How Does the SECURE Act Change Your Estate Plan?

The SECURE Act has made big changes to how IRA distributions are passed on after a participant’s death. Anyone who owns an IRA, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need to be taken.

Some of the changes include reviewing wills and trusts which include provisions creating conduit trusts that had been created to hold IRAs and preserve the stretch IRA benefit, while the IRA plan owner was still alive. Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust.

It may be necessary to rethink and possibly completely restructure the planning for IRA accounts. This may mean changing the beneficiary of an account to a charity, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation.

Another alternative may be to pay the IRA balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.

The biggest change in the SECURE Act being examined by many estate planning and tax planning attorneys is the loss of the “stretch” IRA for beneficiaries inheriting IRAs after 2019. Most beneficiaries who inherit an IRA after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One reason why Congress enacted this law was to generate tax revenues that would become collectible far sooner. In the past, the ability to stretch an IRA out over many years, even decades, allowed individuals to pass their tax deferral on significant IRA growth to their family members, which meant that tax revenue due from the assets’ growth could not be collected.

Another interesting change is that there are now no periodic mandatory withdrawals when an IRA is inherited. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid. Under the prior law, the period in which the IRA assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many IRA owners to bequeath a large IRA balance completely to their heirs. Others, with larger IRAs, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, and disabled heirs. Minor children are also considered eligible beneficiaries during the time that they are minors (as defined by the tax code), but when they reach the age of majority, the ten-year distribution rule then applies to them. For example, a child who has reached the age of majority at 18 must take all assets from the IRA by the time they are 28 and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. Speak with your estate planning attorney to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

Will My Heirs Pay Inheritance Tax?

Will My Heirs Pay Inheritance Tax?
Tax return check on 1040 form background

U.S. News & World Report explains in its article, “What Is Inheritance Tax?” that estate taxes and inheritance taxes are often mentioned as if they’re the same thing. However, they’re really very different in concept and practice.

Remember that not every estate is required to pay estate taxes, and not every heir will pay inheritance tax. Let’s discuss how to determine whether these taxes impact you.

Inheritance is considered to be taxable to heirs. Whether heirs need to pay this is based upon the state in which the deceased lived and the heirs’ relationship to the benefactor.

Inheritance tax is a tax imposed by the state on a portion of the value of a deceased person’s estate that is paid by the inheritor of the estate. There is no federal inheritance tax. Currently, there are only six states that impose an inheritance tax, according to the American College of Trust and Estate Counsel. The states that have an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Inheritance tax laws and exemption amounts are different in each of these six states. In Pennsylvania, there’s no inheritance tax charged to a surviving spouse, a son or daughter age 21 or younger and certain charitable and exempt organizations. Otherwise, the inheritance tax is charged on a tiered system. Direct descendants and lineal heirs pay 4.5%, siblings pay 12% and other heirs pay a hefty 15%.

Whether inheritance tax applies is determined by the state in which the deceased lived. Estate taxes are deducted from the deceased’s estate after death and aren’t the responsibility of the heirs. Some states also charge their own estate taxes on assets more than a certain value. The states that charge their own estate tax are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and Washington, D.C.

Decreasing estate taxes are the responsibility of the deceased prior to his or her death. They should work with an estate planning attorney to map out strategies that can lessen or eliminate estate taxes for certain assets.

Remember that inheritance taxes are state taxes. They are imposed by only six states and are the responsibility of the heirs of the estate, even if they live in another state. In contrast, estate taxes are federal and state taxes. The federal estate tax is a 40% tax on assets more than $11.58 million for 2020 ($23.16 million for married couples). This is charged, regardless of where you live. Some states have additional estate taxes with their own thresholds.

Inheritance taxes are paid by the heirs, and estate taxes are paid by the estate. An estate planning attorney can help to find ways to reduce taxes and transfer money efficiently.

Reference: U.S. News & World Report (October 8, 2019) “What Is Inheritance Tax?”

Should I Use a Trust to Protect My Children’s Inheritance?

