King & Wood, P.A.

Don’t Delay Your Estate Planning

“If you’ve been putting it off because it's sad or uncomfortable, don't. Estate planning can be a loving tribute and source of comfort. Here’s what to consider.”

No one likes death or thinking about their own mortality. OK, maybe the undertaker, but for the rest of us, it’s creepy. Estate planning can make people uneasy because it deals with death. But it can give loved ones peace of mind.

Some of the elements of final planning are described below.

In the article, “A Will Can Be a Beautiful Thing,” Kiplinger’s advises that the initial step in estate planning is creating a will. A recent survey found that 64% percent of American adults don't have a will. They either decided they didn't need one or they have just kept putting it off. A will instructs who you want to inherit your assets. It’s also used to let parents name a guardian to care for their minor children. Without a will, all of your estate may wind up in probate court. One option of an estate plan is a living trust. A trust transfers assets from the trust to beneficiaries without having to go through the probate process.

Here are a few other reminders about estate plans:

Spell Out Your Decisions on End-of-Life Care. Tell loved ones your wishes in the event that you are unable to make medical decisions for yourself. This includes life support, sustenance and pain treatment,  as well as organ donation. A living will also contains a health care declaration with a power of attorney designating the agent you name to ensure that your medical instructions are executed.

Check Your Beneficiaries. Fill out each of the beneficiary designations for your bank accounts, brokerage accounts and life insurance policies. You should specify both your primary and contingent beneficiaries.

Document Your Funeral Wishes.  Specify whether you want to be buried or cremated. You can also list favorite music or scriptures for your end-of-life celebration or funeral. You should also note if you’re a veteran and whether you have funds put aside for funeral expenses.

Other Thoughts. Keep real estate and car deeds, wills, trusts, insurance policies, retirement benefits, 401(k), and IRA documents in a safe location. But make sure to tell the executor of your estate where these items are kept.

If you are married, don’t draft a joint will. This is because it is unlikely that you’ll pass away at the same time. Separate wills for each spouse can address other personal circumstances, like previous marriages, other children and charitable causes.

Don’t think of estate planning as creepy. Think of how it protects your family.

Reference: Kiplinger’s (April 2017) “A Will Can Be a Beautiful Thing”

Avoid Nannygate and Make Sure Your In-Home Caregivers Taxes are Correct

“The nanny tax isn't just for Mary Poppins. It covers any household employee, including housekeepers, gardeners and caregivers.”

With this latest presidential transition, there’s another Nannygate controversy. You may remember the 1993 case of Zoë Baird—the person nominated to be the first female U.S. attorney general—only to be stopped short, when it was made public that she didn’t pay the required “nanny taxes” for her household employee.

Kiplinger’s recent article, “Paying Taxes for a Hired Caregiver,” says that now we have Congressman Mick Mulvaney, who was President Donald Trump’s choice to run the Office of Management and Budget (OMB). Congressman Mulvaney admitted that he failed to pay five years’ worth of taxes for the woman he and his wife hired in 2000 to help take care of their triplets.

 There was also Andrew Puzder. Once he was nominated as Labor Secretary, he disclosed that he hadn’t paid the required taxes due for a household employee who was illegally in the U.S. Both men stated in their confirmation hearings that they’d paid the back taxes they owed the government.

Remember that the nanny tax isn’t just for Mary Poppins, a whimsical movie role played by Julie Andrews who had charge of a banker’s kids. The so-called nanny tax covers any household employee, like a housekeeper, landscaper, or—of particular interest to us here—the caregiver for your spouse or elderly parent. If the caregiver is provided through an agency or is self-employed, you don’t have to be concerned. However, if you hired the individual yourself and control the type of work that is done, you’re most likely considered to be an employer in the eyes of the IRS.

If you hired the caregiver and control his or her work and if you paid more than $2,000 last year, the nanny tax will apply. When you file your tax return, you are required to include a Schedule H and pay the 15.3% Social Security and Medicare tax on the wages you paid. The tax is supposed to be split evenly between you and your employee, but whether you withheld the tax from your employee’s wages during the year or not, you’re responsible to pay the full amount when you file your return.

