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Watch Out for These Potential Problems with Life Estates

1/6/2021

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Life estates have been a common tool for MassHealth planning, probate avoidance and tax efficiency, but there are potential problems to look out for. Knowing the implications and risks of a life estate is essential in determining whether it is appropriate for your situation. 
In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate -- the life tenant -- possesses the property during his or her life. The other owner -- the remainderman -- has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full possession of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

Life estates address some of the concerns people have with planning for protection and transfer of their home. They permit parents to pass ownership in their homes to their children while retaining absolute possession of the property during their lives. By executing a life estate deed, the property avoids probate at the parents' deaths, is protected from a MassHealth lien, and receives a step-up in tax basis.

However, there are potential issues that may arise with life estates and it’s important to fully understand the following risks:
  • As a life tenant, you may not easily sell or mortgage property with a life estate interest. The remaindermen must all agree if you decide to sell or borrow against the property. 
  • If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time and they will likely pay a significant capital gains tax on the portion they receive.
  • It is not as easy to remove or change a name once it is on a deed to real estate as it is to change the beneficiary on a life insurance policy or bank account.
  • Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home. Your child’s interest in the home is not protected if he or she files for bankruptcy. If your child gets a divorce, his or her spouse could claim all or part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. However, while these claims may be made against the property, no one can kick you out of it during your life.
  • Giving away an interest in property could disqualify you from receiving assistance from MassHealth, should you require long-term care within five years of the transfer. In addition, if you and the remaindermen were to sell the property while you were in a nursing home, the state could have a claim against your share of the proceeds for payments it has made on your behalf, but the share of the proceeds allocated to your children would be protected.
As with most planning tools, a life estate may seem like a simple solution at first but contains significant risks.  Most of our clients address these risks by utilizing an irrevocable trust, rather than a life estate. it’s important to talk to a lawyer who knows about this in-depth. 

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Ability to Withdraw Money Early from Retirement Plan Without Penalty Expires at the End of the Year

12/21/2020

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If you are experiencing financial hardship due to the coronavirus pandemic, you may want to consider withdrawing money from your retirement account while you still can. The special exemption allowing early withdrawals without a penalty ends soon. 
Passed in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows individuals adversely affected by the pandemic to make hardship withdrawals of up to $100,000 from retirement plans this year without paying the 10 percent penalty that individuals under age 59 ½ are usually required to pay. This exemption is only for withdrawals made by December 30, 2020.
If you decide to withdraw money from your retirement account, you will still have to pay income taxes on the withdrawals, although the tax burden can be spread out over three years. If you repay some or all of the funds within three years, you can file amended tax returns to get back the taxes that you paid. 
To qualify for the exemption, you must meet one of the following criteria:
  • You or a spouse or dependent have been diagnosed with COVID-19
  • You or your spouse have suffered financial hardship due to the pandemic, such as a lost job, a job offer rescinded, reduced pay, business closed, or inability to work due to lack of childcare. 
This step should not be taken lightly. Withdrawing money now means your retirement funds will be reduced and limits the retirement plan’s ability to grow. But for some people, it may be the best option to pay bills and avoid running up high-interest credit card debt. 
For information from the Consumer Financial Protection Bureau on how the withdrawal exemption works, click here. 

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Special Tax Deduction for 2020 Allows Donations of $300 to Charity Without Itemizing

12/12/2020

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As we enter the giving season, there is an additional reason to be charitable. Congress enacted a special provision that allows more people to easily deduct up to $300 in donations to qualifying charities this year.

Since the increase in the standard income tax deduction in 2018, only 11 percent of taxpayers itemize deductions, so fewer taxpayers take advantage of the charitable deduction. But to both encourage and reward giving in this difficult year, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act Congress created a one-time $300 charitable deduction for people who do not itemize on their tax returns. To qualify, you must give cash (including paying by check or credit card) to a 501(c)(3) charity. Gifts of goods or stock do not qualify.

While $300 may not seem like much, it can make a big difference to smaller charities. And a lot of $300 gifts can add up.  One thing that's not clear is whether a married couple filing jointly can deduct $600. While it's logical that they should be able to do so, the IRS has not clarified this yet. With just four weeks left in the year, time is a-wasting.
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Here are some places you might take a look at to determine which charity you would like to support before the end of the year:
  • Give Directly
  • Giving Compass
  • Community Foundation Locator
  • Philanthropy Together
  • Grapevine
  • Charity Navigator
  • Charity Watch
  • Kristof Impact
For more information from the IRS about the tax deduction, click here. 

