Big Mistakes in Planning for Retirement – Annapolis and Towson Estate Planning

You know it is not always a lack of savings that keeps people from enjoying a great retirement. Despite having a nice nest egg, people can make some common mistakes that mess up their retirement plans.

Kiplinger’s recent article entitled “Avoid These 4 Mistakes That Often Derail Retirement Plans” advises you to avoid these four mistakes, so you do not wreck your golden years.

Early Withdrawal Penalties. It is critical that you know the rules of your retirement plans, if you want to keep the plan on track. If you want to tap into your IRA or 401(k) before age 59½, you will have an early withdrawal penalty. You will also have to add that money in your gross income for the year and pay an additional 10% tax penalty. There are a few exceptions to early withdrawal penalties.

Forgetting about your Employer Match. A recent survey found that roughly a third of workers do not contribute enough to their 401(k) or employer-sponsored retirement plan to get the full match from their employer. The value of this oversight is about $750 each year. That itself can add up to almost $100,000 in missed retirement savings over the course of your career. Retirement savers need to leverage this free money at work.

Paying High Investment Fees. Figure out how much you are paying for your investments. Investment costs that may sound tiny—perhaps 2%—can chip away at your savings over time. These fees compound along with your returns, so you are losing the growth that money could have had.

Missing Out on Compound Interest. Compounding is one of the best rationales for saving early. On a very basic level, compound interest is earning or charging interest on top of interest. When retirement savers are not aware of the value of compound interest, they are missing out on growing their money more quickly. Time is critical when allowing compound interest to work for you, and that is why you should think long-term, when saving for retirement.

Many people think they can plan for retirement alone. However, the closer you get to retirement, the more crucial it is that you have a sound plan that will keep you on track. However, only one in five people has a written plan for retirement.

A comprehensive plan will help get you to and through your later years. Your comprehensive plan should include strategies to pay for health care and a plan for claiming Social Security, as well as strategies to be tax efficient in retirement and leave a legacy for your family.

Reference: Kiplinger (Jan. 29, 2020) “Avoid These 4 Mistakes That Often Derail Retirement Plans”

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Protecting the Financial Future of Children with Special Needs – Annapolis and Towson Estate Planning

Experts say that learning about the special needs of a child early allows parents to have the chance to begin planning immediately, which can give parents peace of mind.

Fox 25 in Oklahoma City’s recent article entitled “How a document could protect the financial future of a child with special needs” recommends that you become knowledgeable about your health insurance coverage.

Note that your child will probably need to apply for government assistance at some point, because at age 26 he will age out of his parent’s insurance.

Securing the future of a child with special needs all the way to adulthood can be very difficult.

Leaving a child with special needs money you have saved could be helpful— but it could place their benefits at risk. Instead, a supplemental trust, called a special needs trust, is the way to plan, so they have everything they need.

With a trust in place, the child would need to pay for expenses in the areas not covered by the government programs.

With a special needs trust, the child has no way to access the income or these assets unless they have a need.

A special needs trust is usually drafted by an estate planning attorney or elder law attorney. This type of trust allows you to leave money or property to a loved one with a disability. These assets are placed in the trust. If you gift them outright, you could risk your loved one’s ability to receive Supplemental Security Income (SSI) and Medicaid benefits. By creating a special needs trust, you can avoid some of these problems.

Naming a guardian for your child with special needs is also very important. A guardian could help make life decisions, if the parent passes away. Therefore, make certain that it’s someone you trust. This may include a legal professional.

Reference: Fox 25 (Oklahoma City) (Jan. 27, 2020) “How a document could protect the financial future of a child with special needs”

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How Bad Will Your Estate’s Taxes Be? – Annapolis and Towson Estate Planning

The federal estate tax has been a small but steady source of federal revenue for nearly 100 years. The tax was first imposed on wealthy families in America in 1916. They were paid by families whose assets were previously passed down through multiple generations completely and utterly untaxed, says the article “Will the government tax your estate when you die, seizing home and assets?” from The Orange County Register.

The words “Death Tax” do not actually appear anywhere in the federal tax code, but was the expression used to create a sympathetic image of the grieving families of farmers and small business owners who were burdened by big tax bills at a time of personal loss, i.e., the death of a parent. The term was made popular in the 1990s by proponents of tax reform, who believed that estate and inheritance taxes were unfair and should be repealed.

