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Saturday, February 28, 2015

Changing Uses for Bypass Trusts

Changing Uses for Bypass Trusts

Every year, each individual who dies in the U.S. can leave a certain amount of money to his or her heirs before facing any federal estate taxes. For example, in 2013, a person who died could leave $5.25 million to his or her heirs (or a charity) estate tax free, and everything over that amount would be taxable by the federal government. Transfers at death to a spouse are not taxable.

Therefore, if a husband died owning $8 million in assets in 2013 and passed everything to his wife, that transfer was not taxable because transfers to spouses at death are not taxable. However, if the wife died later that year owning that $8 million in assets, everything over $5.25 million (her exemption amount) would be taxable by the federal government. Couples would effectively have the use of only one exemption amount unless they did some special planning, or left a chunk of their property to someone other than their spouse.

Estate tax law provided a tool called “bypass trusts” that would allow a spouse to leave an inheritance to the surviving spouse in a special trust. That trust would be taxable and would use up the exemption amount of the first spouse to die. However, the remaining spouse would be able to use the property in that bypass trust to live on, and would also have the use of his or her exemption amount when he or she passed. This planning technique effectively allowed couples to combine their exemption amounts.

For the year 2013, each person who dies can pass $5.25 million free from federal estate taxes.  This exemption amount is adjusted for inflation every year.  In addition, spouses can combine their exemption amounts without requiring a bypass trust (making the exemptions “portable” between spouses). This change in the law appears to make bypass trusts useless, at least until Congress decides to remove the portability provision from the estate tax law.

However, bypass trusts can still be valuable in many situations, such as:

(1)  Remarriage or blended families. You may be concerned that your spouse will remarry and cut the children out of the will after you are gone. Or, you may have a blended family and you may fear that your spouse will disinherit your children in favor of his or her children after you pass. A bypass trust would allow the surviving spouse to have access to the money to live on during life, while providing that everything goes to the children at the surviving spouse’s death.

(2)  State estate taxes. Currently, 13 states and the District of Columbia have state estate taxes. If you live in one of those states, a bypass trust may be necessary to combine a couple’s exemptions from state estate tax.

(3)  Changes in the estate tax law. Estate tax laws have been in flux over the past several years. What if you did an estate plan assuming that bypass trusts were unnecessary, Congress removed the portability provision, and you neglected to update your estate plan? You could be paying thousands or even millions of dollars in taxes that you could have saved by using a bypass trust.

(4)  Protecting assets from creditors. If you leave a large inheritance outright to your spouse and children, and a creditor appears on the scene, the creditor may be able to seize all the money. Although many people think that will not happen to their family, divorces, bankruptcies, personal injury lawsuits, and hard economic times can unexpectedly result in a large monetary judgment against a family member.

Although it may appear that bypass trusts have lost their usefulness, there are still many situations in which they can be invaluable tools to help families avoid estate taxes.

Sunday, February 15, 2015

Bankruptcy and the Elderly - A Growing Demographic

Senior Citizens Comprise Growing Demographic of Bankruptcy Filers

It’s called your “golden years” but for many seniors and baby boomers, there is no gold and retirement savings are too often insufficient to maintain even basic living standards of retirees. In fact, a recent study by the University of Michigan found that baby boomers are the fastest growing age group filing for bankruptcy. And even for those who have not yet filed for bankruptcy, a lack of retirement savings greatly troubles many who face their final years with fear and uncertainty.

Another study, conducted by Financial Engines revealed that nearly half of all baby boomers fear they will be in the poor house after retirement. Adding insult to injury, this anxiety also discourages many from taking the necessary steps to establish and implement a clear, workable financial plan. So instead, they find themselves with mounting credit card debt, and a shortfall when it comes time to pay the bills.

In fact, one in every four baby boomers have depleted their savings during the recession and nearly half face the prospect of running out of money after they retire. With the depletion of their savings, many seniors are resorting to the use of credit cards to maintain their standard of living.  This is further exacerbated by skyrocketing medical costs, and the desire to lend a helping hand to adult children, many of whom are also under financial distress.  These circumstances have led to a dramatic increase in the number of senior citizens finding themselves in financial trouble and turning to the bankruptcy courts for relief.

