Moynihan Lyons PC

Federal Taxes Not Usually at Top of List in Estate Planning

Middle class families had to be concerned with federal taxes in the past but not so much anymore.

The Rome Sentinel recently addressed federal estate taxes from an historical perspective and what its impact may be today in the article “2019 update: Should you be concerned about the estate tax?” One of the main issues, is that if you need to worry about the federal taxes, you are most likely in a very good financial situation.

For starters, there are many loopholes and nuances in the tax laws. Therefore, every situation is different. Your estate planning attorney will be able to review your individual situation and work with the laws of your state to make sure that your estate plan works for your family and minimizes your estate tax liability.

The estate tax concept is based on laws from past centuries, when the goal was to limit the amount of property that individuals could pass from one generation to the next. The estate tax is now the government’s way of saying you had too many assets, or assets that could not be fully valued or taxed, except upon your death. After death, the net worth of your estate is calculated by valuing your assets minus any liabilities.

Assets are counted as anything of value. However, they include: cash, insurance policies, stocks, bonds, real estate, annuities, brokerage accounts, business interests, and today, digital assets. They are brought to present market value to create the “gross estate.” Liabilities are counted as debts, mortgages, assets, funeral and estate expenses, and any assets lawfully passing to a surviving spouse. The liabilities are deducted from the assets to get to the “net estate” value.

Federal limits to the estate tax deduction were doubled, and today very few estates in the US are subject to the federal estate tax. Here’s a comparison: in 2000, the federal estate tax exemption was $675,00 and an estimated 52,000 estates had to pay estate taxes. The top 10% of income earners paid almost 90% of the tax, with more than a quarter of that paid by the wealthiest 0.1%.

When the new Tax Cut and Jobs Act became effective, the exclusion for federal estate tax increased from $5.49 million per person to $11.18 million per person. In 2019, there has been a further increase, to $11.4 million per person. That remains in effect until 2025.

Many states impose their own estate taxes. In New York State, the Basic Exclusion Amount for New York State Tax for estates for people who died on or after Jan. 1, 2019, and before Jan. 1, 2020, has increased from $5.49 million per person to $5.74 million per person. These amounts will increase in 2020.

However, even without the federal estate tax, people still need estate plans to protect themselves and their families because a will ensures that your assets are distributed to the people you want to receive your assets. An estate plan includes a Power of Attorney and Health Care Power of Attorney among the protections.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: Rome Sentinel (Jan. 22, 2019) “2019 update: Should you be concerned about the estate tax?”

So, Just What Does a Financial POA Do?

It is really important to understand the responsibilities of a Power of Attorney.

If you are someone’s Power of Attorney or it is possible you are going to be named a Power of Attorney, it is probably a really good idea to understand the role and responsibilities before proceeding, according to the Rushville Republican in “Financial power of attorney responsibilities.”

The person who signs the POA is called the “principal” and the person to whom authority is given, is often referred to as the “attorney in fact” or the “agent.”

What powers are given to the person who becomes the agent? In some POAs, there are limits placed on the person, but in most cases the power is “general.” In these cases, the agent can do whatever the individual would do. That includes opening bank accounts, buying and selling property, managing investments, filing taxes, cashing checks and closing accounts. An agent is a considered a fiduciary of the principal.

The agent may not change the principal’s will and he is not permitted to transfer such authority to act as an agent for the principal to anyone else, unless specifically authorized in the POA itself.

There are different types of POAs. When they become effective, depends on their type. A financial POA is typically effective the moment it’s signed by the principal. However, a “springing” POA becomes effective only when a specific event, which is described in the POA document, takes place. If the springing POA is to take effect when the principal becomes incapacitated, usually one or more physicians must agree that the principal can no longer make decisions on their own behalf. 

The POA generally is not recorded in a courthouse, If you are signing a document for the principal that does have to be recorded with the county, like a deed to a house, then you will need to present and record the POA with the county recorder, before the document can be recorded. Laws vary by state.

