Garland Law Offices, P.A.

Using Retirement Funds in a Financial Crisis

“U.S. has been making it easier for people to access long-term savings for emergencies, trading future financial security to stay afloat.”

For generations, the tax code has been a public policy tool, used to encourage people to save for retirement and what used to be called “old age.” However, the coronavirus pandemic has created financial emergencies for so many households that lawmakers have responded by making it easier to tap these accounts. The article “Should You Tap Retirement Funds in a Crisis? Increasingly, People Say Yes” from The Wall Street Journal asks if this is really a good idea.

This shift in thinking actually coincides with trends that began to emerge before the last recession. People were living and working longer. Unemployment and career changes later in life were becoming more commonplace, and fewer and fewer people devoted four decades to working for a single employer, before retiring with an employer-funded pension.

For those who have been affected by the economic downturns of the coronavirus, withdrawals up to $100,000 from retirement savings accounts are now allowed, with no early-withdrawal penalty. That includes IRAs (Individual Retirement Accounts) or employment-linked 401(k) plans. In addition, $100,000 may be borrowed from 401(k) plans.

Americans are not alone in this. Australia and Malaysia are also allowing citizens to take money from retirement accounts.

Lawmakers are hoping that putting money into pockets now may help households prevent foreclosures, evictions and bankruptcies, with less of an impact on government spending. With trillions in retirement accounts in the U.S., these accounts are where legislators frequently look when resources are threatened.

However, there’s a tradeoff. If you take out money from accounts that have lost value because of the market’s volatility, those losses are not likely to be recouped. And if money is taken out and not replaced when the world returns to work, there will be less money during retirement. Not only will you miss out on the money you took out, but on the return, it might have made through years of tax-advantaged investments.

The danger is that if retirement accounts are widely seen as accessible and necessary now, a return to saving for retirement or the possibility of putting money back into these accounts when the economy returns to normal may not happen.

IRA and 401(k) accounts began to supplant pensions in the 1970s as a way to encourage people to save for retirement, by deferring income tax on money that was saved. By the end of 2019, IRAs and 401(k) types of accounts held about $20 trillion in the US.

Boston College’s Center for Retirement Research has estimated that even before the coronavirus, early withdrawals were reducing retirement accounts by a quarter over 30 years, taking into account the lost returns on savings that were no longer in the accounts. For many people, taking retirement funds now may be their only choice, but the risk to their financial future and retirement is very real.

Reference: The Wall Street Journal (June 4, 2020) “Should You Tap Retirement Funds in a Crisis? Increasingly, People Say Yes”

How a Charitable Remainder Trust Works

“The most well-known ‘death’ tax is the Federal Estate and Gift Tax. However, the reality is that few people really have to worry about the cost of federal estate taxes.”

The least popular beneficiary is almost always the federal government. Most people are concerned that their estate will need to pay taxes and do what they can through estate planning to keep federal estate tax liability to a minimum. However, with federal estate and gift tax exemptions at $11.58 million per person this year, and twice that when properly used with the spousal exemption, most people don’t need to worry about the federal estate tax, explains The News Enterprise in the article “New federal law resurrects Charitable Remainder Trust.”

The passage of the SECURE Act, effective January 1, 2020, made big changes in how we need to plan for taxes for beneficiaries. Federal estate and gift tax exemptions did not change, but anyone who inherits a retirement account is likely to find fewer options than before the SECURE Act.

Charitable remainder trusts have been used for many years to avoid high capital gains taxes on appreciated assets. Appreciated assets are placed into trusts and no taxes are due on the transfer.  The donor also gets a charitable tax deduction. The amount in the trust grows, while paying out a small amount to beneficiaries in installment payments.

With the passage of the SECURE Act, non-spousal beneficiaries, with certain exceptions, must withdraw the entire amount of the qualified retirement account within ten years. Generally, beneficiaries may not roll the account into their own qualified account, and there are no required annual distributions. However, there’s a ten-year window to empty the account. Taxes are due on every withdrawal, whether it takes place over ten years or as a single withdrawal.

By using a CRT, the full amount of the account may be transferred into the CRT, no taxes are due, and the donor (or the donor’s estate) gets a charitable deduction.

The trust is simply an instrument created, so that a beneficiary may receive regular payments, which may include the donor, beneficiaries or multiple beneficiaries, over the span of their lives, or in a set number of years, with the remainder interest of at least ten percent of the initial contribution paid to a qualified charity at the end of the trust.

