Wednesday, March 03, 2010 More Seniors Eligible for Big Medicare Drug Subsidy
A million low-income seniors have become eligible for a big assist on prescription drug expenses this year under a newly expanded federal program. The subsidy can defray thousands of dollars in costs, and in many cases eliminate prescription drug expenses entirely for participating seniors.
The Extra Help program which is administered by the Social Security Administration subsidizes Medicare Part D prescription drug premiums for eligible seniors. While the program isn't new, eligibility rules have been changed this year in a way that expands its availability dramatically.
The government estimates the average annual benefit to Extra Help participants at $3,900. That should be welcome news for low-income seniors coping with soaring Part D premiums. Average monthly premiums jumped 11 percent for 2010, and they've risen 50 percent since 2006, according to the Kaiser Family Foundation.
Seniors are eligible for Extra Help if their income is no greater than $16,245 a year for singles, and $21,855 for married couples living together. The value of stocks, bonds and bank accounts cant exceed $12,510 for singles and $25,010 for married couples. The income definition doesn't include the value of homes or automobiles.
But there are two significant changes in eligibility rules this year. The cash value of life insurance policies is no longer counted as a resource, and assistance received from friends and relatives to pay for household expenses such as food or utilities also no longer are included. The Social Security Administration is urging anyone who didn't meet the income standards in the past to re-apply.
The assistance helps with monthly premiums, any annual deductibles, co-insurance and co-payments. The program even plugs the notorious doughnut hole the current coverage gap in Part D that starts when beneficiaries exceed $2,830 in total drug costs for the given year. At that point, the beneficiary pays 100 percent of costs up to $6,440, when so-called catastrophic coverage kicks in.
Unlike standard Part D enrollment which occurs annually between Nov. 15 and Dec. 31 seniors can apply for Extra Help anytime during the year. But you'll receive the maximum benefit if you're in a Part D plan with a monthly premium below a certain benchmark monthly premium set by Medicare for each region of the country.
"If you enroll in one of these plans, you receive no bills and don't have to pay up front and get reimbursed," says Kelly Brantley, a senior program manager for Health Assistance Partnership, a non-profit Medicare education organization.
If you're already enrolled in a Part D plan and enter the Extra Help program, you'll be informed whether your premium is entirely covered, or that you need to pay the difference between the premium and the benchmark amount. However, you also have the right to change to a different plan at any time.
Low-income seniors who aren't already enrolled in a Part D plan should apply for the Extra Help subsidy, and simultaneously enroll in a drug plan. "If you are eligible, the benefit is retroactive to the first day of the month when you apply," Brantley explains.
If you're switching plans or enrolling in Part D for the first time, use the Medicare websites plan finder to select a plan that maximizes your Extra Help benefit. You'll input data about your specific prescriptions and some other personal data; the tool will take into account the expected subsidy when it presents Part D plan options to you. You'll be looking for the plan with the fewest restrictions on your specific prescriptions, and one that works with a pharmacy you want to use. To learn more about shopping for plans, visit our page on how to shop for Medicare plans.
You can also get free counseling and assistance in selecting a plan from your local State Health Insurance Assistance Program (SHIP), a government-sponsored counseling service for Medicare beneficiaries. To find the SHIP near you, visit http://www.hapnetwork.org/ship-locator/.
To apply for Extra Help, visit this page Social Security Administration website, call Social Security at 1-800-772-1213 or visit your local Social Security office. Tuesday, February 02, 2010 To Roth or Not to RothNow that 2010 has arrived, people whose incomes were previously too high to permit them to rollover a traditional IRA to a Roth IRA are calling their investment houses about making conversions. That's because for the first time, even if your annual income exceeds $100,000, you can convert a traditional IRA -- or a SEP IRA, Simple IRA or 401(k) or 403(b) plan held with a former employer -- to a Roth IRA.
What's all the excitement about? To review, a Roth and a traditional IRA are effectively the opposite of one another. You get a tax deduction by contributing to a traditional IRA, but the money you take out is taxed at ordinary income tax rates. While there is no immediate tax benefit for contributing to a Roth, you don't have to pay tax on the money when you withdraw the funds in retirement. Also, while the original owner of a traditional IRA is required to start distributions after age 701/2, the original owner of a Roth IRA account is not required to take minimum distributions. One major downside to converting from a traditional IRA to a Roth is that you have to pay income tax on the amount you convert.
Many investment firms are pushing these conversions because they represent new sources of funds to manage. But should you make the conversion? Financial articles on the pros and cons of Roth IRA conversions have proliferated like bankers' bonuses in the past few weeks. Below is a roundup of a few that look particularly helpful. The general advice is: don't rush in before you understand all the variables.
Friday, November 20, 2009 All-Pro DadIf you know me, you know I love my kids and my family life. Playing catch in the back yard with Ryan, reading a book with Conor, pushing Kathryn on the swing -- little things, but what could be better?