Parents with savings have several options for their children’s future inheritances.

nj.com’s recent article answers this question: “We have $1.5 million. Should we get a trust for our children’s inheritance?” According to the article, parents could create lifetime trusts or trusts in their wills for the benefit of the surviving spouse during the spouse’s lifetime.

After that, they can have the remainder of the assets pass in trusts for each of the children, until they reach a certain age or ages.

A lifetime trust is a type of trust that’s created during an individual’s lifetime. This is different from a testamentary trust, which is a trust created after a person’s lifetime through the operation of that person’s will.

Usually, the individual who settles a lifetime trust (the “Grantor”) will retain control over the assets in the trust, including the right to revoke the assets during his or her lifetime. These forms of lifetime trusts are known as grantor trusts.

Another option is to have these types of trusts continue for the benefit of the grandchildren.

The children’s trusts can have instructions that the assets and income are to be used for the health, maintenance, education, and support of the child.

The parents would need to name a trustee or co-trustee. This is the person who’s responsible for investing the assets, filing tax returns and paying taxes (if necessary). He or she will also distribute the assets, according to the terms of the trust.

Trusts are a complicated business, so meet with an experienced estate planning attorney to determine the best strategies based on your circumstances and goals.

Reference: nj.com (October 16, 2019) “We have $1.5 million. Should we get a trust for our children’s inheritance?”

How Will the New SECURE Act Impact My IRAs and 401(k)?

The SECURE Act is the most substantial change to our retirement savings system in over a decade, says Covering Katy (TX) News’ recent article entitled “Laws Change for IRA and 401K Retirement Savings Plans.” The new law, called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, includes several important changes. Let’s take a look at them.

Increased RMD Age. There is now a higher age for RMDs. The old law said that you must start taking withdrawals or required minimum distributions from your traditional IRA and 401(k) or similar employer-sponsored plan when you turn 70½. The new law delays this to age 72, so you can hold on to your retirement savings a while longer.

No age limit for contributions to traditional IRAs. Before the new law, you could only contribute to your traditional IRA until you were 70½. Under the new SECURE Act, you can now fund your traditional IRA for as long as you have taxable earned income.

Stretch IRA Limitations. Previously, beneficiaries could stretch taxable distributions from an inherited retirement account over his or her lifetime. Under the SECURE Act, spouse beneficiaries can still take advantage of this “stretch” distribution, but most non-spouse beneficiaries will have to take out the entire balance of the IRA by the end of the 10th year after the account owner dies. Therefore, non-spouse beneficiaries who inherit an IRA or other retirement plans could have significant income tax consequences due to the larger distributions that must be received within a shorter amount of time.

Exception to early withdrawal penalty for a new child. As a general rule, a plan participant must pay a 10% penalty when funds are withdrawn from IRA or 401(k) accounts prior to 59½. However, the new legislation allows you take out up to $5,000 from your retirement plan without paying the early withdrawal penalty if it is taken out for the costs of a new child, and the money is taken out within a year of a child being born or if an adoption becomes final.

There are provisions of the SECURE Act that primarily impact business owners, which include the following:

New multi-employer retirement plans. The new law allows unrelated companies to coordinate to offer employees a 401(k) plan with less administrative work, lower costs and fewer fiduciary responsibilities than individual employers used to have when offering their own retirement plans.

Tax credit for automatic enrollment. There’s now a tax credit of $500 for some small businesses that create automatic enrollment in their retirement plans. A tax credit for establishing a retirement plan has also been increased from $500 to $5,000.

Annuities in 401(k) plans. The Act makes it easier for employers to add annuities as an investment option within 401(k) plans. Before the SECURE Act, businesses avoided annuities in these plans because of the liability related to the annuity provider. However, the new rules should help decrease any concerns.

Talk to an experienced estate planning attorney to examine the potential impact on your investment strategies and determine any possible tax and estate planning implications of the SECURE Act.

