King & Wood, P.A.

Get Smart About Roths

"Your buddy at work has been bragging about his investing and financial planning prowess, and you've just about had enough.”

Your friend may tell you about the income strategy that he’s building for his family with no tax liability.

It may be, says The Central Penn Business Journal, that he’s talking about his Roth IRA savings techniques and how beneficial its tax-free savings will be in his estate planning. The article, “There's more than one way to save in a Roth,” explains that what you save in a Roth IRA represents post-tax savings. It grows tax-deferred, and then in retirement, the growth that’s never been taxed can be distributed tax-free.

For those savers who anticipate being in a higher income tax bracket in retirement than they are now, the benefits can be significant. Even for those savers who think their tax rate today is higher, there are still worthwhile benefits to the Roth IRA.

Roth IRAs don’t require “minimum distributions” after age 70 ½, like traditional IRAs. Roths can also be passed on just like traditional IRAs in a tax-efficient way to beneficiaries. They supersede a will and avoid the probate process. This makes a Roth a helpful estate planning tool for transferring wealth. The savings made into Roth IRAs can be accessed five years after the initiation of the Roth—even if the owner is under 59½. Early distributions from the Roth may be free of penalties and double taxation, if they represent the investor’s savings into it.

Most 401(k) plans now come with traditional and Roth options. That means the best part about the Roth savings option is that it comes with nearly all of the benefits of the Roth IRA and a few more. 401(k) plans allow for significant annual participant savings ($18,000 or $24,000 for those over 50 years old in 2017). If the participant decides to save all of that in the Roth side of the plan, he can do so regardless of his family’s income, with a $24,000 limit in 2017 into a Roth 401(k) for those 50 years old or older, and the Roth IRA income limits don’t apply.

However, if you leave your money in a Roth 401(k) after age 70½, you’ll be required to take minimum distributions while you are living. Most investors roll their Roth 401(k) to a Roth IRA at retirement and avoid that the RMD requirement.

Reference: Central Penn Business Journal (July 14, 2017) “There's more than one way to save in a Roth”

The Reasons Why You Need a Will at 18 and at 81

“Sooner or later, you’re going to need a will.”

If you are older than 18, it’s time to start thinking about what would happen in a worst-case scenario. You need to create a last will and testament. It’s a binding document that outlines how you want your assets distributed when you pass away.

Mic’s recent article, “Do I need a will? How to write a last will and testament, DIY templates and when to prepare one,” reminds us that we all have assets. Even if you don’t have a family, you’ll want to create a will to specify what you want done with your assets, after you’re gone.

When you die, your assets and debts go through probate. A judge rules how they will be divided. If your will is in order, and there’s no dispute, your assets will be distributed as designated in your will. Review these keys to writing a will:

What goes in your will? It should state how you want your assets, debts, and taxes addressed when you die. Name an executor, like a trusted family member or close friend. He will be tasked with executing the will, disbursing your assets, settling debts and paying taxes.

If you have children, the will should also designate their guardians. If you’re married, your spouse automatically will take custody of your children.

Do I write my will myself or get help?  Many people use a DIY will for free.  However, that can lead to problems, if the will is found to be invalid. In most instances, you’ll want to get an experienced estate planning attorney to assist you. This is especially important, if you’re in a same-sex relationship, own a small business or think your will might be contested. Attorneys can help you minimize the taxes on your estate, make sure your will is legal according to state law and help you set up a trust for your assets. Anyone with property or a family, should consult with an attorney who works in estates and trusts.

What if I don’t have a will? If you don’t have a will, the state intestacy laws will dictate how your assets will be distributed. The usual order in which people inherit your assets is your spouse,  children,  parents and any siblings.  However, the laws in each state can be quite unique, so talk with an estate planning attorney.

Bear in mind that without a will, your beneficiaries may experience a delay in the disbursement of assets. This is because the probate court will be required to appoint an administrator to distribute the estate’s assets. Your best bet, at age 18 or 81: get a will!

