Steps to Take When a Loved One Dies – Annapolis and Towson Estate Planning

This year, more families than usual are finding themselves grappling with the challenge of managing the affairs of a loved one who has died. Handling these tasks while mourning is hard, and often families do not have time to prepare, says the article “How to manage a loved one’s finances after they die” from Business Insider. The following are some tips to help get through this difficult time.

Someone has to be in charge. If there is a will, there should be a person named who is responsible for administering the estate, usually called the executor or personal representative. If there is no will, it will be best if one person has the necessary skills to take the lead.

When one member of a married couple dies, the surviving spouse is the usual choice. Otherwise, a family member who lives closest to the deceased is the next best choice. That person will need to get documents from the local court and take care of the residence until it is sold. Being physically nearby can make many tasks easier.

It is always better if these decisions are made before the person dies. Wills should be kept up to date, as should power of attorney documents, trusts and advance directives. When naming an executor or trustee, let them know what you are asking of them. For instance, do not name someone who hates pets and children to be your children’s guardian or be responsible for your beloved dogs when you die.

Don’t delay. Grief is a powerful emotion, especially if the death was unexpected. It may be hard to get through the regular tasks of your day, never mind the additional work of managing an estate. However, there are risks to delaying, including becoming a target of scammers.

Get more death certificates than seems necessary. Make your life easier by getting at least a dozen certified copies, so you do not have to keep going back to the source. Banks, brokerage houses, phone companies, utilities, credit card companies, etc., will all want to see the death certificate. While there are instances where a copy will be accepted, in many cases you will need an original, with a raised seal. In fact, in some states it is a crime to photocopy a death certificate.

Who to notify? The first call needs to be to the Social Security Administration. You may also want to send an email. If Social Security benefits continue to be paid, returning the money can turn into a time-consuming ordeal. If there are any other recurring payments, like VA benefits or a pension, those institutions need to be notified. The same is true when it comes to insurance companies, banks and credit card companies. Fraud on the credit cards of the deceased is quite common. When a notice of death is published, criminals look for the person’s credit card and Social Security numbers on the dark web. Act fast to prevent fraud.

Protect the physical property. Secure the home right away. Are there plants to be watered or pets that need care? Take pictures, create an inventory and consider changing locks. Take any valuables out of the house and place in a secure location. If the house is going to be empty, make sure to take care of the property to avoid any deterioration.

Paying the bills. Depending on the person’s level of organization, you will have to identify where the money is and if anything is being paid automatically. Old tax returns can be helpful to identify income sources. Figure out what accounts need payment, like utilities.

Some accounts are distributed directly to beneficiaries, like transfer-on-death accounts like 401(k)s, IRAs and life insurance policies. Joint bank accounts and real property held in joint tenancy will pass directly to the joint owner. The executor’s role is to inform the institutions of the death, but not to distribute funds.

File tax returns. You will have to do the final taxes, due on April 15 of the year after death. If taxes were not filed for any prior years, the executor has to do those as well.

Consider getting help. An estate planning lawyer can help with the administration of an estate, if it becomes overwhelming. Regardless of who handles this process, expect the tasks to take anywhere from six months to two years, depending on the complexity of the estate.

Reference: Business Insider (May 2, 2020) “How to manage a loved one’s finances after they die”

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

Would an Early Retirement and Early Social Security Be Smart? – Annapolis and Towson Estate Planning

For older employees who are laid off as a result of the pandemic, the idea of an early retirement and taking Social Security benefits early may seem like the best or only way forward. However, cautions Forbes in the article “Should You Take Social Security Earlier Than Planned If You’re Laid Off Due to COVID-19?,” this could be a big mistake with long-term repercussions.

In the recession that began in 2008, there were very few jobs for older workers. As a result, many had no choice but to take Social Security early. The problem is that taking benefits early means a smaller benefit.

In 2009, one year after the market took a nosedive, as many as 42.4 percent of 62-year-olds signed up for Social Security benefits. By comparison, in 2008, the number of 62-year-olds who took Social Security benefits was 37.6 percent.

You can start taking Social Security early and then stop it later. However, there are other options for those who are strapped for cash.

