The Petrosewicz Law Firm Estate Planning Blog

Thinking Ahead for 2020 Elections

Trying to anticipate changes in the tax codes is like trying to time the stock market—a nearly impossible task. Most tax pundits guessed right, when they said that President Trump was going to cut corporate tax rates in 2017, but the doubling of estate and gift tax exemptions to more than $23 million was a surprise. So was the elimination of deductions for state and local taxes, as reported in The New York Times article “2 Strategies to Consider Ahead of the 2020 Election.”

With a presidential election coming up this fall, the challenge of predicting the impact of changes that may affect taxpayers and their estate planning has already begun. Candidates are talking about big changes, like health insurance, climate change and infrastructure. They are also talking about changes to wealth tax, but what no one has covered yet are changes like lowering exemptions and raising rates for estate and gift taxes and ending the valuation discount for closely held family businesses. This is a tax break that lets families transfer their businesses for far less than they are worth.

This valuation can impact any small business that owners expect to transfer to heirs. The current exemption levels for estate and gift taxes are so high now, that this tax only applies to very few people. However, if the exemption levels and tax rates change, that could become a problem for business owners.

The estate tax is now in effect until 2025, with exemptions at $11.58 million for an individual, and  double that amount for a couple. Everything above that is taxed at a rate of 40%. Lowering the exemption and increasing the tax rate are on some candidate’s agendas, both to raise revenue and address income inequality.

The estate tax is a big target. This is because if the exemption were lowered, it would generate a good amount of income, and impact a relatively small group of Americans. The likelihood of this happening will depend on election results, both at the presidential and congressional levels.

The months before the election occurs may be a good time to take advantage of the high tax exemptions and valuation discounts, just in case they change. This would let business owners pass more of their wealth to heirs free of tax, and could also settle some business issues now, not later, when the owners die.

However, identifying short and long-term goals should be done before making any significant decisions. In some states, like Connecticut, it may not be necessary to plan so aggressively, because the state’s estate and gift tax exemptions are lower than federal ones. It should be noted, however, that the exemptions are set to become equal in 2023.

Eliminating the valuation discount had been proposed by the Treasury Department and the IRS under President Obama, when these discounts were seen as being overly generous. A few months after taking office, President Trump issued an executive order for the Treasury to withdraw the regulation to eliminate the discount. However, the statute is still on the books and could be easily reinstated.

This is an example of the importance of reviewing estate plans on a regular basis and creating estate plans that have enough flexibility to withstand change. Speak with your estate planning attorney to ensure that your estate plan is prepared, whatever the results of the 2020 elections may be.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: The New York Times (Feb. 14, 2020) “2 Strategies to Consider Ahead of the 2020 Election”

Will Your Estate Plan Work Now?

The demise of the stretch IRA is causing many IRA owners and their advisors to take a look at how their estate plans will work under the new law. An article from Financial Advisor titled “Navigating The New Estate Planning Realities” offers several different planning alternatives.

Take larger IRA distributions during your lifetime. If possible, take the IRA distributions and reinvest them in a Roth IRA or other assets that will receive a stepped-up income tax basis on the death of the account owner. The idea is to take out significant additional penalty-free amounts from IRAs during your lifetime, so you will hopefully be taxed at a lower rate than you would be otherwise, with the net after-tax funds then reinvested in either a Roth IRA or other assets that will receive a stepped-up income tax basis when you die.

Paying all or part of the IRA portion of the estate to lower-income tax bracket beneficiaries. The theory here is that if we have to learn to live with the new tax law, at least we can attempt to minimize the tax pain by doing estate planning with a focus on tax planning. If a person has four children, two in high-income tax brackets and two who are in lower tax brackets, leave the IRA portion of the assets to the children in the lower tax brackets and assets with a stepped-up basis to the higher earners.

Withdrawing additional funds early and using the after-tax amount to purchase income-tax-free life or long-term care insurance. Rather than withdrawing all of the IRA funds early, freeze the current value of the IRA, by withdrawing only the account growth or the RMD portion, whichever is greater. Note that this won’t work if the withdrawals push the person’s income into the next higher tax bracket. All or a portion of the after-tax withdrawals then go into an income-tax-free life insurance policy, including second-to-die life insurance that pays only upon the death of both spouses.

