The Petrosewicz Law Firm Estate Planning Blog

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,”

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”

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”

What If Only One Parent Is Willing to Plan?

Making matters much worse for one family, is the fact that while the mother is willing to speak with an estate planning attorney and make a plan for the future, the father won’t even discuss it. What should this family do, asks the article from nwi.com titled “Estate Planning: Can one spouse plan?”

Planning for your eventual demise and distribution of your worldly goods isn’t as much fun as planning a vacation or buying a new car. For some people, it’s too painful, even when they know that it needs to be done. There’s nothing pleasant about the idea that one day you won’t be with your loved ones.

 Although contemplating the reality is unpleasant, this is a task that creates all kinds of problems for those who are left behind, if it is not done.

Unfortunately, it is not unusual for one parent to recognize the importance of having an estate plan and the other parent does not consider it to be an important task or simply refuses. In that case, the estate planning attorney can work with the spouse who is willing to go forward.

Some attorneys prefer to represent only one of the spouses, especially in a case like this. Spouses’ interests aren’t always identical, and there are situations where conflicts can arise. When a couple goes to the estate planning attorney’s office and wishes the attorney to represent both of them, sometimes the lawyer will ask for an acknowledgment that the lawyer is representing both of them as a couple. In the event that a disagreement arises or if their interests are very different, some attorneys will withdraw their representation. This is not common, but it does happen.

The estate planning lawyer usually prefers, however, to represent both spouses. Married couple’s estates tend to be intertwined, with real property jointly owned as husband and wife, or husband and husband or wife and wife. Spouses are usually named beneficiaries of life insurance and retirement accounts. Even in blended family situations, this holds true.

If the father in the situation above won’t budge, the mother should meet with the attorney and create an estate plan. The problem is, she may not be able to plan effectively for the two most common and usually the most valuable assets: their jointly owned home and retirement accounts.

If the home is owned by the spouses as “entireties property,” that is, by the couple, she can’t make changes to the title, without her spouse’s consent. One spouse cannot sever entireties property, without both spouses agreeing. Some retirement plans are also subject to the federal law ERISA, which requires a spouse’s consent to change beneficiaries to someone other than the spouse.

Even with these issues, having a plan for one spouse is better than not having any plan at all.

The only last argument that may be made to the father, is that if he does not make a plan, the laws of the state will be used, and few people actually like the idea of the state taking care of their estate.

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

Reference: nwi.com (Nov. 17, 2019) “Estate Planning: Can one spouse plan?”

Costly Mistakes with 401(k)s and How to Avoid Them

Making sure that you handle your 401(k)s correctly, is not as easy as letting payments be automatically deducted from your wages. Here’s a look at commonly made mistakes, detailed in the article aptly named “More common 401(k) mistakes—and their consequences” from tucson.com.

Investing after-tax dollars before maxing out pretax opportunities. Some plans let you choose to contribute to your 401(k) on a pretax or after-tax basis, or both. The problem happens when the forms provide these choices, without giving an explanation of the different choices. Generally speaking, you always want to lower your W-2 earnings, by contributing pretax dollars first. Your W-2 won’t include the money you put in a 401(k) or other retirement savings vehicle.

Cashing out a 401(k) when you change jobs. This is a big and bad one. The IRS loves when you do this, because the withdrawal is taxable income that would otherwise sit in a 401(k) for years, possibly decades. One survey showed that as many as 28% of people between the ages of 35-65 did not know that some of their retirement distribution choices would trigger tax liabilities and penalties.

A better option: leave the 401(k) with your old employer, move it to your new employer’s plan if that is an option, or set up a rollover IRA with a bank or investment firm to transfer the 401(k). Do this very carefully: you are rolling over the money, not cashing it out. Don’t use the money when you move it—this is your best savings option for retirement.

Borrowing from the plan to pay for a big-ticket purchase. Yes, there may be a loan feature in your 401(k) plan. However, while this may be a blessing in an emergency, it is likely to be one of the most expensive loans you ever take. There are strict rules about paying back 401(k) loans and running afoul of them could create more problems. Read the fine print, before borrowing against your retirement fund. Remember, you are borrowing against your future.