One thing I look forward to is my daily email from www.AllProDad.com. It's thought-provoking and helps keep me focused on good parenting.
Like the email I received today, called, "10 Ways to Make Time for Your Children." You can read it here. Hope you enjoy.
Kurt Monday, November 16, 2009 Understanding the Differences Between a Will and a TrustEveryone has heard the terms "will" and "trust," but not everyone knows the differences between the two. Both are useful estate planning devices that serve different purposes, and both can work together to create a complete estate plan.
One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property before death, at death or afterwards. A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a "trustee," holds legal title to property for another person, called a "beneficiary." A trust usually has two types of beneficiaries one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies.
A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust. A trust, on the other hand, covers only property that has been transferred to the trust. In order for property to be included in a trust, it must be put in the name of the trust.
Another difference between a will and a trust is that a will passes through probate. That means a court oversees the administration of the will and ensures the will is valid and the property gets distributed the way the deceased wanted. A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.
Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or to provide savings on taxes.
Ask Fort Lauderdale estate planning attorney Kurt Zimmerman to tell you how best to use a will and a trust in your estate plan. Reach Kurt here:
Kurt D. Zimmerman
Zimmerman & Associates
2400 E. Commercial Blvd., Suite 820
Fort Lauderdale, FL 33308
Tel 954-202-7440
kurt@zimmermanlaw.com
www.Zimmermanlaw.com Thursday, November 12, 2009 Our November Newsletter for Professional Advisors: Charitable Lead TrustsPosted on Veterans Day, November 11, 2009:
I just returned from the 8th Annual Joint Tax & Estate Planning Seminar at Nova Southeastern University. The organizers did a super job, and it was nice seeing friends and acquaintances from throughout the South Florida estate planning community.
And on this Veterans Day, I was especially gratified at the way the seminar opened . . . with words of thanks and a hearty round of applause for all the men and women who have worn the military uniform in service to our country. Thank you veterans!
The presenting organizations for the seminar -- the Community Foundation of Broward, the Jewish Community Foundation of the Jewish Federation of Broward County, and United Way of Broward County -- all share a common mission of improving lives in our community through charitable giving. So it's fitting that the topic of my newsletter this month is charitable lead trusts, a valuable strategy for many clients. Hope you enjoy.
Kurt
[The remainder of this blog entry is a monthly newsletter intended only for professional advisors with knowledge of tax laws governing charitable giving techniques.]
For the right client, the right charitable lead trust (CLT) can provide significant planning opportunities for reducing generation skipping transfer (GST), estate, gift, and/or income taxes. However, the CLT is a woefully underutilized strategy today. This issue of The Wealth Counselor examines CLTs and the planning opportunities they afford, especially in today's low interest rate, depressed asset value environment.
Charitable Lead Trusts Generally
A CLT is a split-interest irrevocable trust. Under a CLT, a charitable beneficiary or beneficiaries receive their entire benefit first (the "lead" interests), and then the non-charity beneficiary or beneficiaries receive whatever is left (the "remainder" interests). A CLT can be established as an inter vivos trust or at death. The latter is a testamentary CLT or TCLT. CLTs come in two flavors - CLAT and CLUT.
The CLAT
Under a CLAT, the charitable beneficiary or beneficiaries receive an annuity (an amount determined without regard to the value of the trust assets). Assets cannot be added to a CLAT other than at its initial funding.
Planning Tip: With a CLAT, until the annuity term ends or the CLAT's assets are exhausted, the charity's payment stream is independent of how well or poorly the CLAT's investments perform. The remainder interest, on the other hand, is highly leveraged. It will be greatly impacted by the CLAT's investment performance. Thus, it is critical that the planning team include a financial advisor who will monitor the CLAT's investment performance and offer sound investment guidance to the trustee.
The CLUT
Under a CLUT, the charitable beneficiary or beneficiaries receive unitrust payments (a fixed percentage of the trust balance as of the end of the prior year). Assets can be added to a CLUT at any time.
With some CLTs, the tax affected is the estate or gift tax, and with others it is the income tax. The timing of the charitable deduction associated with the CLT is affected by whether it is a grantor trust for income tax purposes.
Why Use a CLT?
The planning intent of a CLT is to use what the client hopes will be a positive difference between the actual rate of return on the trust assets and the "7520 Rate" to achieve a tax-favored transfer of assets to non-charity beneficiaries.
Each month the IRS determines minimum interest rates that must be charged on short-term (less than 3 years), mid-term (3-to-9 year), and long-term (more than 9 year) loans between related persons to avoid the imputation of a gift to the transaction. The 7520 Rate in any month is 120% of that month's mid-term rate. When reporting a CLT to the IRS, the taxpayer may use the lowest among the 7520 Rates for the month of the CLT's creation and the two prior months.
