Nov 10, 2014 4:52 PM ET
Few of us spend months hand-stitching sequined Lycra mermaid costumes. For our cats.
But the hit TV comedy “Modern Family” often rings true, or pretty close to true (it was inspired by the family stories of its creators), and reflects the complex reality of today’s American hearth. There’s one traditional nuclear family, one married same-sex couple with an adopted child, and one blended family post-divorce, this one with an older husband, a younger wife and her son.
We asked financial planners to highlight the real-life challenges of people with similar – though probably less funny — families, and to offer some solutions to those problems.
Modern Family I: The Big Blend
On the show, the patriarch of the clan is Jay Pritchett, who owns his own business and has two adult children — Claire and Mitchell — from his first marriage. His second marriage is to a much younger woman, Gloria, who has a son, Manny. The couple then has an unplanned child.
Jay needs to get serious about estate planning, says Lili Vasileff, whose firm, Divorce and Money Matters, specializes in divorce and post-divorce financial planning. If he plans to pass his inheritance on to all of his kids – the two from a prior marriage, stepson Manny and the new baby — Jay could set up a qualified personal residence trust, QPRT, or other revocable trust. This gets the value of the residence out of the estate for tax purposes.
If Jay put the house and business assets in the trust it would protect them from being tapped by creditors — or by any future spouse of Gloria — if he passed away. Gloria has use of the marital residence until she dies; the house then passes from the trust to the children. A QPRT would also have the benefit of a third-party trustee who could keep an eye on Gloria’s spending, and her distributions from the trust, says Vasileff.
Complicated family structures make being very specific about business succession crucial. If none of Jay’s kids want to run the business, he should start preparing it for sale. If just one child doesn’t want to be part of the business, Jay might plan to leave that child another asset, or name them as a beneficiary on an additional life insurance policy.
Jay faces college costs for children who are about 12 years apart in age. He should promptly fund a 529 college plan. Any excess in a fund for Manny could roll from him to the baby, says Vasileff. If need be, she adds, Gloria could go to work while the baby is in school, and Jay could postpone his retirement. Yeah, that would go over well.
Modern Family II: Same-Sex Strategies
Jay’s son Mitchell, a lawyer, is married to Cam, who has taken a job as a music teacher after being a stay-at-home Dad to their adopted daughter, Lily. They live in suburban Los Angeles, and since California recognizes gay marriage, the couple has all the benefits of a traditional married couple.
Mitchell and Cam would need to think carefully before moving to a different state. Most federal agencies have provided guidance about benefits and rights following same-sex married couples into other states, says Stuart Armstrong, a planner at Centinel Financial Group. But if they move to a state that doesn’t recognize same-sex marriage they could lose the right to file joint tax returns on the state level, and a laundry list of other benefits, he says.
Also, a state that doesn’t recognize same-sex marriage might not fully recognize the couple’s adoption rights. They should both adopt Lily to gain parental rights.
If a same-sex married couple has filed for Social Security benefits as a couple and moves from a state that recognizes their marriage to one that doesn’t, the Social Security Administration has indicated it will approve their retirement benefits strategies, Armstrong says.
If they haven’t yet filed for benefits as a married couple, move to a non-recognition state and then want to file, it’s another story. In this case, they should still file for benefits, says Armstrong — but they won’t be approved. What’s the point of filing, then? The thinking, he says, is that if the policy changes and the benefits get approved in the future, the couple might be able to collect from the date of their application.
The bigger point: If you live in a recognition state and are close to filing for Social Security benefits, do it before you move to a state that won’t recognize your marriage.
Since Cam and Mitchell are legally married, they should run the numbers on their tax returns to see if filing jointly or separately is more advantageous. If filing a federal return jointly makes more sense, they can amend prior years’ returns – generally those filed within the past three years.
Modern Family III: Going Nuclear
Jay’s daughter, Claire, is married to Phil, a real estate agent, and they have three children. The eldest, not very bright daughter, Haley, is in college.
If Phil is self-employed as a realtor, he has some very juicy retirement savings options, says Charles Bennett Sachs, principal at Private Wealth Counsel. If he’s the only employee, with no assistant or other worker, he can add the lesser of $52,000 or 25 percent of his income to a solo 401(k) plan as the employer. And then he can add another $23,000 as the employee. Not only is he saving a lot for retirement, he’s deferred taxes on a chunk of his income.
Phil should also fund Roth IRAs for himself and Claire. If he’s over the $191,000 limit for contributing, they can open traditional IRAs and then take advantage of a “back door” Roth IRA. That allows them to convert to Roth IRAs without triggering much in the way of taxes.
And while he’s at it, says Sachs, Phil should hire his kids to do some work for him — stuffing envelopes, whatever. They can earn up to $5,500, which he can put in a Roth IRA for them.
Even with three college educations to fund, Claire and Phil shouldn’t think about raiding their retirement fund. “People tap their 401(k) for their child’s education, then they’re 80 and haven’t saved enough and what are they going to do – live in the car?” says Sachs. “Kids have the rest of their lives.”
At the very least, he says, have kids borrow the money for college. If they get a certain grade or better in school, help them pay back the loan sooner. The key, Sachs says, is making sure they have skin in the game. If Claire and Phil apply this method to Haley, however, they may wind up with a defaulted loan.