King & Wood, P.A.

What Are the Common Myths of Powers of Attorney?

“While most of us have heard of a power of attorney, many have misconceptions about them.”

The Lubbock Avalanche-Journal’s recent article entitled “Five common myths about powers of attorney” explains away some misconceptions about powers of attorney.

1. There’s just one uniform power of attorney document. No, there are many types. However, they can vary by state. Talk to an experienced estate planning attorney to draft a document to meet your specific needs.
2. It’s OK to sign a power of attorney, even if I lack mental capacity. No, to be valid, the person granting the rights (the principal) must have mental capacity to execute the document. A power of attorney can be valid for an individual with mental incapacity, provided the document was signed before the occurrence. That’s a key reason to have a durable power of attorney in place.
3. A durable power of attorney and healthcare power of attorney are the same thing. No, a durable power of attorney grants rights to an agent to act on your behalf, regarding your assets. These rights can be general to all assets for an unlimited time, or the POA can be limited as to the time frame and assets included. A medical power of attorney grants an agent the authority to make medical decisions on your behalf.
4. Senior citizens are the ones who need a power of attorney. Not true, because accidents and unforeseen illness can strike at any age. You need to have a plan in place to ease the burden of one aspect of an already stressful and complicated situation. Don’t assume your spouse has automatic power to make decisions on your behalf. It can be much more difficult, unless you have given them the power of attorney.
5. A power of attorney can be used to handle my relative’s estate at death. Again, not true. Although there are other ways to structure an estate to avoid probate, a power of attorney isn’t one of them. A power of attorney lets the agent to stand in the place of the principal to make decisions. It doesn’t continue beyond the death of the principal.

If you avoid these common misconceptions, a power of attorney can be a very useful tool to meet your needs.

Reference: Lubbock Avalanche-Journal (March 15, 2019) “Five common myths about powers of attorney”

Does the New Tax Law Give Me More Time to pay Back My 401(k) Loan?

“If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.”

Kiplinger’s article titled “Ex-Workers Get More Time to Repay 401(k) Loans” explains that the new tax law extended the deadline for repayment after you leave your job, starting in 2018.

In the past, you typically had just 60 days to repay the loan. Otherwise, you’d be required to pay income taxes on the money as if it was a withdrawal (and a 10% early-withdrawal penalty, if you left your job before age 55).

However, with the new Tax Cuts and Jobs Act, you don’t have to pay taxes or the penalty, if you repay the loan by the due date of your tax return for the year when you leave your job (including extensions).

Therefore, if you leave your job in 2019, you’d have until April 15, 2020, to repay the loan (or October 15, 2020, if you file an extension). However, using the extended time frame to repay could lead to complications, if you’d like to roll over your 401(k) balance to a new employer’s plan.

You can generally borrow up to 50% of your 401(k) balance, but no more than $50,000.

Most plans charge the prime rate plus 1% point for the loan. As of February, that would add up to 6.50%.

You typically have five years to pay back the loan, while you’re still working for that employer or longer if the 401(k) loan is to buy your primary residence. Most plans give employees 10 to 15 years to repay a loan for a primary residence, but some plans have deadlines as short as five years or as long as 30 years.

If you do take a 401(k) loan, try to keep contributing to your 401(k), while you’re paying back the loan. That way you can continue to get any employer match and to minimize the hit to your long-term savings.

You borrow your own money and pay the interest back into your account. However, you’ll lose the opportunity for investment gains on the borrowed money, while it’s out of the account.

Just because you had to take a loan, is no reason to forget about saving for retirement and earning an employer match.

Reference: Kiplinger (February 13, 2019) “Ex-Workers Get More Time to Repay 401(k) Loans”

How Do I Cash in My Life Insurance Policy?

“In tough economic times, people are sometimes left scrambling for cash to meet everyday expenses and lifestyle demands. Your life insurance policy is a possible source of funds – but should you tap into it?”

