What would happen to your business or to your
family’s finances if you couldn’t go to work tomorrow?
Although we don’t like to think about it, the odds that we’ll become
disabled during our working life are often greater than our chances of
dying.
At age 40, for example, you’ve got a 12 percent chance of dying, but a 19
percent chance of becoming disabled for 90 days or more, says the Health
Insurance Association of America.
Between the ages of 35 to 65, you’ve got about a three in ten chance of
becoming disabled for at least 90 days during your working career. Even
worse, the Health Insurance Association of America estimates that one worker
in seven will become disabled for five years or more. Today 8 million
Americans have become so ill or injured that their disability limits their
workday or keeps them from working altogether.
Just as you plan for other contingencies, you should also plan for the
possibility that serious illness or injury will keep you out of the work
place. Your family’s well being could depend upon it.
SAFEGUARDING YOUR FINANCES
Consider how you’ll get by if a disability
keeps you from earning a living. Do you have liquid assets, such as savings,
that will see you through? Will income from rental property, dividends or
other investments be enough to help you get by? If not, then you’ll need a
supplemental source of income. Here’s a quick snapshot of the four
traditional sources of disability income:
• Social security . . . benefits begin
after six months; many restrictions apply.
• Worker’s compensation . . . only for job-related injuries; not all
occupations are covered.
• Employer disability programs . . . usually last no longer than six
months, and end when employment ends.
• Private disability insurance . . .Typical policies will pay from 60 to
80 percent of your income if you can no longer work in your chosen field,
or will make up the difference if you have to take a lower paying job in
another field. Policies may be chosen for the short term -- five years or
less -- or for ages up to 65 or for a lifetime.
Given the limitations with the first three
sources, private disability insurance is highly recommended for most
workers. But finding an insurance carrier willing to write an individual
policy is getting harder and harder. Your best bet is to try to find
coverage as part of a group, such as a trade organization. If you’re a
business owner, you may be able to create a group of your own employees.
When considering a policy, consider these features:
• How much of your income do you want
your policy to replace? You won’t be able to replace 100 percent, but can
find policies that will give you between 60 to 80 percent of your income.
• How long can you wait before receiving benefits? The longer the waiting
period before benefits kick in, the cheaper the policy.
• Do you want a policy that will pay benefits if you can’t work in your
own occupation? Some policies won’t pay benefits if you can find work in
other fields. For example, a neurosurgeon who loses use of his hands could
still find employment in teaching. Under the “own occupation” policy, he’d
receive benefits. With an “any occupation” policy, he wouldn’t. The “own
occupation” policies tend to be much more expensive. Most policies today
are hybrids of these two traditional types, paying benefits if you can’t
work in your own occupation for a number of years, then expecting you to
find employment in another field after that.
• Do you want your benefits to rise with the cost of living? If so, choose
a policy that offers an automatic cost of living adjustment.
• How long do you want to be covered? Most people want coverage through
retirement. After retirement, social security and retirement income
usually becomes available.
• Do you want coverage in the event of a partial disability that limits
how much you may work? If so, make sure you purchase a policy that covers
this contingency.
• Are you concerned that your policy might be cancelled or that your
benefits might be changed? If so, choose a policy that is non-cancelable
and that has locked-in benefits that can’t be changed by the insurance
company.
STAYING IN CONTROL OF YOUR AFFAIRS
Loss of income isn’t the only way a
disability can threaten your family’s well-being. If your disability is
severe and your recovery prolonged, you may be in no position to manage your
affairs for yourself. In that case, you’ll need some legal tools to protect
your security:
• An Advanced Directive (Living Will) and
Health Care Power of Attorney provide your caregivers with concrete and
clear instructions about what you do -- and do not -- want in the way of
medical treatment.
The Health Care Power of Attorney empowers someone to speak on your behalf
to ensure your wishes are fulfilled.
• A Durable Power of Attorney takes effect only when you’re incapacitated.
It empowers someone you trust to act on your behalf in financial, legal
and business matters.
PROTECTING YOUR BUSINESS
If you are self-employed or an owner of a
small, closely held corporation or partnership, then your disability could
spell the end of a successful venture. That’s why each principal in your
business should have an exit strategy in place before disability strikes.