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Pandemic Relief: Retirement Account Owners Do Not Have to Take Required Distributions in 2020

9/23/2020

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Retirement account owners, many of whose retirement balances have been pummeled by a stock market drop due to the coronavirus pandemic, do not have to take mandatory withdrawals this year. 
Federal law requires individuals who were age 70 1/2 before the end of 2019 to begin taking required minimum distributions (RMDs) from their retirement plan in April of the year after they turned 70. (Note that those who were younger than 70 ½ at the end of 2019 can wait until they turn 72 to take RMDs) The amount of the distribution is based on the value of the account at the end of the previous year, but the funds you withdraw are treated as taxable income in the year you take the distribution. 
The coronavirus pandemic caused the stock market to tumble, depleting many retirement accounts. RMDs for this year would be based on the value of the account at the end of 2019, when the account likely had more money in it because the stock market was at a high point. Although the market has rallied somewhat, it still isn’t back to where it was at the end of 2019. 
Recognizing this, the coronavirus relief bill known as the CARES Act waives the requirement that individuals take RMDs from their non-Roth IRAs and 401(k)s in 2020. This includes any 2019 distributions that would otherwise have to be taken in 2020.  Waiving RMDs will allow retirees to retain more of their savings. The waiver applies to individuals taking RMDs from their own retirement accounts as well as people who have inherited retirement accounts. 
Generally, it is considered a good idea to not take a withdrawal if you do not need to because leaving the money in the account allows it to continue growing tax-deferred. Taking a withdrawal can also increase your 2020 tax burden. However, there are circumstances where it may make financial sense to take an RMD, for example if you need the money to live on. In addition, if you know you are going to be in a much lower tax bracket in 2020, but expect your tax bracket to increase next year, it might make sense to withdraw the money now so you can pay taxes on the withdrawal at a lower rate. 
If you already took an RMD, you may have the option to return it to the account it came from or another retirement account. Usually RMDs cannot be rolled over into another account, but because the CARES Act waived RMDs, they are considered voluntary distributions. This means they can be redeposited or rolled over into a new retirement account (including a Roth account) as long as you do it within 60 days. The IRS has provided guidance, waiving the 60-day rule if you took an RMD between February 1 and May 15 as long as you roll over the RMD by July 15, 2020. This type of rollover can only occur once per year, so if you rolled over a distribution within the previous 365 days, you cannot do it again. 
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How Will the Coronavirus Pandemic Affect Social Security?

9/16/2020

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The coronavirus pandemic is having a profound effect on the current U.S. economy, and it may have a detrimental effect on Social Security’s long-term financial situation. High unemployment rates mean Social Security shortfalls could begin earlier than projected. 
Social Security retirement benefits are financed primarily through dedicated payroll taxes paid by workers and their employers, with employees and employers splitting the tax equally. This money is put into a trust fund that is used to pay retiree benefits. The most recent report from the trustees of the Social Security trust fund is that the fund’s balance will reach zero in 2035. This is because more people are retiring than are working, so the program is paying out more in benefits than it is taking in. Additionally, seniors are living longer, so they receive benefits for a longer period of time. Once the fund runs out of money, it does not mean that benefits stop altogether. Instead, retirees’ benefits would be cut, unless Congress acts in the interim. According to the trustees’ projections, the fund’s income would be sufficient to pay retirees 77 percent of their total benefit. 
With unemployment at record levels due to the pandemic, fewer employers and employees are paying payroll taxes into the trust fund. In addition, more workers may claim benefits early because they lost their jobs. President Trump issued an executive order deferring payroll taxes until the end of the year as a form of economic relief, which could negatively affect Social Security and Medicare funds.  
Some experts believe that the pandemic could move up the depletion of the trust fund by two years, to 2033, if the COVID-19 economic collapse causes payroll taxes to drop by 20 percent for two years. Other experts argue that it could have a greater effect and deplete the fund by 2029. However, as the Social Security Administration Chief Actuary morbidly noted to Congress, this pandemic different from most recessions: the increased applications for benefits will be partially offset by increased deaths among seniors who were receiving benefits. 
It remains to be seen exactly how much the pandemic affects the Social Security trust fund, but the experts agree that as soon as the pandemic ends, Congress should take steps to shore up the fund. 
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Say It Loud: Fight Over James Brown’s Estate May Finally Be Drawing to a Close