There are some drawbacks to using life insurance to meet immediate cash needs, especially if you're compromising your long-term goals or your family's financial future. Investopedia’s recent article “Cashing in Your Life Insurance Policy” says that if other options are not available, life insurance—especially cash-value life insurance—can be a source of needed income.

Cash-value life insurance, like whole life and universal life, builds reserves through excess premiums plus earnings. These deposits are held in a cash-accumulation account within the policy. You can access cash accumulations within the policy through withdrawals, policy loans, or partial or full surrender of the policy. Another alternative is selling your policy for cash, known as a life settlement. Note that although cash from the policy might be useful during stressful financial times, you could face unwanted consequences, depending on the method you use to access the funds.

You can usually withdraw limited cash from a life insurance policy, based on the type of policy you own and the insurance company. The big advantage is that the withdrawals aren’t taxable up to your policy basis, as long as your policy isn’t classified as a modified endowment contract (MEC). However, these can have unexpected or unrealized consequences. Withdrawals that decrease your cash value, could cause a reduction in your death benefits. This is a potential source of funds you or your family might need for income replacement, business purposes or wealth preservation. Cash-value withdrawals also aren’t always tax-free. If you take a withdrawal during the first 15 years of the policy, and the withdrawal causes a reduction in the policy's death benefit, some or all of the withdrawn cash could be subject to tax. Withdrawals are treated as taxable, to the extent that they exceed your basis in the policy.

Withdrawals that reduce your cash surrender value could mean higher premiums to maintain the same death benefit, or the policy could lapse.

If your policy is determined to be an MEC, withdrawals are taxed, according to the rules applicable to annuities–cash disbursements are considered to be made from interest first and are subject to income tax and possibly a 10% early-withdrawal penalty, if you're under age 59½ at the time of the withdrawal. Policy loans are treated as distributions, so the amount of the loan up to the earnings in the policy will be taxable and could also be subject to the pre-59½ early-withdrawal penalty.

Surrendering the policy can provide the cash you need, but you're relinquishing the right to the death-benefit protection. You can sell your life insurance policy to a life settlement company in exchange for cash. The new owner will keep the policy in force (by paying the premiums) and get a return on the investment, by receiving the death benefit when you die.

To qualify for a life settlement, the insured must be at least 65 years old, have a life expectancy of 10 to 15 years or less, and usually have a policy death benefit of at least $100,000. However, the taxation of life settlements is complicated. The gain in excess of your basis in the policy is taxed to you as ordinary income. In addition to the tax liability, life settlements usually include up to a 30% in commissions and fees, which reduces the net amount you receive.

Reference: Investopedia (January 9, 2019) “Cashing in Your Life Insurance Policy”

Are You Prepared for Retirement?

“This is one big thing that boomers should be planning for when they get older—but most aren’t.”

MarketWatch’s recent article, “Baby boomers are more prepared for death than they are for their own lives” explains that more than eight in 10 middle-income boomers have made at least one formal preparation for when they die. This includes preparing a will or detailing their funeral preferences, according to a study released by the Bankers Life Center for a Secure Retirement. However, just 32% have a plan for how they will receive care, should their health fail in retirement. Only 20% have long-term care savings, and 30% have less than $1,000 saved for emergencies, like a healthcare issue. Most aren’t all that worried about it, since 40% of middle-income boomers say that retirement care planning is a low priority or not a priority whatsoever.

Even so, the reality is that failing health is likely to affect most of us, often to a point that we’ll need to get a caregiver or even go into a nursing home. According to the Family Caregiver Alliance, 69% of people 65 and older will have disabilities before they die, and 35% will enter a nursing home. Therefore, why are boomers so resistant to planning for the care they might need in life? Perhaps it’s a topic that makes people uncomfortable because they don’t know where to start.

