Category: Estate Planning

Gift and Estate Tax Exemption Limits Increase for 2024

Gift and Estate Tax Exemption Limits Increase for 2024

The year 2024 will bring more reasons to be generous, since the Internal Revenue Service (IRS) has increased the limits for gift and estate tax exemption amounts to their highest amounts ever. It’s good news to start the year with, reports the article “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying” from yahoo! finance.

Those with large estates should always consider gifting during their lifetime to reduce taxes by using the annual gift and lifetime gift and estate tax exemptions. Right now, you may give an unlimited number of people up to $17,000 each in a single year without taxes. However, in 2024, this increases to $18,000 per person. For married couples starting in 2024, a gift of $36,000 can be made to any number of people, tax-free.

More good news: the IRS announced that the lifetime estate and gift tax exemption will increase to $13.61 million in 2024. A gift exceeding the annual limits won’t automatically prompt a gift tax. The difference is taken from the person’s lifetime exemption limit, and no taxes are owed. Your estate planning attorney will create a long-term strategy to use these exemptions to manage your estate tax liabilities.

Let’s say you were feeling generous and bought a friend a car for $20,000 in 2023. You would have exceeded the annual limit of $17,000 but wouldn’t owe any additional taxes. You’d use IRS Form 709 to report the gift and deduct $3,000 from your lifetime exemption of $12.92 million for this year. If you instead make the gift in 2024, you’d subtract $2,000 from your $13.61 million limit.

Gifts between American spouses are virtually unlimited. Couples have $24.84 million in estate tax exemptions, and going over this limit is only taxed upon the surviving spouse’s death.

However, a gift to a non-U.S. citizen, regardless of whether or not they are a U.S. resident, falls under different rules and is subject to an annual tax exclusion amount. The annual amount one may give to a spouse who is not a U.S. citizen increases to $185,000 in 2024 from $175,000 in 2023.

Something else to keep in mind—unless Congress acts, the lifetime estate and gift tax exemption is due to return to the pre-2017 Tax Cuts and Jobs Act level of $5.49 million on December 31, 2025. Your wisest move is to speak with your estate planning attorney about a strategic plan for gift-giving and planning to minimize estate tax liability before the change occurs. To take advantage of the gift and estate tax exemption limits increase for 2024, consult with you estate planning attorney. He or she will make sure you are reaping the benefits. If you would like to learn more about the gift tax, please visit our previous posts. 

Reference: yahoo! finance (Nov. 14, 2023) “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying”

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Credit Card Debt must be Paid after Death

When you consider the average credit card balance in 2023 was $6,365, chances are many Americans will leave an unpaid credit card balance if they die suddenly. Credit card debt must be paid after death. A recent article from yahoo! finance asks and answers the question, “What happens to credit card debt when you die?”

Many people think death leads to debt forgiveness. However, this isn’t the case. Some forms of debt, like federal student loans, may be discharged if the borrower dies. However, this is the exception and not the rule.

Credit card debt doesn’t evaporate when the cardholder goes away. It generally must be paid by the estate, which means the amount of debt will reduce your loved one’s inheritance. In some cases, credit card debt might mean they don’t receive an inheritance at all.

Outstanding credit card debt is paid by your estate, which means your individual assets owned at the time of death, including real estate, bank accounts, or any other valuables acquired during your life.

Upon death, your will is submitted to the court for probate, the legal process of reviewing the transfer of assets. It ensures that all debts and taxes are paid before issuing the remaining assets to your designated heirs.

If you have a will, you likely have an executor—the person you named responsible for carrying out your wishes. They are responsible for settling any outstanding debts of the estate. If there’s no will, the court will appoint an administrator or a personal representative to manage the assets.

In most cases, your heirs won’t have to pay off your credit card debt with their own funds. However, you may be surprised to learn there are exceptions:

  • Married people living in community property states. In a community property state, the deceased spouse is responsible for repaying credit card debt incurred by their spouse. In 2023, those states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
  • Credit cards with joint owners. If you had a joint credit card shared with a partner or relative, the surviving joint owner is responsible for the full outstanding balance. Only joint users are responsible for repaying credit card debt. If your partner was an authorized user and not an owner, they aren’t legally responsible for the debt.