In 2010, seven percent of all bankruptcy filers were over the age of 65. That’s up from just two percent a decade ago. For the 55-and-up age bracket, that number balloons to 22 percent of all bankruptcy filings nationwide.

Whether filing for bankruptcy relief under a Chapter 7 liquidation, or a Chapter 13 reorganization, senior citizens face their own hurdles. Unlike many younger filers, senior citizens tend to have more equity in their homes, and less opportunity to increase their incomes. The lack of well-paying job prospects severely limits older Americans’ ability to re-establish themselves financially following a bankruptcy, especially since their income sources are typically fixed while their expenses continue to increase.

Thursday, October 30, 2014

Medicare and Skilled Nursing Care - When Will Medicare Pay?

Skilled nursing facilities (SNF), commonly called nursing homes or rehab centers, provide temporary and long-term care for those who need medical care while recuperating, or for those who need assistance with daily living on a permanent basis.

Read more . . .

Tuesday, May 13, 2014

When Can You Destroy Financial Records?

The IRS has three years from your tax return filing date to audit your return, if it suspects good faith errors. (For example, your 2013 taxes were due by April 15, 2014.  The IRS has until April 15, 2017 to audit your return for good faith errors).  

However, the IRS has six years to challenge your return if they think you have under-reported your gross income by 25% or more.  

There is no time limit if you fail to file your return, or if you have filed a fraudulent return.  You should keep your filed tax returns for at least six years.

If you have made a nondeductible contribution to an IRA or a Roth IRA, you should keep your financial records indefinitely in order to prove that you already paid tax on this money when the time comes to withdraw.  You should keep annual summaries from your retirement accounts until you retire, or until you close the account.

Bank records should be kept for at least a year, and perhaps permanently--especially if there are payments made related to your taxes, your business expenses, home improvement costs, and mortgage payments.  You should go through your bank records once a year, and shred those items that have no long-term importance.  

In terms of bills and credit card receipts, you should permanently keep receipts for large purchases, such as jewelry, appliances, antiques, etc.  There will be important if you have a future insurance claim for loss or damages.  Keep business- and tax-related expense records for at least 7 years.

Keep all records documenting the purchase price and sales price of any owned real estate.  Be sure to keep records documenting permanent improvements, such as remodeling, additions, and installations.

Paycheck stubs - one year.  Once you receive your annual W-2 from your employer, make sure the information on your pay stubs matches with the W-2.  If it does, shred the stubs.  

Consider scanning your financial records to an electronic copy (PDF) and/or storing that information "in the cloud."  There are many providers of cloud storage, including Legal Vault, which I make available to my clients at the Law Office of Joan Medeiros.

Friday, April 11, 2014

Changing Beneficiaries in a Revocable Trust After Death

Q:  My mother's Revocable Trust states that her estate must be divided between her four adult children.  She has now died, and each should receive about $150,000.  The problem is one of my brothers is now disabled and is receiving SSI and Medi-Cal.  If he receives this inheritance, it will disqualify him from his benefits and disrupt his life.  Is there a way he can refuse the inheritance?

A: The answer is maybe.  One way to accomplish this is by the use of a "disclaimer."  A disclaimer is a renunciation of one's right to an inheritance.  In order for a disclaimer to be effective, it must pass to the next person in line, without any direction on the part of the original beneficiary.  The estate would be divided as if your brother had died before your mother.  

Example:  If your mother's Trust had directed that if your brother died before she did, that his share would go to his children, then your brother could disclaim his inheritance and let it pass to his children.  He could not disclaim in favor of the other brothers and sisters.

Another possible solution is to petition the Probate Court to allow the creation of a Special Needs Trust for the benefit of your disabled brother.  Medi-Cal laws permits gifting of assets and still maintain Medi-Cal eligibility. Both these strategies requires the assitance of an experienced estate planning attorney.  

Monday, September 16, 2013

What to Do With Inherited IRAs

What to Do With Inherited IRAs

IRAs are usually among the largest assets inherited.  These retirement accounts have been able to grow to such very large amounts because income taxes on the growth in the account are deferred until the owner begins to take distributions.  (You may take distributions as early as age 59 1/2, but must take them at age 70 1/2).