Reference: Covering Katy (TX) News “Laws Change for IRA and 401K Retirement Savings Plans”

What Does the New SECURE Act Mean for My Retirement?

Lawmakers in Washington are providing some essential tools to those trying to put together a financial plan for their retirement, Motley Fool reports, in its recent article entitled “3 Ways the SECURE Act Could Make You Replan Your Retirement.” However, in the process, our legislators also threw some curveballs into the existing legal system. This may provide new opportunities for savers but also may create pitfalls for the unaware. As a result, it’s important to know the three primary ways that the SECURE Act will change the way you think about retirement.

  1. Delaying RMDs from IRAs and 401(k)s until age 72. Many Americans use IRAs, 401(k)s, and other tax-favored retirement accounts to help them save for retirement. These accounts offer deferral on any paying taxes due on the income generated by the investments within the accounts until the funds are withdrawn in retirement. However, Congress didn’t want people to be able to defer taxes on their retirement savings forever, so they created a system of required minimum distributions (RMDs). Under the old law, most people have to start taking withdrawals from IRAs and 401(k)s beginning in the year they turn 70½. The distribution amount is based on the person’s life expectancy, so that they gradually use up the retirement account balances over time. The SECURE Act changes the age at which people are required to take RMDs to age 72. This allows people some extra time before dealing with RMDs and also eliminates the complication of dealing with a half-birthday. You can withdraw money from your retirement accounts at age 70½ if you want to, but the legislation lets you make the choice.
  2. Allowing IRA contributions after age 70½. Under current law, people can’t make IRA contributions once they reach 70½, despite still working. Congress again didn’t want people to keep adding to their retirement accounts when they were already past typical retirement age. However, in reality, many people still work after age 70½. Therefore, allowing them to set money aside in a tax-favored way is only fair. That’s why the SECURE Act’s changed the age to allow further IRA contributions.
  3. Forcing faster withdrawals from inherited IRAs. The third change isn’t as favorable: to help pay for the tax impact of these changes, Congress decided to curtail the rules that let those who inherit retirement accounts to stretch out distributions over their entire lifetimes. The new legislation would still let spouses treat an inherited account as if it belonged to the spouse, but most non-spouse beneficiaries would have to take distributions within 10 years.

With this change, you should review your estate planning to see if changes are necessary to reach the best possible outcome. Ask your estate planning attorney to go over these changes and how they may have an impact upon your estate plan.

Reference: Motley Fool (Dec. 19, 2019) “3 Ways the SECURE Act Could Make You Replan Your Retirement”

Start the New Year with Estate Planning To-Do’s

Families who wish their loved ones had not created an estate plan are far and few between. However, the number of families who have had to experience extra pain, unnecessary expenses, and even family battles because of a lack of estate planning are many. While there are a number of aspects to an estate plan that takes some time to accomplish, The Daily Sentinel recommends that readers tackle these tasks in the article “Consider These Items As Part of Your Year-End Plan.”

Review and update any beneficiary designations. This is one of the simplest parts of any estate plan to fix. Most people think that what’s in their will controls how all of their assets are distributed, but this is not true. Accounts with beneficiary designations—like life insurance policies, retirement accounts, and some bank accounts—are controlled by the beneficiary designation and not the will.

Proceeds from these assets are based on the instructions you have given to the institution, and not what your will or a trust directs. This is also true for real estate that is held in JTWROS (Joint Tenancy with Right of Survivorship) and any real property transferred through the use of a beneficiary deed. The start of a new year is the time to make sure that any assets with a beneficiary designation are aligned with your estate plan. Request a copy of your beneficiary designations from the institutions that administer your plans, and make changes if needed.

Take some time to speak with the people you have named as your agent, personal representative or successor trustee. These people will be managing all or a portion of your estate. Make sure they remember that they agreed to take on this responsibility. Make sure they have a copy of any relevant documents and ask if they have any questions.