Of those who don’t have a retirement care plan, 32% responded that they needed advice but didn’t know who to trust, and 21% said that planning was too complicated. Others said it was too hard to talk about (20%), while 16% reported that they believe a plan isn’t needed.

Many people are also unaware of the fundamental facts about Medicare and paying for retirement care. About 56% mistakenly think they’ll use Medicare to pay for care, even though it typically doesn’t pay for long-term care, like a nursing home. If you factor in their lack of preparation, 81% of boomers underestimate the cost of nursing home care. However, whatever the reasons, it’s vital to plan for caregiving, so that our wishes can be honored, and we can afford to pay for the care we’d like. Let’s look at how to do this.

Draft an advance directive, which details your medical wishes, if you become unable to voice those wishes for yourself. You can also name someone else to make the decisions on your behalf, if you’re unable to do so.

Think about how you’d afford long-term care, if required. Long-term care insurance may cover the nursing home, assisted living or in-home-care costs that Medicare won’t, but it can be costly. It also has limitations, like possible specifications that may require you to be in a very high-level assisted living or nursing home, before the policy starts.

Save for medical costs—not including long-term care—in retirement. The average couple will need $280,000 in today’s dollars for medical expenses in retirement. That doesn’t include the costs of long-term care. You could put the money in an HSA. If you’re still working and your job offers an HSA-eligible health plan, you’re eligible to contribute to a health savings account (HSA). An HSA allows you save pretax dollars (and possibly collect employer contributions), which have the potential to grow and be withdrawn tax free for federal tax purposes, if used for qualified medical expenses—currently or in retirement.

Finally, stay as healthy as you can.

Reference: MarketWatch (March 15, 2019) “Baby boomers are more prepared for death than they are for their own lives”

How Do I Make the Right Estate Planning Moves When I Divorce?

“Getting divorced is a complicated process, even for couples without any minor children. This is because it requires dividing up a partnership, so each individual can go his or her own way. While there are many details to iron out in terms of dividing assets, one thing that often gets overlooked, is how your estate plan will be affected.”

The Journal Enterprise explains in its recent article, “5 Estate Planning Moves If You Are Getting Divorced,” that the following tips will help you get your plans in order, so your final wishes will be carried out later.

Medical Power of Attorney. This is also called a healthcare proxy. This person is named to make decisions on your medical care, if you’re ill or injured and can’t state your medical care decisions. Unless you make the change, your ex-spouse will have this right.

Financial Power of Attorney. Like a healthcare proxy, this is someone you select to take charge, if you become incapacitated. This person has authority over your financial decisions, and it means they have the authority to pay your bills, access your bank and investment accounts, collect and cash your paychecks and make financial decisions for you. You want to be certain that your assets are protected, and your financial obligations are met, while you’re unable to act on your own behalf. Most people name a spouse, but if you get divorced and don’t switch this designation, your spouse will still be your financial power of attorney and will retain access to your finances.

Create a List of Things to Change After Your Divorce. A divorce can freeze some assets and accounts, which remains in effect until it’s finalized. Therefore, you won’t be able to change the beneficiary on life insurance policies, pensions and other types of accounts. Ask your estate planning attorney to find out exactly what accounts will be affected. Once you know which ones are frozen, you should make a list to ensure you won’t neglect to change them, when the divorce is finalized.

Modify Your Will. In some states, you may not be permitted to create a new will, but your attorney should still be able to help you make the necessary changes. You’ll want to review your heirs. If you do have minor children and you have sole custody, you may want to designate another person as their guardian. If you named your spouse as executor of your will, you may want to consider changing that.

Modify Your Trust. You may have a revocable living trust, in addition to a will. One of the advantages of a revocable trust is that it doesn’t go through probate, so your heirs get a bigger inheritance more quickly. If you have a revocable trust, talk to your attorney about changing it after your divorce.

If you don’t make these changes at the time of your divorce, your assets may not go to the right beneficiaries, or your ex-spouse may end up with rights you didn’t intend.