This effectively creates a stretch for the IRA, with withdrawals being taxed to the beneficiary, over a longer time span. With only ten percent being required to be donated to a charity, those who plan on making a donation to a charity anyway receive a benefit, and their beneficiaries can receive a lifetime income stream.

Speak with your estate planning attorney to learn how a CRT could be part of your estate plan.

Reference: The News Enterprise (June 2, 2020) “New federal law resurrects Charitable Remainder Trust”

What You Need to Know about Trusts

“Generally, if you own property, have life insurance and/or have other assets which total over $150,000 (including life insurance and real property), you are a candidate for asset protection.”

Some people still think that trusts and estate planning are just for wealthy people. However, that’s simply not true. Many people are good candidates for trusts, used to protect their assets and their families. Trusts can also be used to avoid probate, says the article “Common misconceptions about trusts” from the Rome Sentinel.

Who controls my property? The grantor, or the person setting up the trust, has the option of being a trustee, if they are setting up a revocable trust or an irrevocable trust. There are tax differences, so you’ll want to do this with an estate planning attorney. The grantor names co-trustees, if you wish. They are usually a spouse, adult child, or trusted adult. Successor trustees, that is, people who will take over the trust if the primary trustee becomes incapacitated or dies.

Only rich people need trusts. Anyone who owns a home, has life insurance and other assets worth more than $150,000 can benefit from the protection that a trust provides. The type of trust depends the grantor’s age, health status, and the amount, variety, and location of assets. A healthy person who owns a lot of life insurance or other assets would probably want either a Revocable Living Trust or a Will that includes a Testamentary Trust. However, a person who is over 55 and is planning for nursing home care, is more likely to have an Irrevocable Medicaid Trust to protect assets, avoid probate and minimize tax liability.

Can I access assets in a trust? A properly prepared trust takes your lifestyle and spending into account. Certain types of trusts are more flexible than others, and an estate planning attorney will be able to make an appropriate recommendation.

For instance, if you have an Irrevocable Medicaid Trust, you will be restricted from taking the principal asset back directly. The assets in this type of trust can be used to fund costs and expenses of real property, including mortgage payments, taxes, furnace and roof repairs. An IMT needs to be set up with enough assets outside of it, so you can have an active retirement and enjoy your life. Assets outside of the trust are your spendable money.

Can my children or any others take assets from the trust? No, and that’s also the point of trusts. Unless you name someone as a Trustee with the power to take assets out of the trust, they cannot access the funds. The grantor retains control over what assets may be gifted during their lifetime. They can also impose restrictions on how assets are restricted after death. Some trusts are created to set specific ages or milestones, when beneficiaries receive all or some of the assets in the trust.

Trusts are not one size-fits all. Trusts need to be created to serve each family’s unique situation. An experienced estate planning attorney will work with the family to determine their overall goals, and then determine how trusts can be used as part of their estate plan to achieve goals.

Reference: Rome Sentinel (May 31, 2020) “Common misconceptions about trusts”

Update Will at These 12 Times in Your Life

“It is also important to realize that it isn’t merely ‘why’ you are updating your will, but ‘when’ you are updating that can make all the difference.”

Estate planning lawyers hear it all the time—people meaning to update their will, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will is so out-of-date that it creates a world of problems for a grieving family.

There are some wills that do stand the test of time, but they are far and few between. Families undergo all kinds of changes, and those changes should be reflected in the will. Here are one dozen times in life when wills need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will should be flexible to accommodate additional children in the future.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your will, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your will now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts in your will, so anything you leave your child won’t be considered a marital asset, if his or her marriage goes south.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your will to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance.

Named executor or beneficiary dies. Your old will may have a contingency plan for what should happen if a beneficiary or executor dies, but you should probably revisit the plan. If a named executor dies and you don’t update the will, then what happens if the second executor dies?

A young family member grows up. Most people name a parent as their executor, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.

An inheritance or a windfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will? If you can’t find the original will, then you need a new will. Your estate planning attorney will make sure that your new will has language that states revokes all prior wills.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. Therefore, if families and friends are fighting, the family member will win. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

Financial Benefits for Seniors on Downsizing Homes

https://blog.estateattorney.info/long-term-care-planning/

Quirk in Medicare System’s Observation Status

“Unfortunately, over a decade, the number of observation stays has increased exponentially and is being used, even when patients have a diagnosis and have been admitted by their own physicians.”

There’s a troubling quirk in the Medicare system that occurs when older patients are hospitalized and instead of being officially admitted, they are placed on “observation status” reports the article “Caught Paying for Rehab Due to Observation Status? Medicare May Owe You” from The National Law Journal.