Reference: Mic (July 14, 2017) “Do I need a will? How to write a last will and testament, DIY templates and when to prepare one.”

What Do I Tackle First: Estate Planning or Exit Planning?

“Once owners see that the two processes share the same goals, they can appreciate how to leverage the time and money they spend developing their exit plans into the design of their estate plans.”

The recent article from Wilmington Insights titled “Which Comes First - Estate Planning Or Exit Planning?” notes that a successful business exit plan accomplishes three important goals:

 

• Financial security, where the business sale or transfer provides the income the owner and her family need after her exit;
• A successor selected by the owner, such as children, key employees, co-owners or a third-party; and
• Income tax minimization, giving the owner more cash in her pocket.

 A successful estate plan also achieves three important personal goals:

• Financial security for the decedent’s heirs and family;
• Control by the decedent to choose who receives her estate assets; and
• Estate tax minimization to reduce the government’s share and give more to the decedent’s heirs.

If you look at exit planning and estate planning together, you can ask relevant questions in order to see the big picture:

• If you fail to exit the business as planned, how do you provide your family with the same income they’d have enjoyed if you had?
• Can you be sure your business retains its previously determined value?
• Does your estate plan reflect and implement your wishes, if you don’t survive after the exit?
• If you die before exiting the business, will your family still receive the full value of the business?

Business owners should determine if their estate plans address these issues.

Another goal is minimizing creditor risk for you and your heirs, which can be done with both exit and estate plans.

Remember: estate taxes are easier to avoid than income taxes, and estate planning can frequently involve funding from life insurance proceeds, which pay in cash upon death.  However, exit planning often involves the owner’s own accumulated assets. There is no correct answer to the estate or exit planning question. You need to do both. Failure to act in either case, brings about lasting problems for you, your business and your family.

Reference: Wilmington Insights (August 1, 2017) “Which Comes First - Estate Planning Or Exit Planning?”

 

 

Philip Seymour Hoffman's Estate Planning Mistake

The late actor Philip Seymour Hoffman made one gigantic estate planning mistake that cost his family millions of dollars.

Perhaps dealing with a lot of wealthy people in Hollywood or New York is what left a certain disgust in actor Philip Seymour Hoffman's mouth. He grew to despise what he called "trust fund kids" and did not want his children to become them.

Unfortunately, this aversion caused Hoffman to forgo hiring an estate planning attorney, in favor of an accountant who created a will for him.

The will left his $35 million estate to his girlfriend Mimi, who is the mother of his three children.

The big estate planning mistakes are Hoffman’s decisions not to marry Mimi and to use an accountant for a will. In the end, Hoffman’s estate did not have the benefit of the unlimited marital deduction. This cost his family $12 million in estate taxes alone, as Kiplinger points out in "Philip Seymour Hoffman's $12 Million Estate Planning Mistake."

Hoffman should have considered visiting with an estate planning attorney who could have explained the consequences of Hoffman’s circumstances, while he was still alive.

Hoffman could have told the attorney about his fears. He could have had the attorney design a specific estate plan to use the unlimited marital deduction with incentive trusts to ensure that the Hoffman children would be less likely to become trust fund dependents.

Do not make the same mistake that Hoffman did. When you want to plan for your estate, talk to an estate planning attorney.

Reference: Kiplinger (July, 2017) "Philip Seymour Hoffman's $12 Million Estate Planning Mistake

Photo by Ahmet Yalçınkaya on Unsplash

Sweepstakes Scammers Prey on the Elderly

“They do not consider a lurking danger in this: the sweepstakes entry forms ask for your identifying information, sometimes even including your date of birth.”

Forbes recently published an article, “Sweepstakes Entries And Your Aging Parent: Know The Danger,” which told a true story about a 91-year-old, "Jenny," who loved sweepstakes. She entered dozens and was very optimistic that many entries would increase her odds of a payday.

