their health can be compromised by delaying medical care they need. According to one Consumer Reports survey, 41 percent of people said they put off a doctor’s visit because of cost.
It’s important for seniors to realize that not only are there medical debt forgiveness programs, like RIP Medical Debt, but there are also several encouraging changes occurring.
For example, one recent development is that major credit reporting agencies have agreed not to report medical debts until 180 days after they were incurred in order to give patients more time to resolve them. Here are a couple additional new developments that can prove hopeful for seniors grappling with medical expenses:
- FICO released a new scoring model, FICO 9, which gives medical debt less weight than ever before.
- Overdue or delinquent bills that have gone to medical collection accounts no longer count as unpaid bills once they’ve been settled.
- VantageScore 3.0 has followed suit with a credit scoring model that is more forgiving of unpaid medical bills than it has been in the past.
Here are three main ways seniors can reduce the impact of medical debt on their credit:
1) Finalize payment arrangements right away
Start asking about payment arrangements as soon as you receive medical bills you know you can’t cover. Being proactive to figure out if your provider can give you a payment schedule option will help you minimize the detrimental effects or discount portions of your bill if you pay in advance.
2) Request to make monthly payments on medical bills
As long as you have documented proof that your healthcare provider or collector has agreed to this payment plan, you could buy yourself time by asking to make monthly payments. If they report a negative item on your credit report, you can dispute it by showing they agreed to the payments you’re making.
3) Avoid paying medical debt with credit cards
Think twice before paying for a huge bill with your credit card. Keep in mind that you lose new protections offered by credit scoring companies if you pay your medical costs with a credit card and then can’t pay off the credit card. This type of credit card debt from medical expenses will be treated like any other debt. As a result, it will hurt your payment history and your credit utilization ratio regardless.
When you’re 65+ years of age and struggling to cover medical expenses, it’s easy to feel overburdened. Thankfully, the tactics we’ve shared and the changes in the credit scoring and credit reporting industries can give hope to seniors dealing with outstanding medical bills.
High healthcare costs coupled with a relatively low fixed income could lead to seniors getting into debt and struggling with credit. Even if medical bills compromise your progress, there are plenty of ways to get back on the right track to reach your financial goals in retirement.
Whether you ask a family member for help or consider using a professional service, prioritizing your financial well-being pays off in the end. If you’re concerned about your credit health while handling medical expenses, reach out to the credit consultants at Lexington Law. Our team can help you learn more about your credit report and strategize ways to improve your credit.
Source: lexingtonlaw.com
Mortgage rates drift lower as investors worry about pandemic – The Washington Post
Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders nationwide to come up with weekly national average mortgage rates. It uses rates for high-quality borrowers with strong credit scores and large down payments. These rates are not available to every borrower.
Because the survey is based on home purchase mortgages, rates for refinances may be different. This is especially true since the price adjustment for refinance transactions went into effect in December. The adjustment is 0.5 percent of the loan amount (e.g., it is $1,500 on a $300,000 loan) and applies to all Fannie Mae and Freddie Mac refinances.
The 15-year fixed-rate average dipped to 2.20 percent, with an average 0.6 point. It was 2.21 percent a week ago and 3 percent a year ago. The five-year adjustable-rate average was unchanged at 2.80 percent, with an average 0.3 point. It was 3.24 percent a year ago.
“After spiking in early January, mortgage rates have spent the last couple weeks trending consistently lower, as the continued spread of the virus, the introduction of new, more virulent variants, and a thus-far sluggish rollout of the vaccine all injected fresh uncertainty into markets,” said Matthew Speakman, a Zillow economist. “Uncertainty surrounding the latest proposed fiscal relief plan also lowered investors’ expectations for higher bond yields, and thus mortgage rates.”
No major policy changes came out of the Federal Reserve’s meeting this week. The Fed kept its benchmark rate at zero and renewed its commitment to purchase $120 billion in bonds each month. Since it began its bond-buying program early in the pandemic, the central bank has increased its balance sheet to nearly $7.5 trillion.
