Salt Lake City Estate Planning

Be Smart and Front-Load Your 529 Plan

 

A 529 plan is designed to pay for future education costs, usually for a child or grandchild. With the new tax law, 529s can now be used for K-12 education costs, as well as certain college costs. Front-loading a 529 plan allows earnings to be compounded on more money over a longer period of time.

Investopedia’s recent article, “Why You Should Front-Load Your 529 Plan,” reminds us that the total amount you can contribute to a single 529 plan is set by the state in which the plan is established. Your contribution is deposited after taxes, so there’s no federal tax deduction. Some states, however, give a deduction for some of your contribution.

Contributions grow tax free and can be withdrawn tax free, provided the money is used for qualified educational expenses. But there can be gift tax consequences, if you exceed the annual gift tax limit–$15,000 per child or grandchild ($30,000 for spouses who give jointly) in 2018. You can avoid this by using an IRS rule that lets you front-load a 529 plan for up to five years at one time with no gift tax consequences. You can’t make additional contributions (or take money out) until the five years are up, at which time you can contribute another $75,000 for the next five years, if you want. If you and your spouse both contribute (and file jointly), the total amount can be as much as $150,000 in 2018 for each five-year period.

The advantage of front loading becomes clear when you compare the savings outcome with regular annual contributions.

A realistic look at the future cost of college for your child or grandchild shows the importance of leveraging every dollar of earnings in your 529 plan. By 2034, one year at a public university will cost $47,045, and the average one-year cost of a private school will be $105,071, according to J.P. Morgan. Those costs translate to $188,180 for a four-year degree from a public school and $420,284 for four years at a private institution.

You must be pretty well-off to afford the large amount needed to front-load a 529 education savings plan.  However, some grandparents are in that position.

The ability to start a 529 plan, front-load it, and, at the same time, eliminate that amount from potential estate taxes, can be a real benefit. It's also a very wise use for a large bonus or inheritance, if you happen to have one come your way.

Reference: Investopedia (December 22, 2017) “Why You Should Front-Load Your 529 Plan”

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What’s Really in The Tax Cuts and Jobs Act of 2017?

With the new Tax Cuts and Jobs Act, most of us won’t have to pay a federal estate tax. However, with the expanded exemption, there are still several reasons to engage in estate planning, according to an article published in Think Advisor, “9 Ways New Tax Law Could Affect Clients’ Estate Plans.”

The new tax legislation increases the federal estate, gift and generation-skipping transfer (GST) tax exemptions to $10 million (indexed for inflation) per person beginning on January 1, 2018. The exemptions are scheduled to sunset (expire) on January 1, 2026. Things then revert to the current federal law. Of course, there’s always a chance of a repeal of the tax law in a subsequent Congress, so it’s critical to stay informed. However, right now, high-net-worth individuals should pay close attention to these areas:

• Estate planning. A trust can provide protection from creditors and divorcing spouses, along with control over how beneficiaries inherit wealth. A trust can also help preserve wealth for generations.
• Portability election. This allows a surviving spouse to use the deceased spouse’s unused federal estate and gift tax exemption. It’s unchanged and means a married couple can use the full $20 million exemption (indexed for inflation).
• Estate tax liability. For those with a high net-worth who will still have federal estate tax exposure and those who live or own property in states that have their own estate tax, the traditional wealth transfer strategies will still be sound. Talk to your estate planning attorney about your federal estate tax exposure under the new rules.
• Basis step-up at death. This lets a decedent’s assets get a step-up in tax cost to their fair market value at the date of death. It’s unchanged. Therefore, with a much higher federal estate tax exemption, income tax planning is a crucial component of estate planning and estate administration.
• Annual exclusion gifts. Making gifts during your lifetime may be a wise tax planning strategy. The gift tax annual exclusion amount is $15,000 and the gift tax annual exclusion amount is still subject to an adjustment for inflation.
• Basis carryover for gifts. Gifts made during the donor's lifetime will continue to pass to the donee with the donor’s tax cost. Perhaps a donor might wait in making gifts of assets that have significant unrealized gain until his or her death, to give the beneficiary the asset and the step-up in tax cost. There are other considerations in gift tax planning, so talk to your estate planning attorney.
• GRATs. Short-term grantor-retained annuity trusts (GRATs) or qualified personal residence trusts (QPRTs) whose terms end before the Act’s sunset provisions in 2026, will still be a good planning tool for very high net-worth clients.
• Irrevocable trusts. Existing irrevocable trusts that hold low-basis assets should be examined to see if there’s an upside to (and the possibility of) rendering them subject to estate tax in the estate of a beneficiary who might die before the increased exemptions sunset. This could result in a step-up in tax cost (thus reducing capital gains tax for the next set of beneficiaries) without payment of estate tax.
• Closely held businesses. With the exemption amounts scheduled to revert to $5 million (indexed for inflation) in 2026, planning is still vital for families with large closely held businesses and a net worth significantly greater than the exemption amounts. If it looks like reversion to the current law is possible as we get closer to 2026, individuals should determine if an aggressive gifting plan makes sense.