Paying IRA benefits to an income tax-exempt charitable remainder trust. This involves designating an income-tax exempt charitable remainder trust as the beneficiary of the IRA proceeds. Let’s say a $100,000 IRA is made payable to a charitable remainder unitrust that pays three adult children or their survivors 7.5% of the value of the trust corpus (determined annually) each year, until the last child dies. Assume this occurs over the course of 30 years, and that the trust grows at the same 7.5% rate for the next twenty years. The children would net nearly $400,000. Note that the principal of the trust may not be accessed, until it’s paid out to the children, according to the designated schedule.

Every situation is different, so it is important to sit down with your estate planning attorney and review your entire estate, tax liabilities under the new law and how different scenarios will work to both minimize taxes during your lifetime and for your heirs. It’s possible that your situation benefits from a combination of all four strategies.

The Petrosewicz Law Firm can assist you with your estate planning and trust needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Financial Advisor (Feb. 11, 2020) “Navigating The New Estate Planning Realities,”

How Bad Can a Do-It-Yourself Estate Plan Be? Very!

Here’s a real world example of why what seems like a good idea backfires, as reported in The National Law Review’s article “Unintended Consequences of a Do-It-Yourself Estate Plan.”

Ann Aldrich wrote her own will, using a preprinted legal form. She listed her property, including account numbers for her financial accounts. She left each item of property to her sister, Mary Jane Eaton. If Mary Jane Eaton did not survive, then James Aldrich, Ann’s brother, was the designated beneficiary.

A few things that you don’t find on forms: wills and trusts need to contain a residuary, and other clauses so that assets are properly distributed. Ms. Aldrich, not being an experienced estate planning attorney, did not include such clauses. This one omission became a costly problem for her heir that led to litigation.

Mary Jane Eaton predeceased Ms. Aldrich. Prior to her death, Mary Jane Eaton had in turn named Ms. Aldrich as her beneficiary.  Ms. Aldrich, in response, created a new account to receive her inheritance from Ms. Eaton. Ms. Aldrich also took title to Ms. Eaton’s real estate.

However, Ms. Aldrich never updated her will after the death of Mary Jane Eaton to include the new account and the new real estate property.

After Ms. Aldrich’s death, James Aldrich became enmeshed in litigation with two of Ms. Aldrich’s nieces over the assets that were not included in Ms. Aldrich’s will. The case went to court.

The Florida Supreme Court ruled that Ms. Aldrich’s will only addressed the property specifically listed to be distributed to Mr. James Aldrich. All other assets passed in part to Ms. Aldrich’s nieces.

Ms. Aldrich did not name those nieces anywhere in her will, and likely had no intention for them to receive any property. However, the intent could not be inferred by the court, which could only follow the will.

This is a real example of two basic problems that can result from do-it-yourself estate planning: unintended heirs and costly litigation.

More complex problems can arise when there are blended families or other family structure issues, incomplete tax planning, or wills that are not prepared properly and that are deemed invalid by the court.

Even ‘simple’ estate plans that are not prepared by an estate planning lawyer can lead to unintended consequences. Not only was the cost of litigation far more than the cost of having an estate plan prepared, but the relationship between Ms. Aldrich’s brother and her nieces was likely damaged beyond repair.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: The National Law Review (Feb. 10, 2020) “Unintended Consequences of a Do-It-Yourself Estate Plan”

Planning for Long-Term Care Before It’s Too Late

Starting to plan for elder care should happen when you are in your 50s or 60s. By the time you are 70, it may be too late. With the national median annual cost of a private room in a nursing facility coming in at more than $100,000, not having a plan can become one of the most expensive mistakes of your financial life. The article “Four steps you can take to safeguard your retirement savings from this risk” from CNBC says that even if care is provided in your own home, the annual median national cost of in-home skilled nursing is $87.50 per visit.

There are fewer and fewer insurance companies that offer long-term care insurance policies, and even with a policy, there are many out-of-pocket costs that also have to be paid. People often fail to prepare for the indirect cost of caregiving, which primarily impacts women who are taking care of older, infirm male spouses and aging parents.

