Barnes Lipscomb & Stewart PLLC

What You Need to Know About 529 College Savings Plans

College finances can be confusing. Tax-free 529 plans, student loans and financial aid all need to be considered when strategically planning to pay for a college education.

A new parent’s best friend is the tax-advantaged 529 college savings account. Starting to save when children are very young reaps the benefit of time. But when you are ready to use those funds, many questions arise. A Wall Street Journal article, “Can You Use the ‘529’ Money for Grad School?” covers many of the most commonly asked questions.

Here are some of answers:

Grad School Use. Yes, 529 funds can be used for graduate school.

An Unused 529. If a child receives a scholarship, you’re allowed to withdraw that amount from a 529 without any penalty. But if that money isn’t used for educational expenses, there is income tax liability on any earnings. In the event a child who graduated several years ago still has money in her 529 account because of a large scholarship in college, the owner can still withdraw the amount of the scholarship from the 529 account without paying tax or penalty. However, there will be income taxes on any earnings. There’s no requirement that you withdraw money from the 529 in the same year you receive a scholarship, but it’s a good idea.

Change of Beneficiary. You can change the beneficiary to any direct relative of the original beneficiary and this can be done at any time.

Estate Planning. To find out how ownership transfers work with your estate plan, you should talk to an experienced estate lawyer, as 529 plan rules can differ. Some plans let you name a successor owner or contingent account holder. At death, ownership would transfer to that person. There is an exception where the parents have made a five-year lump-sum contribution to “superfund” a 529 plan and avoid paying federal gift taxes. In that instance, if the parents die before the end of the five-year period, there could be estate taxes.

Gift-Tax Exclusion. Instead of using a 529 account, a grandparent could use the gift-tax exclusion to help grandchildren pay for college expenses. You’re permitted to give a grandchild (or anyone else) up to $14,000 a year without having to file an IRS gift tax form. You can also pay the school directly without gift tax consequences. However, some institutions will deem this type of payment to be student support. That can mean a dollar-for-dollar reduction in aid eligibility when the student applies for financial aid in the coming year. Note that the gift-tax exclusion for direct payments to colleges only covers tuition, but withdrawals from a 529 account can also cover qualified educational expenses like computers, room and board, and books. Another thought is to contribute to the student’s 529 plan, which is assessed at a lower percentage than student income in the financial-aid calculation—this will have less of an impact on aid reduction.

Make sure that you are very clear on whether or not the withdrawals are deemed “educational expenses.” If a withdrawal does not qualify as educational, there will be tax liabilities. Note that what is deemed qualifying does change over time. Not too long ago, computers were not considered a qualified item! Also, speak with both the college (usually the bursar’s office) and the mutual fund company managing the 529 to learn how they distribute money to the college. The disbursements may not be as prompt as a transfer from a large bank.

Reference: The Wall Street Journal (October 8, 2016) “Can You Use the ‘529’ Money for Grad School?”

Medicare Coverage Basics

Understanding what Medicare is and what it does and doesn’t cover is important in making decisions. Becoming informed will help the process feel a little less intimidating.

An article in the Queens Chronicle, “What Medicare does and does not cover,” explains some of the basics about Medicare, with a special focus on what it does and does not cover. For starters, Medicare is the federal health insurance program for people who are 65 and older and for some young people with disabilities. It is managed by the Centers for Medicare & Medicaid Services, known as CMS. It is not Social Security, although Social Security does work with CMS to enroll people in Medicare.

A person can apply for Social Security benefits at age 62, with eligibility for Medicare three years later. Initial eligibility begins three months before the 65th birthday, extending through one’s birth month, and continuing for the next three months. So new enrollers have a seven-month window with open enrollment for 2017 coverage from October 15 until December 7.

Many people forget to file for Medicare. Sometimes it’s because they’re still working or because they already have another form of health insurance. This can be a costly mistake, along with knowing what Medicare does and doesn’t cover.

Home-care services can become prohibitively expensive and can often quickly deplete one’s life savings.

Medicare pays in full for the first 20 days in a nursing home and then in part for another 80 days. That can leave a patient responsible for a hefty co-payment. In addition, to be eligible, an individual must have a skilled-care need, like physical therapy.

Long-term care insurance might help, as it covers home care, assisted living care, and nursing home care. But many folks can’t get insurance due to the cost or an existing physical condition.