Reference: Journal Enterprise (March 20, 2019) “5 Estate Planning Moves If You Are Getting Divorced”

How Can I Diversify My IRA?

“The available investment options for Individual Retirement Account (IRA) funds may be more and more diversified than you realize.”
Traditional financial institutions that act as custodians for IRA accounts limit investment options to what they have to sell you—stocks, bonds and mutual funds. However, the IRS is more liberal.
Forbes’ recent article, “How To Invest Your IRA Funds Offshore,” explains that IRS regulations that are of the greatest concern have to do with self-dealing: you can’t buy or sell something from or to your IRA personally. You also can’t use any asset your IRA invests in yourself (this becomes important in the context of a real estate investment). You can’t hold collectibles like art in your IRA, because these kinds of things could easily be “stored” in your house, amounting to personal use.
However, provided that you’re not breaking the no self-dealing rules, the IRS is lenient in its position on how you can invest your IRA funds. You can purchase and hold real estate, private companies, private mortgages, or precious metals, both within and beyond the country’s borders.
The issue may be your IRA custodian, which must approve any investments you want to make. It can be tough or impossible to get a conventional financial institution to agree to your investment idea. To that end, you can choose an independent custodian that allows a broader range of investment options.
Just so you know, placing IRA funds in non-traditional assets (anything other than stocks, bonds, or mutual funds) takes more effort from you. A non-traditional custodian will need information on any non-conventional investment you want to make, and you’ll have to provide it.
Your non-traditional custodian will ask for details, and they’re required to make sure the investment is qualified under IRS rules. One way to eliminate the need to get permission from your non-traditional custodian, is to create an LLC in which your IRA can invest. Then you, as the managing member of the LLC, can decide solely when and how to invest the funds of the LLC. You request that your non-traditional custodian invest your IRA funds in the LLC, then you can operate independently. This is usually called a Self-Directed IRA, However, that is misleading because all IRAs are self-directed. You direct your IRA custodian where and how to invest. This doesn’t have to be all-or-nothing: you could keep part of your IRA invested in stocks, bonds, and mutual funds, under the management of a traditional custodian and invest the rest of your IRA funds in an LLC that has you as the managing member, so you’re able to invest these funds where you like, including abroad.
However, an IRA is under the jurisdiction of the United States, and holding an offshore LLC doesn’t change anything. It costs more to set up an offshore LLC, but if you want to invest IRA funds in non-US stocks, bonds or mutual funds, you will need an offshore LLC, since non-US stockbrokers can’t comply with SEC regulations related to doing business with US citizens or entities.
Reference: Forbes (March 13, 2019) “How To Invest Your IRA Funds Offshore”

What’s the Difference Between 457 and 401(k) Plans?