There is a new tool from the IRS that allows taxpayers to update their direct deposit information to get their stimulus payment faster and track when to expect it. There is also a separate tool for non-tax filers.

Apply for unemployment insurance. Yes, the online system is coping with huge demand, so it is going to take more than a little effort and patience. However, unemployment insurance is there for this very same purpose. Part of the economic stimulus package extends benefits to gig workers, freelancers and the self-employed, who are not usually eligible for unemployment.

Consider asking a family member for a loan, or a gift. Any individual is allowed to give someone else up to $15,000 a year with no tax consequences. Gifts that are larger require a gift tax return, but no tax is due. The amount is simply counted against the amount that any one person can give tax free during their lifetime. That amount is now over $11 million. By law, you can accept a loan from a family member up to $10,000 with no paperwork. After that amount, you will need a written loan agreement that states that interest will be charged – at least the minimum AFR—Applicable Federal Rate. An estate planning attorney can help you with this.

Tap retirement accounts—gently. The stimulus package eases the rules around retirement account loans and withdrawals for people who have been impacted by the COVID-19 downturn. The ten percent penalty for early withdrawals before age 59½ has been waived for 2020.

If you must take Social Security, you can do so starting at age 62. In normal times, the advice is to tap retirement accounts before taking Social Security, so that your benefits can continue to grow. The return on Social Security continues to be higher than equities, so this is still good advice.

Reference: Forbes (April 15, 2020) “Should You Take Social Security Earlier Than Planned If You’re Laid Off Due to COVID-19?”

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What are the Blind Spots in Social Security? – Annapolis and Towson Estate Planning

The SimplyWise survey also found that there are five areas that are especially confusing to people. Only one in 300 of those who took a five-question quiz answered all the questions correctly, reports Think Advisor in the article entitled “5 Common Blind Spots on Social Security.”

Here are some Social Security questions that might be relevant and not knowing the answers could cost you thousands of dollars a year in income.

  1. What age do I claim to maximize my monthly earned Social Security benefit? The age is 70, although 62 years is when an individual can first make a claim. However, your benefits grow each year you wait—up to age 70. According to SimplyWise, only 42% of quiz takers got this answer right.
  2. What is the earliest age non-disabled people can get survivor benefits? A mere 9% answered this correctly. It is age 60. Many think it is age 62, the age people can begin claiming Social Security.That is correct for earned benefits and spousal benefits.
  3. Is a current spouse required to be getting Social Security benefits, for the other spouse to qualify for spousal benefits? Yes. Just 20% of respondents got this answer correct. It is important to understand that if both spouses are claiming Social Security, one can either receive their own benefit or 50% of their spouse’s amount, whichever is more.
  4. Is a divorced spouse able to get survivor benefits? Yes, and just 38% of people got this answer right. The criteria is somewhat different than for married people. The marriage must have lasted at least 10 years, and there are certain rules that apply to remarrying. However, divorced spouses can collect survivor benefits under a deceased ex-spouse.
  5. Can divorced spouses get spousal benefits? Yes, and 67% got this answer correct. Divorced spouses who were married for at least 10 years and have not remarried can claim spousal benefits.

Reference: Think Advisor (Feb. 13, 2020) “5 Common Blind Spots on Social Security”

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

Do I Really Need a Health Care Proxy? – Annapolis and Towson Estate Planning

The Pauls Valley Democrat’s recent article entitled “Advance directives and living wills” explains that an Advance Directive has three parts:

  •  A living will
  •  Naming of your health care agent; and
  •  Your directions for anatomical gifts.

The individual that you name as your Health Care Proxy will make decisions for your treatment and care, if you are unable to do so. These decisions may extend to all medical issues and are not limited to end-stage, life determining decisions that are mentioned in your living will. This is a form of power of attorney that authorizes your agent to act in your behalf to address issues like these:

  1. Accessing your medical information
  2. Discussing your treatment options with your healthcare providers
  3. Getting second opinions on your diagnosis
  4. Selecting and authorizing various medical tests
  5. Your placement in a hospital or care facility
  6. Transferring your care to a new physician; and
  7. Communicating your wishes on life support in terminal or unconscious situations.