Some people decide to have more than one agent. It’s not unusual, but it can lead to some complications. The wording should include the agents being appointed “severally,” so that they can act independently of one another, if that is appropriate under the circumstances. If one person is on the West Coast while the principal and another agent live on the East Coast, not having the ability to act independently could create problems for the agent and the principal.

The POA should remember to keep his assets and the principal’s assets separate. Money should not be intermingled in bank accounts or investment accounts. This is a very important point, since the fiduciary responsibility is a serious matter. The POA can be changed or revoked by the principal at any time, as long as the principal is mentally competent.

The POA ends with the death of the principal. It is meant to be used as a helpful tool, while the person is living. After the person dies, the executor takes over as the personal representative of the person’s estate.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: Rushville Republican (Jan. 22,2019) “Financial power of attorney responsibilities”

Prepare for the Three Phases of Retirement

The information you need to prepare for retirement, isn’t the same that you need for retirement itself.

As one prepares for retirement, they usually focus on earning, saving and gathering assets for the future. However, that is just one phase of preparing and living comfortably in those years, according to Financial Advisor in “A Successful And Secure Retirement—Spend-Down Strategies: Part 1.”

The biggest difference in the strategies during the accumulation and withdrawal strategies, is that there’s a greater emphasis on long-term tax planning. Taxes are often the single biggest expense for investors. To make sure that you meet your goals, which includes having the IRS take the smallest piece of your assets, a plan must be created to focus on paying the least amount in taxes, while you are alive and even after you have passed.

The first phase of decumulation, which occurs at different times for different people (and for some people, never occurs) usually comes with a low tax rate. It often starts with retirement, when the paychecks are not coming in and, ideally, you are not yet drawing Social Security or pension benefits. This would allow your Social Security benefits to continue to grow and keep you in a low tax bracket.

The spend-down phase begins, when you start taking withdrawals from tax deferred retirement accounts. This typically starts the year you turn 70½ and start taking RMDs (Required Minimum Distributions). This is the time to be careful, since your tax rate will likely jump up from the amount it was when you were not yet taking RMDs or getting Social Security or pension benefits. The goal is to manage your retirement income, in order to minimize taxes.

The final-spending phase begins all too soon, especially when medical costs and long-term care costs increase dramatically. Given their tax deductibility, as things currently stand, this may provide another period with very low tax rates.

The legacy phase begins upon your death, or on the death of the surviving spouse. The goal is the tax efficient transfer of remaining wealth to heirs and charities and preparing heirs for the assets they will inherit. An estate plan should be in place long before this phase is reached, so that your assets are passed seamlessly to family members and charities.

As a person moves through these stages of post-retirement spending, there are many strategies that can be used to minimize tax liability and maximize the growth of assets. A balance must be found between spending, managing tax burdens and preparing for a legacy.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.

Reference: Financial Advisor (Jan. 21, 2019) “A Successful And Secure Retirement—Spend-Down Strategies: Part 1”

As Time Marches on, Consider an Estate Plan Review

Life rarely remains the same and those changes mean it is time to take a fresh look at your estate plan.

Time marches on and a person’s life changes. That creates the situation of there not being a doubt of whether an estate review is necessary but simply becomes a questions of when it will be reviewed, according to the New Hampshire Union Leader in “It’s important to periodically review your estate plan”

Most people get their original wills and other documents from their estate planning attorney, put them into their safe deposit box or a fire-safe file drawer and forget about them. There are no laws governing when these documents should be reviewed, so whether or when to review the estate is completely up to the individual. That often leads to unintended consequences that can cause the wrong person to inherit, fracture the family and leave heirs with a large tax liability.

