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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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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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Using a Donor-Advised Fund May Be a Way to Get a Charitable Tax Break Under the New Tax Law

2/26/2020

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Donor-advised funds are a growing trend in giving that may get more popular due to the new tax law. These funds allow you to donate money, receive a charitable tax deduction, and continue to grow the money until you are ready to distribute it to a charity or charities of your choice. 
A donor-advised fund is established through a charity or nonprofit. The way the fund works is that you donate assets (it can be cash, stocks, or real estate) to the fund. The gift is irrevocable – the nonprofit controls the assets and you cannot get the assets back. You may then take an immediate tax deduction for the gift to the fund. Once the fund is established, you can tell the fund where to donate the money, and when. 
These funds are becoming more popular in part because the new tax law enacted in 2017 doubled the standard deduction to $12,000 for individuals and $24,000 for couples. This means that if your charitable contributions along with any other itemized deductions are less than $12,000 a year, the standard deduction will lower your tax bill more than itemizing your deductions. For most people, the standard deduction will be the better option and they will get no deduction for their charitable contributions. 
A donor-advised fund allows you to contribute several years' worth of charitable donations to the fund at once and receive the tax benefit immediately, making it more likely that itemizing would be more advantageous than taking the standard deduction. 
There are different types of donor-advised funds. Some are spinoffs of large financial investment firms like Fidelity and Schwab. Others may be smaller community funds. Some universities and faith-based organizations also have funds. Each fund has its own rules on how the money is distributed. There may be limits on how much you can donate each year or a requirement that you donate a certain amount. Some funds are single-issue funds that may require that at least some of the donations go to a particular charity or cause. Each fund also has its own rules on whether the fund can be passed down to heirs. 
Before deciding to give to a donor-advised fund, you should investigate the fund's rules, fees, and how established the fund is. It is best to consult with your financial advisor before making any major donations. 
For more information about donor-advised funds from the Chronicle of Philanthropy, click here.
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Tips on Creating an Estate Plan that Benefits a Child with Special Needs

2/19/2020

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Parents want their children to be taken care of after they die. But children with disabilities have increased financial and care needs, so ensuring their long-term welfare can be tricky. Proper planning by parents is necessary to benefit the child with a disability, including an adult child, as well as assist any siblings who may be left with the caretaking responsibility.

Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid, MassHealth and Supplemental Security Income (SSI). The trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits.
There are three main types of special needs trusts:
  • A first-party trust is designed to hold a beneficiary's own assets. While the beneficiary is living, the funds in the trust are used for the beneficiary's benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care. These trusts are especially useful for beneficiaries who are receiving Medicaid, SSI or other needs-based benefits and come into large amounts of money, because the trust allows the beneficiaries to retain their benefits while still being able to use their own funds when necessary.
  • The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary's access to benefits and the funds can be used to pay for the beneficiary's supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the "payback" provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in the trust can pass to other family members, or to charity, without having to be used to reimburse the government.
  • A pooled trust is an alternative to the first-party special needs trust.  Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary's needs. When the beneficiary dies, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.
Life Insurance
Not everyone has a large chunk of money that can be left to a special needs trust, so life insurance can be an essential tool. If you've established a special needs trust, a life insurance policy can pay directly into it, and it does not have to go through probate or be subject to estate tax. Be sure to review the beneficiary designation to make sure it names the trust, not the child. You should make sure you have enough insurance to pay for your child's care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents' estate intact for other family members. When looking for life insurance, consider a second-to-die policy. This type of policy only pays out after the second parent dies, and it has the benefit of lower premiums than regular life insurance policies. 
ABLE Account
An Achieving a Better Life Experience (ABLE) account allows people with disabilities who became disabled before they turned 26 to set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. This money can come from the individual with the disability or anyone else who may wish to give him money.
Created by Congress in 2014 and modeled on 529 savings plans for higher education, these accounts can be used to pay for qualifying expenses of the account beneficiary, such as the costs of treating the disability or for education, housing and health care, among other things. ABLE account programs have been rolling out on a state-by-state basis, but even if your state does not yet have its own program, many state programs allow out-of-state beneficiaries to open accounts. (For a directory of state programs, click here.)
Although it may be easy to set up an ABLE account, there are many hidden pitfalls associated with spending the funds in the accounts, both for the beneficiary and for her family members. In addition, ABLE accounts cannot hold more than $100,000 without jeopardizing government benefits like Medicaid and SSI. If there are funds remaining in an ABLE account upon the death of the account beneficiary, they must be first used to reimburse the government for Medicaid benefits received by the beneficiary, and then the remaining funds will have to pass through probate in order to be transferred to the beneficiary's heirs.  
Get Help With Your Plan
However you decide to provide for a child with special needs, proper planning is essential. Talk to your attorney to determine the best plan for your family. 
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What Is the Difference Between a Living Will and a Do-Not-Resuscitate Order?