“401(k) plans and 457 plans operate similarly, with the main difference being who is allowed to participate in each one.”
401(k) plans and 457 plans are two types of IRS-sanctioned, tax-advantaged employee retirement savings plans. With these plans, participants can deposit pre-tax money, which is then allowed to compound without being taxed, until it is withdrawn.
Investopedia’s recent article asks: “401(k) Plan vs. 457 Plan: What's the Difference?”
The article explains that these retirement savings accounts were designed to serve as one leg of the famous three-legged stool of retirement: workplace pension, Social Security and personal retirement savings. As workplace pensions become obsolete, however, personal retirement savings has increasingly come to be most people's primary retirement plan, along with Social Security.
401(k) plans are the most common type of defined contribution retirement plan. Employers sponsoring 401(k) plans may make matching or non-elective contributions for eligible employees. Earnings in a 401(k) plan accrue on a tax-deferred basis. These plans offer a menu of investment options, pre-screened by the sponsor and participants choose how to invest their money. They have an annual maximum contribution limit of $19,000, as of 2019. For employees over 50, both plans have a "catch-up" provision that allow up to $6,000 in additional contributions. Premature withdrawals from a 401(k), before age 59½, can trigger a 10% tax penalty. Plan participants can make early withdrawals from a 401(k) under "financial hardships," which are defined by each 401(k) plan.
457(b) plans are IRS-sanctioned, tax-advantaged employee retirement plans offered by state and local public employers and some nonprofit employers. They’re among the least common forms of defined contribution retirement plans. As defined contribution plans, both of these plans are funded, when employees contribute through payroll deductions. The plan participants set aside a percentage of their salary to put into their retirement account, without being taxed (unless the participant opens a Roth account, and any subsequent growth in the accounts is not taxed). In 2019, 457 plans have an annual maximum contribution limit of $19,000. For employees over 50, both plans contain a "catch-up" provision that allows up to $6,000 in additional contributions. Contributions to each plan qualify the employee for a "Saver's Tax Credit." It’s possible to take loans from both 401(k) and 457 plans.
However, 457 plans are a type of tax-advantaged non-qualified retirement plan and aren’t governed by ERISA. Since ERISA rules don’t apply to 457 accounts, the IRS doesn’t assess a "premature withdrawal" penalty to 457 participants, who take withdrawals before age 59½. Those withdrawals are still subject to normal income taxes.
457 plans also have a "Double Limit Catch-up" provision that 401(k) plans don’t. This is designed to allow participants who are near retirement to compensate for years when they didn’t contribute to the plan but were eligible to do so.
Both plans permit early withdrawals, but the qualifying circumstances for early withdrawal eligibility are different. With 457 accounts, hardship distributions are allowed after an "unforeseeable emergency," which must be specifically laid out in the plan's language. Both public government 457 plans and nonprofit 457 plans allow independent contractors to participate. Independent contractors aren’t eligible to participate in 401(k) plans. Because 457 plans are nonqualified retirement plans, you can contribute to both a 401(k) and 457 plan at the same time.
Remember that both plans are tax-advantaged retirement savings plans. 401(k) plans are offered by private employers, and 457 plans are offered by state and local governments and some nonprofits. The two plans are very similar, but because 457 plans aren’t governed by ERISA, some aspects like catch-up contributions, early withdrawals and hardship distributions are treated differently.
Reference: Investopedia (March 7, 2019) “401(k) Plan vs. 457 Plan: What's the Difference?”

What is a Life Estate?

“What, exactly, is a life estate? Does it have any value?”
The question of a life estate may arise, when adult children are discussing the possibility of moving a parent into an assisted-living facility and selling the family home.
The Spokesman-Review’s recent article asks: “Does a life estate have cash value?”
The article explains that a life estate is a form of co-ownership. A person’s interest in property is limited to his life, with the property passing to other recipients at his death. The person who holds the life estate is called a life tenant, and those who receive the property at the death of the life tenant are called remaindermen.
The life tenant and the remaindermen both have real interests in the property, but unlike other partnerships or other forms of co-ownership, the life tenant and remaindermen don’t have rights in the property at the same time. Only the life tenant has a current right to possession. The remaindermen’s interest doesn’t become activated, until the death of the life tenant.
A life estate is an actual form of ownership, rather than a right to use. The life tenant—in many cases the parent—“owns” the house until her death. The parent will need to pay the taxes and keep the property in reasonable condition. The life tenant could sell the property, but the buyer would only have rights until she dies. There would be few people who would ever buy the property. No lender would loan mom money against the property because their interest would go away when the life tenant died.
But there is a value to a life estate, and upon sale, the life tenant must be compensated for the sale of their interest. Life estates are valued using the age of the life tenant and the present fair market value of the property.
Although life estates typically end when the life tenant (or another specified person) dies, some specify conditions that can trigger termination. These would cause the life estate to be terminated, even though the life tenant is still alive and well. For example, a life estate may terminate, if the life tenant leaves the home for more than six months. The actual life estate document details any conditional limits that define when the life estate terminates.
Talk with an experienced estate planning attorney about whether a life estate makes sense for your situation, or if there are alternative strategies that would be better suited.
Reference: The Spokesman-Review (March 17, 2019) “Does a life estate have cash value?”