8/25/2020

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Litigation over James Brown’s estate has been dragging on for 14 years, but the case took a big step towards resolution when the South Carolina Supreme Court ruled that the woman claiming a spousal share in Mr. Brown’s estate was never legally married to him. 
Mr. Brown, known as the Godfather of Soul, married Tommie Rae Hynie in 2001. At the time, Ms. Hynie did not disclose that she was already married to Javed Ahmed. When Mr. Brown discovered the previous marriage in 2003, Ms. Hynie filed a claim to annul the marriage to Mr. Ahmed on the basis that Mr. Ahmed was already married. Mr. Ahmed did not appear at the annulment hearing, and the court granted the annulment, finding the marriage was void. In 2004, Mr. Brown filed a claim to annul his marriage to Ms. Hynie, but he eventually dropped the annulment proceeding.  He died in 2006 without having the marriage formally annulled and leaving the majority of his estate to a charitable trust. 
Following Mr. Brown’s death, Ms. Hynie filed a claim against the estate, asking for a “spousal share.” Under South Carolina law, spouses can collect one-third of an estate even if the spouse isn’t named in the will. The estate argued that Ms. Hynie was not a surviving spouse because her marriage to Mr. Brown was never valid. Ms. Hynie argued that because her marriage to Mr. Ahmed had been annulled, her marriage to Mr. Brown was valid. 
After the case wended its way through the courts for years, the South Carolina Supreme Court finally determined on June 17, 2020, that Ms. Hynie is not Mr. Brown’s surviving spouse. The court ruled that because at the time Ms. Hynie married Mr. Brown she had not resolved her marriage to Mr. Ahmed, her marriage to Mr. Brown was void under state law. The court noted that Mr. Brown’s trust was intended to be used to create scholarships for children in South Carolina and Georgia and lamented that the protracted litigation has thwarted Mr. Brown’s expressed wishes. Further litigation is possible -- including resolving whether James Brown II, the child of Ms. Hynie and Mr. Brown, may inherit a portion of the estate -- but experts say the ruling is a major step towards finally settling the affairs of the former “Hardest Working Man in Show Business.”  
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8 Tips for Having 'The Talk' with Elderly Parents

8/16/2020

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Unless you’re certain your parents have an up-to-date will and a wider plan for what should happen in the event of their passing, you shouldn’t assume everything will be taken care of.
According to a 2017 survey, less than half of Americans have a will. If your mother or father dies intestate – meaning without a will – such a situation could lead to added emotional strain and stress. And it could have financial implications for all their children and/or other family members.
The following eight tips can help you discuss the hard topics thoroughly and respectfully and prepare you for the road ahead.
1. Plan What You Can
Discussing estate planning and all it entails is not something that should happen without any planning. Make a list of topics and questions, then let your parents know what you want to chat about with them.
If possible, set a time and date and choose a private venue that everyone will feel comfortable in. Be aware that you may need to schedule a few conversations as there could be too much to cover in one sitting. Remember to use language that’s respectful and supportive, and to take a breather if emotions run high or the stress becomes overwhelming.
2. Identify Key People
There are several key people you may need to contact for estate planning purposes. Ask your parents for the names and contact details of their:
  • Doctors
  • Attorney
  • Financial planner and/or accountant
  • Insurance brokers
  • Minister of religion
  • Closest friends
3. Address the Topic of a Will
Determine whether there is an existing will in place and whether the document is up to date. If a will was created more than five years ago, check to see if they’d consider reviewing it to ensure it’s a true reflection of their wishes. Establish where they keep the document and confirm who they’ve appointed as the executor/s.  The same goes for any trust that may have been created.
4. Talk About Power of Attorney
Find out whether your parents have appointed someone to manage their financial and other affairs if they become incapacitated. If they haven’t given someone power of attorney, suggest they consider doing so.
5. Discuss End-of-Life Wishes
Even though the subject may be uncomfortable to talk about, you should discuss your parents’ end-of-life wishes with them. Their estate plan will be incomplete without these directives, so it’s important to include them. The form those directives take depend on the state in which you live, and they may include:
  • The appointment of a health care proxy who can make medical decisions for your parents if they become incapable of making those decisions themselves. You can obtain the relevant forms from an elder law attorney or from a hospital or nursing home
  • A medical or advance directive that explains what sort of care they would like and whether life support should be used to keep them alive or not. These directives can be included in the document that appoints the health care proxy. The directive must refer to the Health Insurance Portability and Accountability Act (HIPAA) when naming the proxy
  • A living will contains instructions regarding the withdrawal or termination of life support under specific conditions, such as your parents becoming terminally ill, becoming comatose, or entering a vegetative state
  • Physician Orders for Life-Sustaining Treatment (POLST), which provides more explicit directives regarding the type of treatment your parents would or wouldn’t want
6. Ask About Insurance Policies
Talk about the type of insurance policies in place. That includes:
  • Health insurance – Medicare or private
  • Life insurance
  • Home insurance
  • Long-term care insurance
  • Disability insurance
In some cases, there may be seniors funeral insurance or other policies intended to cover funeral or burial payments. You’ll need to know about these too and have all their details.
If you haven’t already done so, take note of the names and contact details of the insurance brokers. Check where the policy documents are kept, and if possible, make certified copies of them.
7. Request Access to Tax Returns
It can be helpful to know where tax return paperwork is stored. While these documents may not be necessary after death, they could be required if the estate becomes complicated. Confirm where you can find these documents and that they’re all up to date.
8. Discuss All Other Practicalities
In addition to subjects such as power of attorney and insurance, there are several other practicalities you should include in your conversations.
  • Make a list of their accounts – financial accounts such as bank and mutual fund, credit accounts, and store accounts
  • Check if they are registered organ donors or whether they would consider donating their organs
  • Talk about the memorial service they want and whether they want to be buried, cremated, or some other option.
Conclusion
Estate planning conversations are tough no matter how you tackle them. Try your best to be patient with your parents and transparent with other family members about what you’re doing. If you have siblings, invite them to be part of the conversation.
Accept that these talks can take time and avoid placing pressure on those involved to get it all done in a few hours. The smaller details are critical and should not be rushed. Lastly, always consult an attorney if you’re unsure about the legal aspects or implications of any of the points mentioned above.
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Coronavirus Relief Funds Paid to Deceased Americans Must Be Returned