Planning Tip: CLTs are particularly suited for hard-to-value assets (such as real estate or family limited partnership or limited liability company interests).
Planning Tip: Fund a CLT with discounted interests in a family limited partnership or limited liability company. Doing so will increase the CLT's success probability and leverage the inter-generational transfer of wealth.
The Impact of Interest Rates on CLTs
Low 7520 Rates are beneficial for taxpayers who fund CLTs because the IRS assumes that the CLT's assets will grow at exactly the applicable 7520 Rate. If the CLT assets grow at more than the applicable 7520 Rate, the client will pass additional assets to beneficiaries free of gift and estate taxes and without using any of his gift and estate tax exemption. The lower the 7520 Rate, the more likely the CLT will outperform that assumed growth rate.
Temporarily depressed asset values have the same effect on CLT success probability that a low 7520 Rate does.
Planning Tip: Combining a historically low 7520 Rate with temporarily depressed asset values creates a CLT-favored environment that is unlikely to be seen again. Now is the time to talk to your charitably-inclined clients who are worried about estate taxes.
Planning Tip: The November 2009 7520 Rate is 3.2%, unchanged from October. To put that in context, in its 10 1/2 year history, there were only 6 months in which the 7520 Rate was lower - the first 5 months of 2009 and July 2003 - and there were 15 months in which it exceeded 10%.
Testamentary Charitable Lead Trusts
Historically, the most commonly employed CLT has been the testamentary CLAT, which is referred to by its acronym, TCLAT. And of the TCLATs, the most commonly employed was the particular type known as the "zeroed out" TCLAT.
Some clients are extremely averse to the idea of paying estate taxes. The zeroed out TCLAT is popular because it assures that, no matter what, nobody will have to write a check to the IRS to pay federal estate taxes when the client dies.
The down side of the TCLAT for the beneficiaries who would otherwise get the net (under current law, 55% minus the state tax rate) of whatever assets are used to fund the TCLAT is two-fold. First there is the timing. With a TCLAT, the charity gets 100% of whatever it is going to get and the remainder beneficiaries get just that - the remainder, if there is any. Then there is the risk. Unless the TCLAT performs well, there may not be a remainder at all!
Planning Tip: To reduce the probability of your client's beneficiaries' lobbying against the TCLAT strategy, suggest putting life insurance in an ILIT to give the beneficiaries assets to tide them over until their remainder interest in the TCLAT matures.
Lifetime or Inter Vivos Charitable Lead Trusts
For charitably inclined clients with taxable estates, establishing a CLT during lifetime may be preferable to waiting until death. Establishing a lifetime CLT allows the client to enjoy the personal satisfaction of having the charitable distributions made during his lifetime, as opposed to after he is gone. Often the charitable beneficiary is one with which the client is heavily involved and so there may be a real opportunity to influence how the payments are put to use by the charity.
Planning Tip: A lifetime CLT often allows our clients to expand their charitable giving in a meaningful way, either by payments directly to their favorite charities or through their own private foundation. Lifetime CLTs are also beneficial in expediting the transfer of wealth to our clients' beneficiaries.
Inter Vivos CLATs
The typical remainder beneficiaries of a CLT are the client's children or grandchildren. Those remainder assets can pass outright to the beneficiaries, or can continue to be held in trust. Those trusts can be either new trusts or the remainder can pour over into trusts previously established for their benefit and protection.
Under the Internal Revenue Code ("Code"), if the donor to the CLAT dies during the annuity term, the assets in the CLAT on that day are included in the donor's estate for estate tax purposes.
Planning Tip: If the remainder interest of a CLAT will be held in trust, that trust should either (a) have as beneficiaries only individuals who are not in or assigned to a generation below the donor's children; or (b) be included in the taxable estates of beneficiaries who are in or assigned to a generation of or above the donor's children (e.g., by granting the beneficiaries a general power of appointment). Doing either means that there will be no GST taxable distributions from or terminations of the CLAT.
Inter Vivos CLUTs
For some clients, making sure that there will be no GST liability is more important than the magnitude of the estate or gift tax liability. For that situation, the Inter Vivos CLUT is the CLT of choice.
The CLUT may also be the CLT of choice for the client who cannot contribute all of the CLT assets at one time because the alternative is multiple CLATs.
Planning Tip: If any of the CLT beneficiaries are grandchildren or younger beneficiaries (e.g., a beneficiary that is a dynasty trust), consider the advisability of using a CLUT. With a CLUT, the client can allocate GST tax exemption at inception.
"Zeroed-Out" CLATs
Both TCLATs and inter vivos CLATs can be "zeroed out." However, what is "zeroed out" in a TCLAT, however, is not the same as what is "zeroed out" in a lifetime CLAT.