In addition, if you paid more than $1,000 to employees in any calendar quarter of 2016 or 2015, you also owe the federal unemployment tax. You may also owe a state unemployment tax.

If you haven’t done so, you should give your employee a W-2 showing wages paid and any withholding (due at the end of January) and send a copy to the Social Security Administration.

Reference: Kiplinger’s (March 2017) “Paying Taxes for a Hired Caregiver”

Does My Kid Need a Trust?

“If your children are under age the age of eighteen, you should have trusts for them in your wills, in the event that you and your spouse should die before all of your children reach age 18.”

Trust Advisor explains in its recent article “Should You Create Trusts for Your Children?” that if minors receive assets before age 18, a guardian of the property must be appointed to oversee those assets for the child.

Guardians typically need to be bonded and must file a formal accounting with the court each year with a petition for approval. All of the costs are paid from the child’s funds.

Another option is to instruct that a trust be created for each minor child in your will at the death of both parents. In the will, you can state that the trustee doesn’t need to post a bond or to file an accounting with the court every year.

 Setting up a trust for a minor child is usually easier and less expensive than leaving the assets outright to a minor child and having a guardian appointed. Many estate planning attorneys recommend that even if you think your children will be over 18 when both spouses die, consider keeping the assets in a trust for the children to protect them from themselves.  It is recommended to wait until they reach a specific age, when they would be best ready to handle the assets. For some, this might be age 30 or 35, or older. Other parents set up the trust to continue for their entire lives to protect the assets in the trust from future claims of the child’s creditors, or in the event that he or she goes through a divorce. Assets that continue to be held in the trust, can’t be touched by a child’s current or future creditors.

Trusts can have considerable flexibility. For instance, the trustee can be given the authority to make liberal distributions to the child for any reason the trust creator wants or for no reason at all.  At a certain specific age, the child can also become a co-trustee of his or her own trust and be given the power to remove and replace the co-trustee making the distribution decisions. That can give the child significant control over his or her own trust.

There are many reasons to create trusts and every family situation is different. It’s important to work with a qualified estate planning attorney on these issues in order to create a plan that works best for your family.

Reference: Trust Advisor (March 28, 2017) “Should You Create Trusts for Your Children?”

Should You Convert a Traditional IRA to a Roth?

“A new study shows the benefit of converting sooner for your loved ones.”

The question of whether to convert a traditional IRA to a Roth, can become more complicated as we get older. However, if you plan to leave the IRA to an heir, paying the taxes to convert it now can make sense. The Roth IRA can grow tax-free over your lifetime, as well as that of your heir. A study by the Vanguard Group shows that in some situations, converting to a Roth can mean a larger legacy for your heirs, than if you passed down a traditional IRA.

Kiplinger’s article, “Roth Conversions May Be Boon for Heirs,” explains that the study was focused on Roth’s beyond retirement. The Vanguard's study considered a 65-year-old with a 40-year-old non-spouse beneficiary. The investor has a $100,000 traditional IRA and a $28,000 taxable account, with both earning the same 6% annual rate of return. Both the IRA owner and the heir are in the 28% tax bracket. The Vanguard study assumes the beneficiary inherits the accounts after 20 years.

If the investor keeps the traditional IRA and, upon reaching age 70, reinvests all required distributions in the taxable account, when the heir inherits, he will need to take annual RMDs (required minimum distributions) over his own life expectancy and reinvest the after-tax amounts into the taxable account. When the heir inherits the traditional IRA and taxable account, he receives $318,799. Ten years later, that increases to $536,850.

However, if the investor had converted the IRA to a Roth at age 65, the heir's total inheritance could be worth $21,000 more at inheritance. Ten years later, it could be worth up to nearly $66,000 more. With a Roth, the original owner isn’t subject to RMDs. If you use non-IRA dollars for the conversion tax bill, you can transfer more money. Vanguard’s research put the investor and her heir in the same tax bracket. By converting, you’re taking an asset with an embedded tax liability and prepaying that tax. Therefore, if the investor's tax rate is lower than the heir's, the conversion could be even more advantageous to the heir. But the inverse is also true—if the heir is in a lower bracket, the advantage may be less or nothing.