Jenny had signs of diminished capacity for a few years, with short term memory loss and confusion. Other than that, she still lived independently in a senior community in her own apartment.

Many seniors fear running out of money because people can outlive their assets and may require expensive long-term care. It is no wonder that so many seniors enter sweepstakes contests to win a jackpot.  However, these lists of contestants have been sold to marketers who target the elderly to sell them things they don’t need. There are no one guarantees of privacy for a person's information, once they enter a sweepstakes.

Jenny received a phone call from the sweepstakes informing her that she’d won a million dollars. She only needed to pay the "transfer fee" of $5,000 and the money was hers. When her daughter discovered this, she was mad. She told her mother that this was a scam, but Jenny was convinced that the man on the phone couldn't be lying.

In Jenny’s case, she still had total access to all her funds. Her children contacted her estate planning attorney, and he drafted a Power of Attorney for her son to thwart transactions temporarily, until they could be reviewed. Jenny was lucky that her family was aware of this issue. Many elders are not so fortunate and part with their cash, only to later discover that their "winnings" are a phony check.

Consider these ideas to keep your elderly loved ones safer:

• Sole trustee. A senior who’s the sole trustee on any family trust should be monitored for signs of memory loss and confusion. Dementia robs a person of judgment. If the trust provides for it, ask your impaired senior to resign from being a trustee and allow a more competent person to assume the duties.
• Successor trustee. If your parent believes she's fine when everyone knows she's not, look at her trust’s language about a successor trustee. You should get legal advice about how to address this situation from an experienced estate planning attorney.
• Check the mail. Sweepstakes entry private information is sold and used for illicit activity. Review your aging parent's mail and spot any entry forms and letters. Your loved one could be putting herself at risk by giving personal information to companies that don’t promise to keep it private.

Have a conversation about finances with your aging parent. It can be tough, but it’s for the best.

Reference: Forbes (July 13, 2017) “Sweepstakes Entries And Your Aging Parent: Know The Danger”

Managing the Many Moving Parts of Retirement

“Retirees face a tough decision-making process when it comes to their financial assets, and they may have to take more risk than they were expecting.”

There are a LOT of moving parts when it comes to transitioning into retirement. That includes plenty of key decisions—many of which don’t have easy answers. Kiplinger’s June article, “How to Generate Income in Retirement” says one of the most critical issues in transitioning to retirement is income planning. You’ll need to balance investment risk, longevity, and your lifestyle, which is not so simple.

Having a budget in place is the foundation of retirement planning. Start by determining your expenses, and then make some modifications by considering these retirement-specific issues:

• Lifestyle plans. Will you travel extensively or settle down in a less expensive community?
• Life expectancy. Today, the average 65-year-old will live almost 20 years, but that’s an average.
• Health care. There’s more to it than just paying Medicare premiums. Don’t forget about long-term care, prescription drugs, and other out-of-pocket expenses. These all need to be in your budget.
• Taxes. You’ll still be filing a return, so plan ahead. 
• Inflation. It will impact your normal, everyday expenses, and your dollar may not stretch as far year after year.

Once you have the estimates based on your own lifestyle costs and what may happen, start strategizing for your income. First, look at your income sources. Most retirees get their incomes from a combination of the following:

• Social Security benefits;
• Employer pension plans or annuities;
• Qualified retirement accounts and other financial investments;
• Income-generating investments like property or a privately held business; and
• A part-time job, if necessary.

Some income sources are static, while others are discretionary. Consider how your “guaranteed” or static income sources relate to your budget. Will it work or will you need to supplement them with money from your investments?

That is the tough question for retirees and their financial assets. You want to generate income for as long as possible, but you also want to know that your savings are secure. To balance these competing priorities, you may need to assume more investment risk than you anticipated.

If your investments are growing at a low but steady rate that keeps up with inflation, you won’t have fluctuating returns, but you’ll be losing money every year with withdrawals. You could outlive your assets. If you assume more investment risk, you’re more likely to achieve higher long-term growth, and you’re less likely to outlive your savings. But that means you also have higher investment account volatility and a greater chance of losing principal in down markets.