Reference: Think Advisor (January 10, 2018) “9 Ways New Tax Law Could Affect Clients’ Estate Plans”

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The Details on Medicaid Annuities

Consider a scenario when your spouse has made a permanent move to a nursing home, you don’t have long-term-care insurance, Medicare won’t cover the cost and you have too much money to qualify for Medicaid.

However, you also do not have nearly enough money to cover the expense of the nursing home, which is anywhere from $5,000 to $8,000 monthly for a semi-private room.

That’s going to rapidly deplete your nest egg.

In case you missed it, Kiplinger’s article from last fall, “Medicaid Annuities Help Protect Savings,” explains that a Medicaid-compliant annuity might rescue your retirement.

If you purchase an immediate annuity owned by and payable to you that meets several requirements, it will transform cash that would otherwise prevent your ill spouse from qualifying for Medicaid into an income stream that helps you to preserve your quality of life. With the annuity, Medicaid starts covering the nursing home expenses and your monthly bills are manageable.

If you have the time to plan ahead, you can address these long-term-care costs, such as with long-term-care insurance or aggressively saving with the aim of self-insuring any long-term-care costs. However, for couples in crisis, who’re watching their life savings evaporate as they pay nursing-home bills, a Medicaid-compliant annuity may be the only way to preserve a livable income for the spouse who remains at home.

Medicaid recipients typically can’t have more than $2,000 in cash. When one spouse goes into a nursing home, and the other stays at home, there are some special rules that apply. The healthy spouse can keep a certain amount of assets, which varies by state.  However, it can be as much as roughly $120,000. The healthy spouse’s income isn’t counted when determining Medicaid eligibility. The Medicaid recipient must use his available income to pay for his care costs, but the healthy spouse can keep some or all of that income, if she otherwise would not have enough to live on.

Those trying to meet Medicaid’s asset limits can spend down their life savings, which gives the healthy spouse very little on which to live. They could also give away the money, which will mean there’s a period of Medicaid ineligibility, if the gift is made less than five years before applying for Medicaid.  However, a properly structured Medicaid-compliant annuity can reduce the need for these drastic actions.

It’s important to note that some states want to limit their use. A bill introduced in Congress last year would count half of the income from a healthy spouse’s annuity, when determining the Medicaid eligibility of the institutionalized spouse. However, the bill didn’t get much traction.

You might consider a Medicaid-compliant annuity if you have moderate savings—perhaps $500,000 or less—and must pay for nursing home bills out-of-pocket. For those who are not in a crisis situation, these may not be the wisest investments. This is because they’re designed for people in dire straits. They generally offer minimal returns, such as 1%. Those with more wealth are much better off earning a market rate of return on their money and paying the nursing-home bills themselves.

 Since you don’t want to tie up money that could be needed for other expenses, you should only purchase a Medicaid-compliant annuity when you know your spouse has moved to a facility permanently. The amount you should invest in the annuity is determined in part by your finances on the “snapshot date”—the date your spouse has spent 30 consecutive days in the facility.

Talk with an elder law attorney, if you are considering a Medicaid annuity. There are many legal issues to address when you put your spouse in a facility. Your elder law attorney will update your estate plan and powers of attorney.  They will also help you to determine whether a Medicaid annuity might be a sound strategy.

Reference: Kiplinger (October 2017) “Medicaid Annuities Help Protect Savings”

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Hawaii Governor Signs Kupuna Caregivers Assistance Act

Hawaii Governor David Ige signed the Kupuna Caregivers Assistance Act, which provides those who care for an elderly family member, while also working at least 30 hours a week, with a stipend of up to $70 per day.

The Hawaiian word "kupuna" roughly translates to elder, grandparent, or an esteemed older person, says Benefits Pro in its recent article, “New Hawaii law provides daily caregiver stipend.”

Caregivers in the Aloha State can now use the money for anything that allows them to avoid missing work due to their caregiving duties. This includes things like hiring a part-time health aide, paying for meal deliveries, or cleaning services. The stipend can also replace caregiver income that’s lost to carrying out those duties themselves and the resulting lost time at work.