More than 34 million Americans provided unpaid care to older adults in 2015, with an economic value of $522 billion per year.

That’s not including the stress of caring for loved ones, watching them decline and needing increasingly more help from other sources.

The best time to start planning for the later years is around age 60. That’s when most people have experienced their parent’s aging and understand that planning and conversations with loved ones need to take place.

Living Transitions. Do you want to remain at home as long as is practicable, or would you rather move to a continuing care retirement community? If you are planning on aging in place in your home, what changes will need to be made to your home to ensure that you can live there safely? How will you protect yourself from loneliness, if you plan on staying at home?

Driving Transitions. Knowing when to turn in your car keys is a big issue for seniors. How will you get around, if and when you are no longer able to drive safely? What transportation alternatives are there in your community?

Financial Caretaking. Cognitive decline can start as early as age 53, leading people to make mistakes that cost them dearly. Forgetting to pay bills, paying some bills twice, or forgetting accounts, are signs that you may need some help with your financial affairs. Simplify things by having one checking, one savings account and three credit cards: one for public use, one for automatic bill-paying and a third for online purchases.

Healthcare Transitions. If you don’t already have an advance directive, you need to have one created, as part of your overall estate plan. This provides an opportunity for you to state how you want to receive care, if you are not able to communicate your wishes. Not having this document may mean that you are kept alive on a respirator, when your preference is to be allowed to die naturally. You’ll also need a Health Care Power of Attorney, a person you name to make medical decisions on your behalf when you cannot do so. This person does not have to be a spouse or an adult child—sometimes it’s best to have a trusted friend who you will be sure will follow your directions. Make sure this person is willing to serve, even when your documented wishes may be challenged.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: CNBC (Jan. 31, 2020) “Four steps you can take to safeguard your retirement savings from this risk”

Financial Elder Abuse Is Growing

Financial elder abuse is defined as the “fraudulent or otherwise illegal, unauthorized or improper act or process of an individual, including a caregiver or fiduciary, that uses the resources of an older individual for monetary or personal benefit, profit or gain, that results in depriving an older individual of rightful access to, or use of, benefits, resources, belongings or assets.” That’s from The Older Americans Act of 2006.

Consumers Digest estimates that there are at least five million cases of financial elder abuse in America every year. An article titled “Population ages, financial abuse rises” from the Reading Eagle wisely notes that seniors are not just being targeted, they are the bull’s eye.

One of the reasons is because many older Americans live in isolation. A person who spends most of their time alone will welcome any simple human interaction, including talking to anyone who calls on the phone, unknown neighbors introducing themselves, marketing mail or interactions on the internet. This desire for company makes seniors more likely to ignore warning signs and to hand over money and control of their assets.

Do you wonder what kind of person would hand over their power of attorney to a stranger? The plain truth is that most financial elder abuse is committed by people who are closest to the senior. Family members are far more likely to prey on seniors than a stranger.

One financial advisor notes an instance where a scammer forged a check for $25,000 in a senior’s name, then kept doing it until she had stolen up to $75,000. She did it repeatedly, because she knew that she could get away with it.

The key to prevention is planning. First, seniors should simplify their financial and legal matters. Surrounding yourself with trusted advisors and family members who serve as checks and balances for each other is a good idea. It’s sometimes hard to know who to trust sometimes, especially family members. An estate planning attorney should be part of your team, and everyone should work together.

If you become suspicious that financial fraud is happening to you or a loved one, you may want to reach out to the Adult Protective Services office in your community. They will be able to advocate on behalf of the senior.

Treat everything and everyone with a degree of suspicion. If someone knocks on the front door and says they can offer you a discount on tree removal or roof repair because they are in the neighborhood, don’t believe them. You should also have an estate plan in place that protects your assets, so they are less vulnerable to a scammer.

The Petrosewicz Law Firm can assist you with your elder law needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Reading Eagle (Feb. 9, 2020) “Population ages, financial abuse rises”

Tips for Choosing a Fiduciary

One of the important tasks in creating a complete estate plan is selecting people (or financial institutions) to represent you, in case of incapacity or death. Most people think of naming an executor, but there are many more roles, advises the article “What to consider when appointing a fiduciary?” from The Ledger.

