Family Security Law Group, APC

Inherited IRA Basics

“Inherited IRAs and 401(k)s can be a great vehicle for passing assets from these accounts to non-spousal beneficiaries.”

Inherited individual retirement accounts have been a common way to let non-spousal beneficiaries inherit an IRA account and allow the account to continue to grow on a tax-deferred basis in the future. These rules were changed in 2007 to allow non-spousal beneficiaries of 401(k) and similar defined contribution retirement plans to treat these accounts the same way.

Investopedia’s article, “Inherited IRA and 401(k) Rules Explained,” says spousal beneficiaries of an IRA have the option of taking the account and managing it, as if it was their own. This includes the calculation of required minimum distributions (RMDs). For non-spousal beneficiaries, an inherited IRA account can give them a few options, including the ability to stretch the IRA over time by letting it continue to grow tax-deferred.

IRA account holders who want to leave their accounts to non-spousal beneficiaries should enlist the help of an estate planning attorney who understands the complex rules surrounding these accounts. The account beneficiaries must be careful to ensure they don’t inadvertently trigger a taxable event.

The beneficiaries of an inherited IRA can open an inherited IRA account, taking a distribution (which will be taxable), or disclaiming all or part of the inheritance (causing the funds to pass to other eligible beneficiaries). Traditional IRAs, Roth IRAs, and SEP IRAs can be left to non-spousal beneficiaries in this way. A 2015 rule change says the creditor protection previously afforded an inherited IRA was ruled void by the U.S. Supreme Court. Inherited IRA accounts can’t be commingled with your other IRA accounts, but the beneficiary can name their own beneficiaries upon their death.

The rules for RMDs for inherited IRAs or inherited 401(k)s are based on the age of the original account holder at the time of his or her death. If the account holder wasn’t yet 70½—the age at which RMDs must start—the beneficiary can wait until they reach age 70½ to begin taking RMDs. The required percentages will be based on the IRS table in effect for their age at the time.

If the original account holder had reached age 70½ and was taking RMDs, then the beneficiary must continue taking a distribution each year.  However, the RMDs will be based on their age, not the age of the original account holder. As a result, the distribution amounts will be less than those of the original account holders (assuming the beneficiary is younger). This lets him or her to stretch out the account via tax-deferred growth over time.

These rules are complicated, so work with a Thousand Oaks estate planning attorney at Family Security Law Group, APC to be certain they’re followed to avoid costly errors.

Reference: Investopedia (December 18, 2017) “Inherited IRA and 401(k) Rules Explained”

Have You Saved Enough for Assisted Living?

“According to the 2017 Genworth Cost of Care Survey, a widely used barometer for the industry, the median cost of adult day health care in the United States is $1,517 a month.”

The median cost of adult day health care in our country is more than $1500 a month. It is $3,750 for an assisted living facility, $3,994 for home care services and $4,099 for home health aides.

If you want some privacy, the median cost is $7,148 for a semiprivate room at a nursing home and $8,121 for a private room. That’s expensive! Can you afford it? Wealth Advisor poses this question in its recent article, “Have Clients Planned For Long-Term Care?”

These alarming figures should get you thinking. If you don’t think about the possibility that you may require some form of long-term care services—either a home health aide, an assisted living facility, or a nursing home—then you run the risk of wiping out your entire life’s savings to pay for it, even if it’s a only a short period of time when you or a spouse needs such care.

So, how do you avoid that?

Medicaid isn’t a viable option for most people, because of the relatively low state income thresholds to qualify for the program. One option is to purchase long-term care insurance (LTCi) through a reputable broker or agent. LTC insurance policies typically provide coverage in these situations:

• Home care
• Assisted living facilities
• Nursing homes
• Adult day care
• Hospice care

However, getting a policy isn’t as easy as it may at first appear.

LTC policies can vary quite a bit, based on factors like the insurer, area of the country, and your health status. Find out what benefits will be provided and for what duration. You should also determine the tax implications for your circumstances. Finally, your out-of-pocket cost is a big factor.

It’s best to investigate a LTC insurance policy sooner versus later, because the cost of coverage will only go up as you get older.

Reference: Wealth Advisor (February 16, 2018) “Have Clients Planned For Long-Term Care?”

Retirees: Don’t Make These Tax Mistakes!

“Tax-cutting strategies change once you retire. Some ideas that helped while you were working, no longer apply once you start taking Social Security and RMDs. Don't make these three common mistakes.”

Retirees have some unique tax challenges. It can be hard to grasp the federal and state taxes on retirement benefits and investment returns. Effective tax planning is required even for seniors, says Kiplinger in its article, “3 Tax-Planning Mistakes Retirees Too Often Make.” The useful article examines tax-planning ideas that can quickly backfire on retirees.

Tax Loss Harvesting. Tax loss selling means selling a capital asset, like a stock, for a loss to offset a gain realized by the sale of other investments. The result is that the investor avoids paying capital gains on recently sold investments. Retirees with stock holdings should review their holdings every year to determine their market exposure and any tax consequences of selling stocks with substantial capital gains.

Unfortunately, the tax code isn’t very beneficial to stock losses. Stock losses can be used to offset gains.  However, if you have excess losses over gains, you can only take an extra $3,000 annually to offset other income. If your loss is more than $3,000, you can carry it forward into future years. If your loss is big, you could be waiting some time to realize the full advantage of this.

Too Small RMDs. While many experts work on how to limit required minimum distributions (RMDs), there are some good reasons for taking larger distributions. With a lower income, retirees may discover they’re in a lower tax bracket, and they want to minimize their tax burden. However, they don’t see what can happen when they die: the money in their IRAs gets passed on to their beneficiaries as an inherited IRA. Alternatively, the recipients can elect to take a complete distribution of the IRA and get hit with income tax on the whole thing!

Taxes on Social Security. It’s not uncommon for people to think that Social Security isn’t taxable. Well, sorry to say, up to 85% can be subject to income tax. Retirees with minimal income won’t pay federal taxes on their benefits, but if they have additional income, there will be a percentage that’s taxable. They will need to calculate their “provisional income”:

• Adjusted gross income (excluding Social Security)
• Add any tax-free interest received (typically municipal bond interest)
• Add to that total 50% of your Social Security benefit

If the income is less than $25,000 for single filers or $32,000 for joint filers, your benefits are all tax-free.

If the provisional income is between $25,000 and $34,000 as a single filer or between $32,000 and $44,000 as a joint filer, you’re taxed on up to 50% of your Social Security benefits. But if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you’ll be taxed on up to 85% of your benefits.

Review your taxable income annually to see if any additional income impacts the taxation of Social Security. It may also put you in a higher tax bracket, so do some careful planning.

Reference: Kiplinger (December 13, 2017) “3 Tax-Planning Mistakes Retirees Too Often Make”

How to Afford the High Cost of Assisted Living

“Smart moves to strategize your financing and keep costs in line.”

The average person’s savings and Social Security income won’t be enough to pay for assisted living. As a result,  individuals will combine those assets with long-term-care insurance benefits, home-sale proceeds and contributions from family members to cover the costs.

Consumer Reports provides some helpful advice to help you afford assisted living in its recent article, “11 Ways to Afford the Assisted Living Care You Need.”

Life insurance. If you or your parent have been paying premiums on a whole or universal life policy for a decade or more and are comfortable leaving less to heirs, an option is to access the policy’s built-up cash value. If you borrow from the policy or withdraw your cost basis (the amount paid in premiums), there’s no tax owed. If you cash in the policy entirely, you’ll pay ordinary income tax on everything but the cost basis. You can withdraw up to your cost basis and borrow the rest.

Veterans Benefits. Veterans and veterans’ survivors eligible for a Veterans Affairs pension, could be eligible for an increase in monthly pension benefits (an enhanced or special monthly pension). There are specific requirements, as well as income and net worth limits, but the asset test is a somewhat subjective decision made by the person processing the application.

HELOC. Homeowners who want or need to keep a home in the family can apply for home equity loans or home equity lines of credit. Be aware of all the setup costs, fees for loan processing, origination, and underwriting, appraisals and document preparation.

Reverse Mortgage. Homeowners 62 and older may use this, when only one spouse is entering assisted living. A reverse mortgage allows you to tap into your home equity for cash.

Assisted Living with Flexible Pricing. There are very expensive, all-inclusive pricing models that include all services—three meals a day, 24-hour on-call aides and transportation in one price. There are also less costly “levels of care” or “tiered pricing” models.

Sidestep the Sizzle. Consider a residence housed in an older building or one with fewer beds. Remember that the shiny new facilities operated by big chains will offer more amenities—but at a cost.

Coverage Gaps. Did you know that you or your parent could be waiting six months for the payments from a long-term-care insurer to start? Therefore, you could be forced to cash in a CD early and your bank might waive the early withdrawal penalty for an urgent need, like assisted living care.  However, if they don’t help you, the penalty is minimal.

Tax Write Offs. If your total medical expenses exceed 10% of your adjusted gross income, you can deduct the remainder from your federal income taxes. This can include long-term-care insurance premiums and the medical services provided within the facility. If you’re taking care of over half of your parent’s support in assisted living, you can also deduct those expenses from your own taxes when they exceed 10% of your AGI.

Reference: Consumer Reports (August 31, 2017) “11 Ways to Afford the Assisted Living Care You Need”

Millennials: Consider a Prenup

“Prenuptial agreements are a relatively modern concept.”

More millennials are delaying the exchanging of wedding vows until later in life. They are actually waiting much longer than previous generations.  However, they’re more likely to have careers, businesses and property. This makes them more protective of what they’ve built. Because of this notion, the dreaded prenuptial agreement is starting to lose its stigma.

For years, prenups have been a sticking point for couples who saw them as unromantic,  signaling a lack of trust or suggesting that one person is planning for the end of the marriage.

The Washington Post’s recent article, “Why you’re more likely to have a prenup than your parents were,” says that over time, the calculations for when and why two people should marry has changed. In the 1970s, about 80% of people had married by age 30, according to a U.S. census report. Last year, that same percentage wasn’t reached until age 45.

Millennials say it’s also important for them to be financially secure before they get married, according to a 2015 survey by Allstate and the National Journal. This sentiment increases the odds that when two people marry, they will each have a career or business they want to protect. Some couples are now leveraging prenups for each person to protect assets they’ve accumulated, as well as to protect future income.

There’s been an uptick in the number of young couples interested in prenups, and they’re talking to their fiancés about it. A 2016 survey from the American Academy of Matrimonial Lawyers showed that 62% of members saw an increase in the number of couples asking about prenups, compared to the previous three years. Fifty-one percent said they noticed more millennials asking for the agreements.

In the 1970s, when couples typically married younger, prenups were mainly used for estate-planning and usually when one partner had significantly more wealth or stood to inherit money. As young people now delay marriage until they are more financially secure, prenups are a way for partners to protect their assets and future income. In addition, prenups are a tool for dividing debt loads, especially student loan debt.

Despite these trends, some couples are still using prenups for more traditional reasons. These agreements still aren’t being considered by others who see them as the first step to a divorce. Speak with an experienced estate planning attorney, if you have questions about these agreements and how one may work in your situation.

Reference: Washington Post (August 4, 2017) “Why you’re more likely to have a prenup than your parents were”

Healthcare Costs on the Rise for Retirees

“Fidelity Investments reported Thursday that a 65-year-old couple retiring this year can expect an estimated $275,000 in health care and medical expenses throughout retirement.”

Fidelity looks at retirees’ health care costs every year.  They found that it represented a 6% increase over last year’s estimate—and an enormous 70% increase since they did their initial retiree health care cost estimate in 2002.

The article, “Retiring This Year? Here’s What You’ll Pay for Health Care,” appearing in Think Advisor, says that the $15,000 increase over the 2016 estimate is caused by general market trends and expectations for health care costs across monthly expenses associated with Medicare premiums, Medicare copayments and deductibles and prescription drug out-of-pocket expenses. They also assume Medicare health coverage, but don’t include the added expenses of nursing home or long-term care.

The article also explains why reverse mortgages shouldn’t be used to bridge the income gap, when you wait to collect your Social Security benefits. With ongoing uncertainty in health care, you need to understand what you can take to prepare for health care needs in retirement. With these expenses expected to increase in the future, it’s important to add them as a significant part of your retirement plan.

Fidelity’s calculations are based on a hypothetical 65-year-old couple retiring in 2017 with life expectancies from the Society of Actuaries’ RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. The estimate was net of taxes. It considered folks who didn’t have employer-provided retiree health care coverage but qualified for Original Medicare. This included cost-sharing provisions associated with Medicare Parts A and B, Medicare Part D premiums, along with out-of-pocket costs, and some services excluded by Original Medicare. It didn’t include other health-related expenses like over-the-counter medications, dental services, and long-term care.

More companies are offering health savings accounts as part of their benefits packages. HSAs are paired with high-deductible health plans which often have lower monthly premiums than traditional health plans. They also include tax benefits of tax-free contributions and balances and savings that can be withdrawn for medical costs without federal tax.

As retiree health care costs continue to go up, it’s increasingly important for employees to focus on saving enough to ensure that these expenses don’t put a kink in their retirement.

Reference: Think Advisor (August 29, 2017) “Retiring This Year? Here’s What You’ll Pay for Health Care”

Many Americans Take Substantial Debt into Retirement

“MagnifyMoney found that nearly one-third of all Americans over age 50 are carrying non-mortgage debt from month to month.”

Many American seniors are taking their debt with them into retirement years. That’s according to a new MagnifyMoney analysis of data from the latest University of Michigan Retirement Research Center Health and Retirement study.

KSDK Five on Your Side reported in a recent story, “Older Americans are getting crushed by debt,” that the study—done annually since 1990—surveys more than 20,000 Americans age 50+ on their financial well-being. Those with debt, on average, have about $4,800 in credit card debt and $12,500 in total non-mortgage debt.

Carrying high-interest debt makes it easy to ruin the ability of older Americans to live a quality lifestyle in retirement. This only gets to be a more significant problem with the inevitable rising cost of their health care needs as they age.

Working with an elder law attorney, you can make the connection between debt and needing institutional care: the higher the debt load, the less likely the individual will have enough cash assets to cover medical care that’s not provided by Medicare.

According to research, 40% of all older Americans have credit card debt over $5,000, and 20% of Americans age 50+ have more than $10,000 in credit card debt. Typically, those individuals with more than $10,000 in credit card debt couldn’t pay off their debt with all the assets they have.

Here are a few thoughts on how to manage debt before you retire:

• Pay down your debt. If you have a lot of high interest credit card debt, pay that off before you put money into your 401(k).
• Cut the cord. Quit financially supporting your adult children and don’t take on more debt on your children’s behalf. Let them work on it the rest of their working lives.
• Downsize. Take action now to lower the costs of your housing and you’ll be able to make more room in your budget for your needs as you age.
• Wait on retirement. Spend a few more years in the workforce, and you’ll see a big difference. You’ll allow yourself more time to pay off debt before retirement and also delay the age at which you begin taking Social Security benefits. The longer you wait to claim your Social Security benefits, the bigger your monthly check.
• Ask for help. Talk with an elder law attorney and get some advice on a strategy to pay down debt.

Reference: KSDK (St. Louis) Five on Your Side (August 23, 2017) “Older Americans are getting crushed by debt”

Can You Retire on Only a Million Dollars?

“A new report from GOBankingRates measures how long a million dollars would last for retirees 65 and older, state by state.”

Doesn’t being a “millionaire” sound pretty good? Who wouldn’t want to have a million dollars in the bank?  However, it may not be enough for those who expect to live comfortably when they retire, depending on where and how long they live.

Research by the Missouri Economic Research and Information Center multiplied the Bureau of Labor Statistics’ mean annual expenditures for that age group by a cost-of-living measure for each state. They then separated out annual spending on health care, housing, groceries, transportation, and utilities.

Think Advisor’s recent article asks “How Far Does $1 Million Go in Retirement?”

It appears that the takeaway from the number crunching is this: if you want to stretch your dollars as far as possible, retire in the South.

The calculations are conservative and don’t factor in any entertainment or travel. And without those, it would be a pretty grim retirement. It also doesn’t consider inflation’s impact on purchasing power as we get older. Inflation can be more dramatic for seniors due to medical costs. Those expenses can account for a bigger percentage of expenses and have increases at a higher rate than the economy overall.

Estimates indicate that health-care costs for retirees will rise at an average annual rate of 5.5% in the next ten years, according to HealthView Services, a developer of retirement health-care cost projection software. As an illustration, from 2012 to 2016, the average annual broad inflation rate in the U.S. was 1.9%.

The calculations for the annual expenditure numbers also don’t take into account any return on the money seniors are presumably holding while they’re in retirement. Those gains could offset purchasing power that’s lost to inflation.

Despite these caveats, the information is useful in starting to show the relative power of a fixed sum of savings from one state to another.

For many, the notion of a million-dollar savings fund for retirement is a dream. There are many who make do on much less. For others, a million won’t be nearly enough to fund the kind of lifestyle they want in retirement. Health issues make planning so difficult.