The state’s general fund provides the cash from the existing balance, which is funded primarily by income and corporate taxes. The law is aimed at assisting caregivers to stay in the workplace as long as possible and still be able to provide care to loved ones, so that they can be as healthy and independent as possible.

Hawaii is the first state in the U.S. to put this type of system into practice. Nationally, there’s an estimated 44 million Americans who are caring for elderly relatives, with about 60% also employed. Not only does that make it difficult to keep up with caregiving responsibilities, but it takes a toll on their work performance. Here are some statistics among female caregivers:

• 33% have decreased their working hours;
• 29% have declined promotions;
• 20% have switched to part time;
• 16% have quit a job; and
• 13% have retired early
  

… all to provide elder care.

That lost time hurts employees and adversely impacts the economy. An AARP survey found that the cost of leaving the workforce early to care for a senior, costs an employee about $304,000 in lost wages and benefits. Businesses also lose an estimated $33.6 billion annually in productivity from caregiving employees.

Reference: Benefits Pro (December 20, 2017) “New Hawaii law provides daily caregiver stipend”

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Which States Will Tax Your Estate the Most in 2018?

The big numbers are because many states have linked their state estate taxes to the federal amount. Since the GOP tax bill doubles the base federal estate tax exemption amount to a little over $11 million, indexed for inflation for tax years 2018 through 2025, those states will also increase their thresholds.

Forbes notes in its recent article, “Where Not To Die In 2018,” that along with this news, there are two states that are eliminating estate taxes in 2018: New Jersey and Delaware. New York is set to match the current federal exemption amount—a base of just over $5 million indexed for inflation—in 2019. Massachusetts and Oregon now tie for the lowest estate tax exemptions at $1 million per person.

The federal estate tax is 40% on assets above $11.2 million. This tax affects just 1,800 estates in the US next year. However, many more taxpayers pay state estate taxes. The number of state taxable estate tax returns in the state of Oregon alone was 1,563 in 2015. That state’s exemption is just $1 million.

The amount of money you can leave to your heirs without any state death tax depends on where you live and own property, to whom you’re leaving the money and whether your estate planning is current. The highest rates are about 16%, and for inheritance tax states, the tax can apply to the first dollar of assets, meaning there’s no credit like there is on federal estate taxes.

Seventeen states and Washington, D.C. will impose an estate tax or inheritance tax (Maryland has both) in 2018. Eight of these states and DC are making changes for 2018.

New Jersey has repealed its estate tax, but there’s a separate state inheritance tax that hits non-lineal heirs like siblings, nieces, and nephews. The Garden State now is in the group of other inheritance-tax only states: Nebraska, Iowa, Kentucky, and Pennsylvania.

Minnesota and Maryland have scheduled increases to their exemption amounts, and Connecticut just made scheduled changes to its exemption in its 2018 state budget. Washington and Rhode Island made minor upward adjustments in their exemption amounts, due to inflation indexing.

You should not believe that you don’t need to do estate planning because of these larger exemptions. There are plenty of non-tax reasons to plan, including designating a guardian for your minor children and naming someone to act on your behalf with a financial power of attorney, if you become incapacitated.

Speak with a qualified estate planning attorney to be sure your estate plan is up-to-date and addresses any tax law changes in your state.

Reference: Forbes (December 21, 2017) “Where Not To Die In 2018”

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Have You Conducted Your “Dostadning?”

“Death cleaning” is the literal translation of the Swedish word dostadning, which means an uncluttering process that begins as people age. There’s even a new book called “The Gentle Art of Swedish Death Cleaning,” by Margareta Magnusson.

Santa Fe New Mexican’s recent article, “How to ‘death clean’ your finances,” says the focus should be on jettisoning junk. However, most senior’s finances could also use a good death cleaning. Simplifying and organizing our financial lives can make things easier for us while we’re alive and for our family after we’re gone.

This task becomes more pressing when we’re in our 50s. Our financial decision-making abilities generally peak around age 53, researchers say, while rates of cognitive decline and dementia start to increase at age 60. As we get older, we may become more vulnerable to fraud, scams, unethical advisers and bad judgment. Here are some steps you can take:

Consolidate financial accounts. Fewer accounts are easier to watch for suspicious transactions and overlapping investments. You also may save on account fees. See if your employer will let you transfer old 401(k) and IRA accounts into its plan or consolidate them into one IRA. Think about exchanging individual stocks and bonds for professionally managed mutual funds or exchange-traded funds (investigate prior to selling any investments held outside of retirement funds). Move scattered bank accounts into one account, but note that FDIC insurance is generally limited to $250,000 per depositor per institution.

