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Monthly Archives: September 2015

What Can a Postnuptial Agreement Accomplish?



When most people think of divorces, only bad things come to mind. The reason is that divorces are often very complicated and messy matters. Even when a divorce starts out on amicable terms, it’s always possible for proceedings to take a negative turn. Because there are so many negative issues associated with divorces, more people are turning to financial advisors for alternative solutions.


The most common suggestion that trained financial advisors bring up with clients who make this request is a postnuptial agreement. Although far more people have heard of divorces than postnuptial agreements, this document is a legal contract. The simplest definition of a postnuptial agreement is a contract that a couple signs after getting married. The purpose of this contract is to provide clarity about the financial rights and obligations of both spouses in the event of a death or divorce.


The Difference Between Prenuptial and Postnuptial Agreements


The biggest difference between these two types of agreements is that a postnuptial agreement is made when both parties have legal rights. Since prenuptial agreements are signed prior to a couple having any legal financial obligations to each other, they generally can’t provide the same level of certainty about financial matters.


How a Postnuptial Agreement Can Function As a Divorce Alternative


Financial troubles, mental illness, addiction and infidelity are the most common causes of marital distress. When one or more of these issues comes up, it can shake the entire foundation of a marriage. In the event that any of these problems do arise within a marriage, a postnuptial agreement can provide a way for one spouse to seek specific protective measures.


Instead of defaulting to a divorce, a postnuptial agreement can enable a spouse to secure financial protection in the form of assets being distributed. By taking this route, a married couple can then focus on resolving the actual problems of the marriage.


More Details About Postnuptial Agreements


In addition to serving as a possible alternative to divorce, this type of agreement can also be used a financial planning tool when a married couple receives an inheritance or enters a family business. When used in this type of situation, a postnuptial agreement can provide clarity on an issue that will then give both spouses ample peace of mind about the matter.


When certified financial planners discuss this type of agreement with clients, it’s important for them to bring up the terms that need to be present in order for the agreement to be enforceable. Those terms include both spouses entering into the agreement voluntarily, as well as the agreement resulting from full financial disclosures by both spouses.

The IRS Now Allows After-tax 401(k) rollover to Roth IRA

401(k) File Drawer Label Isolated on a White Background.


It’s been standard practice for quite some time now for employees to contribute to their traditional 401(k) plans with after-tax deposits. But because the newer Roth 401(k) has quickly gained a lot of popularity, many employees will be happy to learn that a ruling by the IRS makes it easier than ever to opt for an after-tax 401(k) rollover to a Roth IRA. While this is something that financial advisors should communicate with all of their clients, it’s especially important news for any employee who can’t contribute to a Roth IRA on an annual basis because of their income.


The Rules of 401(k) Contributions


The IRS has rules about the limits for what employees can contribute to their 401(k). As of 2015, the current limit is $18,000. The one addition to that rule is if someone is over the age of 50, they can make an additional catch-up contribution of up to $6,000 more. Two notable elements of these contributions is they’re not counted as income and any gains from them are tax-deferred.


Although a Roth 401(k) has the same limits, what makes it different is that contributions are counted as income. However, the gains are tax-free. Where the recent IRS ruling has a big impact is on employees who work in a company that offers a traditional 401(k) with an after-tax option. Currently, 42% of companies provide that option.


With the after-tax option, the IRS sets a much higher annual limit of $53,000. And now that the IRS has ruled in favor of the after-tax 401(k) rollover to Roth IRA, it’s possible for employees to roll those larger contributions into their Roth IRA upon leaving a company or retiring.


The Recent Ruling Streamlines Rollovers and Benefits Many Employees


The main reason that this issue got to the point where the IRS decided to make an official ruling on it is because so many people have rolled their after-tax contributions into a Roth IRA. While this practice has been quite common in recent years, the unclear nature of the previous IRS guidelines meant that people generally ended up being taxed at some point during the rollover.


Thanks to the new ruling, any employee interested in making this rollover will benefit. This update will be especially beneficial for earners who can’t make contributions to a Roth. With this update, it will now be possible for them to get into a Roth IRA without worrying about incurring out-of-pocket costs.


While the IRS has taken a big step to make the rollover process transparent and easier to follow, anyone planning to do so will still benefit from speaking with a certified financial planner and understanding the full implications of their plan.

