Archive for May, 2009

A couple of years ago I was asked to counsel the employees of a company that was offering early retirement to those employees fifty years old or over. I’ve given seminars to such employees before and also personally counseled more than one thousand people who have been offered early retirement, and I’ve seen how terrifying such an offer by an employer can be. If the employee is emotionally ready to retire, and financially ready to retire, it can be great. Seldom, though, do we have all our emotional and financial ducks in a row at such an early age. Many people are afraid to take offers of early retirement. Yet however afraid they are to say yes to the offer, they’re more afraid to say no. Why? Because if they say no, they’re at the mercy of their company, with no guarantees of employment for as long as they’ll need it. And once they turn down the offer the first time, they may not have a second chance.
This time I discovered something very interesting. Even though most of these people had worked for this company for twenty-five years, and most of them were earning the same salaries the whole time, there was an even split of the people who came for counseling, with only a few exceptions. The vast majority of people who came either had around $400,000 in their 401(k) retirement plans or else they had around $150,000—big difference.
What accounted for the difference? Were some simply better investors than the others? No. Nearly all these people had all their money in the company’s stock, even though they had other investment options; these were loyal employees. Had some been in the company plan longer than others? It wasn’t that, either. Most of them had been in the plan for about the same time, give or take. Had some withdrawn large amounts of money from their retirement plans, even at a penalty? There were a few of these, but they were the people who only had anywhere from $10,000 to $50,000 left in their plans, and they were a small minority.
One single factor accounted for the difference. Those who had $400,000 or more had from the beginning put in the maximum amount they were allowed to put into their 401(k) account. Those who had $150,000 had simply put in 6 percent of their salaries because that was all the company matched. Their attitude was: Why put in more than the company will match? (Sound familiar?) One good reason for these people would have been $250,000.
To look at it a different way, that extra $250,000 would give them an extra $1,500 a month without their ever having to touch the principal, or a hefty amount to invest for growth to cover inflation concerns, or to leave to their family when the time came. For most of the people I counseled, that $250,000 meant the difference between knowing that they would never have to find work again unless they wanted to and being afraid that one day there would be no choice.

It’s easy to tell whether you need a bypass trust. With your spouse, do a quick addition of everything you own—any expected life insurance proceeds due on policies owned by you or your spouse, the equity in your house, your retirement accounts, additional investments, your cars, everything. Now subtract any money you owe. If, to your amazement, your assets are worth $600,000 or more, then, yes, you need a bypass trust.

Think you’re a long way from needing a bypass trust? Repeat the calculations from time to time, perhaps when you do your taxes every year. Your mortgage is closer to being paid off. Your retirement funds are growing. Maybe you inherited a little money here or there. No matter how much you have— even $10 million—your spouse will be okay if you die first; spouses, remember, can inherit billions without paying estate tax, as long as they are U.S. citizens. But once your spouse dies as well, or if the two of you happen to die together and you have more than $600,000, it’s estate tax time—unless you have this trust. The minute you’re lucky enough to hit that $600,000 mark, unless you plan to leave all your money to a charity, you need a bypass trust.

I am very serious about this. I always urge my clients who fall short of the $600,000 mark but are getting up there to set up a bypass trust. You never know when a two can become a one, so I don’t chance it. A bypass trust will cost about $1,500 in attorney’s fees to set up, unless you own a lot of real estate and have lots and lots of cash, in which case it will cost more, or unless you’re just amending a revocable living trust you already have, in which case it will cost less. But wouldn’t you rather leave your hard-earned money to your loved ones than to the IRS?

In the case of Sherry’s family, because Tim and Daniel will eventually die, Tim and Daniel should also set up a revocable living trust, setting up in turn a bypass trust; what’s good for the goose is good for the gander. Tim’s and Daniel’s children should not have to go through what their fathers are going to go through if Mom and Pop don’t take action. At the very least, the brothers should each have a revocable living trust that leaves the business to each other but their share of the income it generates to Sherry and Christine.

They should also think hard about what they want. Let’s say that one of the wives predeceases her husband. Maybe that brother will want his share of the business to go directly to his kids, not to his brother. If there isn’t some provision for this, the first brother to die might leave his children with nothing. I am sure that Tim and Daniel don’t intend to deny their children an inheritance, but the way their estates are set up right now, that might well be what happens.