Automate payments. Memory lapses can cause missed payments, late fees, and credit score damage. This can drive up the cost of borrowing and insurance. Set up regular recurring payments in your bank’s bill payment system, have bills charged to a credit card and set up an automatic payment, so the card balance is paid in full each month.

Scale back on credit cards. Keep just two credit cards: one for everyday purchases and another for automatic bill payments. Closing accounts may hurt credit scores, so wait until you’re sure you won’t need to apply for a loan before you start cutting down on the plastic.

Assign a watchdog. Identify the person you want to make decisions for you, if you’re incapacitated. Ask your attorney to create two durable powers of attorney — one for finances and another for health care. You don’t have to designate the same person for both, but name backups if your first choice can’t serve. Consider naming someone younger, because someone your age or older could become impaired at the same time you do. Discuss where your agent can find the information and access.

Your emergency file. Create “in case of emergency” files that your trusted agent or heirs will need. The file can include the following:

• Estate planning documents, such as your will, trust, healthcare directives, powers of attorney, and living will;
• Birth, death and marriage certificates;
• Military records;
• Social Security cards;
• Car titles, property deeds and other ownership documents;
• Insurance policies;
• A list of your financial accounts;
• Contact info for your attorney, CPA, financial adviser, and insurance agent; and
• Photocopies of passports, driver’s licenses, and credit cards.

A safe deposit box isn’t the best spot because your agent may need access outside of bank hours. A fireproof safe or a locked file cabinet may be better, but share the combination or key (or its location) with your trusted person. Scan important papers and retain an encrypted copy in the cloud to help you or someone else recreate your financial life, if the originals are lost or destroyed.

Reference: Santa Fe New Mexican (December 18, 2017) “How to ‘death clean’ your finances”

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Do You Still Need to Make Some Big Decisions?

The Almanac’s recent article, “Five mistakes to avoid when planning your estate,” reminds us that you still have to consider your estate, even after all of your other careful planning. 

You should be certain that your assets will be distributed exactly the way you want, to the people or organizations you want and that the government won’t take any more than is necessary. To help with this task, here are some of the top estate planning mistakes you need to avoid.

No estate plan at all.  You at least need a last will, financial power of attorney and health care directive. These should be updated with any major life event. You might also look at a trust that will govern how your assets will be managed for your beneficiaries. If you have no estate plan, the state will default your assets to your spouse or closest blood relatives. This may not be what you really wanted, and it can be time consuming, costly and result in large tax liabilities.

Not updating beneficiaries or listing contingent beneficiaries. All of your IRAs, 401(k)s, annuities, and life insurance policies should accurately designate the person or persons you want to receive the proceeds.

Investing lifestyle and legacy assets in the same way. There are plenty of retirees who spend well below their means and can live comfortably on a much smaller investment portfolio than what they’ve accumulated. You should consider dividing your investment portfolio into a “lifestyle” portfolio, invested conservatively, with a focus on producing retirement income, and a “legacy” portfolio, invested more aggressively, with a focus on maximizing your retiree’s legacy.

Not reviewing life insurance policies. It’s crucial to review your life insurance policies to be certain the policy is performing as expected, and that it’s going to be there when you need it. Your policies should be up to date, reflect your current needs and the accounts must be properly integrated with your overall financial goals.

Reference: The Almanac (December 26, 2017) “Five mistakes to avoid when planning your estate”

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Be Honest with Your Doctor and Your Heirs

 

Vanguard advised in a recent article, “The final keys to successful wealth transfer,” that you should communicate honestly with your health care provider for the sake of maintaining your health, and you have to speak honestly with your heirs to preserve your wealth.

It’s hard for many of us to easily disclose personal details about our finances. That’s because money can represent a variety of complex feelings and concepts, like security, control, comfort, selfishness and power. However, it’s imperative to have this important conversation.

You can start by relaying stories about your successes and losses (financial and otherwise). That way, your heirs can learn from your experiences. In addition, even if you detail specific conditions regarding when and how heirs can use their inheritance, you should look at the wealth transfer process with trust and an open mind. You should educate your heirs to make smart financial decisions after you’re gone, by showing them materials to prepare them for the future now.

Have the talk with your heirs when it’s right. If information about a future inheritance might distract them from making wise decisions about their future, you don’t have to disclose specific dollar amounts. Every family is unique, so there’s no one-size-fits-all solution to the question of when you should have “the talk.”