Debt collectors may try to collect from family members, even though the family members are not responsible for paying credit card debts. The debt collector may not state or imply that the family member is personally responsible for the debt, unless they are the spouse in a community property state or a joint account owner.

If a debt collector claims you personally owe money, request a debt validation letter showing your legal responsibility for the debt. Otherwise, you have no legal obligation to pay for it yourself.

When someone dies, their estate is responsible for paying debts, including credit card debt. However, debt is repaid in a certain order. In general, unsecured debt like credit card balances are the lowest priority and paid last.

Some accounts are exempt from debt payment:

  • Money in a 401(k) or IRA with a designated beneficiary goes directly to the beneficiary and is exempt from any debt repayment.
  • Life insurance death benefits go directly to the named beneficiary and go directly to the beneficiaries.

If a loved one has died and they had credit cards, stop using any of their cards, even if you are an authorized user or joint owner. Review the deceased’s credit report to learn what accounts are open in their name and the balance on each account. Notify credit card issuers and alert credit bureaus—Equifax, Experian, and TransUnion. You may need to submit a written notification, a copy of the death certificate and proof of your being an authorized person to act on behalf of the estate.

The bottom line is this: credit card debt must be paid at your death. Talk with an estate planning attorney to find out how your state’s laws treat the outstanding debt of a deceased person, as these laws vary by state. If you would like to learn more about managing debt as an executor of an estate, please visit our previous posts. 

Reference: yahoo! finance (Nov. 9, 2023) “What happens to credit card debt when you die?”

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Avoid Adding Adult Children as Joint Owners

Avoid Adding Adult Children as Joint Owners

It is generally wise to avoid adding adult children as joint owners of your accounts. The conversation may concern a checking or savings account or both. Unsolicited advice usually goes something like this: “If you want to have your children to be able to pay your bills if something happens to you, you need to add them to the account.” While the intentions are good, a recent Spokane Journal of Business article advises otherwise: “Adding adult children to accounts can be problematic.”

People are made to worry even more when they are told that if there is no second name on the account, it will be frozen upon death and no one can access it until a lengthy and costly probate process has occurred.

To do the right thing, many people respond by adding their most responsible adult child to the account. They don’t realize they are creating more problems than they are solving. A better solution exists, and it should be something taken care of when preparing or revising your estate plan.

Why wouldn’t you want to add an adult child to your accounts? Simply put, your last will and testament doesn’t apply to a bank account if it is a joint account. Most bank accounts are owned with a “joint tenancy with right of survivorship.” This means if the primary owner, the parent, should die, the adult child becomes the sole owner of assets in the account, regardless of what your will says.

Assuming that your intention is to split the assets in the account among several beneficiaries, this may or may not happen. The new account owner is under no legal obligation to share the assets, as they are solely and legally entitled to these funds.

Another problem: if the child decides to split the funds and transfer them to siblings, the IRS may see this as a gift subject to the requirement to fill out a gift tax return.

By having a joint owner, you may also expose these assets to creditor claims. What if the child named on the bank account causes a car accident and is sued? Those assets are considered owned by the child and could be attached by a creditor. If your child gets divorced, those assets may also be part of a divorce settlement.

Estate tax reporting gets more complicated. The IRS places an additional burden on accounts held as joint tenants with the right of survivorship. If the child unexpectedly dies first, the law places the burden on the estate to prove the child did not own the asset.

Is there a solution? Yes, a power of attorney.

A power of attorney is a legal document allowing an agent to act on behalf of the parent, providing authorization without ownership. The parent’s goal is almost always to provide authorization and access, but not ownership.

The POA can be made effective immediately upon signing to allow the child immediate access to the account for bill paying. It can apply not only to bank accounts but to all assets. Alternatively, it can also be limited to specific assets.