Investors were watching to see if the Fed signaled it would begin to taper its purchases in the near term. In 2013, when then-Federal Reserve Chair Ben S. Bernanke testified before Congress about a reduction in the government’s bond-buying program, the resulting “taper tantrum” in the market sent mortgage rates soaring.
Fed Chair Jerome H. Powell dismissed speculation about a reduction in the bond-buying program.
“In terms of tapering, it’s just premature,” he told reporters.
He said the economy is a “long way” from the Fed’s monetary policy and inflation goals, and he expects it to take some time for progress to be achieved.
“The Fed has promised to keep interest rates low through 2021, and after this week’s meetings, it’s great to see the Fed [has] fulfilled this promise and held the interest rates at near zero,” said Alec Hartman, chief executive and co-founder of Welcome Homes, an online home-building company. “As a result, we’re going to continue to see record mortgage volumes in 2021.”
Low interest rates won’t be the only thing driving the housing market. Hartman expects President Biden to enact policies that encourage home-buying.
“The administration has signaled its willingness to create an environment to foster homeownership, especially for first-time home buyers,” he said. “In addition to low interest rates, we can anticipate there will be many bonus programs available until inflation passes 2 percent per year.”
Bankrate.com, which puts out a weekly mortgage rate trend index, found nearly half the experts it surveyed predict rates will move lower in the coming week. James Sahnger, a mortgage planner at C2 Financial, is one who is predicting rates will fall.
“The froth on the 10-year Treasury has come off a bit after peaking at 1.18 percent two weeks ago after a quick run-up of 26 basis points in just a week earlier,” he said. “Stocks have been selling off a bit, with the torrid exception of GameStop. As money has left stocks, bonds have been the beneficiary and rates have improved. … Look for rates to drift a little lower as stocks should continue to do the same.”
Meanwhile, mortgage applications pulled back last week. According to the latest data from the Mortgage Bankers Association, the market composite index — a measure of total loan application volume — decreased 4.1 percent from a week earlier. The purchase index fell 4 percent from the previous week, but was 16 percent higher than a year ago. The refinance index dropped 5 percent, but was 83 percent higher than a year ago. The refinance share of mortgage activity accounted for 70.7 percent of applications.
“Applications for refinances in early 2021 are outpacing the fast start seen in 2020, even as a slight rise in mortgage rates pulled activity lower last week,” said Bob Broeksmit, MBA president and chief executive. “Home-buyer demand is also very strong, but home shoppers are competing for a limited number of homes on the market. The supply-and-demand imbalance is accelerating home-price appreciation and continues to push up the average loan balance of purchase applications.”
Source: washingtonpost.com
Rep. Juan Vargas Introduces Act To Ensure Dreamers Can Get Home Loans – KPBS
Credit: Pool photo via Fox 5 San Diego
Above: Rep. Juan Vargas (D-CA 51) in front of the Hall of Justice in downtown San Diego on Jan. 9, 2021, calling for the impeachment of President Donald Trump.
Rep. Juan Vargas, D-San Diego, introduced a bill Wednesday to ensure that Deferred Action for Childhood Arrivals beneficiaries are eligible for federal home loans, home loans backed by Fannie Mae or Freddie Mac, and Rural Housing home loans.
The Homeownership for Dreamers Act, co-written with Rep. Pete Aguilar, D-Redlands, is intended to clarify and protect the eligibility to receive home loans of DACA beneficiaries — also known as Dreamers.
Vargas said that due to the lack of clarity surrounding Dreamers’ eligibility under the Trump administration, lenders held off on providing loans to these individuals.
“I introduced this bill last Congress when the prior administration’s Department of Housing and Urban Development tried jeopardizing government-backed loan eligibility for Dreamers,” he said.
“I am reintroducing the Homeownership for Dreamers Act to ensure that this cannot happen under a future administration. Dreamers and their families deserve the same access to opportunities offered to other Americans. While DACA recipients are once again able to access these loans, a future administration or FHA leadership could attempt to bar such access if we don’t pass legislation that will clarify their eligibility,” Vargas continued.
The act is intended to help clarify eligibility for certain mortgages with federal credit enhancement. Specifically, the bill will ensure loan eligibility is not conditioned on the status of the mortgagor as a DACA beneficiary if all other eligibility criteria are met.