Fast forward to today—2020. Will the federal government tax your estate when you die, seize your home and everything you had hoped to hand down to your children? Not likely. Most Americans do not have to worry about estate or death taxes. With the new federal exemptions at a record high of $11,580,000 for singles and twice that much for married couples, only very big estates are subject to a federal estate tax. Add to that, the 100% marital deduction means that a surviving spouse can inherit from a deceased spouse and is not required to pay any estate tax, no matter how big the estate.

However, what about state estate taxes? To date, thirteen states still impose an estate tax, and many of these have exemptions that are considerably lower than the federal tax levels. Six states add to that with an inheritance tax. That is a tax that is levied on the beneficiaries of the estate, usually based upon their relationship to the deceased.

Many estates will still be subject to state estate taxes and income taxes.

The personal representative or executor is responsible and legally authorized to file returns on a deceased person’s behalf. They are usually identified in a person’s will as the executor of the estate. If a family trust holds the assets, the trust document will name a trustee. If there was no will or trust, the probate court will appoint an administrator. This person may be a professional administrator and likely someone who never knew the person whose estate they are now in charge of. This can be very difficult for family members.

If the executor fails to file a return or files an inaccurate or incomplete return, the IRS may assess penalties and interest payments.

The final individual income tax return is filed in just the same way as it would be when the deceased was living. All income up to the date of death must be reported, and all credits and deductions that the person is entitled to can be claimed. The final 1040 should only include income earned from the start of the calendar year to the date of their death. The filing for the final 1040 is the same as for living taxpayers: April 15.

Even if taxes are not due on the 1040, a tax return must be filed for the deceased if a refund is due. To do so, use the Form 1310, Statement of a Person Claiming Refund Due to a Deceased Taxpayer. Anyone who files the final tax return on a decedent’s behalf must complete IRS Form 56, Notice Concerning Fiduciary Relationship, and attach it to the final Form 1040.

If the decedent was married, the widow or widower can file a joint return for the year of death, claiming the full standard deduction and using joint-return rates, as long as they did not remarry in that same year.

An estate planning attorney can help with these and the many other details that must be taken care of, before the estate can be finalized.

Reference: The Orange County Register (March 1, 2020) “Will the government tax your estate when you die, seizing home and assets?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Tax Planning in Your Retirement Planning – Annapolis and Towson Estate Planning

Once you are retired, the only tax you will not have to pay will be—can you guess? Yes, payroll taxes. However, there are plenty of other taxes to be paid, advises Forbes in the article that answers the question “What Taxes Will I Owe In Retirement?”

People who are accustomed to having employers handle income taxes throughout their working lives, are often surprised when they learn that not working does not mean you are not paying taxes. Income is taxable, whether you are working or not. You will not have to pay into Social Security when you retire, and Medicare becomes a premium, not a deduction from your paycheck. However, there are still taxes to be paid.

Federal income taxes range from 10 to 37 percent, depending on your income bracket and marital status. Pensions, annuities, IRA withdrawals, defined benefit plans, 457 or any other pre-tax retirement accounts will generate tax liabilities.

Is any income tax-free in retirement? Withdrawals from Roth IRAs are tax free, since you paid tax on the money before it went into these accounts. The same goes for the Roth 401(k)s.

Are there taxes on Social Security? Approximately 60% of retirees will not owe federal income taxes on Social Security benefits. However, your Social Security benefits might be taxed, depending upon your retirement income. This tax also varies depending upon where you live. Some states tax Social Security benefits, others do not. Rental income and royalties are also counted as income.

Consumer taxes. Sales tax and property taxes will still need to be paid. For many people, property taxes are their highest tax expenses.

Is there a tax on Medicare? The Medicare Surtax, also known as the Unearned Income Medicare Contribution Surtax or NIIT, is a 3.8% Medicare tax that applies to income from investments and regular income above specific thresholds. For 2020, if you have MAGI (Modified Adjusted Gross Income) above $200,000 ($250,000 for married couples filing jointly), you will have to pay NIIT. This is one that most people do not know about, and can add up quickly, especially if you have great market returns and realized gains.

With good planning, you may be able to replace 100% or more of your pre-retirement income. In many cases, it may mean paying about the same amount in taxes as you did while working. If you do a good job of saving and have a large income during retirement, you will most likely end up paying at least some taxes on retirement income. It is a good problem to have, but still a problem.

All of these retirement taxes add up to quite a nice tax bite, if you are not prepared for them. This is another example of how advance tax planning can make a big difference in the quality of your retirement.

Reference: Forbes (Feb. 23, 2020) “What Taxes Will I Owe In Retirement?”