For end of life decisions, your health care proxy is bound by your written wishes as expressed in your living will. Life support can be terminated, only if you so authorize in writing. Your healthcare proxy cannot make that decision for you, because that is “personal” to you. You may select one or more persons to act as your proxy, although if two are selected, you should predefine what to do in the event of a conflict.

A best practice is to choose a person who is younger than you and who is geographically close. A person with time to assist you and with whom you are willing to share in advance your wishes, likes and dislikes as to medical care. This person should be trusted to act and honor your wishes.

Because many decisions relate to your very personal concerns about religion, death and dying, these feelings should be shared with your health care proxy before any serious situation.

The Advance Directive is a very important document that pertains to your wishes, as they relate to medical care, end-of-life and death.

Parts I and II can discuss your wishes for care treatment, as well as your choice of a person to represent your wishes. These are two very important issues. Take the time to consider the advance written expression of your own wishes.

Reference: Pauls Valley Democrat (Feb. 12, 2020) “Advance directives and living wills”

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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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

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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Preparing for the Inevitable: The Loss of a Spouse – Annapolis and Towson Estate Planning

Becoming a widow at a relatively young age, puts many people in a tough financial position, says the article “Preparing for the Unexpected Death of a Spouse” from Next Avenue. At this point in their lives, they are too young to draw Social Security benefits. There is no best time, but this is a hard time to lose the prime breadwinner in the household.

Women are more likely than men to lose a spouse. They are typically left in a worse financial position if their spouse dies before they are old enough to take retirement benefits.

One of the best ways to plan for this event, is for both spouses to have life insurance. This can replace income, and term life insurance, if purchased early in life, can be relatively affordable. The earlier a policy is purchased, the better. This can become a safety net to pay bills and maintain a lifestyle.

Another key component for surviving early widowhood, is being sure that both members of the couple understand the couple’s finances, including how household bills are paid. Usually what happens is that one person takes over the finances, and the other is left hoping that things are being done properly. That also includes knowing the accounts, the log in and password information, and what bills need to be paid at what dates.

Having that conversation with a spouse is not easy, but necessary. There are costs that you may not be aware of, without a thorough knowledge of how the household works. For instance, if the husband has done all of the repairs around the house, maintaining the yard and taking care of the cars, those tasks still need to be done. Either the widow will become proficient or will have to pay others.

Couples should work with an estate planning attorney and a financial advisor, as well as an accountant, to be sure that they are prepared for the unexpected. What survivor’s benefits might the surviving spouse be eligible to receive? If there are children at home age 16 or under, there may be Social Security benefits available for the child’s support.

Discuss what debt, if any, either spouse has taken on without the other’s knowledge. Any outstanding medical bills should also be discussed. The last thing a loved one should have to cope with when a spouse passes, is a tangle of debt. However, this often happens.

If the spouse was a veteran, the surviving spouse might be eligible for benefits from the Veterans Administration. Find out what information will be needed to apply for benefits.

Talk with your estate planning attorney to make sure that all proper documents have been prepared. This includes a last will and testament, power of attorney, health care proxy and any trusts.

Reference: Next Avenue (Dec. 18, 2019) “Preparing for the Unexpected Death of a Spouse”

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

How to Prevent The Top Six Retirement Planning Mistakes – Annapolis and Towson Estate Planning

One of the biggest mistakes people make with their retirement, is not realizing what they don’t know, says the Chicago Sun-Times in the article “The 6 biggest retirement mistakes—and how you can avoid them.” By misunderstanding how Social Security works, underestimating life expectancies or failing to plan for big expenses, like long-term care or taxes, people put themselves and their families in financial binds.

These are not the people who make an effort to educate themselves. They are sure they know what’s what—until they realize they don’t. Most people don’t seek out objective advice before they retire. They wing it, hoping things will work out. Often, they don’t.

Retirement is complicated. Here are the top six most common mistakes:

Expecting to die young. If you die young, you have fewer worries about retirement funds. Live a long life and you could easily outlive your retirement savings. One smart move is to wait to collect Social Security as long as possible. Each year you put it off from age 62 to 70, increases your benefit by 7-8 percent.