Avoid adding adult children as joint owners of your financial accounts. Your estate planning attorney can create a POA to authorize an agent to give them as much or as little control as you want. You’ll be able to determine precisely what you do and do not wish your agent to do. If you would like to learn more about managing financial and retirement accounts, please visit our previous posts. 

Reference: Spokane Journal of Business (Nov. 9, 2023) “Adding adult children to accounts can be problematic”

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Navigating Estate Tax Planning

Navigating Estate Tax Planning

Read our BooksNavigating the intricacies of estate tax planning can be a daunting task. Understanding the nuances of the estate tax and implementing robust estate tax planning strategies can ensure that your beneficiaries enjoy the fruits of your labor without being overburdened by tax liabilities.

What Is Estate Tax and Who Is Subject to Estate Tax?

The estate tax, often called the “death tax,” is a tax levied on the total value of a person’s estate upon their death. If the estate exceeds certain thresholds, it becomes subject to federal estate tax, potentially diminishing the wealth passed on to heirs.

Understanding who is subject to estate tax requires knowledge of current tax laws, which often change. These laws dictate specific exemption amounts and continually adjust what constitutes a taxable estate.

Why Is Estate Tax Planning Essential?

Proactive estate tax planning is crucial to preventing your heirs from facing unexpected tax burdens. Without careful planning, a significant portion of the estate you’ve worked hard to build could end up in the hands of the government, instead of your loved ones.

Tax planning involves a comprehensive look at your assets and potential tax liabilities, ensuring that your beneficiaries are safeguarded. The goal is to reduce estate tax significantly, allowing more wealth to transition to the next generation.

How Can Trusts Benefit Your Estate Plan?

Incorporating trusts into your estate plan can be a strategic move to minimize estate taxes. Trusts, particularly irrevocable ones, allow you to transfer wealth from your estate, reducing the overall value subject to estate taxes upon your death.

Trusts offer control over assets even after death, ensuring that your wishes concerning asset distribution are honored. Grantor trusts and other types of trust arrangements are advanced estate planning tools that can significantly reduce your taxable estate.

Are Gift Taxes and Estate Taxes Interconnected?

Yes, gift taxes and estate taxes are closely linked. Strategically gifting assets during your lifetime can reduce your estate’s size, subsequently decreasing estate tax liability. However, it’s essential to understand the gift tax exclusion limits in your tax planning.

Large gifts that exceed these exclusions may still be taxable. These count towards your estate and are potentially subject to estate tax if they surpass the lifetime exemption limit. It’s wise to consider the long-term implications of gifting on your overall estate.

What Changes in Tax Laws Mean for Your Estate Planning Strategies?

Estate tax laws are not static; they undergo changes and adjustments that could impact your estate. These changes in tax laws could influence exemption thresholds, tax rates and what assets are considered part of your taxable estate.

Keeping abreast of these changes is critical. Working with a tax professional who understands the latest federal estate tax laws ensures that your estate plan remains effective and compliant, safeguarding your estate from increased tax liability.

Can You Minimize Estate Taxes with Charitable Contributions?

Making charitable contributions is an effective strategy to minimize estate taxes. Donations to qualifying charitable organizations can reduce your taxable estate’s size, while allowing you to contribute to causes you care about.

This estate planning tool requires proper documentation and adherence to tax laws to ensure that your estate benefits from the tax reductions applicable to charitable contributions.

Do All States Impose Own Estate Taxes?

Navigating estate tax planning isn’t just a federal matter. Several states impose their own estate taxes, with exemption thresholds and tax rates that differ from federal guidelines. State estate taxes can complicate estate planning, especially if you own assets in multiple states.

Understanding how state tax laws affect your estate is crucial. It involves complex considerations, particularly if you’re planning for properties in states with distinct estate or inheritance taxes.

How Does the Tax Cuts and Jobs Act Affect Estate Tax Planning?

The Tax Cuts and Jobs Act significantly impacted estate tax planning by increasing the federal estate tax exemption. This change means fewer estates will be subject to the estate tax. However, it is essential to remember that many parts of the Jobs Act are temporary.

