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When you’re starting a business, a family, or any other major life endeavor, you try to think of every risk so you can plan a strategy to put yourself on a path to success. Unfortunately, hardships aren’t always predictable, and certain ones, such as man-made or natural disasters, can wreak havoc on well-laid plans. According to FEMA’s 2019 Emergency Financial First Aid Kit brochure, roughly 40 percent–60 percent of businesses affected by major disasters never reopen.

Natural disasters, man-made disasters, and business disruptions have at least one thing in common: time is never on your side when you’re reacting. Remember Murphy’s law: anything that can go wrong will go wrong. During a crisis, you’re lucky if you have a few seconds to take a breath and react, so it’s critical to consider your financial readiness. As the Roman philosopher Seneca said, “Luck is what happens when preparation meets opportunity.”

Why Financial Preparedness Matters
Financial preparedness is much more than storing extra cash under your mattress. It’s about creating a plan to help you navigate unexpected financial challenges, which can help you:

• Remain calmer. Knowing that you have a plan to cover immediate needs and recover financially can alleviate stress and anxiety in times of crisis.
• Recover more quickly. Quick access to funds can speed recovery following an emergency or disaster. This can be especially important when a repair or medical attention is urgently needed.
• Prevent debt. Without proper financial preparedness, you might be forced to rely on high-interest credit cards or loans to cover expenses. This can lead to debt accumulation.

Steps to Becoming Financially Prepared
The nonprofit organization Operation HOPE has partnered with the Federal Emergency Management Agency (FEMA) to create the Emergency Financial First Aid Kit (EFFAK) to help people and businesses organize financial, medical, and household contact information that is often necessary to begin the recovery process after a disaster. The EFFAK provides lists of vital documents in categories such as household identification, financial and legal documentation, medical information, and household contacts. Having this information in one place, in a safe and accessible location, will set you on the road to recovery as soon as possible.

FEMA also offers recommended steps for financial preparedness. Unsurprisingly, the first one involves completing and dating all EFFAK forms. Learn how to prepare yourself.

• Assess and compile: Gather important financial documents and contacts and complete all EFFAK forms. Be sure that you have original versions of your documents; otherwise, reach out to the proper agency to request a copy.
Consider switching from paper checks to electronic transfer or direct deposit wherever possible. You can do this for federal benefits through Go Direct. Contact your employer to have your paychecks deposited directly into your bank account. In addition, it’s wise to print or download copies of autopay bills, such as rent or mortgage, utilities, loan payments, or membership fees.

Store cash in different denominations in a safe location where you’ll keep your EFFAK forms. In case ATMs aren’t working or banks are closed, you should have enough money (at minimum) for gas, food, and other daily necessities. Think about how many days or weeks during a crisis you’d like to sustain your current lifestyle and keep enough cash on hand for that period.
• Review: Go over your insurance policies and financial paperwork to ensure that they remain accurate and current. This includes verifying that your current homeowners’ insurance, auto insurance, and/or renters’ insurance policies are up to date. The EFFAK will help you clearly see any personal documents or insurance policies you might need or want to set up.

• Safeguard: Store paper copies of your documents in a fireproof and waterproof box or safe, in a bank safe deposit box, or with a trusted friend or relative. If you’re using a safe deposit box, you may want to confirm who can and cannot access the safe deposit box if the owner dies or cannot access it due to illness. Electronic copies of important documents should be stored in a password-protected format on a removable flash drive or external hard drive in your fireproof and waterproof box or safe.

You may want to provide your lawyer, financial advisor, or trusted family member or friend with a paper copy of your EFFAK in a sealed envelope. Provide instructions that they should open the envelope only with your approval or the approval of someone you have chosen in the event you cannot make decisions on your own.