You should also use the counsel of an experienced estate planning attorney who doesn’t have a stake in your legacy and can facilitate the wealth transfer discussion. That will take some pressure off and ensure that all topics are discussed.

A final key to a successful wealth transfer is philanthropy. All family members should be able to participate in the giving process. Finding a charity that matches up well with your family’s values can help your heirs learn how to make decisions, motivate others and develop confidence. These are attributes that will help them be respected stewards of your wealth, when the time arrives.

In summary, to enjoy a successful wealth transfer: (i) identify what’s important to you and your family; (ii) communicate honestly; (iii) stay organized; (iv) get your heirs prepared; and (v) explore philanthropy.

Reference: Vanguard (September 26, 2017) “The final keys to successful wealth transfer”

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Jimi Hendrix’s Estate Still Battling over the Rocker’s Money

Jimi Hendrix would be 75, if he was still alive.

The Express’ recent article, “Jimi Hendrix: Family feud over guitar legend’s £130million estate,” noted that Jimi died in London in 1970 at age 27.

His family has been counting the money ever since.

Nearly 50 years after Jimi’s death, he’s still one of the world’s highest-earning posthumous celebrities, earning more than $6.6 million last year. His $175 million estate remains a battleground. Jimi’s younger brother Leon, 69, has been battling the estate for the past 15 years, with three court cases awaiting trial.

Jimi’s estate is run by his adopted stepsister Janie.

Leon saw his brother’s formative years. Jimi’s first instrument was a ukulele from a garage sale.

He’s has felt plagued by conspiracies, since being cut out of his father’s will, which he’s contested.

Jimi died with no will and his then $66 million estate was inherited by his father Al. He drafted his own will, dividing the estate between his children and grandchildren. Leon claims that his dad was going to leave him $25 million in a trust fund, but in his final years Leon said his dad signed papers to cut him out of the will. When Al died in 2002, he left one gold record to Leon, while control of the Hendrix estate and its fortune went to Janie.

Leon sued to have his father’s original will reinstated, claiming that Janie had exerted undue influence on him.  However, she argued that Leon had been stripped of his inheritance because of his problems with drink, drugs, and crime. A court judge upheld Janie’s control of the estate in 2004, but three years later, Leon won a lawsuit giving him rights to Jimi’s likeness and image. When Leon produced Hendrix vodka, liquor, T-shirts and hi-fi speakers, she sued to stop him.

Janie is suing Leon for marketing Hendrix cannabis, alcohol and electronic goods, calling him a “serial infringer.” In addition, she’s brought an action to stop him from releasing a song on his new album that sounds like Jimi’s hit Foxy Lady, Leon claims.

Reference: The Express (November 25, 2017) “Jimi Hendrix: Family feud over guitar legend’s £130million estate”

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What Can I Do With My Gifts to My Daughter, If I Don’t Trust My Future Son-in-Law?

What if your daughter is getting married and you never have really liked the looks of her future husband? Perhaps you simply don't trust the guy. What if you regularly give her gifts of cash and don't want him to be able to get to that money?

nj.com notes, in its recent article, “Protecting inheritance from future son-in-law,” that the easiest option is for the daughter to create an account to which only she has access and into which she deposits any money from her parents. As long as her future husband's name isn’t on the account, and she hasn’t given him power of attorney over it, he can’t get to it.  However, if there’s a concern that the daughter may not be able to resist her future husband’s attempts to gain access to the funds, a parent will need to take additional steps.

Here are some examples:

Monthly bills: if the daughter uses the gift to pay monthly bills, the parent could pay the bills directly instead of giving her money.

Children: if she has children and is setting aside the money for their college education, the parents could set up a 529 savings account for their grandchildren. They could name themselves as the custodians.

Savings: if the daughter is simply saving the gift money, a trust may be a good solution. However, trusts are not as simple as the other options discussed above. The more restrictive the trust terms are to protect the assets from the son-in-law, the greater the possibility that gift and estate taxes will become an issue.

Prenuptial Agreement: another thing to consider is whether the parents have given their daughter significant amounts of money already and because of that, she’s entering into the marriage with more assets than her spouse. In that case, she should consult with an attorney about a prenuptial agreement. If the marriage then ends in divorce, she will not have to split any of the funds with her ex.

As a final reminder in this scenario, the parents should also speak with an estate planning attorney about updating their estate plan, so that anything they want to leave her when they die, is left to a trust for her benefit.

Reference: nj.com (November 23, 2017) “Protecting inheritance from future son-in-law”

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