A better idea: review the estate plan on a regular basis. For some people with complicated lives and assets, that means once a year. For others, every three or four years works. Some reviews are triggered by changes in life, including:

• Marriage or divorce
• Death
• Large changes in the size of the estate
• A significant increase in debt
• The death of an executor, guardian or trustee
• Birth or adoption of children or grandchildren
• Change in career, good or bad
• Retirement
• Health crisis
• Changes in tax laws
• Changes in relationships to beneficiaries and heirs
• Moving to another state or purchasing property in another state
• Receiving a sizable inheritance

What should you be thinking about, as you review your estate plan? Here are some suggestions:

Have there been any changes to your relationships with family members?

Are any family members facing challenges or does anyone have special needs?

Are there children from a previous marriage and what do their lives look like?

Are the people you named for various roles—power of attorney, executor, guardian and trustees—still the people you want making decisions and acting on your behalf?

Does your estate plan include a durable power of attorney for healthcare, a valid living will, or if you want this, a DNR (Do Not Resuscitate) order?

Has your estate plan addressed the possible need for Medicaid?

Do you know who your beneficiary designations are for your accounts and are your beneficiary designations still correct? Your beneficiaries will receive assets outside of the will and nothing you put in the will can change the distribution of those assets.

Have you aligned your assets with your estate plan? Do certain accounts pass directly to a spouse or an heir? Have you funded any trusts?

Finally, have changes in the tax laws changed your estate plan? Your estate planning attorney should probably take a look at the impact of state law changes, as well as federal.

Reference: New Hampshire Union Leader (Jan. 12, 2019) “It’s important to periodically review your estate plan”

No Plan for Your Estate? It May Well Be at Risk!

No matter how much you want to ignore the impact of your life changes, it really isn’t a good idea.

If you don’t have an estate plan or you have an estate plan that you haven’t looked at in years, chances are your estate is at risk. This is because as time marches on, your life events can really change things, according to Newsmax Finance in “Your Estate is at Risk.” Oh yes, let’s not forget that there may well be some legal liability issues out there.

For many people, the first experience with litigation is a divorce. Even in the best of circumstances, it’s a difficult situation. In a bad situation, it’s a nightmare for all concerned. What would happen if you became disabled? It’s more likely that someone will become disabled during the course of their life than that they will die prematurely.

Do you have a health care power of attorney, so someone you trust is empowered to make decisions on your behalf, if you became disabled? What about a durable power of attorney so a person you trust, who also has some financial savvy, can take over for you if you can’t do things, like pay bills or manage your business?

If you don’t have these documents in place, a court-appointed person will be assigned as your guardian. That is not something you want to happen.

If you’ve created a private business, you also need to plan for succession. Too many business owners let their businesses die along with them, leaving families, employees and clients stranded. Transitioning a business for succession or to be managed in your absence takes planning.

All of these issues can be dealt with in an estate plan, which you should have created for you by an estate planning attorney. The attorney should be someone you trust, who has experience helping people with the same challenges as your situation, whether that’s a blended family or a privately held family business.

Estate planners know how to use certain methods to help individuals and families make the most of their assets, limit their tax liabilities and plan for the future. There are many different tools available, from different types of trusts to the basics, like a will, power of attorney, and health care power of attorney, to make sure you and your family have the correct protection in place.

Going through the estate planning process is a useful experience, since it gives you and your spouse a chance to review your life’s accomplishments from a long-term perspective, prepare for events like retirement or funding a child or grandchild’s college education, and taking care of this important element of adulthood.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.

Reference: Newsmax Finance (Jan. 14, 2019) “Your Estate is at Risk”

Serving as an Estate Administrator Can Be a Challenge. Administrating an estate? Let’s take a look at just how hard it can be.

People often name a family member or close friend as a trustee. However, sometimes it is wise to think it through and consider the possibility of a professional administrator as a trustee, according to Kiplinger in “Why You May Need a Pro Trustee: Trust Administration is Not Just Common Sense.”

The article details some of the problems that can arise despite good intentions.

Let’s call our client Linda. She wants to identify a successor trustee. Linda’s parents had identical estate plans with trusts that were set up for Linda and her two siblings Jack and Diane. Linda was the family’s responsible one, so she received her share in each estate outright and served as the trustee for the other separate trusts, two for Jack and, two for Diane, since the second of her parents died some 10 years ago. This is not unusual—parents will often give the responsible person in the family, the role of trustee, when their siblings are seen as less likely to perform the necessary tasks.

These four trusts were close in value, with about $440,000 in each. They were identical in other ways: the trustee had the power to pay from income and principal each year for the beneficiary’s health, maintenance and support, but there was no requirement to distribute anything. Linda had done a great job, in keeping with her reputation. For 10 years she recorded every transaction. Because she knew her siblings resented her serving as trustee, she never paid herself a fee.

Linda was tired, and she wanted to let someone else be in charge of the trusts.

When the trusts were presented to an institutional trust officer, it was clear why the trusts had never been merged. Linda’s mom had executed an amendment to the estate plan, after Linda’s dad died that ensured that when these siblings passed (that would be Jack and Diane), the trusts would pass to their descendants. Linda’s mom executed this amendment, so that when Jack and Diane passed away, the trust from the mother would be divided among her surviving children. This meant that Linda would get another share, and Jack and Diane’s children would get less benefit from that trust.

Linda’s mom thought she was doing a good thing. However, her decision put Linda in a bad position. She became an “interested” trustee, with the power to make decisions that would eventually put more funds into her pockets or diminish her share. Of course, that would only happen, if she outlived her siblings.

Linda had been diligent and responsible, insuring that the trusts had the exact same asset allocation and investments, paying out income from the trust and when one called asking for money, giving both the same additional amount from the mother’s trust and the father’s trust, even though any distributions made from the mother’s trust make her less likely to receive a larger share in the future. She also made the same distribution for the other sibling, to keep things even.

However, Linda’s actions, while seemingly very prudent and fair, could be interpreted as a breach of trust that leaves her open to a lawsuit judgment against her.

Her sister Diane had few or no other income sources. Each year, she spent every penny she got, just to get by. Diane requested additional distributions every year. When Diane dies, Jack will receive an additional share of Diane’s trusts, if he survives her.

Jack had plenty of income and assets. If Diane survived him, she’d receive a share of one of his trusts. But wait—Jack’s been receiving funds from the trust that was to have benefited his spouse and dependents, not Diane. Therefore, while Linda has been trying to keep everything fair, she has actually been undermining the trusts that may pass to Jack’s descendants, by distributing funds Jack didn’t even need. Linda could have made distributions from her mother’s trusts to increase the chances that Jack’s and Diane’s descendants would receive a greater share at their parent’s death.

Linda didn’t see the larger picture, and as a result has made 10 years of decisions that could create a serious financial problem for herself, if one of her siblings is litigious.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: Kiplinger (Jan. 14, 2019) “Why You May Need a Pro Trustee: Trust Administration is Not Just Common Sense”

The Impact of Addiction on Estate Planning

Families struggle with the damages created by drug habits.

The leading cause of death of Americans under the age of 50 is now from opioid addiction and this is having an impact on estate planning, according to MarketWatch in “How to leave money to a family member with an addiction.”

Addiction has been known to drive even good people to steal and lie to get money to support their habits. Parents of children are wracked by guilt and anger. The stories of families spending hundreds of thousands of dollars in an effort to help their children are growing in number—as are the number of families who exhaust their retirement savings paying for rehabilitation and related services.

Trusted family advisors, including estate planning attorneys and financial advisors, find themselves working with families to protect the family finances and the well-being of their addicted family members. The fallout from addiction creates many secondary problems for families. Estate planning for a family grappling with addiction addresses many different issues, not just inheritance.

Lump sum distributions or full bequests to an adult struggling with addiction can be deadly, if the person uses the funds to purchase large quantities of drugs. At the same time, writing someone out of the will completely and withdrawing all support, can be devastating to the addicted adult and the family.

Creating a trust can help to protect assets and ensure that there is some degree of accountability in how the distributions are made. Incentive trusts, where a certain behavior or accomplishment markers are determined, can be used to encourage behaviors.

This may mean that the addicted adult does not receive funds, until after passing a drug test, attending a certain number of treatment sessions or entering a residential rehabilitation program.

Incentive trusts are part of a special area of estate planning. Therefore, it is necessary to work with an attorney who has experience with trusts and with incentive trusts. Ideally, the attorney who helps your family, will be one who is also familiar with the impact of addiction on families.

Creating incentives for positive outcomes includes having consequences when the person fails to meet the terms of the trust.

In this situation, a trustee who is extremely trustworthy and not prone to being manipulated is necessary. They will need to make sure the person adheres to the requirements and while they may be given certain levels of discretion, this person needs to be strong-willed enough to withstand an addict.

This kind of trust may require the beneficiary to submit to specific terms and provide access to their health records, which itself requires a HIPAA waiver for the trustee.

Creating an estate plan with an incentive trust presents many challenges for the family and the trustee. It may well become a highly charged, emotional process.

Reference: MarketWatch (Jan. 14, 2019) “How to leave money to a family member with an addiction”

Kids All Grown Up? Time to Think about Savings

If you have an empty nest, it might be a good time to think about your own future.

Bringing up children is expensive, so when they grow up and leave the nest you have a chance to review your savings as well as plans for the future, according to USA Today in “5 ways empty nesters can boost their savings and turbocharge their 401(k)s.”

Here’s a five-step plan for making this happen.

Up the savings side. Once you’re not spending cash on your children for clothes, college funds, cars and car insurance, that cash can move into retirement savings. The maximum for a 401(k) in 2019 is $19,000, and if you are over age 50, you can add $6,000 as a “catch-up” contribution. For annual IRA contributions, the limit is $5,000 with a catch-up of $1,000. Increase your paycheck deductions to the percentage, that will get you to the IRS limits. Put savings first.

If there’s a match, don’t miss it. Lucky enough to work for a company that matches all or part of your retirement savings? Do whatever you can to take full advantage of that free money. The most common company match is 50 cents per dollar on 6% of pay, according to Vanguard Group, which says that 70% of 401(k) plans had this match in place in 2017. Let’s say you earn $75,000 and save 6% of your pay. The company would give you $2,250, which means you’d be boosting your savings to $6,750.

Max out savings. The more money that is saved, the faster the nest egg grows. A married couple that socks away a combined $50,000 in pretax dollars every year in their 401(k)s can find themselves with an additional $250,000 in five years. That’s not counting company matches or any investment growth.

Catch-up as fast as you can. Over 50? The IRS promotes savings by allowing catch-up contributions. An additional $6,000 is allowed in a 401(k). Parents who were paying for summer sleep away camp or riding lessons, can move those dollars into their own retirement accounts.

Control spending. The natural inclination when cash flow loosens up is to spend more. Many people decide to live it up during these years, feeling like they deserve to enjoy themselves after dedicating so many years to their children. There’s a balance that needs to be found between enjoying and over-spending. Most families increase their retirement savings when the children are gone, but not by enough. Ramping up spending, instead of saving, means years of missed opportunities to build your retirement accounts.

The best advice is to take the long view. Savings instead of putting a convertible in the garage or taking lavish vacations, when a more modest approach is equally enjoyable could change the nature of your retirement.

Reference: USA Today (Jan. 14, 2019) “5 ways empty nesters can boost their savings and turbocharge their 401(k)s”

Financial Advice for that Second Marriage

Marry a second time and keep finances separate? It may be a good idea at first but after a decade?

When people marry for the second time they often decide to keep things separate but perhaps as time rolls on it is a good idea to take a second look at that plan, according to AARP Magazine in “4 Money Tips for Second Marriages.”