Cash-Out Option:  Anyone who inherits an IRA can cash it out and withdraw the full amount.  But because income taxes must be paid on the full amount withdrawn, this is not usually the best choice.

Spouse IRAs:  A surviving spouse who inherits an IRA from his/her deceased spouse can roll that IRA into a new IRA or merge it with an existing IRA.  In either case, the account can continue to grow tax-deferred, and the surviving spouse can continue to make contributions to the IRA, until s/he must start take distributions at age 70 1/2.

If the IRA is rolled into a new IRA, the surviving spouse will be asked to name new beneficiaries.  It is highly advantageous to name someone much younger (e.g., children and/or grandchildren) because future distributions to the beneficiaries will be based on their actual life expectancies.  This allows the IRA to potentially stretch out for decades.  In some cases, it may be advisable to make your Revocable Living Trust the beneficiary of your IRA.

Non-Spouse Options:  If the original owner of the IRA died before taking distributions, a non-spouse beneficiary can establish a Beneficiary IRA and start taking distributions based on his/her own life expectancy, with the option to take a lump sum at any time.  (Ask your financial adviser to describe the difference between the "life expectancy option," and the "five year rule").

If the original owner died after beginning to receive distributions, a non-spouse beneficiary must take a distribution equal to the owner's required minimum distribution for the year he/she died if one had not yet been taken.  In future years, distributions can be based on either the new owner's life expectancy, or the original owner's remaining life expectancy, whichever is longer.

The original owner's name must be listed on the title, but the inheriting beneficiary will name new beneficiary(ies).  A non-spouse beneficiary cannot roll an inherited IRA into his/her own IRA or make contributions to an inherited IRA.  But when distributions are stretched out over a longer period of time, the tax payments are also stretched out.  And by keeping more money in the IRA for as long as possible, the tax-deferred growth can be maximized...which will result in a much larger balance.

Friday, September 13, 2013

How to Keep Your Wealth from Turning Your Children Into...Brats

Congratulations are in order—you have accumulated enough wealth to be concerned about eventually passing it along to your children and grandchildren in a manner that will encourage them to lead positive and productive lives.  Like many, your objective is to allow your children to enjoy the rewards of wealth without becoming irresponsible, overindulgent or feeling entitled to anything money can buy.

When it comes to sharing one’s wealth with adult children, there are some general principles that may help you guide your children as they shape their values.  Two quotes about sharing wealth with children are an excellent starting point:

I wanted my children to have “enough money so that they would feel they could do anything, but not so much that they could do nothing.” – Warren Buffett

“It’s better to give with warm hands than with cold ones.” – Unknown

Establish Inter Vivos Trusts for Your Children, And Use Restrictions Creatively

You can establish inter vivos trusts (trusts that go into effect during your lifetime) and appoint professional trustees during your lifetime.  Consider some combination of the following restrictions on the trust funds to help your children develop into competent, capable adults:

  • Make receipt of funds dependent on employment
  • Use trust funds to match income from employment
  • Prohibit distribution of trust earnings until the child reaches a certain age (it is not unheard of to distribute trust earnings to children once they reach age 65)
  • Make attaining a certain level of education a prerequisite to distribution of trust income
  • Consider establishing a charitable trust or family foundation, with room for employment of your adult child in the foundation’s management

Consider a generation-skipping trust, so that your wealth is shared directly with grandchildren

Make Gifts or Loans During Your Lifetime—And Not Just Gifts of Money

This is the meaning behind the quotation above regarding warm hands and cold ones.  It is better, in so many ways, to give gifts during your lifetime rather than after your death.  In addition to gifts, consider making strategic, interest-free loans to your children to help them achieve certain goals without losing a lot of their own income to interest payments:

  • Interest-free loans for higher education
  • Interest-free loans for private education for grandchildren
  • Interest-free loans for home purchases

In addition to giving gifts of money or making strategic loans, there are other “gifts” you can give your children to help them learn to live with wealth.  Consider the following suggestions,:

  • Hire a professional to teach your children how to manage their money, instead of banking on your children listening to your own lessons.
  • Pay for family vacations that serve a philanthropic purpose, such as travel to Africa to deliver medical equipment to a remote town or travel to South America to help clean a national park.
  • Begin or continue a family tradition of local volunteer work with disadvantaged people in your own community to ensure that your children get firsthand knowledge of how fortunate they are to have the resources your family has accrued.