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Estate Planning Is For Everyone – Annapolis and Towson Estate Planning

Estate planning is something anyone who is 18 years old or older needs to think about, advises the article “Estate planning for every stage of life” from the Independent Record. Estate planning includes much more than a person’s last will and testament. It protects you from incapacity, provides the legal right to allow others to talk to your doctors if you cannot and takes care of your minor children, if an unexpected tragedy occurs. Let us look at all the ages and stages where estate planning is needed.

Parents of young adults should discuss estate planning with their children. While parents devote decades to helping their children become independent adults, sometimes life does not go the way you expect. A college freshman is more concerned with acing a class, joining a club and the most recent trend on social media. However, a parent needs to think about what happens when the child is over 18 and has a medical emergency. Parents have no legal rights to medical information, medical decision making or finances, once a child becomes a legal adult. Hospitals may not release private information and doctors cannot talk with parents, even in an extreme situation. Young adults need to have a HIPAA release, a durable power of medical attorney and a power of attorney for their finances created.

New parents also need estate planning. While it may be hard to consider while adjusting to having a new baby in the house, what would happen to that baby if something unexpected were to affect both parents? The estate planning attorney will create a last will and testament, which is used to name a guardian for any minor children, in case both parents pass. This also includes decisions that need to be made about the child’s education, medical treatment and even their social life. You will need to name someone to be the child’s guardian, and to be sure that they will raise your child the same way that you would.

An estate plan includes naming a conservator, who is a person with control over a minor child’s finances. You will want to name a responsible person who is trustworthy and good with handling money. It is possible to name the same person as guardian and conservator. However, it may be wise to separate the responsibilities.

An estate plan also ensures that your children receive their inheritance, when you think they will be responsible enough to handle it. If a minor child’s parents die and there is no estate plan, the parent’s assets will be held by the court for the benefit of the child. Once the child turns 18, he or she will receive the entire amount in one lump sum. Few who are 18-years old are able to manage large sums of money. Estate planning helps you control how the money is distributed. This is also something to consider, when your children are the beneficiaries of any life insurance policies. An estate planning attorney can help you set up trusts, so the monies are distributed at the right time.

When people enter their ‘golden’ years—that is, they are almost retired—it is the time for estate plans to be reviewed. You may wish to name your children as power of attorney and medical power of attorney, rather than a sibling. It is best to have people who will be younger than you for these roles as you age. This may also be the time to change how your wealth is distributed. Are your children old enough to be responsible with an inheritance? Do you want to create a legacy plan that includes charitable giving?

Lastly, update your estate plan any time there are changes in the family structure. Divorce, death, marriage or individuals with special needs all require a different approach to the basic estate plan. It is a good idea to revisit an estate plan anytime there have been major changes in your relationships, to the law, or changes to your financial status.

Reference: Independent Record (March 1, 2020) “Estate planning for every stage of life”

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How Can I Fund A Special Needs Trust? – Annapolis and Towson Estate Planning

TapInto’s recent article entitled “Ways to Fund Special Needs Trusts” says that when sitting down to plan a special needs trust, one of the most urgent questions is, “When it comes to funding the trust, what are my options?”

There are four main ways to build up a third-party special needs trust. One way is to contribute personal assets, which in many cases come from immediate or extended family members. Another possible way to fund a special needs trust, is with permanent life insurance. In addition, the proceeds from a settlement or lawsuit can also make up the foundation of the trust assets. Finally, an inheritance can provide the financial bulwark to start and fund the special needs trust.

Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account. It is vital that families use the services of an elder law or special trusts lawyer. Special needs trusts are very complicated, and if set up incorrectly, it can mean the loss of government program benefits.

If a special needs trust is started with life insurance, the trustor will name the trust as the beneficiary of the policy. When the trustor passes away, the policy’s death benefit is left, tax free, to the trust. When a lump-sum settlement or inheritance is invested within the trust, this can allow for the possibility of growth and compounding. With a worthy trustee in place, there is less chance of mismanagement, and the money may come out of the trust to support the beneficiary in a wise manner that does not risk threatening government benefits.

In addition, a special needs trust can be funded with tangible, non-cash assets, such as real estate, securities, art or antiques. These assets (and others like them) can be left to the trustee of the special needs trust through a revocable living trust or will. Note that the objective of the trust is to provide the trust beneficiary with non-disqualifying cash and assets owned by the trust. As a result, these tangible assets will have to be sold or liquidated to meet that goal.

As mentioned above, you need to take care in the creation and administration of a special needs trust, which will entail the use of an experienced attorney who practices in this area and a trustee well-versed in the rules and regulations governing public assistance. Consequently, the resulting trust will be a product of close collaboration.