6/24/2020

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The federal coronavirus relief bill has sent direct emergency payments to some 150 million Americans in the wake of the pandemic. Among the recipients are possibly millions of deceased individuals, raising questions about what their survivors should do with the money. After weeks of silence, the IRS has finally confirmed that the money should be returned and explained how to do it.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law March 27, 2020, included one-time payments of up to $1,200 to millions of eligible individuals, based on their income. To determine who was eligible, the IRS looked at 2018 and 2019 tax returns, without first cross-checking with the Social Security Administration’s master file of U.S. deaths, which apparently would have taken weeks.
As a result, some individuals who passed away after filing 2018 or 2019 taxes have been receiving relief payments, causing confusion for their families. According to the Centers for Disease Control and Prevention, 2.8 million people died in 2018, which means the IRS potentially could have sent out millions of checks to deceased individuals. Although Treasury Secretary Steven Mnuchin said in an interview that the money had to be returned, the IRS was slow to explain how exactly to go about doing that. 
The IRS has now issued guidance, clarifying that the money must be returned. According to the agency, the full amount of the payment sent to a deceased individual should be returned unless there is a surviving spouse. In that case, only the deceased spouse’s portion should be returned. Checks should be voided and returned by mail to the IRS. If a family member cashed a check or the money was received via direct deposit, the recipient of the funds should send the funds back via a personal check or money order. 
Whether you have to return the money is another question. “There’s no legal interpretation,” Nina Olson, a former IRS official and current executive director of the Center for Taxpayer Rights, told The Wealth Advisor.  “I don’t know how they’re basing their decision” to request the money be returned.  Olson said it is “unlikely” the IRS would sue taxpayers for the erroneously awarded stimulus money.
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Pandemic Relief: Retirement Account Owners Do Not Have to Take Required Distributions in 2020

6/17/2020

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Retirement account owners, many of whose retirement balances have been pummeled by a stock market drop due to the coronavirus pandemic, do not have to take mandatory withdrawals this year. 

Federal law requires individuals who were age 70 1/2 before the end of 2019 to begin taking required minimum distributions (RMDs) from their retirement plan in April of the year after they turned 70. (Note that those who were younger than 70 ½ at the end of 2019 can wait until they turn 72 to take RMDs) The amount of the distribution is based on the value of the account at the end of the previous year, but the funds you withdraw are treated as taxable income in the year you take the distribution. 