The most often-used "zeroed out" CLAT is the TCLAT. Its design "zeroes out" the liability of a decedent's estate to pay estate taxes. With a lifetime "zeroed out" CLAT, on the other hand, what is "zeroed out" is the gift attributed, for gift tax purposes, to the CLAT's remainder interest.
How a "Zeroed Out" TCLAT Works
The TCLAT is created under a taxpayer's revocable living trust (RLT) or will. Upon the taxpayer's death the TCLAT is funded with that amount of assets necessary to completely eliminate ("zero out") the decedent's estate tax liability. The annuitant will be one or more qualified charitable organizations designated in the RLT or will. The annuity payments must be made not less frequently than annually. They can be either level or increasing over time.
The annuity payments end when the TCLAT is exhausted or of all annuity payments have been paid. At that point, any remaining trust assets go to the remainder beneficiaries, who are not charities.
How a "Zeroed Out" Inter Vivos CLAT Works
The taxpayer creates and funds a CLAT. The CLAT is so designed that the present value of the stream of annuity payments to the charity or charities, computed using as a discount rate the lowest 7520 Rate that can be chosen for that CLAT, is exactly equal to the value of the assets contributed to the CLAT. In other words, they "zero out."
As with the TCLAT, the annuity payments will be to one or more qualified charitable organizations designated in the CLAT. They must be made not less frequently than annually and they can be either level or increasing over time. The annuity payments end when the CLAT has no remaining assets or the specified date for them to end is reached.
At that end point, any remaining trust assets go to the remainder beneficiaries, who are not charities. Because the anticipated value, determined using the applicable 7520 Rate, of the remainder was set at zero when the CLAT was established, there is no gift tax exemption used or gift tax paid, regardless of how large the remainder actually turns out to be.
Planning Tip: Both of the "zero out" techniques are "heads you win, tails you tie" strategies. If the CLAT is exhausted before the annuity term ends, that is a tie for the remainder beneficiaries compared with the donor making a direct gift to charity. However, if there turns out to be a remainder, that is a win for the remainder beneficiaries and the taxpayer who desires to transfer wealth to another generation did so without incurring gift tax liability.
Planning Tip: A private foundation can be a charitable beneficiary of a CLAT or a TCLAT. However, the taxpayer who funds a CLAT must have very limited authority over which charity is to receive money from the foundation that is its beneficiary because having too much control has adverse tax consequences.
Planning Tip: One of the items on the Treasury Department's "wish list" of changes it would like Congress to make to the Code is elimination of the zeroed out CLAT. Treasury would like for the Code to require that the remainder interest of a CLAT be at least 10% of the CLAT funding.
Some CLT Examples
Suppose Fred (age 65) and Wilma (age 60) transfer $5,000,000 to a 9-year zeroed-out CLAT in November 2009 when the 7520 Rate is 3.2%.
If the CLAT assets grow at exactly 3.2%, it will transfer $6,636,997 to charity and $0 to the non-charity beneficiaries (e.g., Pebbles and Bam-Bam). However, if the CLAT assets grow at 10%, it will transfer $2,990,237 to the non-charity beneficiaries in addition to the $6,636,997 to charity. Note that if the assets transferred to charity continue to grow at 10% the total amount transferred to charity will equal $8,799,501.
Suppose instead that Fred and Wilma transfer $5,000,000 of an entity interest that is discounted 30% from the value of the underlying assets (e.g., an interest in a Family Limited Partnership). If the CLAT has sufficient cash flow to make all annuity payments in cash, the CLAT will transfer $5,374,802 in underlying asset value to the beneficiaries in addition to the $6,636,997 in cash to the charity. Of the asset value of the remainder received by the beneficiaries, the entity discount accounts for $2,384,565 and the remaining $2,990,237 is due to the earnings spread between the 3.2% 7520 Rate and 10% return, as in the last example.
Planning Tip: As the above example demonstrates, funding a CLT with discounted assets significantly increases the tax-free transfer of wealth to beneficiaries. A similar asset-transfer result would obtain in both examples had the client chosen to use a CLUT because the non-charity beneficiaries were their grandchildren. However, the tax avoided would have been GST tax and gift tax.
"Back Loaded" CLATs
Recently issued IRS sample CLAT forms confirm that with CLATs we can increase the annual payout to charity during the term of the annuity. "Back loaded" Grantor Retained Annuity Trusts (GRATs) have been in use for some time based on earlier-published IRS sample documents. The advantage of a back loaded CLAT is it allows the trust assets to accumulate more rapidly during the term as a consequence of the lower initial charity distribution requirements.
Planning Tip: Back-loading can provide tremendous wealth transfer, particularly for longer-term CLATs (e.g., longer than 10 years).
Planning Tip: CLTs are not for klutzes. CLTs are all about numbers. Mathematical errors in evaluating them can lead to disastrous results and extremely unhappy clients. The mathematically gifted team member (typically the CPA) should be the one who "runs the numbers" to provide the team and the client apples-to-apples comparisons of planning options; e.g., with and without the CLT, CLAT versus CLUT, and back loaded versus level annuity payment using various assumptions about real asset value growth and cash flow availability. There are commercially available packages to do these calculations, too.