• Update: Revisit your EFFAK on a regular basis to determine whether any information needs updating. Suggested times to review it include tax preparation time, the beginning or end of daylight saving time, your birthday, and the start of a new year. Any of the following events should prompt you to change your EFFAK as soon as possible:

o Change of insurance
o Change of residence
o Purchase of new home or rental of new apartment
o New bank account
o Change in marital status
o Birth or adoption of child
o Change in your child’s school
o Retirement planning
o Death in household

How to Stay Safe from Scams
Unfortunately, natural disasters and other emergencies inspire fraudsters to take advantage of those in difficult or desperate situations. In addition to being financially prepared to handle the aftermath of an unexpected crisis, you should be aware of red flags that might indicate a scam, including:

• Up-front fees. Help with claiming services, benefits, or loans should not require payment in advance.
• Door-to-door repair sales. These types of salesmen should be thoroughly vetted and should trigger suspicion, especially if they ask for advance payment or offer steep discounts.
• People asking for personal information or payment without credentials. Never give out personal information to people you don’t know, including over the phone. Con artists may attempt to pose as government employees, insurance adjusters, or bank employees. Call these agencies back at a verified number before disclosing any information.
• A sense of urgency. Be suspicious of those who claim to want to help but warn that there is a limited-time offer or pressure you to sign on the spot. You need time to thoroughly review and process anything presented to you. Consult a trusted friend, relative, lawyer, or advisor.

Of course, we hope you never find yourself in a situation where you need to reference these tips, but it’s best to be prepared. If you have questions about financial preparation for an emergency or the information in this article, please reach out to us by phone or email.

Third-party links are provided to you as a courtesy and are for informational purposes only. We make no representation as to the completeness or accuracy of information provided at these websites.

© 2023 Commonwealth Financial Network®

Sarah Ruef-Lindquist, JD, CTFA

By Sarah Ruef-Lindquist, JD, CTFA 
For Pen Bay Pilot 

Tax legislation is often written and enacted to sunset on a date certain…”kicking the can” of tax policy down the road for future legislators and administrations to wrestle over…and leaving some uncertainty for the purpose of planning for taxpayers.

The Tax Cuts and Jobs Act (TCJA) of 2017 is no exception. Significant changes could be on the way then or even beforehand – if Congress acts before the sunset date of 12/31/2025.

For many, the most significant parts of the TCJA were the changes in tax brackets and rates, increase in the standard deduction, and changing the threshold for capital gains taxes to benefit high-income taxpayers. Also significant for the wealthy was the doubling of the lifetime exclusion amount for gifts and the estate tax exemption (both went from over $5 million to over $11 million). This allows the wealthier among us to give away or own at death twice as much as previously possible without transfer taxes due.

It is possible that when the TCJA provisions expire, the tax provisions will revert back to where they were before TCJA…so what might one consider doing before those provisions expire or other changes take effect?

With income taxes potentially increasing across the board, accelerating income if possible into a year while the TCJA rates apply may be advisable. This could pertain to payments due from others under installment sales contracts or other types of arrangements, like rents or royalties.

It also can mean taking advantage of potentially favorable-by-comparison capital gains treatment with a current low 15% rate applying to those with taxable income between $44,625 per year ($89,250 for married filing jointly) and $492,300 ($553,850 for married filing jointly) and no capital gains for those earning below those lower threshold amount. Many experts believe these rates will increase, and their applicability reach more taxpayers at lower income levels. Considering harvesting capital gains sooner, rather than later, could mean lower capital gains taxes than waiting.

Making gifts without having to report them for gift tax purposes and minimizing exposure to estate tax can be accomplished. The current annual gift exclusion is $17,000 for individuals and $34,000 for married couples for gifts per done. In other words, a taxpayer or a couple can make gifts in those amounts to one or more individuals. If a married couple makes 4 annual exclusion gifts – one to each of their 4 children – they can reduce their estate by $134,000 each year.

There are other possible strategies to address the potential increase in income, gift and estate taxes and in all cases one should consult with their own financial, tax and legal advisors before taking any action. But the time to consider this is now, before any changes take effect.