Defaulting on a 401(k) loan. Don’t give yourself a loan from your 401(k), unless you understand all of the rules and penalties. Most 401(k) loans must be paid back within five years, unless the loan is used to purchase a primary residence. However, this is supposed to be a retirement savings account, not a house fund. You should also find out what happens if you quit or lose your job, while the loan is outstanding. The balance of your 401(k) account is often used to pay for the outstanding loan and you’ll be responsible for paying taxes on the withdrawal, PLUS a tax penalty for early withdrawal from the 401(k).

Thinking you’ve got plenty of time before retirement. The sooner you start saving for retirement, like when you receive your first paycheck, the better. Pay your future self, first. You can always get a loan for a home, a car or your children’s college education, but there’s no such thing as a retirement loan.

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

Reference: tucson.com (Nov. 15, 2019) “More common 401(k) mistakes—and their consequences”

Many Different Ways to Age: What’s in Your Future?

At some point in life, many people face the decision of moving into a retirement home or welcoming in-home care. Living in these communities can be a step up to aging in a place, where there is actually more independence. This is because you are not busy caring for a house or being confined to a solitary life in a private home. In fact, according to the article “The Many Faces of Aging” from Harrisburg Magazine, it can be a very dynamic option.

Deciding to buy or rent a home in an age-restricted community is a major step toward achieving a new lifestyle. It’s important to consider a number of factors, so you can make the right choice. Here are some questions and answers to consider.

What’s your budget? Make sure that you have the numbers right. Consider additional expenses, like yearly or monthly resident fees. Some luxury communities have equity memberships, which require extra financial investment. Don’t forget taxes.

What are the rules and covenants? Every community will have some kind of homeowner’s association that governs what residents can and cannot do. If you want to have grandchildren stay with you for an extended period of time, make sure that this is permitted in the communities you are considering. The homeowner’s association will implement and enforce restrictions, so know what they are beforehand.

What are the neighbors like? Your future social life is key to your enjoyment of the new community. If you are seeking like-minded people, be sure you’ll know what kind of people live there. Get a sense of the general vibe and personalities. Will you feel included and accepted?

What will a different climate feel like year-round? If you are thinking about moving far from your current home, be sure the new climate suits you. Rent before you buy, if at all possible. A southern home is great during the winter, but if you’re too uncomfortable with summer heat, or living most of your summer in air-conditioned spaces, it may not be for you.

Are there activities you’d enjoy? Make sure the activities you like are offered. If you are a reader, you’ll prefer a community with an active lending library and book groups. A golfer will, of course, want a high-quality golf course (although there will likely be additional fees).

Is good medical care nearby? Every community is different. In large communities, there may be on-site health care services. Some may rely on local ambulance companies and hospitals for all medical care. Medical services that are five minutes away may be a better choice, than those that require a one-hour transport to a hospital.

One of the biggest questions is, can you imagine yourself being happy in the community? If it represents a chance to thrive and grow safely as you age, then it just may be the right place for you.

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

Reference: Harrisburg Magazine (Nov. 8, 2019) “The Many Faces of Aging”

How an HSA Could Be the Best Account to Fund for Retirement

Generation X is hitting midlife. They are finding out that it’s not such a bad place to be. At the same time, they are starting to consider how they are going to manage a retirement that may stretch out longer than many other generations. Right now, many Gen Xers are helping their own parents navigate longevity, but they need to start addressing this for themselves, says Forbes in the article “Why Those in Their 40s and 50s Need to Factor Longevity Risk Into Their Retirement Planning.”

The 2019 Transamerica Study on Retirement Savings reflects this focus, since 51% of Gen Xers surveyed said they were concerned about outliving their savings. This is at the same time that they are struggling to manage the complexity that comes with midlife financial planning. However, there is a tool that is often overlooked: the Health Savings Account (HSA).

Not only is the HSA triple tax exempt, but it’s a great way to save for future medical costs in retirement. The generation that is most likely to embrace these accounts and make them part of their retirement account is Gen X.