Locate your original estate planning documents. When was the last time they were reviewed? New laws, and most recently the SECURE Act, may require a revision of many estate plans, especially if you own a large IRA. You’ll also want to let your executor know where your original will can be found. The probate court, which will review your will, prefers an original. A will can be probated without the original, but there will be more costs involved and it may require a few additional steps. Your will should be kept in a secure, fire and water-safe location. If you keep copies at home, make a note on the document as to where the original can be found.

Create an inventory of your online accounts and login data for each one. Many people open a new online account on a regular basis, so it is important to keep track of the login information. That should include email, personal photos, social media, and any financial accounts. This information also needs to be stored in a safe place. Your estate planning document file would be the logical place for this information but remember to update it when changing any information, like your password.

If you have a medical power of attorney and advance directive, ask your primary care physician if they have a means of keeping these documents, and explain how you wish the instructions on the documents to be carried out. If you don’t have these documents, make them part of your estate plan review process.

A cover letter to your executor and family that contains complete contact information for the various professionals—legal, financial, and medical—will help them know who your trusted professional team is in the case of an unexpected event.

Remember that life is always changing, and the same estate plan that worked so well ten years ago may be out of date now. Speak with an experienced estate planning attorney in your state who can help you create a plan to protect yourself and your loved ones.

Reference: The Daily Sentinel (Dec. 28, 2019) “Consider These Items As Part of Your Year-End Plan”

Can You Tackle Elder Law on Your Own?

What usually happens when people do their own estate planning or work on elder law issues, without a lawyer who has years of practice? They may not incur the costs on the front end, but the costs, in financial and emotional terms, often arrive just when the individual or their family is most vulnerable. That message comes through loud and clear in the article “Do-it-yourself elder law estate planning can be risky” from a recent article in the Times Herald-Record.

Let’s clarify the two different areas:

  • Estate planning is about leaving assets to heirs with a minimum of court costs, legal fees and avoiding will contests.
  • Elder law is concerned with protecting assets from the cost of long-term care and empowering people who will be able to make legal, financial and medical decisions on your behalf if you become incapacitated.

Two of the most important documents in an elder law estate plan are the Powers of Attorney (POA) and health care proxies. If these forms are not prepared correctly, problems will ensue. In some states, like New York, the POA form is long and complicated. Banks and financial institutions will refuse to recognize the form if they are not completed correctly.

A POA needs to include the “Statutory Gifts Rider,” which allows broad giving powers to the elder law attorney to save assets, even on the eve of the person being admitted to a nursing home. Someone who is not an elder law attorney is not likely to know what this is, or how to prepare it.

There will be similar issues to a do-it-yourself health care proxy. Here’s just one example of the many things that can go wrong: an agent may not make decisions about withholding certain extreme life support measures, even if they are in possession of a valid health care proxy. There needs to be a living will from the individual that explicitly states their wishes regarding withholding heroic means and/or artificial measures. Without the proper documentation, the person could remain on life support for months or years, even if this was not their wish.

A do-it-yourself approach leaves much to chance. As a result, the potential for problems is enormous. A far better solution that spares spouses and loved ones is to work with an experienced estate planning lawyer. Can you put a price on peace of mind?

Reference: Times Herald-Record (Nov. 23, 2019) “Do-it-yourself elder law estate planning can be risky”

What You Need to Know about a Medicaid Asset Protection Trust (MAPT)

Moving into a nursing home can be expensive, costing you $5,000 to $10,000 a month or more. This expense can quickly wipe out your life savings. Medicaid will pick up the bill for you if your income and assets are low enough to qualify for Medicaid benefits. The problem is, you typically have to be nearly destitute before you can qualify for Medicaid.  If you put your assets into a Medicaid Asset Protection Trust, however, you might be able to qualify for Medicaid, even if your assets exceed the limit. Here is what you need to know about a Medicaid Asset Protection Trust (MAPT).

Medicaid Income and Asset Limits

Eligibility for Medicaid varies by state. In general, you must have little or no income and few countable assets. Each state also may have non-economic requirements, such as age, disability and household size, depending on your circumstances.