In general, experts agree that families fare better when their wealth is used to enrich their lives and to help others less fortunate.  Give your children opportunities to learn to use money in responsible ways, from as early in their lives as possible.  Show them the difference between buying a new sports car and donating the same amount of money to a program that sends food to people in need.  That isn’t to say a new sports car shouldn’t be on the shopping list – but perhaps it shouldn’t be the only thing on the shopping list.

Saturday, August 31, 2013

Caring for the Caregivers

Caring for the Caregivers

If you’re one of 43 million Americans caring for an aging relative, you know firsthand the physical and emotional pressures that accompany being the sole chauffer, cook, and physical therapist for an ailing person. A caretaker’s life can often revolve around medical appointments and medicine dosages. But what about the caretaker? Who takes care of them? And how does caretaking affect their health?

Currently, medical literature on caretakers shows an interesting divide. On one hand, there are suggestions that caretaking can affect health significantly. For example, a 1999 study in the Journal of the American Medical Association found that caring for an elderly individual was so “burdensome” to family members that it contributed to an early death. The study concluded that the physical demands of care giving made many caregivers physically vulnerable to health problems. In simple language, people who gave care were often more at risk for death than those that did not provide regular care to a loved one.  

However, a more recent study of caregivers by a Boston University epidemiologist, found that while caregivers were more stressed than non-caregivers, their mortality rates were still lower than those of non-care givers. The researchers in this study theorize that caregivers are more physically active than non-caregivers and reap the physical benefits of that activity.

Although researchers continue to study caregivers and debate its risks and benefits, there’s no doubt that caregivers themselves face a number of stresses associated with their care giving duties. More and more organizations have started to offer care giving services to help ease the burden for caregivers. For example, if you’re an AARP member, you can get access to resources for families with aging relatives including a care plan with a registered nurse. If you’re a caregiver, you should also check out the New York Times list of resources for caregivers. Remember, the more you take care of yourself, the better equipped you are for providing care to others.

Thursday, August 15, 2013

Where to Store Your Estate Planning Documents


You’ve Established an Estate Plan. Do You Know Where the Documents Are? Does Your Family?

For most people, finally establishing an estate plan is a big step that they have undertaken after years of delay. A second step is making decisions regarding the executor, trustees, beneficiaries, funeral costs and debt, and a third step is actually completing the will. There is, however, a fourth step that is often skipped: placing the original will and other critical documents in a place where it can be found when it is needed.

As far as wills are concerned, this step is more important than you might think, for two reasons:

  1. If your will can’t be found upon your death then, legally, you will have passed away intestate, i.e. without a will.
  2. If your loved ones can only locate a photocopy of your will, chances are the photocopy will be ruled invalid by the courts. This is because the courts assume that, if an original will can’t be located, the willmaker destroyed it with the intention of revoking it.

Options for Storing the Original Copy of Your Will

Because an original will is usually needed by the probate court, it makes sense to store it in a strategic location. Common locations recommended by estate planning attorneys include:

  • A fireproof safe or lock box
  • Stored at the local probate court, if such service is provided.
  • A safety deposit box in a bank

There are advantages to each choice. For many, a fireproof safe is simplest: it’s in the home, doesn’t need to leave the house and can be altered and replaced with maximum convenience. The probate court makes sense because it is the place where the last will and testament may end up when you pass away. A safety deposit box also makes sense, especially if you already have one for which you’re paying.  Just make sure that your executor can access it.

By making sure that your original will is safe and can be found when needed, you don’t just ensure that it can be used when the allocation of your assets and debt occurs. You also ensure that disputes, confusion and disappointment don’t occur years after your death; while uncommon, in some cases, by the time the will has been discovered, the assets of the decedent have long been distributed according to intestacy laws and not the decedent’s will. Intestacy laws are essentially the “default will” that the state establishes for individuals who do not have their own estate plan.

You’ve taken the trouble to protect your assets and loved ones by creating an estate plan. Don’t leave its discovery to chance. Ensure that your executor or trustee can easily and reliably find it when it comes time to put it into effect. 