There’s a new phrase in retirement planning: longevity planning. As more Americans are living into their 90s and even 100s, it has become necessary to plan for retirements that can span three or four decades. It’s different from the lifespans when Gen Xers were being born. The average male life expectancy in 1965, according to the Social Security Administration, was 66.8 years for men and 73.8 years for women. By 1980, the average male life expectancy was 69.9 and 77.3 for women. For those born in 2019, life expectancy has grown to 76.6 years for men and 81.3 for women.

For married couple in their 50s today, the man has an 18% chance of living to age 90 and the woman has a 30% chance of living to 90. The chance that one of them will live to age 90 is 42%. Those are good odds. But with these longer lifespans, comes a higher likelihood of medical expenses. How do you plan for that?

HSAs are available to individuals and families who are enrolled in High Deductible Health Care Plans (HDHCP) that are HSA compatible. They can be funded with $3,500 for an individual plan and $7,000 for a family plan in 2019. Those numbers will go up in 2020 to $3,550 and $7,100 respectively. This deposit provides a tax deduction, the funds are tax deferred and if they are used for qualified medical expenses, the distributions are tax free.

How will that work for Gen Xers? Instead of using the HSA for current year medical costs, they need to shift to thinking of the HSA as another retirement account. Investing these funds and letting the money compound will grow a new kind of nest egg that is solely reserved for healthcare costs.

Most people don’t understand how the HSA accounts work and are not maximizing their benefits. Only 7% of all HSA users are investing these funds, says the Employee Benefit Research Institute (EBRI). The average 65-year-old couple today needs about $300,000 to pay for medical expenses during retirement. Therefore, if the Gen Xers start saving this way now, they are likely to get very close to that amount.

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. 9, 2019) “Why Those in Their 40s and 50s Need to Factor Longevity Risk Into Their Retirement Planning”

Where’s the Best Place in America to Age Well?

Springfield, Massachusetts became the first place to receive three marks of “age-friendliness,” as designated by a global initiative of the World Health Organization. This town in western Massachusetts, with a population of about 155,000 people—and a third of them who are age 55 or older—has been designated “age friendly,” meaning it has made a commitment for improving quality of life for all residents, with a focus on the older population. What’s extra nice, says Next Avenue in the article “Is Springfield, Mass. The Best Place in America to Grow Old?” is that what’s great for seniors is also good for others.

A wider sidewalk and streetlights that provide more time to cross busy streets are good for people who depend on walkers or wheelchairs, but they’re also good for parents with kids in strollers, teens with a cast, or kids on bicycles.

Starting in 2012, AARP’s Network of Age-Friendly States and Communities has named age-friendly city designations throughout America. There are more than 400 such municipalities, meaning that they’re committed to policies and services that support aging well.

Age-friendly awards may be new to Springfield, but the city’s commitment to its older demographic is not. The Live Well Springfield Coalition is centered on collaboration to attain a positive future of aging. There are twenty-five organizations that work together, including city departments, regional transit and healthcare groups. Not everything is in place, said a representative, but many innovations are flourishing.

Among them is a mobile organic fresh market that stops at buildings where older adults live, the library and medical center during the summer and fall. Many senior center services and activities are free. On Tuesdays, public transportation is free. So are many fall-prevention programs, bus routes to the Jordan Senior Center, one of five senior centers in the city and connections to aging-in-place modification sources.

In June 2019, Springfield’s Baystate Medical Center and three Springfield community health centers were awarded the designation of age friendly. The Age-Friendly Health Systems movement was created in 2016 by The John A. Hartford Foundation and the Institute for Healthcare Improvement, in partnership with the American Hospital Association and the Catholic Health Association of the United States.

The hope is that in years to come, there will be many such communities throughout the country. In the future, cities and healthcare systems that aren’t focused on being age-friendly, will be behind the curve.

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

Reference: Next Avenue (October 31, 2019) “Is Springfield, Mass. The Best Place in America to Grow Old?”

Million-Dollar Retirement? Here’s How It Might Work

For most retirees, the goal is simple: don’t run out of money. That’s the worry that plagues most Americans—61% of them, according to a survey from Allianz Life. How do you keep that $1 million from running out before you do, asks Investors Business Daily in the article “How Long Will Your $1M Last in Retirement?”

Let’s use this example. A person is 65 years old, earning $115,000 annually. It’s not a king’s ransom, but it’s a decent income. They sock away a good-sized amount of money every year, but not so much that they reach income limits in a 401(k) or similar retirement plan.