Observation status originally was meant to serve as a temporary status for people who were receiving medical care and tests in a hospital setting until they were either sent home or a diagnosis was made, and they were officially admitted.

However, in the past 10 years or so, the number of patients in hospitals deemed to be in observation status has increased enormously, even when patients have received a diagnosis and their doctors have admitted them to the hospital. This is a direct result of the Medicare claims review process, where hospitals risk not being paid because of inpatient services being billed without documents of certain diagnoses and levels of care.

The hospital seeks to protect itself, by designating a patient as observation status. There’s no downside to the hospital, since this is covered by Medicare, just under Part B, rather than Part A.

However, for the patient, it’s not that simple. First, the denial of Part A inpatient coverage means that the patient has to pay for each and every deductible and copay for each service. Prescription drugs received while the patient is in the hospital are billed separately and aren’t included under the Part A inpatient payment.

 It gets worse. Medicare coverage for post-hospital care is denied or extremely limited for observation status patients. Medicare only covers rehab costs in a facility, if the patient was admitted to the hospital for at least three days.

Observation status days do not count towards those qualifying days. It doesn’t matter if the treating physician had the patient admitted to the hospital, because hospitals can change the status of the patient retroactively.

Until recently, there was no recourse for patients. However, a recent class action suit in Connecticut may see that begin to change. A federal judge held that Medicare beneficiaries whose hospital stays were changed to observation status may appeal to Medicare for reimbursement of their payments to rehabilitation facilities. As a result of Alexander v. Azar, patients have the right to recover payments for their nursing home rehabilitation stays.

Patients whose doctors placed them on observation status still are not permitted to appeal.

Speak with your elder law estate planning attorney, if this scenario applies to you or family member.

Reference: The National Law Review (May 26, 2020) “Caught Paying for Rehab Due to Observation Status? Medicare May Owe You”

Elder Financial Abuse Fraud Occurs, When No One’s Watching

“Take, for example, the sad and sordid tax case of Mary Ellen Cranmer Nice vs. United States of America, which would not have existed if an attentive financial advisor hadn't noticed the large IRA distributions that were allegedly stolen right from under a matriarch’s nose.”

The case of Nice vs. U.S. is a dramatic example of what can happen when there are no professionals involved in an elderly person’s finances and one person has the power to make transactions without supervision. In the article “Tax case reveals possible intrafamily fraud” from Financial Planning, a trusted son allegedly decimated his mother’s IRA and left her estate with $500,000 tax bill.

Mrs. Nice and her husband had been married for more than 60 years. Before he died in 2002, her husband arranged to leave significant assets for his wife’s care. Their son Chip was named executor of the husband’s estate and moved in with his mother. In 2007, she was diagnosed with dementia. As her condition deteriorated, Chip allegedly began fraudulent activities. He gained access to her IRAs, causing distributions to be made from the IRAs and then allegedly taking the funds for his own use.

Chip also filed federal income tax returns for his mother, causing her to execute a fraudulent power of attorney. The federal tax returns treated the IRA distributions as taxable income to Mrs. Nice. She not only lost the money in her IRA but got hit with a whopping tax bill.

In 2014, Mrs. Nice’s daughter Julianne applied for and received a temporary injunction against Chip, removing him from her mother’s home and taking away control of her finances. Chip died in 2015. A court found that Mrs. Nice was not able to manage her own affairs and Mary Ellen was appointed as a guardian. Julianne filed amended tax returns on behalf of her mother, claiming a refund for tax years 2006-07 and 2009-13. The IRS accepted the claim for 2009 but denied the claims for 2006 and 2010-2013. The appeal for 2009 was accepted, but the IRS never responded to the claim for 2007. Julianne appealed the denials, but each appeal was denied.

By then, Mrs. Nice had died. Julianne brought a lawsuit against the IRS seeking a refund of $519,502 in federal income taxes plus interest and penalties. The suit contended that because of her brother’s alleged fraudulent acts, Mrs. Nice never received the IRA distributions. Her tax returns for 2011-2014 overstated her actual income, the suit maintained, and she was owed a refund for overpayment. The court did not agree, stating that Julianne failed to show that her mother did not receive the IRA funds and denied the claim.

There are a number of harsh lessons to be learned from this family’s unhappy saga.

