Guidelines on keeping FINANCIAL Records

Many people have their financial documents scattered all over the house - on the kitchen table, in stacks of old newspapers, the hall closet, the basement, the garage. This type of “organization” makes it difficult, if not impossible, to keep tabs on your finances.

Sorting and filing financial papers is no one’s idea of fun.  Fight the urge to procrastinate and make the time to put things in good order. The financial professionals who work with you will be better able to advise you if they have accurate and up-to-date information.  When you pass away, your loved ones will have an easier time locating the important documents needed at that time. One large file cabinet may suffice for storage. Some prefer a few storage boxes or stackable units. Whatever you choose, here is what you should keep:

1. Investment statements. Organize by type: IRA statements, 401(k) statements, mutual fund statements. Keep the annual statements and discard the others. For an IRA or 401(k), keep Forms 8606 (reporting nondeductible contributions), Forms 5498 (the "Fair Market Value Information" statements that your IRA custodian sends you each May), and Forms 1099-R (reporting IRA distributions).  Keep records of your original investment in a fund or a stock to help determine capital gains or losses later.

2. Bank statements. Keep the last three years of bank statements. Under certain circumstances (lawsuit, divorce, past debts) you may need more than three years worth.

3. Credit card statements. Keep statements showing tax-related purchases for up to seven years.

4. Mortgage documents, mortgage statements and HELOC statements. Keep mortgage statements for as long as you own the property plus seven years. For other mortgage documents, keep them for the ownership period plus ten years. 

5. Annual Social Security benefits statement. Keep the most recent one. It shows your lifetime earnings record. If you see an error, you will need your W-2 or tax return for the particular year to help Social Security correct it.

6. Federal and state tax returns. Keep three years of federal (and state) tax returns and supporting documentation, and keep them as long as seven years to be really safe.  Keep tax records pertaining to real property as long as you own the asset (and for at least seven years after you sell, exchange or liquidate it).

7. Payroll statements. If you own a business or are self-employed, keep your payroll statements for seven years or longer.

8. Employee benefits statements. Keep at least the most recent year-end statement.

9. Insurance. Life, disability, health, auto, home ...keep the policies and policy information for the life of the policy plus three years.

10. Medical records and health insurance. Keep these documents for five years after the medical treatment. If you deduct medical expenses on your federal return, keep them for seven years.

Finally Congress did something.  It extended the Bush era tax cuts for another 2 years.  This included raising the estate tax exemption to $5 million per person, or $10 million for a married couple.  Other good news:  along with the increased estate tax exemption, the tax rate is lowered to 35% and the exemptions are made “portable,” meaning that husband and wife share them even if one does not have enough assets to fully use the exemption. Even more good news: the federal gift tax exemption is raised from a $1 million lifetime exemption to a $5 million lifetime exemption and a 35% rate.

Remember however, that if you live in some states, including Tennessee, you still have a state inheritance tax.  Tennessee’s inheritance tax is applied to everything over $1 million owned at death.  Furthermore, Tennessee has a gift tax with its own unique set of rules which do not follow the federal rules. Planning will still be required to minimize the Tennessee inheritance tax and to avoid running afoul of TN’s gift tax rules.

For most of us the new law means that we will easily avoid the federal estate tax, but planning will still be necessary to minimize or completely avoid state inheritance taxes.  Those with very large estates may want to consider giving more than the $13,000 per person per year in annual gifts, now that $5,000,000 of gifts are exempt from federal gift tax.  Only the TN gift tax would be required for TN residents.   However, it is always wise to make sure that you have enough for your own needs, particularly your long term care needs, before embarking on a extensive gift-giving program.

And remember: the new law is effective only for the next 2 years.   In 2012, we may return to the uncertainty that has become so familiar in the last few years.

What is a disclaimer?

            A disclaimer is a refusal to accept property that one would otherwise receive by gift or inheritance.  These days the disclaimer is receiving much more attention from estate planners for its usefulness in adjusting estate plans after death when needed.

            Disclaimers are a way of changing the distribution from a Will if there is a tax benefit or other reason to do so.  For example, Grandpa leaves his estate to his Daughter who is already wealthy.  Daughter disclaims the inheritance and allows it to go instead to her children who need the money to pay college tuitions for their children. 

            In order to disclaim property, the person disclaiming must satisfy several requirements.  There must be a written document describing the property to be refused and signed by the person disclaiming.  The written document must be delivered to the Executor and filed in the Probate Court within 9 months of the date of death. The person disclaiming must not have received any benefits from the property they are disclaiming.  In order to preserve the right to disclaim, the person entitled to an inheritance should consult with an estate attorney before doing anything with the estate assets.  The estate attorney will help determine whether the disclaimer is needed, and if it is needed, will prepare the written document and make sure that all the legal requirements are met.

            Disclaimers are useful in this time of uncertainty about the federal estate tax.  The disclaimer can be used to correct planning that relied on tax credits and exemptions that do not exist in 2010.  The disclaimer can be built-in to documents designed now as a way of giving flexibility and allowing for future adjustments to be made to obtain the most beneficial outcomes.

    As you may know, under current law, there will be no federal estate tax assessed against the estates of those who die in 2010.  However, the federal estate tax will be reinstated with a $1 million exemption and a 45% tax rate on January 1, 2011.  Many thought that Congress would have acted by now to set a higher exemption for the estate tax for 2010 and beyond, but so far no action has been taken.  If Congress does act this year, whatever changes they enact may be retroactive to January 1^st.

    How does this affect the average person who already has a Will or Trust in place?  It depends.  For those with simple Wills and no tax planning, there will be no problem.  There is more cause for concern if you have documents that include tax planning language that divides estate assets by referring to estate tax credits and exemptions.  Most of these credits and exemptions do not exist for those who die in 2010.  It is unclear what will happen if someone dies in 2010 with this type of language in their Will or trust.  However, it is certain that in some situations, there will be undesirable results.   

    If you have existing wills or trusts with tax planning and you are able to make changes, you should review your existing estate planning documents with your estate planning attorney.  If your documents divide assets into marital trusts and shares, and “family trusts” or “credit shelter trusts,” and these trusts have different beneficiaries, you may need to amend your documents.  Second marriage situations in particular may require review. Elderly persons or others in poor health are more likely to be impacted by the 2010 situation than others and may want to have an estate planning “check-up”.

            Most people will not need to take any corrective action. If you live until 2011 when the estate tax is restored, the 2010 issues go away.  Hovever, it is a good idea to have your estate planning documents reviewed regularly and adjusted for changes in the law, changing family situations, increasing or decreasing asset values, and other changes.   You should consider making an appointment with your estate planning attorney to have your documents reviewed for 2010 issues and for any other changes that have occurred since the documents were prepared.