Estate plans should consider future changes, possibly with lower exemptions. Careful planning and continual review of your estate strategy are necessary to adapt to legislative shifts and protect your estate from excessive taxation.

Closing Thoughts: Estate Tax Planning Takeaways

To encapsulate, here are the key points to remember in your estate tax planning journey:

  • Understand the implications of the estate tax on your assets.
  • Utilize trusts and lifetime gifts strategically to reduce estate size.
  • Keep updated with changes in tax laws, including state estate taxes.
  • Consider charitable contributions as part of your estate strategy.
  • Consult with a tax professional to navigate complex estate scenarios.

Navigating the complex rules around estate tax planning is challenging. Effective estate tax planning can preserve your wealth for future generations, ensuring that your legacy endures as you envision. If you would like to learn more about estate taxes, please visit our previous posts. 

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Tax Planning may Impact your Medicare Costs

Tax planning may impact your Medicare costs. How much retirees pay for Medicare Part B premiums is based on income levels, and an income increase of even $1 can trigger higher tax rates, explains the recent article, “Year-end tax strategies may affect how much retirees pay for Medicare. Here’s what to know” from CNBC.

Social Security beneficiaries will receive a 3.2% increase in benefits in 2024 based on the annual COLA (Cost of Living Adjustment). According to the Social Security Administration, this will result in an estimated increase of more than $50 per month, bringing the average monthly retirement benefit for workers from $1,848 in 2023 to $1,907 in 2024.

How much beneficiaries will actually receive won’t be known until December, when annual benefit statements are sent out. One factor possibly offsetting those benefit increases is the size of Medicare Part B premiums, which are typically deducted directly from Social Security monthly benefits.

Medicare Part B covers physician services, outpatient hospital services, some home health care services, durable medical equipment and other services not covered by Medicare Part A.

Medicare Part B premiums for 2024 have not yet been announced. However, the Medicare trustees have projected the standard monthly premium possibly being $174.80 in 2024, up from $164.90 in 2023.

Some beneficiaries may pay more, based on income, in what’s known as IRMAA or Income Related Monthly Adjustment Amounts. In 2023, it is the standard Part B premium for those who file individually and have $97,000 or less (or $194,000 or less for couples) in modified adjusted gross income on their federal tax return in 2021.

Monthly premiums can go up to as much as $560.50 per month for individuals with incomes of $500,000 and up, for couples with $750,000 and up.

Beneficiaries receive the same Medicare services regardless of the monthly Part B premium rate.

In 2024, the monthly Part B premiums will be based on 2022 federal tax returns. Beneficiaries need to pay attention to how their incomes may change when implementing year-end tax strategies.

For instance, if you do a Roth conversion, taking pre-tax funds from a traditional IRA or eligible qualified retirement plan like a 401(k) and moving them to a post-tax retirement account, you’ll trigger income taxes, which may trigger higher Medicare Part B premiums later.

Tax planning may impact your Medicare costs. People who do end-of-year tax loss harvesting, selling off assets at a loss to offset capital gains owed on other profitable investments, may reduce adjusted gross income and future Medicare premiums.

If you’re taking distributions from IRAs and want to make charitable donations, you might want to make those donations directly from your retirement account, known as a qualified charitable distribution. These funds don’t appear on your tax return and won’t increase income taxes or future Medicare premiums. If you would like to read more about Medicare and tax planning, please visit our previous posts. 

Reference: CNBC (Oct. 12, 2023) “Year-end tax strategies may affect how much retirees pay for Medicare. Here’s what to know”

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Selling the Family Home when a Loved One needs Nursing Care

Selling the Family Home when a Loved One needs Nursing Care

When an aging relative decides the time is right to move into an assisted living or continuing care facility, families face many decisions. This is often a difficult but necessary step for older individuals with trouble living independently or planning for their future needs. Selling the family home when a loved one needs nursing care can be a challenge. A recent article from Herald—Standard, “How to handle selling a home when moving into an assisted living facility,” offers suggestions to help families navigate the process.