Thursday, August 1, 2013

There’s a Retirement Community for That

There’s a Retirement Community for That

Whatever your interest, culture or lifestyle, it’s likely that there will soon be a retirement community for you, if one doesn’t already exist. While retirement communities have long tried to attract seniors with amenities like golf courses, fine dining and other on-site activities, the newest trend is “niche” or “affinity” communities that cater specifically to retirees who share a common interest, hobby or trait.

A number of such communities are already in existence and several more are scheduled to open in the next few years. Some examples of niche retirement communities include those targeting particular school alumni, providing access to college classes and other educational opportunities. Then there are retirement communities for those who share a common culture or lifestyle, such as for gays and lesbians or Asian Americans.  Lastly, there are communities for those who share common interests or hobbies, such as RV enthusiasts or those interested in music and the arts.

Like many changes in retirement living, this trend is driven by 78 million baby boomers who are approaching retirement. The concept of niche retirement communities is alluring as these retirees are increasingly likely to define themselves by their interests and leisure activities than previous generations.  They are also more likely to have the requisite good health to pursue their hobbies long after retirement.

Many residents argue that being in proximity to others with similar lifestyles or passions enhances their own enjoyment and makes them feel more comfortable and accepted. However, there are potential disadvantages to living in a niche retirement community. For one, people who are surrounded by like-minded people fail to broaden their horizons.  They may also become more extreme in their views. Residents of niche communities with a focus on a hobby or lifestyle can get “burned out” or over-satiated with activities for which they were once passionate.  Finally, while the cost of most niche retirement communities is on par with traditional retirement homes, some can be pricey, with entrance fees of up to one million dollars.

Ultimately, experts urge retirees to base their decision of where to live primarily on more imperative criteria such as proximity to loved ones, access to adequate health care options, weather and reputation rather than less consequential extras the community may provide.

Monday, July 15, 2013

Acting as an Executor - What’s Involved?

What’s Involved in Serving as an Executor?

An executor is the person designated in a Will as the individual who is responsible for performing a number of tasks necessary to wind down the decedent’s affairs. Generally, the executor’s responsibilities involve taking charge of the deceased person’s assets, notifying beneficiaries and creditors, paying the estate’s debts and distributing the property to the beneficiaries. The executor may also be a beneficiary of the Will, though he or she must treat all beneficiaries fairly and in accordance with the provisions of the Will.

First and foremost, an executor must obtain the original, signed Will as well as other important documents such as certified copies of the Death Certificate.  The executor must notify all persons who have an interest in the estate or who are named as beneficiaries in the Will. A list of all assets must be compiled, including value at the date of death. The executor must take steps to secure all assets, whether by taking possession of them, or by obtaining adequate insurance. Assets of the estate include all real and personal property owned by the decedent; overlooked assets sometimes include stocks, bonds, pension funds, bank accounts, safety deposit boxes, annuity payments, holiday pay, and work-related life insurance or survivor benefits.

The executor is responsible for compiling a list of the decedent’s debts, as well. Debts can include credit card accounts, loan payments, mortgages, home utilities, tax arrears, alimony and outstanding leases. All of the decedent’s creditors must also be notified and given an opportunity to make a claim against the estate.

Whether the Will must be probated depends on a variety of factors, including size of the estate and how the decedent’s assets were titled. An experienced probate or estate planning attorney can help determine whether probate is required, and assist with carrying out the executor’s duties. If the estate must go through probate, the executor must file with the court to probate the Will and be appointed as the estate’s legal representative.  Once the executor has this legal authority, he or she must pay all of the decedent’s outstanding debts, provided there are sufficient assets in the estate. After debts have been paid, the executor must distribute the remaining real and personal property to the beneficiaries, in accordance with the wishes set forth in the Will. Because the executor is accountable to the beneficiaries of the estate, it is extremely important to keep complete, accurate records of all expenditures, correspondence, asset distribution, and filings with the court and government agencies.

The executor is also responsible for filing all tax returns for the deceased person including federal and state income tax returns and estate tax filings, if applicable. Additional tasks may include notifying carriers for homeowner’s and auto insurance policies and initiating claims on life insurance policies.

The executor is entitled to compensation for his or her services.  This fee varies according to the estate’s size and may be subject to review depending on the complexity as well as the time and effort expended by the executor.


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