Note that the conversion scenario assumes the IRA owner pays the conversion tax bill with funds in the taxable account and not from the IRA. That makes a difference, because if the tax had been paid with IRA money, the advantage of the conversion after 30 years would be sliced to about half.

Paying the tax bill with outside funds leaves more money in the tax shelter, supercharging its growth and making it more of a bargain for the taxes paid. In addition, Roth RMDs are tax-free, so he can fully reinvest the withdrawals and the money still in the inherited Roth continues to grow tax-free over his own lifetime.

Reference: Kiplinger (March 2017) “Roth Conversions May Be Boon for Heirs”

Planning for College Means Financial Planning

“The rising cost of higher education is out-pacing inflation and families’ need to plan accordingly.”

Higher education costs are out-pacing inflation by an average of 4%. From 2012 to 2017, tuition has risen by about 9% across the board. With these escalating expenses, some families are having a tough time deciding the best way to pay for college.

The Michigan State University Extension recently posted an article, “Planning and paying for higher education,” that says applying for financial aid is usually the first step people will take to help with the expense.

There are four basic types of aid that can be received:

• work study;
• grants;
• loans (federal and private); and

Aid is requested by completing the Free Application for Federal Student Aid (FAFSA form). This is filed between October and February, prior to the student’s fall and spring classes to see what financial aid he or she is eligible to receive based on need. Student resources, parents’ resources (if the student is considered a dependent) and academic status (full-time, part-time) are factored into the equation.

Once the FAFSA form is filled out, the Expected Family Contribution (EFC) is created. The EFC isn’t the amount of money the family will have to pay for college and it’s not the amount of federal student aid the student will receive. It’s a number used by the school to calculate the amount of federal student aid the student is eligible to receive. The school sends financial aid award letters in the spring, which will help in calculating what will be required to defray the cost of school for a year.

When a student and parent have time, they should look into available college saving tools, such as 529 educational savings plans. Withdrawals from these plans aren’t taxable, the earnings are tax deferred, the contributions are considered gifts and the funds can be transferred between siblings without an effect on American Opportunity, HOPE, and Lifetime Learning Education Tax Credits. A Coverdell Educational Savings Account is another option to assist with college expenses. It’s similar to a Roth IRA, but can only be used for education.

In addition, willing relatives can help through estate planning strategies. A grandparent can gift or pay tuition directly to the university, without any gift tax liability. Talk about these options with an experienced estate planning attorney.

Reference: Michigan State University Extension (May 1, 2017) “Planning and paying for higher education”

News Flash: You Need an Estate Plan

“Estate planning is not only important in directing the way that a person’s money and property  are handled after death, but it also provides valuable information to loved ones to help seniors in their final years.”

Some people think that an estate plan is only needed by the wealthy. In reality, however, an estate isn’t only a grand mansion with a deer park and rolling hills. An estate describes all people and their possessions, including bank accounts, cars, real estate, stocks and bonds and jewelry.

Newsmax’s recent article, “7 Tips for Seniors to Get Their Estate Plans in Order,” says that without proper estate planning, all of the decisions and arrangements for your property distribution after death will be made by a probate judge pursuant to state law—not according to your own wishes. This often results in stress and conflict among family members. The article shares some specific tips  for seniors to get their estate plans in order:

1. Store personal and financial records in a safe place. Personal records are things like your name, date of birth, and Social Security number and employment records, as well as contact information for relatives and close friends. Financial records include banking and insurance information, liabilities, mortgages, deeds and estate planning documents.
2. Tell family or trusted friends that you have records. In an emergency or death, people must know the location of this information. Just give them the location, not all the details of the records. An estate planning lawyer can help.
3. Draft a will. This makes it much simpler to distribute the property in the estate and avoids strict oversight by the probate court. Detail how you want your assets distributed to family members, friends, or charities.
4. Talk to your attorney about a living trust. Trust property goes directly to the heirs after death and avoids probate. A trust is also more difficult to challenge in court than a will. It should be created by an experienced and knowledgeable trust and estate lawyer.
5. Designate a power of attorney. You may become incapacitated and unable to make financial decisions on your own. A power-of-attorney authorizes a trusted person to oversee these affairs, which avoids having a court-appointed person managing your financial affairs.
6. Make your end-of-life and final arrangements. This includes a healthcare directive with your wishes about medical care and prolonged treatment, if you’re no longer able to make those decisions. A document on your final arrangements states your desires for the type of burial, body or organ donations and who you want to handle these arrangements.