When Should I Claim Social Security?

“Know the five factors you should consider, when weighing whether it's time to tap your benefits.”
It’s kind of hard to know exactly when you should file—even if you only consider age (which you shouldn’t). You can take your benefits as early as 62. However, the earlier you claim, the less you’ll get. You can delay until 70 and you’ll get 8% more for each year you wait past your full retirement age.
Kiplinger’s recent article, “Social Security Timing Should Be Part of Larger Financial Plan,” notes that some people don’t have much choice and claim at 62, because they need the money. In addition, there’s the question of whether Social Security will be solvent, when it’s time for you to start collecting. There are also those who really don’t give it much thought. They’re tired of working and file before their full retirement age.
Most people like to think there’s some magical calculation that will give them their exact “break-even point,” so they don’t claim too soon or wait too late. You can find this by using calculators provided at www.ssa.gov/planners/calculators/ and www.aarp.org/tools/.
There are several factors that can greatly impact what you, as an individual, actually receive. Consider these points to help you make a smarter decision about when to file:
Health and family history. If you’re unhealthy or have a family history of some illness, you may want to retire and take your benefits as early as possible. However, if you’re healthy and/or most of your family members have had a long life, you may want to delay filing and get the maximum benefit to see you through, what could be a decades-long retirement.
Spouse. If you’re married, one of your primary concerns is what will happen to your spouse, if you die first. When one spouse dies, the lower of the two Social Security payments is eliminated. If you have a pension, based on which survivorship option you choose at retirement, he or she also could lose that income. Therefore, it’s critical to maximize the higher earner’s benefit when possible, especially if Social Security will be a major part of that income. If the higher earner in the family is one with a poor family history of longevity, you should plan early, if delaying is not an option and you have to claim a smaller benefit.
Taxes. The IRS measures your “provisional income” to determine whether you must pay taxes on your benefits. It’s calculated by adding your adjusted gross income, any tax-free interest you received and half of your Social Security benefits. If the sum is more than the designated threshold ($25,000 and up annually for singles, and $32,000 and up for those married filing jointly), based on your filing status, your Social Security benefits could be taxed up to 50% to 85%. If you’re receiving Social Security and withdrawing from your IRA at the same time, you may pay more in taxes. You might want to wait to claim and withdraw from your tax-deferred accounts at a lower rate.
Other assets. Before you decide to delay claiming to save on taxes or to get a higher Social Security payment in the future, be certain you have enough income to cover your current expenses without drawing too much from your retirement savings. You’ll want to leave some money there to keep growing, in case you need it later in retirement.
Your legacy. If leaving behind something for your children is a priority, you could use your Social Security income for that purpose. You could claim your benefits (which they can’t inherit) and leave more in your IRA (which they can). Or, if you are wealthy and don’t need Social Security to support your lifestyle, you could might claim your Social Security benefits and use that money to purchase life insurance.
Remember that your Social Security filing decision should not be made in a vacuum, but should be an important part of an overall financial plan.
Take your time, think it through and get some help from an experienced estate planning attorney.
Reference: Kiplinger (March 15, 2019) “Social Security Timing Should Be Part of Larger Financial Plan”

K&W Fiduciary Litigation News

Last week, our firm was pleased to welcome distinguished Louisiana trial lawyer James H. Gibson back to our office for continued work on a Tallahassee case involving multi-state trusts and estates litigation.  Jim and his law partner Charles M. Kreamer, of Gibson Law Partners, LLC, in Lafayette, Louisiana, are co-counsel with us in the case. 

Pictured are Jim Gibson, Elizabeth J. Maykut, Kimberly L. King, and Edward W. Wood.