Should I Use a Home Equity Loan to Float my Retirement? – Annapolis and Towson Estate Planning

Many retirees—and those nearing retirement—have put much of their savings in traditional IRAs or 401(k)s, which are tax-deferred methods for accumulating wealth. In addition, taxpayers may decide to use other tax-deferred accounts to avoid interest, dividends, and capital gains from spilling into their tax returns. These strategies can help taxpayers decrease income and taxes.

However, Kiplinger’s recent article, “How You Can ‘TAP’ into Home Equity to Help Keep Your Retirement Stable,” says that once we “turn on the faucet” and withdraw money from these tax-deferred accounts, additional income will have to be claimed on our tax returns. Instead, retirees can make moves that will help them reduce taxes. A lesser-known tool to look at for tax-free income is a home equity line of credit, or HELOC, on your home.

Let’s examine two scenarios in which a HELOC may make sense in retirement:

An IRA drawdown. Let’s say that a typical married retired couple wants to stay in the 12% tax bracket as joint filers. They can withdraw up to $78,950 of taxable income from their IRAs to stay in this bracket in 2019. That amount goes up to $103,350, after adding the standard deduction of $24,400. Then, for any additional funds they may need during the year, they can use a HELOC. For example, if they take $15,000 out, they will actually receive $15,000 tax-free. However, if they take the same amount from their IRA, it would move them into the 22% tax bracket. As a result, they’d owe $3,300 in federal taxes, in addition to any state or local income taxes. Therefore, they only receive about $10,000 after taxes from their IRA withdrawal. The HELOC is tax-free, and the interest rate charged on a HELOC is generally low at this point. Depending on your purpose for the money, that interest may be tax deductible, and repayments can be planned over a multiyear term to be covered by future IRA distributions or other investment income. This spreads out the tax impact to continuously stay under tax bracket thresholds, keeping as much of your money in your hands as possible.

Emergency money. Unexpected expenses can arise, and if you don’t have funds available in a checking or savings account, the emotion of a stressful emergency may drive you to make impulsive (and costly) financial decisions. Instead of using a high-interest credit card or cashing out investments, a HELOC can be a wise move. Note that there are some HELOC disadvantages. The interest rate is variable, which means the monthly payment can be unpredictable, especially during times of rising interest rates.

There are other ways to use the equity in your home to create cash flow in retirement, but a HELOC may be best for some retirees, based on its flexibility for scenarios, such as future downsizing or the potential need for the cost of assisted living facilities down the road. A HELOC can be a very useful tool for a proactive and comprehensive cash-flow plan in retirement.

Reference: Kiplinger (October 8, 2019) “How You Can ‘TAP’ into Home Equity to Help Keep Your Retirement Stable”

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

How Can Life Insurance Help My Estate Plan? – Annapolis and Towson Estate Planning

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

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

How Do I Reduce My Blended Family Fighting Concerning My Estate Plan? – Annapolis and Towson Estate Planning

The IRS recently announced that in 2020, the first $11.58 million of a taxable estate is free from federal estate taxes. Therefore, a vast majority of estates won’t have to pay federal estate taxes. However, a TD Wealth survey at the 53rd Annual Heckerling Institute on Estate Planning found that family conflict was identified as the leading threat to estate planning.

Investment News’ recent article, “Reducing potential family conflicts,” explains that a blended family can result from multiple marriages, children from a current or former marriage, or children involved in multiple marriages. There are more “blended families” in the U.S. than ever before. More fighting over estate planning occurs in blended families.

The key element in any conflict resolution is open and honest communication. It’s especially the case, when it involves a blended family. In many instances, it’s best to explain a proposed estate plan to the family in advance.

If anyone objects, listen to their point of view and try to be empathetic to their position. You may wind up with a compromise, or, if no changes are made, at least the family member had an opportunity to air their grievances.

One potential solution to minimize conflicts within a blended family may be a prenuptial agreement. The agreement is signed prior to the marriage and outlines the financial rights of each spouse, in the event of a divorce or death. Prenups are particularly useful in second marriages, especially when there is a disparity in age and wealth between the parties.