Reference: Newsmax (May 2, 2017) “7 Tips for Seniors to Get Their Estate Plans in Order”

Estate Planning with Bitcoin and Other Digital Assets

A recent article in Coin Journal, “The 7 Steps of Estate Planning for Bitcoin and Other Digital Assets,”  presents seven steps for handling the estate planning process for digital assets.

1: Conduct an Inventory of What’s Already Owned. Make sure that you have a good idea of what you really have. People often forget about bitcoin in an old wallet, only to find it later.  It is also important to list all of the digital assets currently owned and to write down how each specific asset can be accessed in the future.

2: Separate Your Assets into Tiers. Divide up your digital assets into three tiers: (i) easily spendable; (ii) mid-range storage; and (iii) long-term cold storage. Don’t lock up all of your bitcoin because you might want to spend it.

3: Create a Plan for Each Tier. After you set up the tiers, create a plan for each of them. Think about balancing security, ease-of-use and accessibility. In addition to seeing what’s already working, a digital assets owner should also consider options that have stronger security protections. Some of these are hardware wallets, multi-factor authentication and multi-signature addresses.

4: Determine Who Gets What. Here’s the actual estate planning–deciding who gets what. Remember that you need both a tech plan and a legal plan for digital assets. Give a percentage of each tier to specific people, so they can avoid the unpredictable price fluctuations that would result from leaving specific amounts of specific digital assets for each person. Be certain that your heirs can access the digital tokens.  Therefore, you must give them access to critical information. Such information includes passwords or the location of a hardware wallet. In addition, speak with an estate planning attorney about state laws on leaving digital money to heirs.

5: Test the Plan. It’s critical to test the estate plan from the viewpoint of the owner of the assets and the heirs. Start with a very small value for the tests to limit losses, if something goes wrong. You should test every possible scenario of the plan’s outcome, not just the most likely outcomes.

6: Execute Your Plans. Move ahead and implement the plans. In addition, set up regular audits to make sure the funds are always accessible.

7: Store Your Plans. Finally, store the plans where access is controlled, tamper evident, fireproof, waterproof, redundant, and without multiple multi-signature backups in the same location. If you lose the keys and you lose the backups, you’ll be out of luck … and so will your heirs.

Reference: Coin Journal (April 21, 2017) “The 7 Steps of Estate Planning for Bitcoin and Other Digital Assets”

No Joke: You Can’t Ad Lib Your Retirement Planning

“If you want your nest egg to be robust when you're ready to retire, you have to take care of it now. That means careful investing and saving. You can't just go out there and wing it.”

Nasdaq’s recent post, “5 Considerations to Help You Retire Wealthy,” offers five things to think about as you create and manage your wealth with an eye to retirement.

1. Decrease your risk. If you lose 10% of your savings when you're younger, it’s a tough bounce. But if you lose 10% of the $1 million you saved for retirement at 65, it may be devastating. It is important to know your timeline and the level of risk you can stand.
2. Build a firm foundation. Be certain that your retirement's financial needs are addressed and secure them long before you retire. Create a practical budget and a plan that includes a structured way of drawing income from certain assets, implementing cash flow on others, dealing with inflation and taxes and thinking about asset protection in the event either you or your spouse require long-term care.
3. Hedge your risk with diversification. There's no reason not to take some risk, but you should protect against losses so you don't lose your hat. Make sure that you don't go with just one investment or asset class. It is better to maintain a diversified portfolio and to consider risk-management options.
4. Be realistic. You can retire wealthy by saving your money and avoiding costly mistakes. Shift your focus slowly and strategically from accumulation to preservation, as you get nearer to retirement.
5. Seek out experts. Talk with those who have experience in taxes, estate planning and financial planning. This isn’t a do-it-yourself proposition.