Income Tax Planning with CLTs
Unlike Charitable Remainder Trusts, CLTs are not tax-exempt trusts. Therefore, some taxpayer has the income tax liability resulting from the CLT's taxable income.
The timing of the deduction for the charitable contributions depends on whether the CLT is a grantor trust for income tax purposes. If a CLAT is a non-grantor trust, the client gets no up-front charitable income tax deduction. Instead, the taxpayer (the trust) gets to take a deduction each year equal to the payment actually made to the charity by the CLT in that year.
Alternatively, by establishing the CLT as a grantor trust for income tax purposes, the client can take an upfront charitable income tax deduction for the present value (determined using the applicable 7520 Rate) of the annuity stream planned to be paid to the charity beneficiary or beneficiaries. However, the downside of making the CLT a grantor trust is that the client must report the CLTs annual trust income on his or her personal income tax return without a deduction for the annual annuity payment to charity. The client, having taken the charitable income tax deduction up front, is not permitted a "second bite at the apple." Thus back-loading a grantor CLAT has no income tax impact on the donor.
Planning Tip: For those clients with a large spike in income, establishing a grantor CLAT in the same year will generate an immediate charitable income tax deduction that can offset the spike in income. Taking the deduction in the first year and reporting as the taxpayer's own the CLT's income each year during the CLT's term thus has the effect of spreading the taxpayer's spike in income earned in the first year over the term of the CLT.
Planning Tip: If the grantor CLT invests in assets that produce capital gains or pay dividends, an ordinary income spike can not only be spread out over a period of years to take advantage of tax brackets, it can also be converted from ordinary income to income taxed at lower fixed rates.
Planning Tip: With a grantor CLT, it is incumbent upon the financial planning team member to manage the trust assets so as to minimize taxable trust income, thereby reducing the client's total income tax liability.
Some Planning Strategies to Consider
CLTs offer a number of strategic options for the charitably inclined client. Here are just a few strategies to consider:
- Have the grantor of the CLT buy insurance on his life (including in an ILIT) to reduce or eliminate the estate tax liability for the trust's assets.
- Have the CLT hold improved real estate because real estate offsets taxable income with non-cash depreciation.
- Have the CLT hold indebted real estate because of the leverage and interest deductions.
- Have the CLT hold assets that produce capital gain or dividend income, especially if the CLT is not a grantor trust and thus income is taxed in compressed brackets.
Conclusion
CLTs are sometimes marketed as a planning panacea. They are not. Their being touted as such merely exposes the ignorance of the presenter. As the saying goes, "To a hammer, everything looks like a nail." There are no panaceas, just options.
While not right for all clients, CLTs can provide significant estate, gift, GST, and even income tax benefits for clients who are charitably inclined. However, CLTs are complex advanced planning tools. Their success depends on the entire planning team working together. It takes a cooperative effort to make sure that when selecting a CLT, it is the right strategy for that client. It takes a continued team effort to keep the client focused to maximize the probability that the CLT assets will outperform the assumed growth at the 7520 Rate, thereby maximizing the tax-free wealth transfer to the client's non-charity beneficiaries. With a CLT, you definitely can't "set it and forget it."
Sunday, November 08, 2009 Getting Cash From a Life Insurance Policy If You Are Terminally IllA diagnosis of a terminal illness often comes with many expenses. If you need money to pay for your medical care or comfort, you may be able to use your life insurance policy to get some immediate cash. "Viatical settlements" allow terminally ill individuals to sell their life insurance policies. Alternatively, some insurance companies allow you to receive an accelerated death benefit.
A viatical settlement is similar to a life settlement, but it is designed for individuals that are terminally ill. You sell your policy to a company, which then collects the death benefit when you die. Most companies require that you have owned your policy for at least two years, your beneficiaries sign a release or waiver, you have a life expectancy of anywhere from two to four years (depending on the company), and you allow the company access to your medical records.
A company will usually pay more than the cash surrender value, but less than the death benefit, although the exact price depends on a number of factors. In determining price, companies look at your life expectancy, how long you have had the policy, and the face value of the policy, among other things.
Rather than selling your policy, some insurance companies allow you to collect a portion of your death benefit before you die. This is called an accelerated death benefit. This option may be included as part of your policy or you may have to pay extra for it.
Accelerated death benefits are paid under certain circumstances, usually the onset of a terminal illness, the need for long-term care, or the diagnosis of a specified medical condition. The amount you can receive may be capped and you may be able to receive either a lump sum or monthly payments. Any remaining amount will go to your beneficiaries when you die.
Both viatical settlements and accelerated death benefits could have tax consequences and affect Medicaid planning.