Reference: TapInto (February 2, 2020) “Ways to Fund Special Needs Trusts”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Is So Important About Powers Of Attorney? – Annapolis and Towson Estate Planning

Powers of attorney can provide significant authority to another person, if you are unable to do so. These powers can include the right to access your bank accounts and to make decisions for you. AARP’s article from last October entitled, “Powers of Attorney: Crucial Documents for Caregiving,” describes the different types of powers of attorney.

Just like it sounds, a specific power of attorney restricts your agent to taking care of only certain tasks, such as paying bills or selling a house. This power is typically only on a temporary basis.

A general power of attorney provides your agent with sweeping authority. The agent has the authority to step into your shoes and handle all of your legal and financial affairs.

The authority of these powers of attorney can stop at the time you become incapacitated. Durable powers of attorney may be specific or general. However, the “durable” part means your agent retains the authority, even if you become physically or mentally incapacitated. In effect, your family probably will not need to petition a court to intervene, if you have a medical crisis or have severe cognitive decline like late stage dementia.

In some instances, medical decision-making is part of a durable power of attorney for health care. This can also be addressed in a separate document that is just for health care, like a health care surrogate designation.

There are a few states that recognize “springing” durable powers of attorney. With these, the agent can begin using his or her authority, only after you become incapacitated. Other states do not have these, which means your agent can use the document the day you sign the durable power of attorney.

A well-drafted power of attorney helps your agent help you, because he or she can keep the details of your life addressed, if you cannot. That can be things like applying for financial assistance or a public benefit, such as Medicaid, or verifying that your utilities stay on and your taxes get paid. Attempting to take care of any of these things without the proper document can be almost impossible.

In the absence of proper incapacity legal planning, your loved ones will need to initiate a court procedure known as a guardianship or conservatorship. However, these hearings can be expensive, time-consuming and contested by family members who do not agree with moving forward.

Do not wait to do this. Every person who is at least age 18 should have a power of attorney in place. If you do have a power of attorney, be sure that it is up to date. Ask an experienced elder law or estate planning attorney to help you create these documents.

Reference: AARP (October 31, 2019) “Powers of Attorney: Crucial Documents for Caregiving”

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Should You Move Your 401(k) to A Roth? – Annapolis and Towson Estate Planning

Overhauling the retirement savings system is the subject of considerable talk in Washington these days, with the focus on how to give an immediate boost to government tax revenues. With retirement fund accounts being measured in the trillions, it is no surprise that they are being eyed.

One of the ideas being discussed, according to the article “What ‘Rothifying’ 401(k)s Would Mean for Retirees” from The Wall Street Journal, is to repeal the current structure of pretax contributions to retirement accounts and adopt a system where contributions would come only from after-tax contributions, just as Roth IRAs do now. It also has a name, “Rothification.” It could become very popular in the not too distant future.

However, behind this need to plug the gaps in the national budget could be a dismal scenario for workers saving for retirement.

Those U.S. savers who do save money for retirement now contribute to their IRA, SEP, and other tax-deferred accounts with money that is deducted from their taxable income. They only pay taxes on this money when they take Required Minimum Distributions (RMDs) during retirement, or after age 72. The tax deferral provides a powerful incentive to save. The Investment Company Institute reports that defined contribution plans and IRAs were valued at $18.3 trillion as of the third quarter of 2019.

With a federal deficit now at more than $1 trillion and the federal debt at $23 trillion (according to the U.S. Treasury), the money has to come from somewhere. The Treasury also estimates that it will forgo $2.4 trillion in tax revenue from the nation’s tax-deferred retirement savings over the next ten years.

With Social Security having an additional $43 trillion in underfunding, according to the 2019 report of the Social Security and Medicare trustees, government funds are going to have to come from somewhere.

Under “Rothification,” savers would make their retirement fund contributions with after-tax income, and the Treasury would get its money now, rather than waiting for current workers to retire or die.

The challenge is that people do not save as much as they need to for retirement. Many of them are depending upon Social Security to cover the lion’s share of their retirement income. Removing the tax incentive for retirement saving will discourage retirement saving.

What will that mean for estate planning? Adjusting to the changes from the SECURE Act already has estate planning lawyers reviewing estate plans for the new ten-year withdrawal requirements for IRA beneficiaries. Once the “Rothification” discussions move from talk to legislation, expect large push-back from the financial services industry, which runs these accounts, now worth $18.3 trillion.