First, speak with an estate planning attorney to have a trusted, responsible family member be named Power of Attorney. Individuals moving into assisted living may not have any cognitive problems at the time of the move. However, selling a home for a family member who develops dementia can present complex challenges. Only a person with legal capacity may transfer their home to a new owner. Having a Power of Attorney allows a family member to step in and manage the transaction without needing to go to court and have a guardian named.

Talk about the situation and the sale with the aging family member. They will need time to process the idea of selling their home and moving. Homeowners make untold sacrifices and compromises to buy and maintain their homes, so the decision to sell a beloved home is almost always very difficult and brings out a range of emotions.

Throughout this process, an open and honest dialogue about what can be achieved by selling the home and improving their quality of life will be helpful.

Sorting through belongings is an extremely hard task. A lifetime of memories and a loss of their independence are all wrapped up in the contents of a home. It will be impossible to take the entire contents into a one or two-bedroom apartment. Take the time to sort through belongings with your family members and select certain items to give them a sense of home in a smaller space.

If possible, try to pass on some items to younger family members. Most importantly, handle this process with as much compassion as possible.

Keep all relevant people involved and current throughout the process. This is particularly important if the family members are scattered in different states. Adult children who live far away and can’t be active participants in this process shouldn’t be dismissed and left out. Open communication with other family members will minimize the chances of objections when the sale and move take place.

Finally, because this is perhaps the largest and last financial transaction, make sure the sale of their home is done with an eye to their estate plan. Selling the family home when a loved one needs nursing care may cause tax issues. There may be ways to minimize tax exposure for the individual and their estate plan. Confer with an estate planning attorney to avoid any missteps. If you would like to learn more about managing property in your estate plan, please visit our previous posts.

Reference: Herald-Standard (Oct. 27, 2023) “How to handle selling a home when moving into an assisted living facility”

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The Difference Between Guardianship and Power of Attorney

The Difference Between Guardianship and Power of Attorney

Navigating the intricate landscape of elder law can be daunting, especially when faced with the decision between guardianship and power of attorney for elderly parents. This article sheds light on the difference between guardianship and power of attorney, providing clarity on which approach might be the best fit for your family’s unique situation.

What Exactly Is a Power of Attorney?

A power of attorney is a legal document that empowers an individual, often referred to as the “agent” or “attorney-in-fact,” to act on behalf of another, known as the “principal”. This authority can span a myriad of areas, from handling financial matters to making pivotal medical decisions.

  • Deciphering the Power of Attorney Document: The power of attorney document delineates the extent of the agent’s authority. For instance, a medical power of attorney focuses on health care decisions, while a financial power of attorney pertains to managing financial assets, like bank accounts.
  • The Significance of Durable Power of Attorney: This variant of power of attorney remains valid even if the principal becomes incapacitated due to conditions like dementia or Alzheimer’s disease. It’s imperative that this durable power of attorney must be prepared with precision, ensuring the agent’s ability to act remains unaffected by the principal’s mental state.

Guardianship: An Overview

Guardianship establishes a legal relationship where a guardian is court-appointed to make decisions for someone unable to do so themselves.

  • Guardianship Proceedings: Initiating guardianship requires one to file a petition in the probate court. If the court ascertains that the individual is no longer able to care for themselves or their assets, it may appoint a guardian.
  • Differentiating Guardian of a Person from Guardian of an Estate: While the former is tasked with personal and medical decisions, the latter oversees financial matters. The guardian’s responsibilities, whether it’s a duty to provide care or manage financial assets, hinge on the terms of the guardianship.

Power of Attorney or Guardianship: Which Path to Choose?

The choice between power of attorney and guardianship is contingent on the specific needs of the elderly individual.

  • Comparing Decision-Making Power: Both the agent (under power of attorney) and the guardian have a shared duty to provide for the best interest of the individual. However, a guardian typically possesses a more expansive level of decision-making power.
  • Flexibility and Autonomy: With a power of attorney, the principal gets to choose the person who will act on their behalf. In contrast, in a guardianship proceeding, the court has the final say, which might not always resonate with the individual’s preferences.