Last month, the Federal Housing Administration asserted that DACA recipients would be eligible to apply for FHA-backed mortgages effective Jan. 19. According to the statement, FHA’s recognition of DACA recipients’ eligibility results from the entity’s recent decision to change the language in the FHA Handbook.
“Dreamers and their families are key members of our communities and should have the same opportunities to become homeowners as any other American,” Aguilar said. “I’m proud to partner with Rep. Vargas on legislation to codify this policy so that Dreamers can utilize FHA loans, and I look forward to working with him and the Biden administration to make sure this bill becomes law.
Vargas serves on the Financial Services Committee. Both Aguilar and Vargas are members of the Congressional Hispanic Caucus.
Vargas represents California’s 51st Congressional District, which includes the southern portion of San Diego County, all of Imperial County and California’s entire U.S.-Mexico border. Vargas was first elected to the U.S. House of Representatives in 2012 and is currently serving his fifth term in Congress.
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Source: kpbs.org
A Guide to Estate Planning for Second Marriages
your financial details.
Getting married for a second time following a divorce or the death of your first spouse can feel like a fresh start. But it’s important to consider how joining your life with someone else’s may impact your financial plan, including how you manage your estate. What is fair in a second marriage and estate planning? It can be a difficult question to answer, especially when you or your new spouse are bringing children into the marriage or you plan to have children together at some point. Understanding some of the key financial issues surrounding a second marriage can help with reshaping your estate plan. So can consulting a financial advisor, especially one experienced in estate planning for second marriages.
Key Estate Planning Considerations for Second Marriages
Remarriage can bring up a number of important questions for estate planning. Both spouses should be aware of what the central issues are when updating individual estate plans or creating a new joint one.
Here are some of the most important questions to ask for estate planning in a second marriage:
- What assets will be left to each of your children?
- Do you plan to have additional children together and if so, what assets will be preserved for them?
- Which assets will you each continue to hold individually?
- Are there any assets that will be retitled in both of your names, such as a first home, vacation home or bank accounts?
- Are either of you bringing any debts into the marriage or will you incur new debts after the marriage?
- Do each of you have a will in place that needs to be updated?
- Or will you establish a new joint will?
- Besides a will, what other estate planning tools may be necessary, i.e. a trust, advance healthcare directive or power of attorney?
- Will you continue working with your current financial advisors or choose a new advisor to help you manage your financial plan together?
Asking these kinds of questions can help you each get a sense of the other’s perspective on estate planning. Ideally, you should be having these types of discussions before the marriage takes place to minimize potential conflicts later. This can also help you decide if a prenuptial agreement may be necessary to protect your individual financial interests. But if you’ve already remarried, it may be a good idea to have this discussion sooner, rather than later.
At the same time, it can also help to complete an inventory of your assets and liabilities so you both know what you’re bringing into the marriage. This can help with managing the distribution side of your estate plan later as well as planning for how any debts may need to be handled should one of you pass away.
Estate Planning for Second Marriages With Children
Having kids can add a wrinkle to your estate planning efforts when you’re getting remarried. For example, you may wish to leave certain assets to your children while your new spouse may want your assets to be equally distributed among his or her children as well as yours. Or there may be questions over who would assume control over assets on behalf of minor children should one of you die.
When there are children in the picture, it’s important to consider any provisions you’ve already made for them in a will or trust and how that might affect any assets your spouse stands to inherit. You may need to update your will or set up a separate marital trust, for example, to ensure that your spouse receives the share of your assets you wish them to have while still preserving your children’s inheritance. Provisions may also need to be made for any children you plan to have if you’re still relatively young when a second marriage occurs.
It’s important to consider the age of your children when deciding what is fair in a second marriage and estate planning. If you have adult children, for example, it could make sense to gift some of their inheritance to them during your lifetime. But if you have minor children, you and your new spouse would need to decide who should be in charge of managing their inheritance on their behalf if one of you dies prematurely.