Before taking either option, please contact me and we'll discuss your best course of action. Kurt Zimmerman, 954-202-7440, kurt@zimmermanlaw.com. Tuesday, November 03, 2009 What To Do When a Loved One Passes AwayWhether your spouse has just passed away or you've lost your mom or dad, the emotional trauma of losing a loved one often comes with a bewildering array of financial and legal issues demanding attention.
"It's difficult enough for family members to handle the emotional trauma of a death, let alone taking the steps necessary to get these matters in order," says Kurt Zimmerman, a leading estate planning attorney and partner at the law firm of Zimmerman & Associates in Fort Lauderdale, Florida.
As the executor or representative of the will, you first should secure the tangible personal property, meaning anything you can touch such as silverware, dishes, furniture or artwork, he points out.
"Then, take your time; while bills need to be paid, they can wait a week or two without any real repercussions. It's more important that you and your family have time to grieve. Financial matters can wait," says Zimmerman.
When you are ready, but not a day sooner, Zimmerman advises meeting with an attorney to review the steps necessary to administer the will. While the exact rules of estate planning differ from stateto state, the key actions include:
- File the will and petition in probate court in order to be appointed executor.
- Collect the assets. This means that you need to find out about everything the deceased owned and file a list or inventory with the court.
- Pay the bills and taxes. If an estate tax return is due, it must be filed within nine months of the date of death.
- Distribute property to the heirs. Generally, executors do not pay out all of the estate assets until the period for creditors to make claims runs out, which can be as long as a year.
- Finally, you must file an account with the court listing any income to the estate since the date of death and all expenses and estate distributions.
"While some of these steps can be avoided through trusts or joint ownership arrangements, whoever is left in charge still has to pay all debts, file tax returns and distribute the property to the rightful heirs." says Zimmerman.
For more details on steps surviving family members should take, contact Kurt Zimmerman at 954-202-7440 or kurt@zimmermanlaw.com, www.zimmermanlaw.com. Friday, October 30, 2009 Gifts to Grandchildren - You Have Many OptionsGifts to Grandchildren
Gifting assets to your grandchildren can do more than help your descendants get a good start in life; it can also reduce the size of your estate and the tax that will be due upon your death.
Perhaps the simplest approach to gifting is to give the grandchild an outright gift. You may give each grandchild up to $13,000 a year (in 2009) without having to report the gifts. If you're married, both you and your spouse can make such gifts. For example, a married couple with four grandchildren may give away up to $104,000 a year with no gift tax implications. In addition, the gifts will not count as taxable income to your grandchildren (although the earnings on the gifts if they are invested will be taxed).
But you may have some misgivings about making outright gifts to your grandchildren. There is no guarantee that the money will be used in the way you may have wished. Money that you hoped would be saved for educational expenses may instead be spent on a shiny new sports car or other things you perceive as "misuse." Fortunately, there are a number of options to protect against misuse of the funds by grandchildren.
Direct Payment for School or Health Costs
You can pay for educational and medical costs for your grandchildren. There's no limit on these gifts, meaning that you can pay these expenses in addition to making annual $13,000 (in 2009) gifts. But you have to be sure to pay the school or medical provider directly.
Custodial Accounts Under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA)
Both of these Acts allow you to make gifts to a custodial account that parents can establish for a minor child. Since the account is in the name of the child, the tax liability is often shifted to the child, who presumably is in a lower tax bracket than you or the grandchild's parents. Gifts to such accounts are irrevocable, but you retain control of the money and decide how it will be invested.
UGMA and UTMA differ in the type of property they permit a person to transfer: States usually restrict UGMA investments to life insurance, cash and certificates of deposit, while UTMA allows a wider variety of investments, including mutual funds, stocks, bonds, real estate -- even artwork.
Either type of account should be managed by someone other than the parent; otherwise, the parent will be responsible for taxes on the account income. For children over age 14, all income is taxed at the child's rate. For children under 14, income below $800 is not taxed, income from $800 through $1,600 is taxed at the child's rate, and income over $1,600 is taxed at the grandparent's rate.
The major downside of these accounts is that custodians must turn the money over to the child when he or she reaches the age of majority (18 or 21, depending on the state). The child may then do as he or she wishes with the money -- and it may not be what you would prefer. In addition, as with custodial accounts, the child's sudden ownership of the account funds could jeopardize his or her eligibility for financial aid for college.
Gift Trusts
The above options have some serious drawbacks. Either there are no tax or estate planning advantages, or you have no control of the funds (or lose control after a certain point), or the money could affect a grandchild's eligibility for financial aid. An option that overcomes many of these problems involves transferring money into a trust established to benefit a grandchild. With the help of an attorney, you can draft a trust that reflects your express wishes about when the income and principal will be available to the grandchild, and even how the funds will be spent.