The coronavirus pandemic caused the stock market to tumble, depleting many retirement accounts. RMDs for this year would be based on the value of the account at the end of 2019, when the account likely had more money in it because the stock market was at a high point. Although the market has rallied somewhat, it still isn’t back to where it was at the end of 2019. 
Recognizing this, the coronavirus relief bill known as the CARES Act waives the requirement that individuals take RMDs from their non-Roth IRAs and 401(k)s in 2020. This includes any 2019 distributions that would otherwise have to be taken in 2020.  Waiving RMDs will allow retirees to retain more of their savings. The waiver applies to individuals taking RMDs from their own retirement accounts as well as people who have inherited retirement accounts. 

Generally, it is considered a good idea to not take a withdrawal if you do not need to because leaving the money in the account allows it to continue growing tax-deferred. Taking a withdrawal can also increase your 2020 tax burden. However, there are circumstances where it may make financial sense to take an RMD, for example if you need the money to live on. In addition, if you know you are going to be in a much lower tax bracket in 2020, but expect your tax bracket to increase next year, it might make sense to withdraw the money now so you can pay taxes on the withdrawal at a lower rate. 
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If you already took an RMD, you may have the option to return it to the account it came from or another retirement account. Usually RMDs cannot be rolled over into another account, but because the CARES Act waived RMDs, they are considered voluntary distributions. This means they can be redeposited or rolled over into a new retirement account (including a Roth account) as long as you do it within 60 days. The IRS has provided guidance, waiving the 60-day rule if you took an RMD between February 1 and May 15 as long as you roll over the RMD by July 15, 2020. This type of rollover can only occur once per year, so if you rolled over a distribution within the previous 365 days, you cannot do it again. 

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How the Coronavirus Has Brought Ageism into Stark Relief

6/13/2020

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With older Americans being most at risk from the COVID-19 coronavirus, the response to the pandemic is highlighting issues of ageism in the United States. According to experts, ageism is evident both in the response to the virus and the lack of protective equipment allocated to nursing homes.

Experts on aging assert that the medical field, politicians, and the public may have acted quicker and taken the coronavirus more seriously if the perception had been that it primarily affected younger Americans. In an article in the Washington Post, Syracuse law professor Nina Kohn argues that the “devaluation of older lives” has caused more older Americans to die than necessary. 

Many young people ignored social distancing recommendations at the start of the pandemic. Headlines emphasizing the virus’s effect on young people (For example: "It isn’t only the elderly who are at risk from the coronavirus" and "Not just older people: Younger adults are also getting the coronavirus") were used to persuade Americans to take the virus seriously. Geriatrician Louise Aronson pointed out that “when you say ‘just’ older people, it sounds like, well, it’s just killing old people, they’re all dying anyway.” Aronson adds that even some older Americans have not followed social distancing recommendations because they do not want to think they are “old.” According to Aronson, “It’s almost as if, if they’re not out there doing things, then they’re one of those old people that doesn’t count. We have created that cultural reality, so shame on all of us.” As the debate raged about closing our economy to prevent the spread of the virus, Texas Lieutenant Governor Dan Patrick even suggested that seniors would be willing to give up their lives in order to help the economy.

Even though COVID-19 has been more deadly for seniors who have contracted the virus, hospitals have focused on helping younger patients. A geriatrician in San Francisco writes in The Atlantic about that special clinical protocols to deal with COVID were developed for children and adults, but not for seniors. Kohn explained that “Ageism is evident in how we talk about victims from different generations, in the shameful conditions in many nursing homes and even -- explicitly -- in the formulas some states and health-care systems have developed for determining which desperately ill people get care if there’s a shortage of medical resources.” 

Nursing homes have been a hotbed for coronavirus, but have been slow to receive the necessary protective equipment for their employees and patients. Bob Kramer, the leader of Nexus Insights, a think tank on aging issues, told Forbes that ageism is apparent everywhere during the pandemic. “It showed up when the management of your parent’s assisted living, memory care, or skilled nursing facility asked for help from their state or county government in securing personal protective equipment (PPE) for their staff and residents. They were told to get in line behind hospitals, medical personnel, government facilities, and military installations. Test kits? Same story. They are victims of our government’s unwillingness to prioritize the health and safety of older adults and those who care for them.”
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Ageism is nothing new, but the coronavirus has exposed the phenomenon in a stark way. 

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    Areas of focus: estate planning, estate & trust administration and elder law. 
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    Areas of focus: estate planning, estate & trust administration, and 
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