However, not every married couple in a blended family has a prenuptial agreement. Even if they do, blended families can still have family conflicts in estate planning.

It is important to remember communication, reducing the chances of a will contest with a “no-contest” clause, asking your attorney about a revocable living trust and compromise.

Estate planning can be particularly difficult for blended families. Talk with an experienced estate planning attorney about the techniques that can help reduce potential family conflicts.

Reference: Investment News (December 9, 2019) “Reducing potential family conflicts”

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

What Estate Planning Documents Does My Child Need Now That She’s an Adult? – Annapolis and Towson Estate Planning

Your child may graduate from high school and head off to college or start a full-time job or vocational training program.

Although they’re still your children, the law sees them as adults. As a result, parents’ “right” to protect their adult children or make decisions for them immediately becomes quite limited.

The Tewksbury Town Crier’s recent article, “Is your child turning 18? Here’s what you need to know,” explains that people often have an estate planning attorney draft the appropriate documents, so they will be legal and binding. Let’s look at a list of documents to consider and discuss with your young adult:

  • HIPAA Authorization: if your 18-year-old has a job in another state or will be attending college and needs medical records or assistance making appointments, ask her to go to the doctor’s and dentist’s office and sign forms that designate agents to act on her behalf. Due to HIPAA laws, information can’t be released without the adult child’s permission.
  • Healthcare Proxy: Have your 18-year old complete this document, make a copy, put a copy on each parent or guardian’s phone and put a copy on your child’s phone. This is for an emergency, like when the child can’t speak for herself. However, don’t wait for an emergency. If your child is at college, the school will only contact you as the emergency contact, but the proxy is between you and the hospital and includes mental health issues. A healthcare proxy lets you to participate in life and death decisions, should your child not be able to advocate for herself.
  • Durable Power of Attorney: A general durable power of attorney or financial power of attorney must also be signed by the 18-year old, designating his parents, guardians, or others as agents authorized to act on his behalf. This allows the agent access to financial information, so that he can participate in the financial issues with a university or business in the event that the child cannot.
  • FERPA: This is an educational records release, which allows the educational institution to share grades, transcripts and other related materials with parents or designated agents. Without it, the school will not provide you with access to any information.

Finally, encourage your young adult family member to register to vote.

Reference: Tewksbury Town Crier (December 8, 2019) “Is your child turning 18? Here’s what you need to know”

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

What’s the Best Way to Take My Required Minimum Distribution? – Annapolis and Towson Estate Planning

CNBC’s recent article, “These tips can help retirees make required minimum distributions easy and tax penalty free,” gives the steps to follow, so we don’t leave money on the table.

RMDs or required minimum distributions, are the minimum amount people age 70½ and older must withdraw from their retirement funds. If you’ve inherited a retirement account, you may also have to make a withdrawal. The amount you need to withdraw varies from year to year and is based on specific calculations, including what your account values were as of December 31 the prior year and your age.

The time to get started on your RMD for this year is right now, because the paperwork may take some time. You have until April 1, if you just turned 70½ this year. Let’s look at a few tips:

Get your paperwork organized. In order to know how much you have to withdraw, you have to have an accurate picture of what you own. Create a list of accounts and take an inventory first, so you know where all your retirement accounts are located.

Know what you can take from what account. If you have multiple IRAs, you can take your total RMD from any one of those accounts because of the aggregation rule. However, with multiple IRAs, you still must calculate the amount you take out based on the value of all of them. It’s that same with multiple 403(b) retirement accounts. The rule doesn’t apply to 401(k) plans. If you have multiple 401(k) accounts, you must take money from each one, and you can’t take an RMD from an IRA to satisfy a 401(k), or vice versa.

Understand the rules, if you’re still working. If you’re 70½ and still employed, you could get a break from taking your RMD in certain circumstances. Generally, 401(k) plans have a still-working rule, which stipulates that you don’t have to take the RMD until you retire. However, you can only delay the RMDs, if the plan is attached to the company where you’re currently employed. Other accounts from a previous employer are excluded, so you must still take distributions from those.