Conclude your working career with enough wealth to be comfortable and confident in retirement. To do so, you'll need a strategy, discipline and knowledgeable assistance.

Work with a professional who can keep you on track with your goals and help you to build your fortune, so you can enjoy it.

Reference: Nasdaq (April 21, 2017) “5 Considerations to Help You Retire Wealthy”

The Perils of Giving Children or Grandchildren an Inheritance

“There are many “what ifs” to consider when giving your children or grandchildren an inheritance—from when and how to let them know they are receiving an inheritance, to protecting your gift from becoming the property of a future ex-spouse and another family altogether.”

While you may have some pride knowing that you’ve accumulated valuable assets to pass on to your family, there’s also some trepidation in having to deal with your own mortality and losing control of the wealth you worked so hard to create.

WTOP’s article simply poses the question: How do you ensure that your wealth gets distributed to the right people in accordance with your intentions? The article, “How to protect inheritances for future generations,” first suggests that you sit down with your children and talk about your estate planning. Discussing any inheritance can be difficult for the donor, as well as the recipient-beneficiary. This may be the first time you’re telling your kids as adults about your net worth. This can be a lot of new information to process.

Rather than transferring assets directly to children, parents can create a trust to transfer wealth to their kids and get some protection for these assets. Depending on the state and circumstances, trust assets may be more at risk when a beneficiary is the sole trustee and has broad discretionary powers to distribute assets to anyone, including to themselves.

You can add provisions that help restrict the beneficiary’s control over the trust assets to help safeguard a trust as being deemed separate property, such as in a divorce. You can add an independent co-trustee to the trust and give them total authority to withhold or make distributions to the beneficiary at his or her sole discretion. You can also add protection by these methods:

• Adding multiple beneficiaries, instead of only one primary beneficiary;
• Requiring that the “distribution” trustee be a corporate or professional trustee;
• Making certain that the beneficiary doesn’t have general power of attorney to direct trust assets; and
• Creating a trust that lasts for multiple generations, rather than outright age-based distributions.

Trusts are complex, so consult with an experienced estate-planning attorney to make sure that your children understand the trust terms and the importance of maintaining the assets under the trust’s ownership.

Reference: WTOP (April 19, 2017) “How to protect inheritances for future generations”

Who Polices the Executor of a Will?

“Executors can be paid for their duties, but in this case, you could have a fight on your hands.”

A father passes away and leaves everything to his two sons. The will designates that his best friend will serve as the executor. The will also states that the executor is only to be paid fees for incurred charges. What if the executor decides to write himself a check for $15,000 from the estate?

NJ.com recently posted an article, “Fight brewing over 'best friend's' executor fee.” As the article explains, the state statute stipulates that 6% commissions may be taken on all income received by an executor, like interest and dividends. In addition, the executor may take commissions on all "corpus,” which is all the assets controlled by the executor that’s equal to 5% on the first $200,000, 3.5% on the excess over $200,000 up to $1 million, and 2% over $1 million.

The executor and the decedent can agree on additional or lesser amounts. The judge can also increase commissions upon application by the executor or decrease the commissions upon application by a beneficiary. Another possibility is that the executor signed a fee agreement where he waived the fee. In that instance, the agreement may be binding against the executor and enforceable by the beneficiaries of the estate.  However, the beneficiaries would have to pursue that claim on their own with their own attorney.

An attorney who’s representing the executor would have a conflict of interest representing the executor in his capacity as executor of the estate and the beneficiaries in their claim against the executor.

What if a beneficiary believes that the executor had no right to commissions, either based on a contract the executor signed with the testator or because the services the executor rendered were "materially deficient" or that the actual pain, trouble and risk in settling the estate were substantially less than generally required for an estate of a similar size? In that case you can ask the judge to reduce or eliminate the commissions.

However, it’s not likely that the executor will have to reimburse you or the estate the attorney fees incurred in bringing the action. The executor may also be allowed to pay his or her attorney fees in defending such a suit from the estate, which would decrease the share payable to the beneficiaries.

Reference: NJ.com (April 17, 2017) “Fight brewing over 'best friend's' executor fee”