For many business owners, the buy-sell agreement is an ideal solution. A
buy-sell agreement goes into motion when a triggering event -- such as
disability, retirement or death -- occurs with one of the owners of the
business. In the event of a long-term disability that keeps you from
returning to work, a buy-sell agreement can accomplish several important
objectives, such as:
• Providing you with cash to replace lost
income and help pay for your care.
• Providing a strategy for transferring your share of ownership to the
other members of the business, helping to ensure its survival.
• Providing an effective way to set the value of your business, preventing
a “fire sale” of assets when you’re disabled.
Here are the three most commonly used buy-sell agreements:
• Cross purchase agreement . . . ideal when there are only two or three
business owners, this agreement allows the remaining owners to purchase
the business from the disabled or departing owner.
• Entity-purchase agreement . . . the business agrees to redeem the
interests of the disabled owner.
• Hybrid agreement . . . Also known as a two-tier agreement, this buy-sell
strategy provides a great deal of flexibility, allowing individual owners
or the business -- or both -- to buy out the disabled owner.
Which strategy is right for you? Only a
careful analysis of your business situation and your estate planning goals
can answer that question. Call us to review your situation to determine the
strategy that’s most appropriate for your business. We’ll also review the
other planning tools you may need to implement to protect yourself and your
family against the potentially devastating impact of a disability.
Taxing Situations:
The
Alternative Minimum Tax
Nothing irks the American taxpayer like
wealthy taxpayers who don’t pay their fair share. In 1969 when Treasury
Secretary Joseph Barr reported that more than 150 taxpayers making over
$200,000 annually paid no federal income tax, Congress got more letters of
protest about this one issue than about the Vietnam War. The Congressional
response was the Alternative Minimum Tax (AMT), once the bane of high-income
earners with exploitative tax write-off schemes but now a threat to ordinary
taxpayers.
The AMT was once deemed a "class tax," because it was solely targeted at an
elite group of the super-rich who used abusive tax deductions and
questionable exemptions to avoid paying their fair share. But by the year
2010, the AMT may become a “mass tax,” applying to one-third of all
taxpayers.
Why? The AMT hasn't been indexed for inflation, so as incomes rise, more and
more Americans are caught in its snare. In 2002, for instance, 2.6 million
taxpayers had to pay the AMT. And those numbers weren’t limited to the
wealthy. One single mother earning $45,000 paid the AMT when she cashed in
stock options to pay for her child’s braces.
Without a major overhaul in the system, the AMT only gets worse. According
to the Urban- Brookings Tax Policy Center, by 2005 12.7 million families
will pay the AMT. By 2010, that number is expected to grow to 33 million.
The Urban-Brookings folks forecast that in 2010 95 percent of those earning
between $100,000 and $500,000 will pay the AMT.
The AMT was devised to prevent the super-wealthy from using excessive tax
shelters and deductions to avoid paying their fair share. In theory, the AMT
requires that all taxpayers pay at least a minimum tax, based on their
adjusted gross income. At a tax rate of 26 to 28 percent, depending on your
income, the AMT rate is lower than the standard income tax rate. But since
you lose out on your deductions and exemptions, the net result is a higher
tax bill! Ironically, President Bush's well-publicized cuts in federal
income taxes have actually increased the likelihood you’ll have to pay the
AMT. Because it reduced the overall tax rate, it made the AMT the higher
rate for a growing number of taxpayers. In fact, by 2008, the AMT tax rate
will actually be higher than the standard tax rate!
According to the tax experts, a single factor doesn’t usually trigger the
AMT. Rather, a combination of exemptions and deductions will push you into
AMT territory. Regardless of your income, you may be at risk of potential
AMT rates if:
• You claim exemptions for high local and
state property, income and sales taxes;
• You take deductions for home-equity loan interest;
• You have several children for which you claim exemptions;
• You experience considerable capital gains;
• You paid high health care costs;
• You experienced deferred gains on incentive stock options.
Figuring out the AMT isn't easy. You've
basically got to compute your taxes twice: once using the standard rates and
deductions and once using the AMT. You'll have to pay the higher of the two
amounts. Fortunately, a knowledgeable tax preparer should be familiar with
the AMT and be able to alert you to a potential problem.
Both Congress and the administration have publicly agreed that the AMT needs
revision. But don't look for relief in 2004. So, what can you do now if you
think you may be at risk of paying the AMT for tax year 2004? Turn your
normal tax-savings steps upside down and accelerate your income for this
year while postponing deductions until next year.
|