Reference: The Wall Street Journal (February 17, 2020) “What ‘Rothifying’ 401(k)s Would Mean for Retirees”

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Your Estate Plan is a “Dynamic Document” – Annapolis and Towson Estate Planning

One of the most common mistakes people make about their estate planning is neglecting to coordinate all of the moving parts, reports the Dayton Business Journal’s article “Baird expert gives estate planning advice.” The second most common mistake is not thinking of your estate plan as a dynamic document. Many people believe that once their estate plan is done, it is done forever. That creates a lot of problems for the families and their heirs.

In the last few years, we have seen three major federal tax law changes, including an increase in the federal estate tax exemption amount from $3,500,000 to an enormous $11,580,000. The estate tax exemption is also now portable. Most recently, the SECURE Act has changed how IRAs are distributed to heirs. All of these changes require a fresh look at estate plans. The same holds true for changes within families: births, deaths, marriages and divorces all call for a review of estate plans.

For younger adults in their 20s, an estate plan includes a last will and testament, financial power of attorney, healthcare power of attorney and a HIPAA authorization form. People in their 40s need a deeper dive into an estate plan, with discussions on planning for minor children, preparing to leave assets for children in trusts, ensuring that the family has the correct amount of life insurance in place, and planning for unexpected incapacitation. This is also the time when people have to start planning for their parents, with discussions about challenging topics, like their wishes for end-of-life care and long-term care insurance.

In their 60s, the estate plan needs to reflect the goals of the couple, and expectations of what you both want to happen on your passing. Do you want to create a legacy of giving, and what tools will be best to accomplish this: a charitable remainder trust, or other estate planning tools? Ensuring that your assets are properly titled, that beneficiaries are properly named on assets like life insurance, investment accounts, etc., becomes more important as we age.

This is also the time to plan for how your assets will be passed to your children. Are your children prepared to manage an inheritance, or would they be better off having their inheritance be given to them over the course of several years via a trust? If that is the case, who should be the trustee?

Some additional pointers:

  • Revise your estate plan every three or five years with your estate planning attorney.
  • Evaluate solutions to provide tax advantages to your estate.
  • Review asset titling and beneficiary designations.
  • Make sure your charitable giving is done in a tax efficient way.
  • Plan for the potential tax challenges that may impact your estate

Regardless of your age and state, your estate planning attorney will be able to guide you through the process of creating and then reviewing your estate plan.

Reference: Dayton Business Journal (February 4, 2020) “Baird expert gives estate planning advice”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Do You Need a Revocable Trust? – Annapolis and Towson Estate Planning

A will lets you determine how your property will be distributed when you die, and a revocable living trust also accomplishes that task. However, the owner of the trust can make strict stipulations about how specific assets should be distributed, says Barron’s in the article “Revocable Living Trusts Can Help Your Heirs Avoid Probate. Here’s How They Work.” Another advantage of a revocable trust—avoiding probate, which gives the trust owner far more control over asset distribution.

Remember, probate is a process that takes place under the supervision of a judge in a court. Things do not always happen the way the decedent may have wanted.

It is best for individuals or couples with complex estate planning needs to meet with an estate planning lawyer, who will discuss whether a living trust is the right option. One question couples should ask: does it make sense for them to have a living will, and should it be a joint trust, or should it be two separate ones?

When a trust is created, it needs to be funded. Assets such as real estate, bank accounts, taxable non-retirement investment accounts all need to be retitled so they are owned by the trust. The person who creates the trust has no restrictions as to how the assets within the trust are used while they are alive. The trust can also be revoked during the owner’s lifetime, but it is more common for owners to make tweaks to the trust.

Trusts are very popular in states like California and Massachusetts, which have more restrictive probate laws than other states. Trusts are very good for people who own property in multiple states and would otherwise have to deal with probate in multiple states. Trusts are also excellent for people who wish to maintain privacy about their assets, since the trust’s contents remain private. A will, once it enters the probate process, becomes a public document.

Someone who does not own his or her own home and has limited assets may prefer to use a will, which is less expensive and simpler than a trust. Once they do own a home and have more extensive assets, they can always have a trust created.

A living trust is part of a larger estate plan. Other estate planning documents are still needed, including a durable power of attorney for finances, an advance health care directive, a nomination of guardianship for families with minor children and a living will.

People who have revocable trusts should ask their estate planning attorney about something called a “pour-over” will. This is a will that ensures that any assets accidentally left out of the trust are added to the trust after the death of the owner. If the majority of assets are in the trust, the probate of the pour-over will should be much simpler and there may even be a “fast-track” option for assets under a certain dollar level.

Reference: Barron’s (February 22, 2020) “Revocable Living Trusts Can Help Your Heirs Avoid Probate. Here’s How They Work”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys