Orlando Estate & Elder Law

To Roth Or Not To Roth

A tax tsunami is coming at the end of this year. And this is the absolutely last chance for a massive Roth conversion.

As you likely have read here or elsewhere, both the end of 2012 and the transition to 2013 are likely to be tumultuous times for taxes of all sorts. Accordingly, this is a year of planning.

One major thing to bear in mind: This may be the last excellent year for the Roth IRA conversion.

Forbes recently ran a few articles on this subject, including this recent test. I thought I’d share it here to help you determine whether a Roth IRA conversion may be right for you. So, somewhat abridged, here it is:

1. Do you expect your tax bill to stay the same well into retirement?
2. Do you have a traditional IRA (especially a large one) that can be converted?
3. Are you ready, willing, and able to pay for the taxes of tomorrow, today?
4. Are you interested in estate-reduction and, at once, leaving a large tax-free gift to your heirs?

If you answered “yes” to the above questions, then you may want to put pencil to paper and assess whether a Roth IRA can make sense and, more to the point, can create a huge savings now and a huge value for your heirs later.

The big payoff: A Roth IRA is not a tax-deferred account as retirement accounts traditionally are. The reason a tax-deferred account is nice is that it’s assumed you’ll have a lower income in retirement and, therefore, have a lower tax percentage. As a result, you allow the account to appreciate now and ultimately pay fewer taxes later.

If your income is not expected to drop, as is often the case, then your tax bracket might not drop and so your tax savings won’t appear. Instead, you’ll have less liquidity during the golden years.

By paying the taxes upfront, by rolling a traditional IRA into a Roth, you’ll pay a tax upfront to secure that account for the future and avoid any RMD’s (the very same that might force you into other tax problems).

Moreover, since taxes are generally expected to go up with the expiration of the Bush-era tax cuts (unless some serious attention is given and quickly) paying the tax now might be an actual steal.

There is more information in the original article, and my previous posts on this subject.

Reference: Forbes (February 20, 2012) “Roth IRS Conversion 2012: Are You A Good Candidate?”

 

"Portability” Deadline for Surviving Spouses Extended

The Internal Revenue Service has extended the deadline to file estate tax returns and make a portability election to benefit the surviving spouses of married individuals who died during the first six months of 2011.

It would be a gross understatement to say that 2010 and 2011 were tumultuous years in the world of estate law. While we can’t expect anything less from 2012 (that battle simply hasn’t occurred yet and likely will be another end-of-year struggle), the “developments” wrangled in 2010 and 2011 are still making news into 2012.

The recent news: The IRS has extended the deadline for the estate tax “portability” election for some surviving spouses. Apparently, the new laws are still largely unknown to the public.

For the surviving spouses of those who died within the first six months of 2011, so long as the decedent’s estate was valued at less than $5 million, there is now an extension to file for portability. Now, even if the personal representative of such estate didn’t file the return within the first 9 months, or even file for a 6 month extension within that time, they have all 15 months to file. However, to comply they need to properly file both the extension Form 4768 and the estate tax form itself, Form 706. Effectively, this means that the first 2011 portability elections become due on Monday, April 2, 2012.

“Portability,” as you may be aware, is the new ability for a surviving spouse to pick up and carry along, as it were, the unused estate tax/gift tax exemption of the decedent. For 2011 that meant $5 million, less whatever of that exemption had been used as part of the lifetime gift tax exemption, can be passed along to a spouse who would have a $5 million exemption of their own for a total combined exemption of as much as $10 million.

This is not an automatic ability, however, and so proper and timely filing is essential. It may not seem that important today, especially if $10 million seems like a lot, but it is a simple step to plan for a future you can’t foresee (that’s why you’re planning in the first place, is it not?) and a future where this may make the difference.

Clearly, the IRS wouldn’t be offering such extensions if they felt that portability was properly understood and fully utilized; in fact, it likely means that the new laws are not yet understood and so it’s worth getting the word out. 

Reference: Accounting Today (February 17, 2012) “IRS Extends Deadline on Estate Tax Portability Election”

 

Son Seeks Eviction Of Elderly Mother From Her Home

Peter Kantorowski wanted his 98-year-old mother to move into a nursing home or live with him. She wouldn’t go; she didn’t want to leave her home of nearly 60 years. Finally, Kantorowski went to court — and served his mother with an eviction notice shortly before her 98th birthday in December.

There is a difficult transition in old age. When it becomes necessary to move on from the homestead, it can be difficult to think about, let alone follow through. In the end, it’s a difficult transition for both the elderly person and their family.

The family dynamics of transitioning an elder family member to a nursing home can make for some tricky cases, and even trickier court battles, as one recent case shows. Consider it a worst-case-scenario family feud.

In New Haven, Connecticut, a 71 year old son has been utterly unable to come to an agreement with his mother and get her to move into a nursing home. She just didn’t want to leave home. As a result, this son evicted his 98 year old mother from her “own” home. The catch: it seems the mother had ceded ownership of the house, but retained the right to live there.

Now the matter landed in court and she has been found competent by a judge and assigned counsel.

There are some wrinkles in this case. For example, it turns out that the son may not have seen his mother recently and is, therefore, not in a position to know her status. In fact, the mother has healthcare workers in and around the house often and can still cook for herself and regularly attends her church. But to take the son at his word, he doesn’t want to put her on the street and simply wants to be sure that she has the care she needs.

At 98 the son’s concern isn’t much of a stretch, but this is still a bad way of going about it.

You can read more at the original article, here. Let the worst-cases underscore the need to do things right and to open proper communication within your own family.

Reference: The Columbus Dispatch (February 18, 2012) “Son gives mom, 98, an eviction notice”

 

“Stretch IRAs” in The T-man’s Crosshairs

Inherited retirement accounts are truly one of those gifts that keep on giving because heirs can benefit for many years without much tax burden, but Congress is starting to talk about curtailing breaks on the accounts.

For all the bills, budget proposals, and political fury raging over Capitol Hill these days, it’s strange to think that one of the more far-reaching changes may come from a funding proposal for a transportation bill. That’s right, but it’s a big transportation bill. As Reuters reported here, the Senate Finance Committee has been considering action that would severely limit inherited IRA’s.

A lot of people stash fairly large sums into their nest-egg accounts and work to keep that money safe. They do this rather than spend it because, in the worst case, tax-advantaged dollars would be nice in a pinch. In the best case it offers a fairly convenient way of giving excess assets to your heirs at a tax advantage.

There are a number of rules in that regard that I’ve discussed here in the past, but in short, heirs generally have the choice between taking a lump sum or stretching out the withdrawal in a pattern similar to required minimum withdrawals (RMDs). The latter alternative, called a “stretch” IRA, is on the chopping block.

The proposal would limit the life of such “stretch” IRAs by placing a five year limit on liquidations of such accounts. It’s “financing” to the Senate because that forces an awful lot of money to be taken out and taxed within a short time span. It’s financial security for the inheriting taxpayer, on the other hand, but this proposal would limit the ultimate potential of these accounts to accrue over time and then limit the leeway of the inheritor to have even withdrawals over a longer period.

It might not go anywhere. Regardless, keep your eyes on this because it’s made its way to the table and therefore we might see it reappear in any number of budget discussions.

Unfortunately, too, in order to make it work Congress would grandfather old IRAs into it, so that means an awful lot of inheritors have something to think about for the future. Read more in the original article, and others like it.

Reference: Reuters (February 14, 2012) “ ‘Stretch’ IRA tax shelter on the chopping block

 

IRS Changes Its “Power Of Attorney” Rule for Spouses

Couples who filed joint returns must now file separate powers of attorney.

The IRS makes little changes all the time and while not all such changes are life threatening (or estate plan threatening, as is more likely) the devil is often in the details.

In the interest of tracking changes, then, it’s worth noting that the IRS is changing its filing practices for power of attorney. As pointed out here in the Journal of Accountancy, the IRS will no longer be accepting the old version of form 2848 and will only be accepting the new version that has been available since October 2011.

What’s interesting is that while the old form allowed a husband and wife who filed a joint tax return to also jointly file for power of attorney, the new procedure doesn’t allow this. Now, such couples will have to file their power of attorney documents “separately,” even if they file for the same individual and even if they file taxes jointly.

This won’t affect couples who have already filed, and only marks a turning point in a certain kind of filing; that is to say that it seems minor at best. Nevertheless, this change means that the IRS is working to acknowledge spouses separately (at least to a certain extent).

For estate planners it has to mean the opposite; that couples will have to work ever more intently together as a partnership. Is this a trend that will continue in all aspects? Further, it may also be worth thinking about whether this is how you and your spouse plan (or ought to plan).

Reference: The Journal of Accountancy (February 6, 2012) “Couples who filed joint returns must now file separate powers of attorney”

 

Reasons for Going “Offshore” With Your Accounts

If you're not running for president, and don't have to worry about public relations, what are the legitimate reasons for moving money offshore?

Offshore accounts have been in the news recently and not without reason. For one thing, the IRS has been gunning for foreign accounts for some time. It just doesn’t like them.

Likely, you have seen a discussion (or two… or three) of the topic in connection with Mitt Romney and his use of such accounts. The truth is that such accounts are not all illegal or unpatriotic, and indeed, might just be a good idea.

If you’re interested, there are a few ideas to be gleaned from a recent article through SmartMoney regarding offshore accounts. Is the real reason tax minimization? Not always. The article suggests that taxes truly aren’t the sole motivation. Although it should be said that there are advantages, even though the U.S. government still thinks it’s owed a piece on everything you own internationally.

For one thing, an offshore account has a measure of “jurisdictional safety,” or more simply put, the U.S. courts have a harder time seizing your assets to satisfy litigation against you. Whatever the reason, it’s a growing trend.

One more offshore and growing trend: expatriation. As pointed out in a recent Forbes article, the rate of expatriation has soared 16% in 2011 over 2010. In many ways, the use of offshore accounts and some form of expatriation work together. One thing they do share is that neither is easy and both involve further layers of taxation (like the government would allow an easy out).

If it is something worth thinking about – say if there are foreign and golden sands in your retirement future - it’s worth planning now, especially in light of global politics.

Reference: SmartMoney (February 13, 2012) “The Real Reasons the Rich Are Moving Cash to the Caymans”; and

Forbes (February 14, 2012) “Celebrity Leavings: Bidding Stars Adieu”

 

Pet Trusts Provide Peace of Mind

The pet trust is a little-known legal option for the elderly and caregivers worried about what will happen to furry family-members following the deaths of their owners.

The four-legged members of a household (or two-legged, or conceivably even eight, as the case may be) are undoubtedly special members in any home. Accordingly, proper planning ought to address them as well.

Whatever the size of your pet and whatever the size of your family, it’s simply not always enough to leave these matters for your heirs to figure out. After all, the well-being of your animal (i.e., your friend and companion) is at stake and so it’s worth considering legal devices to provide for them, such as a pet trust.

In a way, the idea of a “pet trust” is a natural one and yet it’s also not always common. Deborah Jacobs recently tackled the subject over at Forbes and her article certainly is worth a look. In its basic formula, a pet trust is like any other trust in its formation, however, it is designed to take care of the member of the family that can’t take care of itself (nor speak to which home it will move to upon its owner’s passing).

While that can be meaningful for many pet-owners, there also is reason for the elderly to pay special attention to the prospect, as another article over at the New Old Age Blog points out, here.  For the elderly, especially, a pet can be an incredibly important family member and one for whom planning can be all the more important. Why? The pet may outlive its owner. In the end, a pet trust may afford important protection and care for the pet, as well as peace of mind to the owner.

Reference: Forbes (February 14, 2012) “If You Love Your Dog (Or Cat Or Gerbil), Read This” and The New York Times – The New Old Age Blog (February 3,2012) “The Pet Problem

 

1st Shot of the Estate Tax Skirmish

Hold on to your patience.  President Obama recently released his budget proposal and the battle begins.  

As you are likely to have heard, President Obama unveiled his budget proposal not too long ago and it packs a wallop. We are living an era of fierce partisanship, and election season hasn’t exactly put a damper on that. As a result, the media and the critics have been quick to pounce on a number of points, to include accusations that the President’s proposal is mere election-season partisanship.

That media din aside, it truly is an important proposal to understand, especially when you are planning your estate. Why? Because you can at least attempt to hedge your bets against political tides, if not also plan for what may become law.

Fortunately, there are a few straightforward analyses of the proposal from an estate planning perspective, like this one from the Wills, Trusts & Estates Professor (and the second part, here).

Here are a few topics to whet your appetite:

Wealth Transfer Taxes: The proposed budget would permanently roll back the Estate, Gift, and Generation-Skipping Transfer (GST) taxes to their 2009 levels. The exemptions and rates would remain unified and “portability” between spouses of unused exemptions would also become permanent. However, that means going back to an exemption amount of $3.5 million and a taxation rate of 45%, thereby saving us from the possible default of falling to 2001 levels (a $1 million exemption at a 55% rate), but still representing a serious hike from the current exemptions and rate (at $5 million and 35%, respectively). 

Grantor Trusts: Grantor trusts, and grantor retained annuity trusts (GRATs) in particular, get some special attention. For GRATs, the proposal calls for longer “minimum” terms, with 10 years as the minimum. For those of you familiar with the device, you know this makes the prospect inherently more risky, since you have to “outlive” the term of the GRAT before transfer of the trust assets. There’s more to GRATs, but even with Grantor trusts in general the proposal is intended to beef up transfer taxes. Why? Because, as a class of trusts, they have been so useful for disseminating wealth.

Those are two of the bigger – and to a certain extent, less nuanced topics – but it ought be clear that there are myriad changes in the works (also see the changes regarding “valuation”) and you are well-advised to stay tuned and keep informed.

It is politics, of course, and not yet actual law. On the other hand, it can help you understand the evolving debate and your own estate plans. If these changes were to become law, the impact would be expansive.

Reference: Wills, Trusts & Estates Prof Blog (February 15, 2012) “Obama’s Budget Proposal Part 1” and “Obama’s Budget Proposal Part 2”

Medicare Misunderstandings Costly

Some Medicare beneficiaries who visit the hospital are getting surprised by big bills because their stays weren't considered inpatient services.

When an elderly person is ready for the nursing home, some families are entirely understanding, in agreement, and financially able. As a result, the transition happens smoothly. Unfortunately, for a far larger number of families and elderly persons, some trip to the hospital will happen in between and precipitate the transition to nursing home care.

If that’s the case, then there are important hospital and Medicare policies of which you should be forewarned. Enter “observation care” which can make for a big bill upfront and even far bigger ones down the line.

According to a recent article in the Wall Street Journal, and their sources at the Medicare Rights Foundation, the number of “observation hours” has been steadily growing for years. Tragically, such observation hours count as “outpatient services,” even if the service lasts for several days (as it sometimes does with the elderly) and Medicare pays for inpatient and outpatients services in entirely different ways.

As you likely know, Medicare Part A pays for inpatient bills, so those are usually taken care of, but Medicare part B is what takes care of outpatient services. And those services can add up to a far greater cost.

It’s often vital to know the distinction between the two types of services from the hospital, and yet it’s also fairly difficult. Medicare advises to simply ask, but then there are certain documents such as the “Important Message from Medicare” which accompanies inpatient care, but not outpatient. Still, the hospital can switch with little to no notice.

It’s actually even more important than the size of the immediate bill. Medicare will only pay for nursing home expenses if the person was admitted inpatient at a hospital for at least three days, excluding the discharge day.

For so many families that’s the sole reason why it takes a hospital visit to arrange for the transition to nursing home care in the first place, but if you are put under observation or other so-called “outpatient” care, and without your notice, it can literally mean thousands of dollars out-of-pocket down the line.

Bottom line: It all hinges on hospital practice and Medicare definitions.

Reference: The Wall Street Journal (February 5, 2012) “Check Hospital Tab”

 

A National Alzheimer’s Agenda

The Obama administration announced plans last Tuesday for a two-year, $156 million cash infusion for Alzheimer’s research and care. The money will help solidify a still-developing national plan to better treat and even prevent the illness by 2025.

With budget plans just now coming to a head, it’s good news for many of us that Alzheimer’s has become one of the “we can’t wait” initiatives in President Obama’s plan.

Such measures still need to be passed through Congress, and positive advances may not be immediately forthcoming. However, it is heartening to see fiscal support for an issue that affects so many of us and our loved ones.

If all goes to plan and the approach makes it through Congress – a politically trepidatious journey these days even for the most common-sense and appealing legislation – then the budget will earmark an infusion of $156 million for Alzheimer’s research and care.

In many ways it’s the flesh and bones to an earlier announcement from the administration regarding a national plan toward treating Alzheimer’s that came out to some guffaws due it’s lack of a clear source of funding.  The full details on allocation are still forthcoming, but at least a small portion of that infusion, some $26 million, is intended for immediate use and care of Alzheimer’s patients. The rest is to go toward research and the hope of improving future care, and also perhaps systematic prevention.

How this news will affect us, and whether it will weather violent political and economic seas is yet to be seen, but it’s a powerful promise for many. 

Reference: The Kaiser Health News (February 7, 2012) “Alzheimer’s Research Gets Funding Boost”