The best thing may be a diversified approach that uses investments suited for an individual’s needs. This depends on a number of financial and personal factors, such as the degree to which you’ll need to rely on your investment accounts for income; the stability of your other income sources; and your lifestyle and anticipated longevity.

Reference: Kiplinger (June 2017) “How to Generate Income in Retirement”

Oregon Passes Law for Quality and Safety in Long-Term Care Facilities

“The bill provides much-needed updates in many areas concerning oversight, penalties, quality and provision of care for individuals residing in licensed care facilities, the agency said.”

The Oregon Legislature recently passed legislation that bolsters quality and safety in long-term care settings. House Bill 3359 provides a comprehensive approach to improving safety and quality in licensed long-term care settings, according to the state’s Department of Human Services.

KTVZ.com in Bend, OR, reports in, “New Oregon law aims to improve long-term care,” that special emphasis was given to the improvement of training for those who care for people with Alzheimer's disease and other types of dementia.

With more than 1,000 Oregonians experiencing abuse in licensed long-term care settings every year, the bill was designed to address a variety of areas.

Oregon HB 3359  requires that administrators of residential care facilities, including assisted living and memory care, must be licensed by an independent board by July 2019. There will be regulations promulgated on the process for this new requirement. The bill also updates amounts and caps for civil monetary penalties for elder or adult abuse and harm within licensed long-term care settings. These caps were set in the 1970s. The legislation increases fines for incidents categorized as serious harm from a maximum of $500 up to $2,500. It also adds new penalties for facilities, specifically a penalty for "failure to report suspected abuse" and "failure to perform corrective action noted during a survey or inspection."

Oregon HB 3359 also updates licensing fee amounts for residential care/assisted living facilities and nursing facilities and authorizes the department to impose an immediate suspension in residential care facilities, when there are critical health, safety, or welfare issues. Previously, there was a 10-day wait for a hearing.

The new law also requires the Oregon Department of Human Services to develop an enhanced oversight and supervision program for residential care facility oversight and requests the development of a technology-based, acuity-based staffing tool for use by providers and Oregon DHS. This tool would let providers determine staffing patterns based on current residents' needs.

The bill establishes a variety of training and certification requirements for care staff in long-term care facilities and adds new safety requirements, licensing options and establishes new quality measurements.

Finally, the bill creates a Quality Measurement Council. This group will have representatives from the Office of the Long-Term Care Ombudsman, Alzheimer's advocacy, elder rights advocate, academics with data/metrics expertise, members of the Oregon Patient Safety Commission, provider associations, and Oregon DHS.

The bill will go into effect once it’s signed by the Governor.

"The main focus for the Oregon DHS Aging & People with Disabilities program is on the safety of the Oregonians we serve," the news release said.

Reference: KTVZ.com (Bend OR) (July 17, 2017) “New Oregon law aims to improve long-term care”

Charitable Giving 101

“For most people, giving to charities is a pretty simple matter: Write a check or donate cash, goods, other assets or time.”

Roughly $400 billion was donated by Americans to charitable causes last year. That’s about 2% of the U.S. gross domestic product. These donations came in many forms, like personal checks and distributions from trusts.

According to Morningstar’s recent article, “7 Tips for Better Charitable Giving,” creating a long-term charitable or philanthropic plan means careful consideration with your family, as well as professionals. You want to develop the right giving strategies that address estate, tax, and investing issues. Here are a few ideas to make certain that your money is donated wisely.

Make a Plan. Some donors feel they should leave large, one-time gifts to colleges, hospitals, or other charitable institutions. Others divide their donations among multiple causes over a period of time. Start with a "goals analysis" of your charitable strategy and implement a basic financial plan. Write down your charitable priorities and look at which have the most immediate need and where a donation can do the most good.