Transferring funds into such a trust offers the following benefits:
(1) You can reduce the size of your estate by transferring up to $13,000 (in 2009) into each trust you create for each grandchild. No gift taxes will be due in connection with the transfers;
(2) Although the trust owns the assets, you control them as trustee and can decide what type of investments to make;
(3) Income earned by the trust from amounts that you've deposited will not be taxed to you; the trust pays the taxes;
(4) Amounts deposited in trust, and the income earned from those funds, will be used for the benefit of your grandchildren; and
(5) You can provide that the trust terminate at any age you specify.
In order to qualify for these benefits, however, certain restrictions apply. These trusts are complex legal documents and should not be set up without the help of an experienced attorney. As a result, the chief downside of such trusts is the cost of establishing and maintaining them, which you should discuss with an attorney before going ahead with a trust.
As a final note on establishing such trusts, you must be totally comfortable with this gift planning strategy and the amount of money available to you in your estate. In short, you should only make gifts if you feel certain that the amount of funds remaining in your name and the amount of income they will produce will be adequate for your needs.
529 Accounts
This new type of account, named for Section 529 of the Internal Revenue Code, enables you to reduce your taxable estate while earmarking funds for the higher education of a grandchild (or any other family member). Funds contributed to such accounts are invested to pay for a grandchild's college tuition, room and board, or other expenses. The account funds are usually invested in mutual funds, and under the tax law passed in 2001 the earnings from these accounts are tax-free beginning in 2002 (previously they were taxable to the beneficiary when used to pay for college). (Prepaid 529 plans are an alternative to traditional investment 529 accounts; for more on these, click here.)
You can contribute up to $13,000 (in 2009) per year ($26,000 for a couple) to 529 accounts without incurring a gift tax. Or, if you prefer, you can contribute up to $65,000 ($130,000 for a married couple) in the first year of a five-year period, as long as there are no additional gifts to that same beneficiary over the five years. In other words, 529 accounts can be a quick way of getting a sizable amount of money out of your taxable estate (although if you die within the five-year period, the portion of the contribution allocated to the years following your death would be included in your estate). An added benefit is that donors to these accounts can take the money back later if needed, although they pay a penalty of 10 percent of earnings. (However, this power to control the assets means that the savings in a 529 account will be counted as an available asset under Medicaid rules in the event the account holder requires long-term care. For more on this issue, click here.)
If the grandchild uses the funds for any purpose other than higher education, the earnings are taxed as ordinary income to the account owner (you) and a 10 percent penalty is assessed on investment gains. Since you are the account owner, such accounts generally do not affect a child's eligibility for financial aid. This change may increase a student's chances for financial aid since qualified withdrawals will no longer be considered income to the student. Moreover, you can change beneficiaries at any time, as long as the new beneficiary is a member of the original beneficiary's family. (The tax law enacted in 2001 expanded the list of family members to include the first cousin of the original beneficiary.) Most states now permit or are planning to permit 529 account plans, and many investment firms now offer them as tax- and estate-planning vehicles for their clients.
The Web site www.savingforcollege.com can help you compare the many state plans. In addition, Wisconsin elder law attorney Timothy P. Crawford has prepared excellent materials on 529 accounts that can be found in ElderLawAnswers' State Content area under Wisconsin. In addition, click here for a good guide of things to look out for when choosing a 529 plan.
Other Gift Vehicles
IRAs: You can make contributions to your grandchildren's regular, Roth or Educational IRAs. Roth and Educational IRAs are explained in the Retirement Planning section.
Roth IRAs can be a particularly good way to help a grandchild build a nest egg. The amounts contributed to such accounts aren't tax deductible, but the earnings accumulated can be withdrawn at age 59 completely tax-free (as long as certain conditions are met). This tax-free compounding can quickly add up: If a 15-year-old contributes $2,000 to a Roth today, the investment will be worth $146,000 when the child turns 60 (assuming a 10 percent annual return). Also, starting five years after the account has been set up, first-time homebuyers can withdraw up to $10,000 tax-free. And if Roth IRAs are used to pay college tuition, the earnings are taxed at the child's rate and early withdrawal penalties do not apply.
Savings Bonds: Don't overlook U.S. Savings Bonds, the most widely held type of security in the world. Bonds increase in value monthly and interest is compounded semiannually. Moreover, interest is free from state and local taxes, and federal income tax is deferred until you redeem the bonds. Provided you meet certain eligibility requirements, you can reap special tax benefits if bonds are redeemed to pay for college expenses.
Series EE and the new Series I Bonds make great gifts for grandchildren. Series EE Bonds sell for half their face value. The bond denominations range from $50 to $10,000. If not redeemed when they mature, the bonds will continue to earn interest for up to 30 years. Series I (or Inflation-Indexed) Savings Bonds come in denominations ranging from $50 to $10,000 and are issued at face value. The earnings rate, adjusted semiannually, is a combination of a fixed interest rate at the time of purchase and the rate of inflation. These bonds have a 30-year life. Current rates for both the EE and I Bond are available by calling 1-800-4USBond. Additional information on U.S. Savings Bonds can be found at the Web site www.savingsbonds.gov Savings bonds can now be ordered directly online with a credit card!