Medicaid does not count all of your assets toward the asset limit. For example, if you or your spouse live in your primary house, Medicaid considers the home an exempt asset. The value of that property does not count toward your state’s asset limit. There may be limits on the amount of equity that does not count. The limits vary from state to state.

Additional examples of assets that can be exempt include one car, term life insurance, household furnishings, clothing, wedding and engagement rings and other personal items. Medicaid also does not count prepaid funeral and burial plans or life insurance policies with little cash value toward the limit.

However, Medicaid does count these things toward the asset limit:

  • Cash
  • Bank accounts
  • Investments
  • Vacation homes
  • Retirement accounts not yet in payout status (only in some states)

These are the general guidelines. Each state’s treatment of assets differ, and it is important that you or your estate planning attorney understand how those rules apply to your specific situation.

How a MAPT Works

A Medicaid Asset Protection Trust (MAPT) is an irrevocable trust. When you put your assets into the trust, Medicaid does not count those things toward the asset limit. You do not own those items – the trust does. Medicaid does not count assets that do not belong to you. The trust can protect the assets for distribution one day to your beneficiaries.

Please note that a “Medicaid Asset Protection Trust” can also go by the name of “Medicaid Planning Trust,” “Home Protection Trust,” or “Medicaid Trust.” Make sure that the trust you select is Medicaid-compliant. Most revocable living trusts, family trusts, irrevocable funeral trusts, and qualifying income trusts (QITs, also called Miller trusts) are not Medicaid-compliant. They will not protect your assets in the event you want to be eligible for Medicaid to pay for a nursing home.

Essential Aspects of MAPTs

MAPTs are sophisticated estate planning documents. Here are a few of the highlights of these documents:

  • You cannot create a MAPT and immediately apply for Medicaid. You will have to wait at least five years (2.5 years in California) before you apply for Medicaid, after setting up a MAPT. If you apply for Medicaid before this “look back” period expires, you could face harsh financial penalties.
  • You are the grantor of your trust. You state might use a different term, like the trust-maker or settlor. Your spouse cannot be the trustee of your MAPT, but your adult child or another relative can be.
  • The trust must be irrevocable. Once signed, you can never change or cancel the trust. You can never own those assets again. If you create a revocable trust, Medicaid will count all the assets in the trust toward the asset limit, because you still have control over the assets.
  • The trustee must follow the instructions of the trust. No funds of the trust can get used for your benefit.
  • A MAPT protects your assets from Medicaid estate recovery. Without a MAPT, after you die, the state could seek reimbursement from your estate for all the money they paid for your long-term care.
  • While a Miller trust will not protect your assets, it can protect some of your income, if your income exceeds the limit for Medicaid. Used with a MAPT, many people can qualify for Medicaid to help pay for the nursing home, even if their assets and income exceed the eligibility limits.
  • The rules for MAPTs vary from one state to the next.

The regulations are different in every state. You should talk to an elder law attorney in your area to see how your state varies from the general law of this article.

References:

American Council on Aging. “How Medicaid Planning Trusts Protect Assets and Homes from Estate Recovery.” (accessed December 19, 2019) https://www.medicaidplanningassistance.org/asset-protection-trusts/

American Council on Aging. “How to Spend Down Income and/or Assets to Become Medicaid Eligible.” (accessed December 19, 2019) https://www.medicaidplanningassistance.org/medicaid-spend-down/

SECURE Act Means It’s Time for an Estate Plan Review

The most significant legislation affecting retirement was signed into law on Friday, Dec. 20, 2019. After stalling for months, Congress suddenly passed several bills, as attachments to budget appropriations, as reported by Advisor News’ article “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans.”

Here are some of the key points that retirees and those planning their retirements need to know:

Changes to Age Limits for IRA and 401(k) Accounts. The age for taking Required Minimum Distributions (RMDs) has increased from 70½ to 72 years. Adding a year and a half for investors to continue deferred growth for retirement gives a little more time to prepare for longer lifespans. The change recognizes the prior limits were arbitrary, and that Americans need to save more.