Research Your Causes. Look at how much the charity spends donor funds on marketing and administrative expenses.  It is important to see the percentage of donations that actually goes to the programs. Some charities have very high administrative costs, while others run lean operations.

Determine the Timing. Some people  choose to leave some of their estate to specific causes after they die and others donate while they're still alive. How might this impact your retirement income?  You should also consider whether you want to make ongoing contributions or a lump sum.

Work with Professionals. An experienced estate planning attorney can help you with your charitable-giving strategy. An attorney will analyze how your donations impact your estate and heirs, potential tax benefits during your lifetime and the types of donations you can make. Your charitable giving should be a component of your overall estate planning strategy.

There are many ways to donate, depending on when you want to give and how. Work with your attorney to develop a plan that makes sense from a tax and philanthropic perspective.

Reference: Morningstar (July 29, 2017) “7 Tips for Better Charitable Giving”

Unfunded Trusts

Getting a trust is only the first step to making it effective. You also need to put your assets in it.

One of the most common estate planning mistakes is known as an “unfunded” trust. It happens when people have trust documents drawn up and executed, but they do not transfer any of their assets into the trust.

The trust is essentially empty. When the person passes away, it has nothing to do in some cases.

There are no assets for the trustee to manage and distribute to the trust beneficiaries, as directed by the trust.

What happens after the trust settlor passes away with an unfunded trust varies, as the NWI Times discussed in "Estate Planning: Unfunded Trust."

In the best case scenario, the deceased did create a will providing that any assets in the estate be placed into the trust. This is called a pour over will.

As long as no one challenges the estate, then a probate judge will allow assets to be transferred to the trust and everything should proceed normally from there. However, things can get very messy, if there is no will or a non-pour over will.

Under those circumstances, getting assets into the trust can be very difficult, if not impossible.

The best thing to do is to avoid this problem.

After getting a trust, make sure that you fund it.

If you do not know how to transfer assets into the trust, then ask your estate planning attorney. The attorney who helped you get the trust can help you fund it.

Reference: NWI Times (May 7, 2017) "Estate Planning: Unfunded Trust."

Learn About the Medicaid Estate Recovery Program

“Many clients planning for long-term care are anxious about the consequences of using the Medicaid long-term care program to finance their long-term care, and rightfully so.”

Many people in Texas are afraid that if they access benefits, the Medicaid Estate Recovery Program will automatically take their home when they die. It is true that the Medicaid Estate Recovery Program really pushes to reclaim funds from the homestead at the time of death, for monies paid out for the Medicaid recipient's care. But the Houston Chronicle says in “Elder law: Don't miss opportunity to protect your home from estate recovery,” that with proper planning, the home can be protected from Medicaid estate recovery. Your state may have a similar law in place.

The State of Texas can make claims against estates of Medicaid recipients of certain Medicaid services, if the Medicaid recipient was age 55 or older when the services were provided. The state figures out the funds spent on the Medicaid recipient daily and tries to recover the funds from the person’s estate.

Some estates are exempt from Medicaid estate recovery, like when there are certain surviving family members of the Medicaid beneficiary. The state can’t start a recovery against the estate if a spouse, a child under the age of 21, or a disabled child of any age survives the beneficiary. If there’s a surviving unmarried adult child of any age at home for at least a year before the Medicaid beneficiary's death, estate recovery can be avoided. Evidence of the exemption must be proven and can include a death certificate listing the surviving spouse, a birth certificate listing the age of surviving child, or an eligibility letter from Social Security indicating disability onset.

There’s another exception for when recovery would cause an undue hardship on the heirs.

Setting up a transfer on death deed on the home avoids probate.  It is a common and efficient way to protect the home from an estate recovery claim. This may protect the home from a potential Medicaid estate recovery claim and lets the grantor transfer an interest in the home, without incurring a Medicaid transfer of assets penalty.

Reference: Houston Chronicle (July 10, 2017) “Elder law: Don't miss opportunity to protect your home from estate recovery”