Still more options: If you have a taxable estate, other options may also exist, such as life insurance trusts and family limited partnerships.
Check with Kurt Zimmerman, 954-202-7440, kurt@zimmermanlaw.com, for more information about these powerful planning options. Friday, October 23, 2009 Protecting Your Home Against "Estate Recovery" After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient's care. This is called "estate recovery."
Life Estates
For many people, setting up a "life estate" is the most simple and appropriate alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period of up to five years.
Example:
Jane gives a remainder interest in her house to her children, George and Mary, while retaining a life interest for herself. She carries this out through a simple deed. Thereafter, Jane, the life estate holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of George and Mary, the remainder interest holders.
When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, George and Mary. Although the property will not be included in Jane's probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state's estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when George and Mary sell the property because they will receive a "step up" in the property's basis.
Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest, as Jane did in this example. In many states, once the house passes to George and Mary, the state cannot recover against it for any Medicaid expenses Jane may have incurred.
Trusts
Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Trusts provide more flexibility than life estates but are somewhat more complicated. Once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. Further, if properly drafted, the later sale of the home while in this trust might allow the settlor, if he or she had met the residency requirements, to exclude up to $250,000 in taxable gain, an exclusion that would not be available if the owner had transferred the home outside of trust to a non-resident child or other third party before sale.
Please contact Kurt Zimmerman at 954-202-7440 or kurt@zimmermanlaw.com to discuss the best planning alternatives for you.
Saturday, October 17, 2009 Wait, That Special Gift from Grandma Could End Up Costing You Thousands: How a "Sole Benefit Trust" Can Either Hurt or Help a Person With Special Needs When helping older clients quickly qualify for Medicaid coverage of long-term care, elder law attorneys often ask right at the outset, "Do you have a relative with special needs?" The reason this question is so important is because under federal Medicaid law, someone applying for Medicaid long-term care (nursing home) benefits can transfer her assets into a trust for the "sole benefit" of a person with disabilities, and that transfer will not disqualify the Medicaid applicant from receiving benefits. In other words, a senior who is willing to give away her assets to a person with special needs, and who meets all the other Medicaid eligibility requirements, can almost always qualify for Medicaid quickly.
This sounds like a great deal for both the Medicaid applicant and the person with special needs. But as with most things that sound too good to be true, funding a so-called "Sole Benefit Trust" comes with a big catch in some states -- for the person with special needs.
In order for a trust to qualify as a Sole Benefit Trust, and thereby enable the senior to qualify for Medicaid when she transfers her assets into it, the trust must provide a benefit only to the person with special needs. This means that unlike typical special needs trusts, a Sole Benefit Trust cannot have a remainder beneficiary who receives the trust assets once the person with special needs passes away. Instead, at least in some states, the Sole Benefit Trust must pay out all of its assets to the person with special needs over his actuarial life expectancy. So, for example, if the Sole Benefit Trust is funded with $500,000, and the actuarial life expectancy of the trust beneficiary at the time the trust is funded is 25 years, the trust will state that the trustee must pay the beneficiary at least $20,000 a year.
Unfortunately, if a person with special needs who is receiving Supplemental Security Income (SSI) or Medicaid becomes the beneficiary of a Sole Benefit Trust in states that require actuarially sound distributions, there is a very strong likelihood that he will lose his benefits. This is because SSI and Medicaid are "means-based" programs that have very strict income and asset limits and they may count Sole Benefit Trusts as available assets. So even though the senior who transferred her assets into the Sole Benefit Trust may be able to receive her Medicaid benefits, she may have unknowingly disqualified her relative with special needs from receiving his own important government benefits.
Still, there is some good news for people who would like to set up a Sole Benefit Trust for a person with special needs. Social Security Disability Insurance (SSDI), the other main federal benefit program for people with special needs, does not have income and asset restrictions. If a person with special needs is receiving SSDI and is never going to qualify for SSI or Medicaid because his SSDI payments are too high, he can probably be the beneficiary of a Sole Benefit Trust since he is not worried about having extra income or assets. In these cases, everyone wins -- the senior can qualify for long-term care, and the person with special needs receives additional income.
Sole Benefit Trusts are often marketed to seniors as a quick-fix Medicaid spend-down tool, and they do accomplish that goal. But uninformed planning could seriously harm the person with special needs at the other end of the trust.
Before creating any trust for the benefit of a person with special needs, or a family member of a person with special needs, contact special needs attorneys Kurt Zimmerman or Sarah Spangler at 954-202-7440, www.ZimmermanLaw.com, kurt@zimmermanlaw.com.
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