The Law Office of William C. Wombacher
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September 2015 Archives

Should I put my money in joint tenancy with my children?

     I can't tell you how many times I have sat down with a potential client to discuss planning their estate upon their death and I find out they have put one or more of their children on their checking account, CDs or investment account as a joint tenant. I ask them if they intend on favoring that child or group of children over the other ones. The answer is almost always, " No!"

   This is done many times because the client is elderly and concerned about someone in the family having access to funds to pay bills if they become sick or incapacitated. This is the wrong way to do things in almost every case. We have Powers of Attorney to accomplish these purposes. An agent under a Power of Attorney has special responsibilities under the law which are known as fiduciary duties. They can not favor themselves and being an agent under a Power of Attorney is not a license to steal. Do agents sometimes do things they shouldn't do --sure. Agents are legally held to a high standard under the law. 

    The problem with making your child or children joint tenants is that it creates a presumption under the law that it is your intention upon your death that the joint tenant should be the sole owner of the account. If you want that account divided equally among all your children you could have big problems.  A joint tenant can also go into the Bank and withdraw all of the money without your knowledge or permission. I had one client that had 3 children and added each child as a joint tenant on each of three different CDs she owned. Now if one CD needs to be cashed in to bill some medical bills who is the odd man out?      There are a number of ways to avoid probate that maybe much better than than the do it yourself method of adding your children as joint tenants. I don't want want your children's financial problems to be your financial problems. If the bill collectors are chasing your kids what makes you think they are  going to stop when their research shows up that joint account with you. What about if your kids don't have enough liability coverage and manage to run over an orthopedic surgeon crossing the street in front of the hospital. When you kill someone who makes $900,000 per year in slow year it is going to get expensive. What if one of your kids decides they don't want to be married anymore? Are you going to have prove to some Court that the money in that joint account is not their's? Why in the world would want any of these worries when they could easily be avoided. Discuss your options with a well qualified Elder Law attorney. You will rest easier knowing your approaching this the appropriate way. 

William Wombacher, your Central Illinois Certified Elder Law Attorney (CELA) and Social Security Disability Specialist. I'll help you!

Serving Peoria, East Peoria, Peoria Heights, Pekin, Dunlap, Chillicothe, Morton, Washington, Metamora, Canton, Galesburg, Lacon, Henry, Bloomington, Normal and surrounding cites and counties of Peoria, Tazewell, Woodford, Fulton and  Knox Counties in Central Illinois.

Does A (Qualified) Longevity Annuity Contract (QLAC) make sense?

Be careful. This may not make good financial sense for you right now. Michael Kitces explains why.The longevity annuity - also known in some circles as the Deferred
Income Annuity (DIA) - is similar in principle to an immediate annuity,
where a lump sum is converted into a lifetime stream of payments. The
key distinction, however, is that with a longevity annuity, the payments
for life don't begin immediately. Instead, they start at some point in
the future. 
While the Qualified Longevity Annuity Contract (QLAC) rules allowing a
longevity annuity to be owned inside of a retirement account were
essential to avoid running afoul of the RMD rules, the question still
arises: a (qualified) longevity annuity can be now purchased inside of a retirement account... but will anyone actually want to?  Thus far, the industry statistics suggest that demand for the products is still weak. In 2012, longevity annuity purchases topped $1B for the first time (averaging $250M per quarter), and in the first quarter of 2014 they're up to $620M (an annual pace of almost $2.5B). However, the first quarter of 2014 also saw $57.7B of total annuity sales, which means longevity annuities only make up barely more than 1% of all new annuity transactions. By contrast, even single premium immediate annuity purchases were $2.5B in Q1 of 2014, nearly quadruple the pace of longevity annuities. Nonetheless, interest in longevity annuities does seem to be growing, and more companies are throwing their hats into the ring with new products.  At a more basic level, though, the fundamental challenge is that in a world where consumers are often loath to purchase an immediate annuity - ostensibly out of concern for losing their liquidity and their upside potential - it seems even more of a stretch for a longevity annuity to be compelling, with the same problems but no payments until what may be decades from now. Fortunately, the common "what if I get hit by a bus" fear can be mitigated at least, with the purchase of a return-of-premium death benefit, though such guarantees just lower the payments even further. For instance, the 55-year-old who purchases a longevity annuity for $100,000 will get guaranteed payments of $3,690.30/month starting at age 85 with a return-of-premium death benefit along the way. However, if we calculate the actual internal rate of return being generated on the longevity annuity over the time period, the results turn out to be less compelling, as shown below. Internal Rate of Return (IRR) On Longevity Annuity Starting At Age 85]
As the results reveal, it still takes until age 87 before the couple actually receive back their original principal and begin to generate any actual "return" on their dollars. Even by age 90, the internal rate of return is only 3%, and by age 100 it's still only 5.3%. While 5.3% certainly isn't a "bad" return from an annuity company, over a 45-year time horizon it's still not a very compelling return either, as a combination of both interest rates and mortality credits. Even in today's low-return environment, long-term corporate bonds pay close to those yields, and the long-term return on equities is highly likely to beat 5.3% over 45 years as well (especially given that no cash flows are assumed for 30 years, which provides a significant barrier to fend off market volatility along the way). In other words, while it might be nice that a longevity annuity can give a significant payment that's "guaranteed for life" beyond age 85, if it's internal rate of return is low enough, the truth is that a simple conservative investment over the same time horizon might have generated even more cash flow over any foreseeable age of death (even with very long life). Similarly, the reality is that delaying Social Security - which itself is implicitly a longevity annuity - still has a far better implicit payout rate as well compared to today's commercial longevity annuities, especially given that Social Security is inflation-adjusted while a longevity annuity also runs the risk that unexpected inflation will significantly degrade the purchasing power of its guaranteed income. (Some contracts do provide inflation-adjusted payments starting after age 85, but still require the retiree to "guess" - and risk being wrong - at what inflation will be between today and when payments begin.) Notwithstanding the not-terribly-compelling implied returns that longevity annuities provide in today's marketplace, the potential remains for longevity annuities to become an increasingly significant part of the retirement income puzzle, especially if/when/as interest rates rise (boosting future payouts), and/or more companies enter the marketplace (potentially making longevity annuity pricing more competitive - i.e., with higher payouts). And for those who dofind a longevity annuity compelling, for at least a portion of retirement income... the new QLAC regulations do at least permit investors to own such contracts inside their retirement accounts. And while the dollar amount contributions remain limited, from a practical perspective a retiree would likely only put a portion of funds into a longevity annuity anyway (as they still need to fend for themselves between now and when payouts begin!).
In the end, though, whether prospective retirees will pursue such trade-offs or not remains to be seen, and thus far it appears the "breakthrough" of the Qualified Longevity Annuity Contract (QLAC) regulations is more about permitting insurance companies to sell longevity annuities inside of retirement accounts than consumers demanding to do so, especially once guaranteed payouts are converted into the equivalent not-terribly-high return they're providing over the ultra-long time horizon. Nonetheless, if guaranteed future payouts get higher in the coming years as rates rise and the marketplace heats up, longevity annuities might get a whole lot more interesting. Read about this on Michael Kitces blog at 
William Wombacher, your Central Illinois Certified Elder Law Attorney (CELA) and Social Security Disability Specialist. I'll help you!

Serving Peoria, East Peoria, Peoria Heights, Pekin, Dunlap, Chillicothe, Morton, Washington, Metamora, Canton, Galesburg, Lacon, Henry, Bloomington, Normal and surrounding cites and counties of Peoria, Tazewell, Woodford, Fulton and  Knox Counties in Central Illinois.