Here are the most common roles that an estate planning attorney will ask you to select:

• Executor or personal representative, who is named in your will and appointed by the court to administer your estate.
• Agent-in-fact (under a durable power of attorney) who manages your financial affairs while you are living, if you are unable to do so.
• Health care surrogate who makes health care decisions on your behalf while you are living, if you are incapacitated.
• Trustee of a trust document; administers the trust that you have created.
• Guardian: a person who makes health care and financial decisions on your behalf, if the court determines that other roles, like health care surrogate or agent-in-fact, are not sufficient.
• Guardian for minor children: person(s) who make decisions for your children, if you are not able to because of death or a loss of capacity before the children reach adulthood.

The individuals or financial institutions who take on financial roles are considered fiduciaries; that is, they have a legal duty to put your well-being first. Their responsibilities may include applying for government benefits, managing and invest your assets and income, deciding where you will live and working with your attorneys, financial advisors and accountants.

Many people name their spouse or eldest child to take on these roles. However, that’s not the only option. A few questions to consider before making this important decision include:

• Does this person have the experience, skill and maturity to manage my financial affairs?
• Does this person have the time to serve as a fiduciary?
• Would this person make the same health care decisions that I would make?
• Can this person make a difficult decision for my health care?
• Does this person live near enough to arrive quickly, if necessary?
• How old is this person, and will they be living when I may need them?
• What kind of response will my family have to this person being named?
• Are my assets substantial enough to require a financial institution or accountant to manage?

These are just a few of the questions to consider when choosing fiduciaries or health care agents in your estate plan. Speak with your estate planning attorney to help determine the best decision for you and your family.

The Petrosewicz Law Firm can assist you with your estate planning and trust needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: The Ledger (Oct. 16, 2019) “What to consider when appointing a fiduciary?”

What Women Need to Know about Social Security

Deciding when and how to claim Social Security benefits depends on several different factors, all of which are unique to each person’s situation. For women, there are additional financial realities to be aware of, according to the article “3 Things Women Must Know About Social Security Benefits” from Next Avenue.

First, the Earnings Limit Test. Many people end up taking their benefits before they reach their FRA—full retirement age. However, for those who keep working and want to claim benefits at the same time, there is the Social Security Earnings Limit test, which may lower benefits, while you are working. Any retirement benefits over the limit are withheld, until you reach your FRA. They are eventually paid to you.

Here’s an example: Dolores is turning 62 in December 2019. She currently earns $55,000 working full time. If she goes part time, her income will drop to $35,000. Her idea is to start claiming Social Security benefits at the earliest age, when her benefits would be about $1,170. Note that if she waited until her FRA, age 66 and six months, she would receive $1,616.

However, the 2019 earnings limit was $17,640. She earns twice that, so her benefit would be reduced by $1 for every $2 she is over the limit. Her annual Social Security payment of $14,060 would be reduced by half of her excess earnings, or $8,680. She’ll get the benefits back when she reaches FRA, but while she is working, she won’t get as much as she might have expected.

Social Security Benefits and Taxes. The general rule for this is that if a household’s combined income exceeds a certain amount, a portion of the taxes are taxed. The limits for determining the income level are not indexed for inflation, so every year more and more retirees fall into this tax range.

For single women who have an income of $34,000 or more, as much as 85% of Social Security payments for the year will be considered income and taxed as ordinary income. Married women filing jointly with a combined income of $44,000 or more will also have up to 85% of their Social Security payments for the year reported on IRS Form 1040 as income.

Medicare Premiums and Social Security Benefits. Consider your Medicare Part B premiums, before you consider claiming Social Security benefits. The Social Security and Medicare programs are separate programs, but each has a bearing on the other. The Social Security Administration collects Part B Medicare premiums and automatically deducts premiums from Social Security benefits before you receive them. This is often a big surprise to women. Their benefits are reduced, and they may not have included this in their budget.