Did you have a prenup before your second marriage? It’s not a big deal. You can also do a post-nuptial agreement. You can have either one one drawn up and put in a drawer. Chances are you came to the marriage with different incomes, assets and children. Talk about what is fair and come up with a document that works for both of you.

Do you have a system for paying ongoing household costs? One solution is a household account to which both partners contribute, with both contributing a certain amount, depending on income and asset levels. Some couples have a joint credit card, just like first-time marrieds, so every time you use the card, you’re not negotiating all over again about who is paying for what.

You might need help with managing your finances. If one of you is going to retire in the near future, how will that impact your finances? Can the person who is retiring first, wait to tap retirement savings before claiming their Social Security benefits? You need a strategy that will work for both spouses, and it  must take into account your ages, retirement dates, assets and any health issues.

Different investment portfolios may be needed if you have different investment comfort levels. Women are traditionally more conservative than men. Talk about your comfort levels with stock purchases and other kinds of investments. If you came to the marriage with a significant portfolio and a financial advisor, did you stay with your advisor or switch to your spouse’s? After 10 years, are you ready to combine accounts? Or, if for estate planning purposes, does it make sense to keep them separate?

If your second marriage has made it past the 10-year mark, when was the last time you reviewed your estate plan and your designated beneficiaries? We hope you updated your wills and reviewed all  your accounts with named beneficiaries shortly after you were married, but if not, now would be the time to do this important task. You don’t want anyone’s ex receiving a large IRA or the proceeds from a life insurance policy.

This may be the time to consider your attitudes toward “mine and “ours.” For some people, the 10-year mark gives them the security that their marriage is a keeper and they begin to let go of some of the separated assets.

Reference: AARP Magazine (January 2019) “4 Money Tips for Second Marriages”

Accessory Dwelling Unit an Option for Later Years?

An ADU can be used as a home for your parents for a few years and then possibly an income-producing structure in the future.

Families that often would like to have the older members of the family age in place with them, are finding one way to accomplish this with an Accessory Dwelling Unit (ADU), according to Next Avenue in the article “Could an Accessory Dwelling Unit Help Your Aging Parent?”

Sometimes referred to as a “granny pod,” the ADU is usually a small structure in a backyard, with little more than a bathroom, sleeping quarters and a kitchen. They are basically “tiny homes,” the very small living quarters that some people are opting for in place of sprawling homes.

A survey by AARP found a third of adults 50 and older would be open to living in an ADU. Why not? It’s a great way to have some degree of privacy, while living near, but not with, children and grandchildren.

Communities are starting to update their zoning laws to permit the construction of ADUs, especially where housing costs are high. In Los Angeles, ADUs have been legal since 2017, when new laws about their use went into effect and the increase of ADU construction permits increased by 1,000%. Housing codes changes are being examined in many other cities, including Boston, Denver, Chicago, Denver, Seattle and Washington DC, say industry experts.

Some barriers still exist, and they may not go away quickly. One is that ADUs are not cheap, even thought they are small. Many cost $150,000 or more. Much of the cost is to hook the little house up to local utilities, as well as the cost of construction. Most lenders don’t offer ADU mortgages, so payment tends to be with cash or with a home equity line of credit. This restricts the number of people who can afford an ADU.

Local communities not behind the concept of an ADU, may be concerned about the little houses being less like a tiny home and more like a shack, having a negative impact on neighborhood looks and values. Zoning codes, even those that are changing, are strict about maintaining the structures.

If your family would benefit from an ADU, start by checking with your town’s planning or building department. If the community permits the use of ADUs, you’ll want to find local builders who have constructed ADUs before. Some builders may not be interested in what they perceive as a very small project.

Reference: Next Avenue (Jan. 2, 2019) “Could an Accessory Dwelling Unit Help Your Aging Parent?”