529 College Savings Plan: 3 Things Advisors Need to Tell Their Clients

529 college savings plan concept


Although it’s fairly easy to put money into a 529 college savings plan, getting the money out can present more of a challenge. Far too many people do what they think is right by putting large amounts into this type of plan, only to discover when it’s too late that the financial aid and tax benefits they were expecting aren’t going to come to fruition.

Data researchers found that the amount of money in 529 college savings plans increased from $13 billion in 2001 to $224 billion in 2014. Due to that significant growth, it’s likely that financial advisors will have clients who are already using these plans or are interested in doing so. For those clients, advisors need to be sure to inform them about the following issues:


Help from Grandparents and Non-Custodial Parents Can Reduce Financial Aid

When initial financial aid calculations are done, 529 college savings accounts owned by grandparents aren’t factored into the equation. However, if withdrawals are then given to the grandchild, those amounts will be classified as untaxed income when the calculations are done for the next year’s aid. Based on the way calculations are done, it can cause a student to lose scholarships or grants that are equal to up to half the amount that’s distributed from the account.

The same issue can come up if a student’s parents are divorced. In this scenario, it’s standard practice for financial aid calculations to be based on the parent that student lives with the majority of the time. But as with grandparents, even though the non-custodial parent’s 529 college savings plan won’t be factored in the first time around, any distributions given to the student will be viewed as income and can result in future financial aid reductions.



Tax Benefits Can End Up Competing with Each Other

Another issue that financial planning professionals need to talk about with their clients is the conflicts that can arise when tax-free 529 money is used for expenses that would normally be claimed as tax credits. Plenty of people have inadvertently double dipped, only to find out too late when they end up with an unnecessary tax bill.



Timing is Critical

Last but not least, certified financial planners need to make it clear that the tax break associated with withdrawals from a 529 college savings plan is only valid if they properly match up with the value of qualified education expenses incurred during the same year. Making a mistake with timing or assuming a purchase like a laptop qualifies as an education expense can result in taxation or even penalties.

As these issues show, there are more caveats to 529 college savings plans than most students, parents and grandparents realize. Maximizing the benefits of a plan while minimizing any negative effects it can have is best accomplished by trained financial advisors being proactive in their conversations with clients.

What Can Financial Advisors Do to Assist Clients with Dementia?



One of the most difficult situations an advisor may find themselves in is needing to help a client who has dementia. Not only does helping a client with dementia require understanding and compassion, but it’s also important for advisors to be aware of the legal issues associated with this condition.


The Most Common Warning Signs of Dementia


In order to provide the right type of help to clients with this condition, financial advisors need to be able to recognize it. There are three warning signs that are strong indicators of dementia. The first is extended spells of uncertainty during a conversation. The second is a sudden and significant change in how a client approaches their money management. And the third is noticeable forgetfulness that occurs on multiple occasions.


If these signs are present in a client, the best way for trained financial advisors to react is by providing a gentle but firm assessment to see a doctor. Although the specific issue of dementia may not need to be brought up, it’s important for the client to clearly understand that something is not the way it should be.


Financial Planning Advice for Clients with Dementia


When an individual is struggling with this condition, it can make them susceptible to people who want to get their money. That’s why it’s very important for certified financial planners to not rush into a sudden request to gift someone who hasn’t been talked about in the past.


In addition to watching out for signs of a client being ripped off, it’s important for advisors to be proactive in preparing for a client’s condition to worsen. From trusts to wills to estate plans, the sooner an advisor can get everything in order, the better position their client will be in.


Understanding the Liability Associated with Dementia


There’s no question that a financial advisor should take steps to help protect a client who is showing warning signs of dementia. But it’s also important for an advisor to be aware of their own liability in this kind of situation. The biggest source of liability is if any material action is taken on the client’s behalf without specific authorization.


Because dementia can add a layer of complexity to financial planning issues, it’s often in the best interest of both the advisor and client for the advisor to speak with the client’s designated heirs or relatives about the possibility of dementia. If one of those individuals does confirm the presence of this condition, the necessary steps can be put into motion without delay.


While dementia is a very unfortunate condition, financial planning professionals who are proactive about preparation can play a major role in both helping and protecting a client with this condition.