Medicare B is the part that pays for doctors and outpatient procedures. There are co-pays and deductibles. However, generally speaking, Part B pays for about 80% of covered services. The amount that is paid depends upon the overall household income. The 2019 standard monthly premium is $135.50 per month, or $1,626 for the entire year. That’s a per-person cost. If you have a high household income, you’ll pay more for Part B—the range is from $160 to more than $460 a month per person.

Like many other aspects of retirement, you’ll need to do your homework and understand how Social Security works to make the best decisions about your benefits.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Next Avenue (Nov. 19, 2019) “3 Things Women Must Know About Social Security Benefits”

Spare Yourself These Retirement Expense Surprises

Learning about the common financial surprises that occur during retirement is an excellent way to try to protect nest eggs, says the article “The Expenses People Often Forget When They Plan for Retirement” from The Wall Street Journal.

A study by the Society of Actuaries found that one in five retirees and one in four widows experienced four or more financial shocks during retirement. That’s a lot of surprises for people living on fixed incomes. The good news is that the study also revealed that many older adults who experienced a stealth surprise appear to have bounced back.

Retirees are resilient, and most are good about making adjustments to their budgets to overcome their surprises. However, being prepared for these financial shocks is even better. Here are some of the more common hidden costs of retirement:

Replacement costs for big ticket items. A new furnace, a new car, or a new roof are all expenses that come up when you’re working. They don’t stop because of retirement. Many retirees underestimate their longevity and overestimate big ticket items that need replacement.

Relatives in need. This pinch can come from older parents or relatives and younger family members who find themselves in a financial crisis. An adult child who loses their job or goes through a divorce or a grandchild who needs help with tuition are some of the typical examples. Can your nest egg sustain their needs, or do you need to say no? Can other family members help?

Required distributions and taxes. Most people know that they will need to start taking withdrawals from tax-deferred accounts upon reaching 72, but they don’t often understand the larger picture. The distribution may push the couple into a higher tax bracket, and increase Medicaid Part B premiums, which are tied to annual income.

It’s not possible to anticipate every single surprise cost that will come up during retirement. However, there are a few things that can be done. First, try to avoid any major expenditures during the first five years of retirement. That’s when nest eggs are most vulnerable to bear markets. Next, while you are saving for retirement or making budgets, include money for home repairs and upkeep.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: The Wall Street Journal (Oct. 17, 2019) “The Expenses People Often Forget When They Plan for Retirement”

Social Security Scams Evolve Despite Growing Awareness

Security experts are predicting that Social Security phone scams are going to multiply and get worse, according to the article “Don’t Fall For These New Social Security Phone Scams” from Forbes. The Social Security phone scam is the most common phone scam in 2019, with a 23-fold rise in frequencies. A study by BeenVerified says that Social Security numbers accounted for 10% of all fraudulent calls. The FTC says that Social Security scams cost Americans $19 million in 2018.

How are they getting away with it? Scammers know that their potential victims are screening calls, so they’ve shifted their tactics. They’re leaving official sounding voicemails, with a phone number that looks like it just might be legitimate. The area code will appear to be from Washington, D.C. However, the numbers are not even from the United States.

Here are the worst offenders:

“Your Social Security number has been suspended.” A dire sounding threat, especially to seniors who count on their Social Security benefits. The caller says there has been fraudulent or criminal activity and the only way to resolve the problem is to call back. It’s not real. The Social Security Administration does not suspend, block or freeze numbers.

“Your Social Security number has been compromised.” This is a smart scam, as everyone is worried about data breaches. The automated call requests that you enter your Social Security number to verify that it has not been breached, and may also ask you to provide details, like a bank account number. Follow these instructions, and you’ve given your Social Security number to thieves. The SSA does not make these types of calls and would never ask for confirmation of your number by phone.

“A federal case has been brought against your Social Security number.” Seniors are especially vulnerable to the idea that a lawsuit is pending against them. However, the SSA or the government does not alert people to lawsuits by phone.

“You must send money to dismiss the case against you.” The government does not request payment by gift cards. If you really owe the government money, you’ll receive an official tax notice from the IRS.

Scammers are getting more sophisticated and more brazen. Don’t become a victim.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Forbes (Nov. 24, 2019) “Don’t Fall For These New Social Security Phone Scams”