When Is Guardianship the Answer?

Guardianship becomes indispensable when an elderly parent is incapacitated and lacks a power of attorney.

  • The Process of Seeking Guardianship: If there’s a belief that an elderly parent is vulnerable, it becomes imperative to file a petition for guardianship. Consulting an elder law attorney can streamline the guardianship proceeding.
  • Guardianship vs Power of Attorney Post-Incapacitation: In the absence of a durable power of attorney, guardianship emerges as the sole recourse if an individual becomes incapacitated.

Can Power of Attorney and Guardianship Coexist?

Indeed, it’s possible to have both mechanisms in place, although their interplay can be intricate.

  • Roles and Boundaries: An adult child might be designated as the agent for financial matters under a power of attorney, while a professional guardian could be entrusted with medical decisions.
  • Harmonious Operation: Both the agent and guardian must act in the best interest of the individual, ensuring their comprehensive well-being.

Making the Right Choice for Your Family

Deciding between power of attorney and guardianship demands careful contemplation.

  • Engage with an Elder Law Attorney: Their expertise can offer tailored guidance, helping you traverse the complexities of elder law.
  • Factor in the Elderly Parent’s Desires: Their voice is paramount in the decision-making matrix, ensuring that their autonomy and dignity are preserved.

Key Takeaways:

  • Power of Attorney is a legal instrument allowing individuals to designate someone to act on their behalf.
  • Guardianship is a court-sanctioned role for those incapacitated and unable to make decisions autonomously.
  • The distinction between the two hinges on the individual’s circumstances and the extent of decision-making power required.
  • Both mechanisms can coexist, though their roles might differ.
  • Engaging with an elder law attorney is pivotal to making an informed decision tailored to your family’s needs.

Work closely with your estate planning attorney to ensure you understand the difference between power of attorney and guardianship. If you would like to learn more about guardianship, please visit our previous posts.  

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Retirement Planning Mistakes to Avoid

Retirement Planning Mistakes to Avoid

Planning for your golden years is no small feat. A robust retirement plan is a treasure map to comfort and security in your later life. However, the road to a stress-free retirement is often littered with potential mistakes. Identifying common retirement planning mistakes and knowing the mistakes to avoid can save future retirees from headaches and financial instability.

Are You Underestimating Health Care Expenses When Your Retire?

One retirement mistake made often is underestimating health care costs. It’s easy to overlook long-term care and other health expenses, especially if you’re currently in good health. However, healthcare expenses can deplete your retirement savings faster than anticipated.

As you age, healthcare becomes an integral part of your expenses. Considering potential needs like long-term care, which Medicare does not usually cover, is crucial. Working with a financial planner can help you factor these costs into your retirement plan, ensuring your nest egg is equipped to handle future medical expenses.

Is Your Investment Portfolio Too Aggressive or Conservative?

Your investment strategy plays a pivotal role in your financial security. One of the common retirement mistakes is maintaining an inappropriate investment risk level. As you approach retirement, financial advisors often recommend gradually shifting towards more conservative investments to preserve capital. However, being overly cautious can also impede the growth of your retirement savings.

Discussing your risk tolerance and retirement timeline with a financial advisor is essential. They can help rebalance your portfolio to protect your assets, while still capitalizing on market opportunities.

Have You Neglected Tax Planning?

Tax planning is often overlooked in retirement planning, which can lead to unexpected tax burdens on your retirement income. Without proper planning, everything from social security benefits to withdrawals from your retirement account could be taxed, significantly shrinking your usable income.

Strategies like investing in Roth IRAs, where qualified withdrawals are tax-free, or setting aside funds to handle tax obligations, can be beneficial. It’s advisable to consult with a financial advisor or someone who can provide tax or legal advice to optimize your retirement plan for tax efficiency.

Do You Rely Solely on Social Security Benefits at Full Retirement Age?