Those who are looking at retirement in the next few years, should concentrate on tracking the smaller amounts they’re spending now. Getting a handle on your budget and on the basic tenets of investing now, is an important first step in figuring out how much you’ll need when you retire.

Reference: Think Advisor (August 22, 2017) “How Far Does $1 Million Go in Retirement?”

Financial and Estate Planning for Singles

“I’m single, do I need to do anything differently with my finances?”

According to a recent Forbes article, “5 Financial Planning Strategies For Singles,” most of the advice on this topic isn’t very different from what’s given to married couples. Nonetheless, here are a few tips to consider, especially if you’re single.

Start saving for retirement now. Many of us will bank on Social Security along with our own personal savings in retirement. Some may have a pension or will possibly continue working in retirement. Whatever the exact plan, a good retirement savings objective is 15% of your salary and include your employer match, if you get one in your 401(k) plan. If you don’t have a plan through work, consider starting a personal IRA.

Prepare for the unexpected. Singles don’t have the luxury of second income as a fall back, so build up an emergency fund that can cover three to six months of expenses. Singles should aim toward the six-month cushion, so any unexpected expenses can be paid off without having to use your credit cards or retirement savings. Keep the money in a liquid account.

Consider insurance. Life insurance can be a replacement income for those who depend on you. With no dependents, it might not be needed, but consider a small policy to cover funeral expenses.

Estate planning. Perhaps you think you don’t need an estate plan, because you’re single.  However, you should have certain documents prepared, if you become incapacitated, so a trusted friend can make health and financial decisions on your behalf. This document is called a durable power of attorney for health care or an advance health care directive. You need this, along with a durable power of attorney for financial and legal matters.

If you’re single and have minor children, have a will drafted to designate a guardian to care for them. Likewise, if you’re single, most of your assets are in your own name. It’s important that your beneficiary information is up-to-date. In addition to your will, beneficiary designations on your retirement accounts and life insurance policy will direct how those assets are to be distributed.

You can also title some accounts to “transfer on death” to move the account directly to another person.

Take time to prioritize a financial and estate plan and review it regularly. Share this with your trusted family members so that you all will have peace of mind.  We are here to assist you.  Contact one of our Thousand Oaks estate planning attorneys at Family Security Law Group, APC for a complimentary consultation.

Reference: Forbes (July 5, 2017) “5 Financial Planning Strategies For Singles”

Don’t Stick Your Head in the Sand When It Comes to Senior Care

“Are we in denial when it comes to care down the road?”

Statistics show that most Americans are in denial about senior care and their future needs, according to HomeCare in a recent article, “5 Ways to Sort Through Long-term Care Planning.”

Roughly 70% of Americans 65 and older will require some type of long-term care. But few do enough or anything at all to plan for this. This is critical, with assisted living costs increasing faster than the pace of inflation. For those who are looking to move into a private-pay assisted living community, the median cost of rent and care in the U.S. is about $50,000 a year.

Finding the money to support senior care needs is difficult, but not impossible. Start with the following:

1. Inventory and Find Ways to Maximize Assets. Consider the value of your assets, like your home and your savings, then calculate your anticipated senior care costs. This includes things like the cost of living with inflation, medical expenses associated with illnesses you may have and the costs of different types of care—like memory care, homecare, nursing care, assisted living and long-term care communities and other family circumstances.
2. Look at Other Factors Concerning Senior Care. Smart strategies include financial planning, but also legal planning—like a will, powers of attorney, and a living trust to protect yourself and your family, and emotional planning, which includes leaving a legacy for your family or managing family dynamics.
3. Conduct Research. There’s plenty of misinformation about senior care, but education can help eliminate misconceptions. The best source is a knowledgeable estate planning and elder law attorney. Some people think that lawyers just draft documents. However, the documents are really just part of the legal service. There’s also the time, effort, and advice that goes into the document, working to address an individual’s unique circumstances.
4. Work with Professionals Who Can Provide Support. When it comes to senior care, you’ll need advice from several professionals, such as your family doctor, your financial advisor, an insurance agent or broker and your attorney. You may also work with a geriatric social worker.
5. Share with Your Family. Communicate your plans with your family to be certain that your wishes are understood and to help alleviate concerns your family may have regarding your care.

Whether you are looking out for yourself or your parents, planning and expert advice are crucial to ensure that you can afford the costs of senior care.

Reference: HomeCare (July 2017) “5 Ways to Sort Through Long-term Care Planning”