When IRA funds are mishandled or misappropriated, it may be possible for the amounts taken to be rolled over to an IRA, if a lawsuit to recover the losses occurs in a timely manner. In 2004, the IRS issued 11 private-letter rulings that allow lawsuit settlements to be rolled over to IRAs. The IRS allowed the rollovers and gave owners 60 days from the receipt of settlement money to complete the rollover.

Leaving one family member in charge of family wealth with no oversight from anyone else—a trustee, an estate planning attorney, or a financial planner—is a recipe for elder financial abuse. Even if the funds had remained in the IRA, a fiduciary would have kept an eye on the funds and any distributions that seemed out of order.

One of the goals of an estate plan is to protect the family’s assets, even from members of their own family. An estate plan can be devised to arrange for the care of a loved one, at the same time it protects their financial interests.

Reference: Financial Planning (March 6, 2020) “Tax case reveals possible intrafamily fraud”

Are You Making the Most of the SECURE and CARES Acts?

“There have been several law changes that affect IRAs passed since December 2019.”

The SECURE Act made a number of changes to IRAs, effective January 1, 2020. It was followed by the CARES Act, effective March 27, 2020, which brought even more changes. A recent article from the Milwaukee Business Journal, titled “IRA planning tips for changes associated with the SECURE and CARES acts,” explains what account owners need to know.

Setting Every Community Up for Retirement (SECURE) Act

The age when you have to take your RMD increased from 70½ to 72, if you turned 70½ on or before December 31, 2019. Younger than 70½ before 2020? You still must take your RMDs. But, if you can, consider deferring any distributions from your RMD, until you must. This gives your IRA a chance to rebound, rather than locking in any losses from the current market.

Beneficiary rules changed. The “stretch” feature of the IRA was eliminated. Any non-spousal beneficiary of an IRA owner who dies after Dec. 31, 2019, must take the entire amount of the IRA within 10 years after the date of death. The exceptions are those who fall into the “Eligible Designated Beneficiary” category. That includes the surviving spouse, a child under age 18, a disabled or chronically ill beneficiary, or a beneficiary who is not more than ten years younger than the IRA owner. The Eligible Designated Beneficiary can take distributions over their life expectancy, starting in the year after the death of the IRA holder. If your estate plan intended any IRA to be paid to a trust, the trust may include a “conduit IRA” provision. This may not work under the new rules. Talk with your estate planning attorney.

IRA contributions can be made at any age, as long as there is earned income. If you have earned income and are 70 or 71, consider continuing to contribute to a Roth IRA. These assets grow tax free and qualified withdrawals are also tax free. If you plan on making Qualified Charitable Distributions (QCD), you’ll be able to use that contribution (up to $100,000 per year) from the IRA to offset any RMDs for the year and not be treated as a taxable distribution.

Coronavirus Aid, Relief and Economic Security (CARES) Act

The deadline for contributions for traditional or Roth IRAs this year is July 15, 2020. The 2019 limit is $6,000 if you are younger than 50 and $7,000 if you are 50 and older.

RMDs have been waived for 2020. This applies to life expectancy payments. It may be possible to “undo” an RMD, if it meets these qualifications:

• The RMD must have been taken between February 1—May 15 and must be recontributed or rolled over prior to July 15.
• RMDs taken in January or after May 15 are not eligible.
• Only one rollover per person is permitted within the last 12 months.
• Life expectancy payments may not be rolled over.

Individuals impacted by coronavirus may be permitted to take out $100,000 from an IRA with no penalties. They are eligible if they have:

• Been diagnosed with SARS-Cov-2 or COVID-19
• A spouse or dependent has been diagnosed
• Have experienced adverse consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to the virus, are unable to work because of a lack of child care, closed or reduced hours of a business owned or operated by the individual or due to other factors, as determined by the Secretary of the Treasury.
• Note that these distributions are still taxable, but the income taxes can be spread ratably over a three-year period and are not subject to the 10% early distribution penalty.

Keep careful records, as it is not yet known how any of these distributions/redistributions will be accounted for through tax reporting.

Reference: Milwaukee Business Journal (June 1, 2020) “IRA planning tips for changes associated with the SECURE and CARES acts”

Your Children Wish You Had an Estate Plan

“Without a proper elder law estate plan, the children’s responsibilities are even more exhausting, stressful and sad.”

It is the adult children who are in charge of aging parents when they need long-term care. They are also the ones who settle estates when parents die. Even if they can’t always come out and tell you, the recent article, “Why your children wish you had an Elder Law Estate Plan” from the Times Herald-Record spells out exactly why an elder law estate plan is so important for your loved ones.