2/12/2020

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It is a very good idea to create advance directives in order to plan for the possibility that you may one day be unable to make your own medical decisions. In doing so, there can be confusion about the difference between a living will and a "do-not-resuscitate" order (DNR). While both these documents are advance medical directives, they serve different purposes.
A living will is a document that you can use to give instructions regarding treatment if you become terminally ill or are in a persistent vegetative state and unable to communicate your instructions. The living will states under what conditions life-sustaining treatment should be terminated. If you would like to avoid life-sustaining treatment when it would be hopeless, you need a living will. A living will takes effect only when you are incapacitated and is not set in stone -- you can always revoke it at a later date if you wish to do so.
When drawing up a living will, you need to consider the various care options and what you would like done. You need to think about whether you want care to extend your life no matter what or only in certain circumstances. A living will can dictate when you want a ventilator, dialysis, tube feeding, blood transfusions, and other life- saving or life-prolonging options. 
A DNR is a different document. A DNR says that if your heart stops or you stop breathing, medical professionals should not attempt to revive you. This is very different from a living will, which only goes into effect if you are unable to communicate your wishes for care. Everyone can benefit from a living will, while DNRs are only for very elderly and/or frail patients for whom it wouldn't make sense to administer CPR.
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A Final Retirement Account Distribution Must Still Be Made After Death

2/5/2020

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Federal law requires that beginning on April 1 of the year after you reach age 70 1/2, you must begin withdrawing a minimum amount from your non-Roth individual retirement account (IRA) or 401(k) accounts. These withdrawals are called required minimum distributions (RMDs).

But what if you die after age 70 1/2 and before all the account funds have been distributed? In the eyes of the law, death is no excuse not to take RMDs from an IRA or 401(k). Your heirs must take the final RMD before they can take control of the account.  

Congress created the rules governing the minimum distribution of retirement plan funds to encourage saving for retirement and to allow retirement assets to build up tax-free during the plan owner's working years. But lawmakers built in provisions so the money wouldn’t simply keep accumulating tax-free forever. The funds you withdraw are treated as taxable income in the year you take the distribution. If you don’t start taking the RMDs from your retirement accounts and pay taxes on the withdrawals, you will face a 50 percent penalty on what should have been withdrawn but wasn’t.

The rules for inheriting an IRA as a spouse are different than the rules for a non-spouse beneficiary, but regardless of who is inheriting the IRA, the heir must take the RMD for the year the account owner died. The full RMD must be taken by December 31 in the year the account owner died, even if he or she died at the beginning of the year. To take the RMD, beneficiaries must contact the custodian of the account and submit a death certificate. If the account owner died before he or she was required to begin distributions, then the beneficiaries do not need to take an RMD. 
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The money from the RMD will go directly to the beneficiary listed on the account, not the estate. That means it will be taxable income for the beneficiary. If there is more than one beneficiary, it will be split evenly. 
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Should You Sell Your Life Insurance Policy?

1/29/2020

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Older Americans with a life insurance policy that they no longer need have the option to sell the policy to investors. These transactions, called "life settlements," can bring in needed cash, but are they a good idea? 
If your children are grown and your mortgage paid off, you may decide that there is no longer a reason to be paying premiums every month for a life insurance policy, or you may reach a time when you can no longer afford to keep up with the premiums. If this happens, you may be tempted to let the policy lapse and get nothing from it or to surrender the policy for its cash value, which usually is a fraction of its death benefit. Another option is a life settlement. This allows you to sell your policy to an investor for an amount that is greater than the cash value, but less than the death benefit. The buyer pays all future premiums and receives the death benefit when you die. 
Life settlements offer seniors a way to get cash to supplement retirement income and help pay for living expenses, health care, or other needed items. They can be a good alternative to surrendering a policy or letting it lapse. But as with any financial transaction, you need to exercise caution. 
The amount you receive from a life settlement depends on your age, your health, and the terms and conditions of the policy. It is hard to determine if you are getting a fair price for the policy because there are no standard guidelines for life settlements. Before selling you should shop around to several life settlement companies. You should also note that the amount you receive will be reduced by transaction fees, which can eat up a good chunk of the proceeds of the sale. In addition, you may have to pay taxes on the lump sum you receive. Finally, the beneficiaries of your policy may not be pleased with the sale, which is why some life settlement companies require beneficiaries to sign off on the transaction.
Before choosing a life settlement, you should consider other options. If you need cash right away, you can borrow against your policy. If the premiums are too much, you may be able to stop premiums and receive a smaller death benefit. In some cases of terminal illness, you can receive an accelerated death benefit (this allows you to receive a portion of your death benefit while you are still alive). If you don't need the cash but no longer want the policy, another possibility is to donate the policy to charity and get a tax write-off. 
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Will My Advance Directive Work in Another State?

1/15/2020

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Making sure your end-of-life wishes are followed no matter where you happen to be is important. If you move to a different state or split your time between one or more states, you should make sure your advance directive is valid in all the states you frequent.

An advance directive gives instructions on the kind of medical care you would like to receive should you become unable to express your wishes yourself, and it often designates someone to make medical decisions for you. Each state has its own laws setting forth requirements for valid advance directives and health care proxies. For example, some states require two witnesses, other states require one witness, and some states do not require a witness at all.
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Most states have provisions accepting an advance care directive that was created in another state. But some states only accept advance care directives from states that have similar requirements and other states do not say anything about out-of-state directives. States can also differ on what the terms in an advance directive mean. For example, some states may require specific authorization for certain life-sustaining procedures such as feeding tubes while other states may allow blanket authorization for all procedures.
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    meet the attorneys

    Peter C. Herbst Jr
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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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