There are two main ways to be covered: original Medicare—Parts A and B—or a Medicare Advantage Plan (Part C). Some choose additional coverage like Medicare Supplement Insurance, which, along with Parts A and B, is also replaced by the Medicare Advantage Plan, or Medicare outpatient prescription drug coverage (Part D).

If you require services that Medicare doesn’t cover, you’ll have to pay for them yourself—unless you have other insurance or you’re in a Medicare health plan that covers them. Medicare covers 80% of medical bills and, to cover the difference, many seniors purchase Medicare Supplement Insurance, which costs around $200 to $300 per month. There’s also a Medicare Advantage Plan, or Part C. This replaces regular Medicare and the supplemental insurance.

Each Medicare Advantage plan can charge different out-of-pocket costs. These can be based on many factors, like whether the plan charges a monthly premium, whether it pays any of Medicare Part B premiums, whether it has a yearly deductible or any additional deductibles, and the amount you pay for each visit or service.

Some insurance companies charge high rates for supplemental coverage, so shop around. Look at several health insurance companies for the best prices.

Before you can enroll, you must first make sure that you are eligible. Here are a few different scenarios: a working person who has health insurance from their employer, a person who is retired and has health insurance from a group health plan from an employer, or a person who is retired and does not have any other health insurance. Eligibility and the impact of being enrolled may have an impact on how the non-Medicare policies pay health care bills, so it’s very important that you understand how one affects the other. Usually, Medicare pays first, and your group health plan coverage pays second, but every situation is different.

Reference: Queens Chronicle (October 6, 2016) “What Medicare does and does not cover”

How to Pay for Long-Term Care

At some point in many senior’s lives, they will need long term care, whether that’s at home or in a nursing facility. But how to pay for that care is complex and often misunderstood.

Long term care is defined as needing help with a range of activities of daily living, including eating, dressing, going to the bathroom, personal hygiene, household chores and financial management. Care can be provided at the person’s home or in a skilled nursing facility. Long-term care also encompasses post-hospital rehabilitation, even if the person eventually returns home to independent living.

About 80% of people who need assistance get it at home, according to caregiver.org, the website of the Family Caregiver Alliance. This organization was cited in the Queens Chronicle’s recent article, “Shielding assets when it’s time for Medicaid.”

Many people are under the impression that once a senior gets into Medicare at age 65, along with a Medicare supplement plan, his or her long-term needs are totally covered. Not quite. Medicare and Medicare supplement plans cover doctor visits and hospitalizations for acute and chronic illnesses, but not long-term care. Medicare and Medicare supplements only cover up to 100 days of rehabilitation. Those seniors who require more rehabilitation or need assistance for the rest of their lives will need to pay for it out-of-pocket, use long-term care insurance purchased in advance, or qualify for Medicaid.

Anyone under 60 years of age should be investigating long-term care insurance. Although people over age 60 might be able to buy LTC, they might not qualify for health reasons. Plus, the premiums become very expensive as one gets older. This could result in an insured paying an insurance bill for years, and then discover that he or she can’t afford the expense. They end up without coverage when it’s needed. Another option is hybrid LTC insurance. This provides a set dollar amount of coverage that will goes to heirs as a life insurance payout if it isn’t used for care during the insured’s lifetime.

Those with moderate incomes who are less likely to be willing to pay for long-term care insurance must do Medicaid planning, as Medicaid eligibility is limited to those with very limited assets.

It’s possible to transfer assets to someone else, such as a child, and have them excluded from consideration for Medicaid eligibility. But it has to be done correctly. This means the transfer has to be done five years or more before applying for nursing home care, or one month for home care. If the applicant doesn’t satisfy this “look back” provision, they’re responsible for covering the cost of the care.

The single biggest mistake people make is giving their home to a child or having the child’s name added to the deed. This makes the owner and the child vulnerable. If the heir is sued or divorces, the house could be lost. Even in the best of circumstances, this move eliminates tax advantages.

Speak with an experienced elder law attorney about planning for long term care and Medicaid. This is a highly complex area of the law where one mistake could destroy a lifetime of savings.

Reference: Queens Chronicle (October 6, 2016) “Shielding assets when it’s time for Medicaid”

Planning to Distribute Assets Includes Family Dynamics

It’s never as simple as who will get the family’s best china. Distributing assets between children with different economic and responsibility levels will almost always leave someone unhappy.