Avoid court proceedings while living. In a perfect world, everyone over age 18 will have an advance directive, including a power of attorney, a health care proxy, and a living will. These documents appoint others to make financial, legal, and medical decisions, in case of incapacity. Without them, the children will have to get involved with time-consuming, expensive guardianship proceedings, where a judge appoints a legal guardian to make these decisions. Your life is turned over to a court-appointed guardian, instead of your children or another person of your choosing.

Avoid court proceedings after you die. If you die and assets are in your name alone, then your estate will go through probate, a court proceeding that can be time consuming and costly. Not having any assets in trusts leaves your kids open to the possibility of wills being challenged, disputes among family members and litigation that can drag on for years.

Wills in probate court are public documents. Trusts are private documents. Do you really want a stranger to access your will and learn about your assets?

An elder law estate plan also plans for the possibility of long-term care and costs. Nursing home care costs can run between $12,000—$18,000 per month. If you don’t have long-term care insurance, you can create a Medicaid Asset Protection Trust (MAPT) that protects assets in the trust from nursing home costs, once the assets are in the trust for five years. The MAPT also protects assets from homecare provided by Medicaid, called “community” Medicaid, once the assets are in the trust for 30 months under a new rule that starts on October 1, 2020.

The “elder law power of attorney” has unlimited gifting powers that could save about half of a single person’s assets from the cost of nursing homes. This can be done on the eve of needing nursing home care, but it is always better to do this planning in advance.

Having a plan in place decreases stress and anxiety for adult children. They are likely busy with their own lives, working, caring for their children and coping in a challenging world. When a plan is in place, they don’t have to start learning about Medicaid law, navigating their way through the court system, or wondering why their parents did not take advantage of the time they had to plan properly.

You probably don’t want your children remembering you as the parents who left a financial and legal mess behind for the them to clean up. Speak with an elder law estate planning attorney to create a plan for your future. Your children will appreciate it.

Reference: Times Herald-Record (May 23, 2020) “Why your children wish you had an Elder Law Estate Plan”

Tapping an Inherited IRA?

“When a loved one dies, any leftover IRA funds they had, goes to whomever they labeled as beneficiaries. If you're a beneficiary, you have to decide how you're going to use it—a decision that's a little more complicated this year than it normally is.”

Many people are looking at their inherited IRAs this year, when COVID-19 has decimated the economy. The rules about when and how you can tap the money you inherited changed with the passage of the SECURE Act at the end of December 2019. It then they changed again with the passage of the CARES Act in late Marc,h in response to the financial impact of the pandemic.

Things are different now, reports the article “Read This Before You Touch Your Inherited IRA Funds” from the News & Record, but one thing is the same: you need to know the rules.

First, if the owner had the account for fewer than five years, you may need to pay taxes on traditional IRA distributions and on Roth IRA earnings. This year, the federal government has waived mandatory distributions (required minimum distributions, or RMDs) for 2020. You may take out money if you wish, but you can also leave it in the account for a year.

Surviving spouses who don’t need the money may consider doing a spousal transfer, rolling the spouse’s IRA funds into their own. The RMD doesn’t occur until age 72. This is only available for surviving spouses, and only if the spouse is the decedent’s sole beneficiary.

The federal government has also waived the 10% early withdrawal penalty for taxpayers who are under 59½. If you are over 59½, then you can access your funds.

The five-year method of taking IRA funds from an inherited IRA is available to beneficiaries, if the owner died in 2019 or earlier. You can take as much as you wish, but by December 31 of the fifth year following the owner’s death, the entire account must be depleted. The ten-year method is similar, but only applies if the IRA’s owner died in 2020 or later. By December 31 of the tenth year following the owner’s death, the entire IRA must be depleted.

Heirs can take the entire amount in a lump sum immediately, but that may move their income into a higher tax bracket and could increase tax liability dramatically.

A big change to inherited IRAs has to do with the “life expectancy” method, which is now only available to the surviving spouse, minor children, disabled or chronically ill people and anyone not more than ten years younger than the deceased. Minor children may use the life expectancy method until they turn 18, and then they have ten years to withdraw all remaining funds.

There is no right or wrong answer, when it comes to taking distributions from inherited IRAs. However, it is best to do so, only when you fully understand how taking the withdrawals will impact your taxes and your long-term financial picture. Speak with an estate planning attorney to learn how the inherited IRA fits in with your overall estate plan.

Reference: News & Record (May 25, 2020) “Read This Before You Touch Your Inherited IRA Funds”