Check Beneficiary Designations
Assets that already have a named beneficiary may need to be updated if you’re remarrying. For example, if you named your previous spouse as beneficiary to your 401(k), individual retirement account or life insurance policy, you’d likely want to change the beneficiary to your new spouse or to a trust you’ve set up so that your former spouse can’t collect on those assets.
You should also consider other assets, such as bank accounts or real estate, should be titled. Adding your new spouse to your home as a joint tenant with right of survivorship may seem like the right move for keeping things simple in your estate plan. But doing so means that if something happens to you, your spouse will automatically assume full ownership of the home. They could then do with it as they wish, regardless of what you might have specified in a will or trust.
Look for Gaps in Your Estate Plan
When deciding what is fair in a second marriage and estate planning, consider where the gaps might exist that could leave your assets in jeopardy. Not having a will, for example, could be problematic if you pass away. Without a will, your state’s inheritance laws would be applied – not your wishes. That means your assets may not go to your children or other heirs as you’d like them to.
A trust can also be a useful tool in estate planning for passing on assets to your spouse or children as well as managing estate and inheritance taxes. If either of you are bringing considerable assets into a second marriage or you want to minimize the potential for conflicts over asset distribution later, setting up one or more trusts could be a good idea. Talking to an estate planning attorney can help you decide whether a trust is necessary and if so, which type of trust to set up.
Also, consider whether you have sufficient life insurance coverage to provide for the surviving spouse and any children associated with the marriage. Both spouses in a second marriage may need to have life insurance coverage, particularly if one person is the primary breadwinner while the other is the primary caregiver for children. Checking your existing life insurance policies and talking to your insurance agent can help you determine whether what you have is enough or if more coverage is necessary.
Finally, think about what you may need in terms of end-of-life planning. Long-term care insurance, for instance, can help pay for nursing home costs so that your spouse or either of your children aren’t left in the lurch financially. An advance healthcare directive and a power of attorney can ensure that your wishes are carried out in end-of-life situations where you’re unable to make financial or medical care decisions on your own behalf.
The Bottom Line
Deciding what’s fair in a second marriage and estate planning can be tricky and it’s important to get the conversation started early. Understanding what the biggest challenges of estate planning in a second marriage are can help you work together to shape a plan that you can both be satisfied with. And if you have adult children, it’s important to keep them in the loop so they understand how a second marriage may impact their inheritance.
Tips for Estate Planning
- Consider talking to a financial advisor about the implications of a second marriage and what it might mean for your portfolio. You and your spouse may choose to maintain your current advisors or find a new advisor to work with together. In either case, finding the right professional to work with doesn’t have to be hard. SmartAsset’s financial advisor matching tool can offer personalized recommendations for professional advisors in your local area, in just minutes. If you’re ready, get started now.
- Trusts can be a useful estate planning tool for couples, including those who are getting married for a second time. A marital trust, for example, goes into effect when the first spouse dies. This can be helpful for passing assets on to a surviving spouse while minimizing estate taxes. You may want to create this type of trust, along with a second living trust set up specifically for your children, to manage assets more efficiently while also protecting them from creditors.
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Source: smartasset.com
Simple Trusts vs. Complex Trusts
your financial details.
A trust can be a useful estate planning tool, in addition to a will. You can use a trust to remove assets from probate, potentially minimize estate and gift taxes and ensure that assets are managed on behalf of beneficiaries according to your wishes. There are different types of trusts you can establish and some are more specialized than others. Knowing how these broad categories of trusts compare can help with choosing the right option. When it comes to estate planning, including whether to create a trust, a financial advisor can help you make the most informed decision possible.
What Is a Trust?
A trust is a type of legal entity that can be created in accordance with your state laws to manage your assets. The person who creates a trust is called a grantor and they have the right to transfer assets into the trust. They can also choose one or more trustees to oversee the trust and manage the assets within it.
The trustee’s job is to manage assets according to the grantor’s specifications on behalf of one or more trust beneficiaries. For example, you might set up a trust to hold assets that you want to be distributed among your three children when you pass away. Or you might choose your favorite charitable organization to be a beneficiary of your trust.