New Restrictions for Inheriting IRAs. The SECURE Act also enacted strict limitations on the usage of the “stretch” IRA. With few exceptions, Americans who inherit an IRA must now withdraw the money within 10 years of the account owner’s death, along with paying taxes. Some of the exceptions include surviving spouses and minor children. These exempt heirs can still spend down inherited IRA accounts over their lifetime, otherwise known as “stretching” the IRA.

Small Business 401(k)s. The SECURE Act expands access to Multiple Employer Plans, known as MEPs, so that employers with only a few employees can pool resources and share the costs of retirement plans for employees. This will cut administration and management costs, which will ideally allow more small businesses to offer higher-quality retirement plans to their employees.

The law also enhances automatic enrollment and auto-escalation, letting companies automatically enroll employees into a retirement plan at a rate of 6%, instead of 3%. Employers can now raise employee contributions to a maximum of 15% of their annual pay, although workers can opt out of these plans at any time.

Annuities Options. The SECURE Act now allows 401(k) plans to offer annuities as a retirement plan option. Experts have mixed opinions on this. Annuities are a type of life insurance that convert retirement savings into lifetime income. However, fees are often high, and if the insurance company closes its doors, those lifetime income payments may vanish. Under the new law, employers also have what’s called a “safe harbor” from being sued in the event that annuity providers go out of business or stop making payments to annuity purchasers. Being freed from liability may make employers more likely to offer annuities, but that may put 401(k) investors at more risk, say consumer advocates.

529 Plans and Saving for Children. The new law expands 529 accounts to cover many more types of education, such as registered apprenticeships, homeschooling, private elementary, secondary or religious schools. Up to $10,000 can be used for qualified student loan repayments, including for siblings.

Reference: Advisor News (December 23, 2019) “SECURE Act, Signed by Trump, A Game-Changer For Retirement Plans”

Family Gatherings Often Reveal Changes in Aging Family Members

A look in the refrigerator finds expired foods and elderly family members are asking the same questions repeatedly. The same person who would never let you walk into the house with your shoes on now is living in a mess. The children agree Mom or Dad can’t live on their own anymore. It’s time to look into other options.

One of the biggest questions, according to the Cherokee Tribune & Ledger-News’ article is “How to pay for long-term care.”

The cost can depend significantly on the types of facilities being considered. There are many different options but the distinctions between them are often misunderstood. Assisted living facilities provide lodging, meals, assistance with eating, bathing, toileting, dressing, medication management, and transportation. However, a skilled nursing facility adds more comprehensive health care services. There’s also the personal care home, which provides assisted-living type accommodations, but on a smaller scale.

The question of how to pay for the residential care of an elderly family member weighs heavily on the family. That elderly person is often the one who did the caregiving for so many years, and the reversal of roles can be emotionally difficult.

There are a few different ways people pay for care for an elderly family member.

Long-term care insurance, or LTC insurance. Few elderly people have the insurance to cover their residential facility stay, but some do. Ask if such a policy exists, or go through the piles of paperwork to see if there is one. It will be worth the search.

Veteran’s benefits. If your loved one or their spouse served during certain times of war, is over 65 or is disabled and received an honorable discharge, he or she may be entitled to certain programs that pay for care through the Department of Veterans Affairs.

Private pay. If your loved one has financial accounts or other assets, they may need to pay the cost of their residential facility from these assets. If they don’t have assets, the family may wish to contribute to their care.

Apply for Medicaid/Medi-Cal. An elder law attorney in their state of residence will be able to help the individual and their family navigate the application, explore if there are any options to preserving assets like the family home, and help with the necessary legal strategy and documents that need to be prepared.

Meet with an elder law estate planning attorney to learn what the steps are to help your elderly loved one enjoy their quality of life, as they move into this next phase of their life.

Reference: Cherokee Tribune & Ledger-News (November 30, 2019) “How to pay for longterm care.”

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