The simple answer to the how long will $1 million last is less than nine years. That’s if the person spends $115,000 a year from the $1 million.

The average American life expectancy is now 78.6 years, as of 2017, according to the CDC. However, if you make it to 65, you’re more likely to make it to 20 more years. For the average person, that means living to around 85. Retirement funds in this case, which is admittedly an average, will need to last twenty years. Will they?

That nest egg isn’t done growing, just because you’ve turned 65. Given enough time, even including setbacks in the market, you’re likely to have a nest egg that keeps growing over those twenty years. If you use a 5.6% annual rate of return for forecasting how your portfolio will do, you may be in better shape than you thought.

A 5.6% return would grow your portfolio to $2.97 million, even at a 5.6% growth rate. However, that’s without subtracting any money for living expenses every year. Let’s plug that in.

You’ll be getting Social Security, so you won’t be taking out $115,000 ever year. While the size of benefits may change in the future, there will still be income. For a 65-year-old earning $115,000, expect to receive about $27,815 from Social Security annually.

That’s $87,185 to maintain your current lifestyle, from retirement savings, any part-time income or other sources. Let’s say you don’t want to work, and it all has to come from savings. Don’t forget inflation, which will come in at some point. U.S. inflation is now 1.7%.

It looks like your $1 million will last about fifteen years now. Will that be enough? Downsizing to cut housing costs will help, as would part-time employment. You should also make sure that you have long-term care insurance to protect you and your family from one of the biggest health care costs.  However, people with $1 million can pat themselves on the back—well done!

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

Reference: Investor’s Business Daily (Oct. 28, 2019) “How Long Will Your $1M Last in Retirement?”

Are Taxes a Good Reason to Relocate in Retirement?

There are states where taxes are lower than others. However, if you plan to move to a state that has low tax rates or tax breaks designed to help older residents, make sure to look at the entire picture, advises the article “Should You Relocate to Trim Taxes in Retirement?” from Kiplinger.

Especially now that tax reform has put the kibosh on the federal deduction for state and local income taxes (SALT), seniors preparing to leave the workplace are feeling the tax pain more than ever before.

There are some savings to be had by moving from a high-tax state to a low-tax state. If you live in a state like New York or California, and move to Florida, you’ll definitely enjoy the fact that Florida has no state income tax.

However, a quick fix isn’t always the solution. If you move to Dallas or Seattle, your property taxes will take a skyward leap. If you end up flying back to your hometown several times a year, how much will you be saving? If you continue to earn income in the state you leave behind, you’ll need to pay non-resident taxes. Not paying could cost a hefty sum.

There are other costs associated with relocating. High-tax states, including New Jersey and Connecticut, are actually doing their best to make it hard to leave, imposing tax surcharges or tax prepayments on high-end homeowners who relocate. You’ll need to be extra detail-oriented about establishing residency in your new home state, from signing up with a new network of healthcare providers to joining a local neighborhood group. High tax states have become super-aggressive about investigating former residents. Just keeping a pocket diary of the dates you live in another state or saving receipts from E-Z-Pass to document your travels won’t be enough. You’ll really need to cut ties with your old state.

Losing that SALT deduction has meant that people who might have stayed in a high tax state in the past, are heading for the exit.

Moving can be financially beneficial, even if you’re not in a high-tax state. If retirement income is limited to a pension and IRAs, moving to a lower cost state can give you a pay raise. For one New Jersey resident, the realization that two months of property taxes in New Jersey would cover his entire year of property taxes in Florida was all the impetus he needed to set his sights on the Sunshine State. By moving South, he’s also getting rid of state tax payments.

There are several bills in the U.S. House that might raise or eliminate the SALT deduction cap. That cap is scheduled to expire, along with other provisions of the 2017 Tax Cuts and Jobs Act after 2025.

If you do move to another state, remember that each state has its own estate laws. Therefore, you’ll want to be sure to meet with a local estate planning attorney to be sure that your will, power of attorney and other documents are valid in your new home state.

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

Reference: Kiplinger (Oct. 28, 2019) “Should You Relocate to Trim Taxes in Retirement?”