Keep an eye on any inherited accounts. If you’ve inherited a retirement account, you may have to take an RMD by the end of this year. That generally doesn’t apply if you inherited the money from your spouse, because spouses can do a rollover and keep postponing the distributions. However, if you’re a non-spouse beneficiary, you probably must take a distribution by the end of 2019. If you inherited the account in 2018, you’ll need to take your first RMD in 2019.

RMDs from a Roth IRA will likely be tax-free. However, if you’ve inherited one of these accounts and you didn’t take that money out, you’ll have to pay a 50% penalty on the funds you should’ve withdrawn.

Consider giving to charity. A good way to avoid paying taxes on your RMD, is to give the money to charity. A qualified charitable distribution lets you make donations to a charity directly from your IRA, instead of taking the RMD yourself. Therefore, if your RMD is $5,000, and you typically give $5,000 to charity each year, you can donate that money directly and not pay tax on it.

Reference: CNBC (November 29, 2019) “These tips can help retirees make required minimum distributions easy and tax penalty free”

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

Why Even “Regular Folks” Can Benefit from Trust Funds – Annapolis and Towson Estate Planning

A trust is a useful tool, even if you’re not a wealthy person. There are many different types of trusts, but the most basic types are revocable and irrevocable. A recent article from Business Insider “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich” clarifies when and how to use a trust fund.

Trust funds are often used to avoid having assets pass through the probate process. They allow for a tax-efficient means of transferring wealth, avoid or defer estate taxes and help with charitable giving. An experienced estate planning attorney can help clarify what type of trust is needed, and how it can work with an overall estate plan.

Trust funds have a bad reputation for creating badly-behaved young adults, but they are a good planning tool for anyone. Some trusts are more expensive to maintain than others, which is why they are often associated with wealthy people. However, they have the same purpose: to ensure that a person’s money goes where they want it to go. The directions can be as specific as you wish.

There are three people involved in any trust: the grantor, who puts their assets in the trust fund; the beneficiary or beneficiaries, who receive those assets according to the terms of the trust; and the trustee, the person or group of advisors or the organization that is responsible for managing the trust when the trust is created and after the grantor has died. A grantor can put almost any kind of asset into a trust, but most people use them for real estate, bank accounts, investment accounts, business interests and life insurance policies.

If a trust is revocable, it means the grantor may make changes at any time and can generate income through the assets in the trust. The assets are included in the grantor’s estate and the grantor may pay taxes on the assets now and upon their death. Creditors can access the assets for any unpaid debts. Once the grantor of a revocable trust dies, the trust becomes irrevocable.

An irrevocable trust cannot be changed, once it is created. It can only be accessed after the death of the grantor. The assets are not included in the grantor’s estate and they do not have to pay taxes during their lifetime or at death. The taxes are the responsibility of the trust and beneficiaries. Depending on how the trust is designed, creditors may not access the trust.

If you are considering setting up a trust, meet with an estate planning lawyer to discuss your unique situation and determine which type of trust works best for you and your family.

Reference: Business Insider (December 2, 2019) “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich”

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

What 2020 Tax Changes May Bring for Wealthy Families – Annapolis and Towson Estate Planning

What happens in the political landscape in 2020 could have an impact on wealthy individuals, in a positive and a negative way. The biggest impact may be changes in estate and income taxes. With income taxes, the tax brackets are indexed, so they will go higher in 2020. There are also new IRS thresholds, so people will need to be aware of these changes.

The article “What Wealthy Clients Need to Know About 2020 Tax Changes” from Financial Advisor offers a look at what’s coming next year.

The tax rates were generally lowered, and thresholds increased. The top bracket for married couples in 2017 was 39.6% for couples whose taxable income was higher than $470,700. In 2020, that same bracket is 37%, with a new income threshold of $622,051.

There are more holiday gifts from the IRS. The estate exemption increases to $11.58 million in 2020, although the annual exclusion for gifts stays at $15,000. The maximums for retirement account contributions have also been increased.

The mandated penalty for not having health insurance is gone. Therefore, anyone who has the income to self-insure without having a policy that is ACA-qualified won’t have to pay a penalty. However, that varies by state: California enforces a tax penalty for people who do not have health insurance.