There are many different kinds of trusts and they can be categorized in different ways. For instance, a revocable trust can be changed during the grantor’s lifetime. If you have this type of trust and you want to add assets to it or change the beneficiaries, you can do so while you’re still living. An irrevocable trust, on the other hand, involves a permanent transfer of assets.
Trusts can also be categorized as grantor or non-grantor. In a grantor trust, the trust creator retains certain powers over the trust, including rights to the trust’s assets and income. Trust assets may be included in the trust creator’s estate when they pass away. With a non-grantor trust the trust creator has no interest or control over trust assets. Trust assets are generally excluded from the trust creator’s estate at their death.
Benefits of Trusts in Estate Planning
Trusts can be used inside an estate plan to perform a number of functions. For example, you might create a trust to:
- Pass on specific assets to your chosen beneficiaries
- Ensure that certain assets aren’t subject to the probate process
- Manage estate and gift tax liability
- Protect assets from creditors
- Ensure that a special needs beneficiary is cared for when you’re gone
- Receive the proceeds of a life insurance policy when you pass away
Some of these scenarios may call for a simple trust, while others may require a more specialized trust. One thing that’s important to keep in mind is how each one is treated for tax purposes when creating a simple vs. complex trust.
Simple Trust, Explained
A simple trust is a type of non-grantor trust. To be classified as a simple trust, it must meet certain criteria set by the IRS. Specifically, a simple trust:
- Must distribute income earned on trust assets to beneficiaries annually
- Make no principal distributions
- Make no distributions to charity
With this type of trust, the trust income is considered taxable to the beneficiaries. That’s true even if they don’t withdraw income from the trust. The trust reports income to the IRS annually and it’s allowed to take a deduction for any amounts distributed to beneficiaries. The trust itself is required to pay capital gains tax on earnings.
Complex Trust, Explained
A complex trust also has certain criteria it must meet. In order for a trust to be complex, it must do one of the following each year:
- Refrain from distributing all of its income to trust beneficiaries
- Distribute some or all of the principal assets in the trust to beneficiaries
- Make distributions to charitable organizations
Any trust that doesn’t meet the guidelines to qualify as a simple trust is considered to be a complex trust. Complex trusts can take deductions when computing taxable income for the year. This deduction is equal to the amount of any income the trust is required to distribute for the year.
There are also some other rules to keep in mind with complex trusts. First, no principal can be distributed unless all income has been distributed for the year first. Ordinary income takes first place in the distribution line ahead of dividends and dividends have to be distributed ahead of capital gains. Once those conditions are met, then the principal can be distributed. And all distributions have to be equitable for all trust beneficiaries who are receiving them.
Simple vs. Complex Trust: Which Is Better?
When it comes to simple and complex trusts, one isn’t necessarily better than the other. The type of trust that ultimately works best for you can hinge on what you need the trust to do for you.
A simple trust offers the advantage of being fairly straightforward when it comes to how assets and income can be distributed and how those distributions are taxed. A complex trust, on the other hand, could offer more flexibility in terms of estate planning if you have a sizable estate or numerous beneficiaries.
When comparing trust options, consider whether you want to retain control or an interest in the assets that are transferred to it. If you choose a simple or complex trust, you’re choosing a non-grantor trust which means you’ll no longer have an interest in the trust assets. Talking to an estate planning attorney or trust professional can help you decide which type of trust may work best for your financial situation.
The Bottom Line
The main difference between a simple vs. complex trust lies in how income and assets are distributed and how those distributions are taxed. Whether it makes sense to establish a simple vs. complex trust can depend on the size of your estate, the nature of the assets you want to include and your wishes for managing those assets. It’s important to understand the tax rules before creating either type of trust as well as how a trust fits into your larger estate plan.
Tips for Estate Planning
- Consider talking to a financial advisor about whether it makes sense to use a trust to plan ahead for the distribution of assets or to manage estate and gift taxes. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with a financial advisor in your local area. It takes just a few minutes to get your personalized recommendations online. If you’re ready, get started now.
- While trusts can offer numerous benefits, creating one doesn’t necessarily mean you don’t also need a last will and testament. You can use a will to distribute assets that you don’t want to include in a trust. Or you could create a pour-over will to transfer assets into a trust.
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