You may have heard the term discussed in financial advising or estate planning conversations, but what exactly is a trust? In the most basic terms, a trust is a legal arrangement in which assets are held for the benefit of someone else (the beneficiary). There are many types of trusts for various goals, and complex trust law makes it necessary to hire an experienced attorney to help you establish one. First, though, it’s important to understand the basics to help you figure out whether a trust is right for your planning needs; here, your financial advisor can help guide you in the right direction.

 Why Create a Trust?

Trusts are popular estate planning tools because they can be used for many purposes, including:

Estate planning. Trusts can provide control and flexibility over the distribution of assets, minimize estate taxes, and preserve assets for your children until they are grown (in case you die while they are still minors). Trusts can also help avoid the expense and delay of probate because they allow for the seamless transfer of assets to beneficiaries without the need for court involvement.

Asset protection. Certain trusts can shield assets from potential creditors or legal claims. Placing assets in an irrevocable trust effectively removes them from your personal ownership, which makes them less vulnerable to financial liabilities or potential lawsuits. Trusts also allow you to set specific rules for distributing your assets, such as how much money a beneficiary can receive each year, an age when they can start to receive funds, or even how the funds can be used (e.g., for education only).

Tax benefits. Creating a trust can shift part of your income tax burden to beneficiaries in lower tax brackets. Also, if certain conditions are met, assets placed in an irrevocable trust may be protected from estate tax after your death.

Protection in case of illness or disability. Living trusts can be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your affairs, your trustee steps in and manages your property. Your trustee has a duty to administer the trust according to its terms and must always act with your best interests in mind. Without a trust, a court could appoint a guardian to manage your property.

Charitable giving. Charitable trusts allow you to support causes you care about while potentially enjoying tax benefits. These trusts can provide income for you or your beneficiaries during your lifetime, with the remaining assets designated for charitable organizations after your death.

What Are the Drawbacks of a Trust?

Be sure to discuss the pros and cons of setting up any trust with your attorney and financial professional. Although there can be many advantages of this type of arrangement, consider these potential drawbacks:

• A trust can be expensive to set up and maintain—trustee fees, professional fees, and filing fees may need to be paid.
• Depending on the trust you choose, you may give up some control over assets in the trust.
• Maintaining the trust and complying with requirements can take considerable time.
• Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate.

What Are the Different Types of Trusts?

The type of trust you choose depends on what you’re trying to accomplish. In fact, you may need more than one type of trust to meet all of your goals.

Living (revocable) trust. You create a living trust during your lifetime to maintain control over property such as your house, a boat, or investments. Assets that pass through a living trust are not subject to probate—they don’t get treated like the property in your will. Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate, or if you want to delay the transfer, you can opt for the trustee to hold the assets until a specific time, like when the beneficiary reaches a certain age.

Living trusts are appealing because they are revocable. You maintain control—you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review the details of the trust documents unless you allow it.

Despite these benefits, living trusts have drawbacks. Assets in a living trust are not protected from creditors, and you are subject to taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.

Irrevocable trust. Unlike a living trust, an irrevocable trust typically can’t be changed or dissolved once it has been created. You generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust can be a valuable tool for tax planning, asset protection, and charitable giving.

When you transfer assets into the trust (these must be assets you don’t mind losing control over), you may have to pay gift taxes on the value of the property transferred. If you have given up control of the property, all of the property in the trust is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors.

 Testamentary trust. A testamentary trust allows you to specify how your assets should be distributed and managed for your beneficiaries. It is created through a will and only takes effect upon the trustor’s death. At that point, selected assets in your will are distributed into the trust. From that point on, these work very much like other trusts. The terms of the trust document control how the assets are managed and distributed to heirs. Since you have a say in how the terms are written, these types of trusts give you a certain amount of control over how the assets are used, even after your death.

As always, we appreciate your trust in us and aim to help you figure out the best financial plan to help you meet your goals. If you have any questions about this article, please reach out to us via phone or email.

Authored in part by Commonwealth Financial Network and Broadridge.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

© 2023 Commonwealth Financial Network^®