Ignoring your spouse’s needs. One of you will die first. When that happens, one of your Social Security checks goes away. The survivor will need to get by on only one check. This is why it is vital to maximize the survivor benefit by having the higher earner delay filing for Social Security as long as possible.  Married people who receive a pension, should consider a “joint and survivor” option that lets payments continue for both lives.

Bringing debt into retirement If you’re rich, debt may not be a big deal. You have plenty of income to make payments. Your investments may be earning more than you are paying in interest payments. However, if you are not rich, are you pulling too much from your savings to pay down the debt? This would increase the chances you’ll run out of money. If you take big withdrawals from retirement accounts, it could push you into a higher tax bracket and increase your Medicare premium. Try to get rid of your debt before retiring. However, be careful about tapping retirement accounts to pay off big debts, like a home mortgage.

Neglecting to plan for long-term care. Someone turning 65 today has a 70 percent chance of needing help with daily living tasks, like bathing, eating or dressing. Family and friends may be willing to help, but about half will need long-term care at a cost of $250,000 a year or more. Long-term care insurance is the most obvious solution. However, if you didn’t purchase it when you were healthy, you may need to earmark certain investments, or consider tapping your home equity to pay for this cost.

Thinking you’ll just keep working. About half of retirees report leaving the workforce earlier than they had planned. Most retire because they lose their jobs and cannot find a replacement job or can’t find one at the same income level as their previous job. Others retire because of ill health or the need to stop working to care for a loved one. Working longer can help you make up for not saving enough, but don’t count on it.

Putting off retirement too long. Consider time, health and energy as finite resources. Spend the time and money to speak with professionals, including an estate planning attorney and a financial advisor to determine when you can retire, prepare an estate plan and enjoy retirement.

Reference: Chicago Sun-Times (September 23, 2019) “The 6 biggest retirement mistakes—and how you can avoid them.”

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How Can I Plan for Medical Expenses in Retirement? – Annapolis and Towson Estate Planning

Healthcare can be one of the biggest expenses in retirement.

Fidelity Investments found that a 65-year-old newly retired couple will need $285,000 for medical expenses in retirement. That doesn’t include the annual cost of long-term care. In 2018, that expense ran from $18,720 for adult day care services to $100,375 for a private room in a nursing home, according to Investopedia’s recent article, “How to Plan for Medical Expenses in Retirement.”

Despite saving and preparing for retirement their entire lives, many retirees aren’t mentally or financially prepared for these types of expenses. A survey by HSA Bank found that 67% of adults 65 and older thought that they’d need less than $100,000 for healthcare. However, Fidelity calculated that males 65 and older will need $133,000—and females, $147,000—to pay for healthcare in retirement.

There are two important numbers for healthcare expenses in retirement: how much money is coming in and how much is going out. A typical person in their 60s has an estimated median savings of $172,000. On average, those 65 and older spend $3,800 per month, but Social Security only replaces about 40% of their working-life income.

Medicare can pay for some healthcare spending in retirement. However, there are some limitations. If a senior doesn’t have a Part D prescription drug policy, Medicare won’t cover medications. Medicare Parts A and B won’t cover dental and vision care, but Medicare Advantage plans typically do. Medicare also doesn’t offer coverage for long-term care. Medicare Advantage plans are offered through private insurers.

There are two ways pre-retirees can create a safety net for healthcare spending when they retire. One way is with a Health Savings Account (HSA). HSAs are available with high-deductible health plans and offer three tax advantages: (i) deductible contributions; (ii) tax-deferred growth; and (iii) tax-free withdrawals for qualified medical expenses. HSA funds can be used to pay for certain medical premiums, like Medicare premiums and long-term care insurance premiums. If you’re in your 50s, you can still maximize these plans by taking advantage of catch-up contributions and employer contributions. However, those already enrolled in Medicare can’t make new contributions to an HSA.

You can also buy long-term care insurance to fill the gap left by Medicare. This policy can pay a monthly benefit toward long-term care for a two-to three-year period.

Healthcare spending can easily take a big bite out of a retirement budget. Estimate your costs and design a strategy for spending to help preserve more retirement assets for other expenses.

Reference: Investopedia (June 25, 2019) “How to Plan for Medical Expenses in Retirement”

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