A common mistake is assuming that social security benefits will be sufficient as your sole source of income. However, these benefits are designed to supplement your retirement savings account and usually don’t suffice for a comfortable retirement on their own.

It’s essential to have additional sources of income. Strategies like investing, setting up annuities, or continuing part-time work can help ensure a steady income flow throughout retirement, enhancing your financial security.

Are You Withdrawing Too Much, Too Soon?

Careful planning for how much you withdraw in the early years of retirement ensures that you don’t outlive your savings. Retirees sometimes start by withdrawing larger amounts. However, this approach can compromise their financial health in the later stages of retirement.

Setting a sustainable withdrawal rate as part of your retirement plan, considering factors like life expectancy and inflation, is prudent. Financial planners recommend the “4% rule” as a starting point, adjusting as necessary based on individual circumstances and market conditions.

Have You Failed to Consider Inflation?

Inflation can erode the purchasing power of your retirement savings over time, a reality that retirees cannot afford to ignore. A common retirement mistake is failing to factor inflation into retirement planning.

Investing in inflation-protected securities or assets that tend to increase in value over time can help your savings grow in step with or outpace inflation. Regular consultations with your financial advisor can help adjust your strategies to mitigate inflation’s impact.

Did You Forget to Plan Your Estate?

Beyond securing your lifestyle post-retirement, it is also essential to consider how your assets will be distributed upon your death. Without an estate plan, your heirs may not receive the assets you intend to leave them, and legal complications could arise.

Estate planning involves setting up wills, trusts and designating beneficiaries, ensuring that your wishes are honored. Discussing your desires with an experienced estate planning attorney will help ensure that your estate plan is comprehensive and legally sound.

Summary: Key Takeaways to Remember

To wrap up, here are the essential points to remember to avoid these common retirement planning mistakes:

  • Plan for health care costs: Factor in expenses like long-term care and unexpected medical bills.
  • Balance your investment portfolio: Ensure your investments align with your risk tolerance and retirement timeline.
  • Don’t neglect tax planning: Understand potential tax obligations on your retirement income.
  • Supplement social security benefits: Identify additional income sources to bolster your social security income.
  • Adopt a sustainable withdrawal rate: Use strategies like the “4% rule” to avoid depleting your savings prematurely.
  • Protect against inflation: Invest in assets that can counteract the rising cost of living.
  • Establish an estate plan: Prepare the legal mechanisms for asset distribution after your death.

Incorporating these strategies can help you avoid these common mistakes as you plan for retirement and set you on a path to a comfortable and secure retirement. If you would like to learn more about retirement planning, please visit our previous posts.

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Consider using a Trust Be for Long-Term Care

Consider using a Trust Be for Long-Term Care

More than a few seniors who are retired or nearing retirement lose sleep worrying over being able to afford the expense of long-term care, including nursing home care, which can cost thousands monthly. The fallback option for many Americans is Medicaid; according to a recent article, “Long-Term-Care planning using trusts,” from the Journal of Accountancy., Medicaid is a joint federal-state program requiring spending down assets. One option is to consider using a trust for long-term care.

To be eligible for long-term care through Medicaid, a person’s “countable” assets must fall below an extremely low ceiling—in some states, no more than $2,000, with some provisions in some states protecting the “well” spouse. States vary in terms of which assets are counted, with many exempting a primary residence, for example.

For many people, planning for Medicaid for long-term care may consider the use of an irrevocable trust. The basic idea is this: by transferring assets to an irrevocable trust at least five years before applying for Medicaid for long-term care, the Medicaid agency will not count those assets in determining whether Medicaid’s asset ceiling is satisfied.

If the planning is done wrong, there is a risk of not qualifying, thereby defeating the objective of creating the irrevocable trust. In addition, any tax planning may be undone, causing liquidity and other problems.

Some people plan to qualify for Medicaid even though they have asset levels as high as $2 million or more. Much of this may be the family’s primary residence, especially in locations like New York City, with its elevated real estate market. Costs at nursing homes are equally high, with nursing homes costing private-pay patients upwards of $20,000 a month, or $250,000 per year.