A major consideration for 2020 is the higher standard deduction. This may mean more strategic planning for which years people should itemize. Some experts are advising that taxpayers bunch their deductions, so they can itemize. One strategy is to do this every other year.

Many nonprofits are advising their donors to plan their charitable giving to take place every other year for the same reason.

With the stock market continuing to hit record highs, it may also make sense for people to transfer highly appreciated securities to donor advised funds.

Another potentially big series of changes that is still pending is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The legislation is still pending, but it is likely that some form of the bill will become law, and there will be further changes regarding retirement accounts and taxes. The bill passed the House in the spring, but it still pending in the Senate.

Reference: Financial Advisor (December 2, 2019) “What Wealthy Clients Need to Know About 2020 Tax Changes”

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

Q & A – Medicaid for Nursing Home Care – Annapolis and Towson Estate Planning

As we approach our third act, new terminology comes into our daily lives that we may have heard before, but maybe never gave much thought to. Terms like Medicare, Medicaid, Social Security, Long-Term Care, and so on, can become sources of anxiety, if we don’t truly understand them. Therefore, today we’re answering some of the fundamental questions about Medicaid for nursing home care, in the hopes that we can alleviate at least one source of anxiety for you.

Question #1 – What is Medicaid?

Medicaid is a state and federal government-funded program that provides medical services to financially eligible individuals. Unlike Medicare, you do not have to be elderly to qualify for Medicaid, and many elderly individuals receive Medicaid benefits, including nursing home care. Every state administers its own version of Medicaid. For more information on Medicaid programs in your state, visit the Medicaid website, and select your state.

Question #2 – What are Medicaid’s basic financial eligibility requirements for nursing home care?

To determine your eligibility for nursing home benefits under Medicaid, the government will look at your income and resources in a given month to ensure you are within the legal limits for Medicaid benefits. To qualify for Medicaid, your monthly income must be less than the Medicaid rate for nursing home care, plus your typical monthly healthcare expenses. If you are eligible, you are allowed to keep $70 of your income for personal use. The rest is taken to pay for your care.

Question #3 – What is the Medically Needy Program under Medicaid?

For individuals that may exceed the financial limits to receive Medicaid, they may still qualify to receive Medicaid benefits under the medically needy program. This program allows individuals with medical needs to “spend down” their income to acceptable rates, by paying for medical care for which they have no insurance. For individuals over the age of 65, states are required to allow you to spend down your income regardless of medical necessity.

Question #4 – What resources can we have if my spouse is applying for Medicaid?

When a married couple applies for Medicaid, both spouses’ income and resources are included in the qualifying calculations. You may have all of the “exempt” resources, like an automobile and a house, along with one non-exempt item that does not exceed a set value (currently just over $58,000), such as cash or investments. Once your spouse qualifies for Medicaid, after one year, all excess income and resources must be transferred to the non-Medicaid-benefitted individual. That spouse may also accrue income and resources over and above the limits that Medicaid imposes on the benefitted spouse.

More information can be found on the Medicaid website, including requirements and benefits information for the state in which you reside.

References:

Medicaid.gov. (Accessed November 28, 2019) https://www.medicaid.gov/medicaid/index.html

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

The Medicaid Medically Needy “Spend-Down Program” – What You Need to Know – Annapolis and Towson Estate Planning

If you’ve been denied Medicaid benefits because you have too many assets or too high an income, don’t give up. There are available programs that may enable you to qualify for Medicaid benefits, despite this setback. Each state may offer different programs, and the Affordable Care Act (ACA) has added new ways to obtain coverage. This article addresses the “spend down program” offered in every state.

Medicaid Spend-Down Program – The Basics

To qualify for Medicaid benefits, your income and assets may not exceed a certain amount set by law. If these items do exceed the legal limits, you may still qualify after a spend-down period. The medically needy spend-down program helps individuals over the age of 65, and some younger individuals with disabilities. To be eligible for this program, you must not be receiving public financial assistance.

Exempt & Non-Exempt Assets

It is not necessary to sell off everything you own to qualify for the spend-down program. You may keep a certain amount of “exempt assets,” such as the home you live in, your car (used for transportation), household furniture, clothes, jewelry and other personal items. None of these assets affect your eligibility, regardless of their value (unless you have high equity, say $1 million in an asset, in which case you may need to spend that down).

Non-exempt assets, on the other hand, do affect your eligibility for the spend-down program. These assets include bank accounts, stocks, investments, and cash over $2,000 for an individual or $3,000 for a married couple.

Amount of Income You Can Have to Apply

It does not matter how much income you have when you apply. The more income you have, though, the more medical expenses you must incur before your coverage can start. The way you spend down this income is by spending it on medical expenses, until you reach the income requirements for Medicaid. Interestingly, you just need to incur medical costs. You don’t have to actually pay them.

In addition, you can pay down accrued debt to spend down your income. Therefore, paying down credit card bills, car payments, or mortgage debt can count towards your spend down. Another tactic you can use, is to pay excess monthly amounts on old medical bills.

Seeking Professional Assistance

Medicaid programs are different in each state, and the laws change frequently. If done wrong, you could end up incurring penalties instead of obtaining benefits. It may be a good idea to enlist the help of a Medicaid specialist or elder law attorney to walk you through the process in a way that will avoid these types of penalties.

Resources:

National Council on Aging. “Benefits Checkup” (Accessed November 28, 2019) https://www.benefitscheckup.org/fact-sheets/factsheet_medicaid_la_medicaid_spend_down/#/

U.S. News and World Report. “How a Medicaid Spend Down Works.” (Accessed 28, 2019) https://money.usnews.com/money/retirement/baby-boomers/articles/how-a-medicaid-spend-down-works

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

Having “The Talk” – Resources to Help You Talk About End of Life Needs – Annapolis and Towson Estate Planning

When it comes to thinking about the end of our lives, it can be uncomfortable. Perhaps you’ve thought a lot about how you want the end of your life to look, but you’re having trouble initiating a conversation with your loved ones. Perhaps you’re the adult child of aging parents who have not mentioned their end-of-life wishes. This is a conversation that should not be put off any longer. This article provides resources to get the conversation started, so that you and your loved ones are on the same page regarding end-of-life issues.

Preparing for the Conversation

We often don’t talk about difficult things with family, because we don’t know where to start or we don’t have the words to broach the subject. It can be helpful to sit down and outline what your goals are in the conversation. For example,

  • Putting finances in order
  • Ensuring a family member or pet is taken care of
  • Alerting loved ones to an important or upsetting health issue
  • Informing loved ones, as to who you want as your health care proxy

This list can get pretty long, so it’s essential to write things down in advance to help keep you on track. One resource we’ve found that is useful at this stage is The Conversation Project’s Conversation Starter Kit. This 11-page guide consists of fillable forms designed to help you plan and guide the conversation with your loved ones.

Educating Loved Ones

Sometimes, priming yourself and your loved ones can provide a starting point for the end-of-life conversation. Podcasts are a popular way for people to learn new things. -Why not end-of-life care options? Here’s a list of several popular podcasts addressing end-of-life issues that you can subscribe to and share with your friends and family:

Finding the Words

Whether you are thinking about your own future or the future of an aging loved one, it can be hard to find the right time and the right words to begin a conversation. The truth is, this doesn’t have to be one single, heavy conversation. You can lead up to longer, more in-depth discussions using a few smaller conversations that can happen at any time. Consider these conversation-starters:

  • “I was thinking about what happened to Aunt Sally, and it made me realize…”
  • “My friend Louis died suddenly last month, leaving his wife and daughter reeling. I’m worried that might happen to you and dad.”
  • “You know, I’m okay right now, but I’m worried that _____, and I want to be prepared.”
  • “I need your help thinking about the future.”
  • “Remember when Uncle Fred died and everyone said it was a ‘good death’? How can we make sure yours is too?”

Talking about end-of-life issues can be difficult. However, it’s a conversation worth having to ensure you face your last years, months, days and hours on your own terms.

Resources:

The Conversation Project. “Starter Kits.” (Accessed November 28, 2019)  https://theconversationproject.org/

ARRP. Org. “Caregiver Life Balance.” (Accessed November 28, 2019) https://www.aarp.org/caregiving/life-balance/info-2017/talk-end-of-life-care.html

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