Timing is a key part of planning for Medicaid. Many estate planning attorneys recommend clients consider planning in their mid-to-late 60s or early 70s to move assets into a Medicaid Asset Preservation Trust, also called a Medicaid Asset Protection Trust.

This is because of Medicaid’s five-year lookback period. Most states have a five-year look-back period for both nursing home and home health care. If any transfer of countable assets has been made within the preceding five years of applying for long-term-care Medicaid, there will be a penalty period when the person or their family must pay for the care. The penalty is typically measured by the length of time the transferred assets could have paid for care, based on the average costs of the state or the region.

While there is no way to know when a person will need long-term care, statistically speaking, a person in their mid-to-late 60s or early 70s can expect to be healthy enough to satisfy the five-year lookback.

Why not simply make gifts to children during this time to become eligible for Medicaid? For one reason, there’s no way to prevent a child from spending money given to them for safekeeping. A trust will protect assets from a child’s creditors, and if the child should undergo a divorce, the assets won’t end up in the ex-spouse’s bank accounts.

Using a trust for Medicaid planning could be combined with gifts made to children or assets placed in trust for children, depending on the individual’s financial and familial circumstances.

The creation of a Medicaid Asset Preservation Trust is critical. The estate planning attorney must seek to accomplish two things: one, to say to Medicaid that the settlor, or creator of the trust, no longer owns the assets. At the same time, the IRS must see that the settlor still owns these assets and, therefore, receives a basis step-up at death.

If you are considering a trust for long-term care, an experienced estate planning attorney will be needed to advise you and create a Medicaid Asset Preservation Trust to meet the Medicaid and IRS requirements. If you would like to learn more about long-term care planning, please visit our previous posts. 

Reference: Journal of Accountancy (Oc. 9, 2023) “Long-Term-Care planning using trusts”

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Houses make horrible Wealth Transfer Vehicles

Houses make horrible Wealth Transfer Vehicles

Houses make for horrible wealth transfer vehicles. Bequeathing a house can mean passing along financial burdens, red tape, home maintenance responsibilities, potential family conflict and housing market volatility, says Kiplinger’s recent article, “Your Home Would Be a Terrible Inheritance for Your Kids.”

Communication about plans is critical. A study from Money & Family found that 68% of homeowners plan to leave a home or property to heirs. However, 56% haven’t told them about their plans. That will surprise the recipients who may or may not want or be able to service an inherited home.

Suppose you bequeath a house to an heir or heirs. In that case, they’ll have to make an immediate plan for home maintenance, mortgage payments (if necessary), utilities, property taxes, repairs and homeowners’ insurance. Zillow says this can amount to as much as $9,400 annually, not including mortgage payments.

The psychology of the home. Owners often have deep emotional attachments to their homes. Therefore, when people gift their homes to children and heirs, they’re not just giving an asset — they’re endowing them with all the good memories that were made on that property. Emotional connections to the home can be nearly as powerful as a strong attachment to a living being.

Beneficiaries may struggle to make practical choices about the inherited property because of the home’s sentimental value. This emotional aspect can cloud judgment and hinder the effective management and allocation of assets.

The financial burdens and family conflicts for beneficiaries. Inheriting a home entails a range of financial responsibilities that can quickly add up.

Property taxes, insurance premiums, ongoing maintenance costs and unexpected repairs can strain beneficiaries’ financial resources dramatically. If beneficiaries already have their own homes, inheriting an additional property can exacerbate financial burdens and potentially hinder their own financial goals, retirement plans and aspirations. The passing of a family member can also sometimes lead to conflicts among heirs, potentially exacerbating existing fractures in relationships among siblings and other family members. These are just a few reasons why houses make for horrible wealth transfer vehicles.

According to a 2018 study, nearly half (44%) of respondents saw family strife during an estate settlement. Disagreements can cause tension, strain relationships and even result in lengthy legal battles. If you would like to learn more about managing real property in your estate planning, please visit our previous posts. 

Photo by Binyamin Mellish

 

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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