Circumstances change, decisions are made and the best made plans don’t always work out the way you thought they might. When it comes to distributing your assets, communicating your intentions and discussing them well in advance may be the best gift you can give your loved ones.

The Washington Post’s article, “Think now about what you will leave behind,” notes that a study by Accenture estimates that more than $12 trillion in assets are being shifted from those born in the 1920s and 1930s to baby boomers. Then in the next several decades, about $30 trillion of wealth will be transferred by baby boomers to their heirs.

“At the peak, between 2031 and 2045, 10 percent of total wealth in the United States will be changing hands every five years,” the Accenture report said.

How that money is distributed will matter. Consider long-term care insurance, a significant expense. Some adult children don’t want to spend the money their parents saved because they might be criticized by other heirs about reducing their inheritance. In many cases it’s the adult daughter who holds a full-time job and would take care of her mother before work and after. But soon she needs some help. And even though mom has money to pay for long-term care, the daughter’s hesitant to spend it because her out-of-state siblings give her grief about the cost.

Frequently family members who are the caretakers are given little or no consideration for the time they spend providing care. The estate’s split up evenly, which can be a source of resentment. Try to avoid estate battles. An elder law attorney can draw up a family agreement in advance regarding who will be responsible for care and what they’ll be paid. They will be paid for their time and effort during their service, or if that’s not an option, they’ll receive compensation in the estate plan.

Inheritances don’t occur in a vacuum. If an adult child or children are completely left out of your will, your decision will hurt their feelings and lead to stress and conflict within the family. Yes, it’s your money, but it’s also your family. Do you want your legacy to be litigation and estrangement? Consider discussing these issues with an experienced estate planning attorney, who has seen and heard more than a few families with challenges. Their guidance and good communication with family members may go a long way in preventing an estate battle.

Reference: The Washington Post (October 8, 2016) “Think now about what you will leave behind”

Big Changes Made to Bolster Power of Attorney Laws in Connecticut

I wish we had a law like this in Texas!

Connecticut now joins 20 other states in giving family members power to combat banks that reject power of attorney forms. The new law also addresses issues of POA abuse.

For the first time in decades, changes have been made to the Connecticut power of attorney law. These changes, which went into effect on October 1, were detailed in The Connecticut Law Tribune’s “Changes Go into Effect for State Power-of-Attorney Laws.”

The Connecticut probate court administrator notes that it’s common for banks to frustrate the purpose of estate planning by rejecting power-of-attorney forms (POAs) when a senior or a disabled individual doesn’t have the competency to execute a form that would meet the bank's standards.

The reason for a durable power of attorney is to plan ahead, but if a bank won't accept the power of attorney, the purpose of the document goes awry. The new law makes certain this won’t happen due to the whim of a bank teller.

With the law change in Connecticut, family members can now go to probate court to enforce POAs and be awarded attorney fees and costs if a bank isn’t following the law. These judges have been granted new authority to compel financial institutions to accept POAs. In contrast, bank employees can also petition the court to review the actions of a person who has a POA if they are concerned that the person who granted the POA is being exploited.

Connecticut now joins 20 other states that have enacted a model law, so it should be easier for elderly people who relocate to be closer to their caregivers and family in other states to have their POAs recognized.

The changes to the POA law also address the issue of abuse, which is a concern nationwide. The category of people who have the right to raise concerns about POA abuses has now been expanded. A caregiver or a person who “demonstrates sufficient interest in the principal’s welfare” now has legal standing to petition the court to review the actions of a POA agent. If the court finds that abuse took place, the POA agent can be ordered to reimburse the financial losses.

It should be noted that the new law does not address whether or not agents should be granted control in a POA over a person’s email, social media accounts or other digital assets. This still needs to be added to POA forms.

Reference: The Connecticut Law Tribune (October 7, 2016) “Changes Go into Effect for State Power-of-Attorney Laws”

An Estate Plan Must Be Complete

Financial planning benefits you while estate planning benefits your loved ones.

Estate planning is the exception when planning for your future whether it is your financial future, long-term goals or Social Security because your estate planning generally is for your family as The Brainerd (MN) Dispatch reports in “3 common estate planning questions, answered.”

The basic component of your estate plan is your will but there may be other parts you need. Depending on your estate, you may want to consider a trust, in addition to healthcare directives, powers of attorneys and guardian designations. You should also remember that your will isn't necessarily the only instruction when it comes to distributing your assets. The beneficiary designations on your retirement and brokerage accounts, and the life insurance policies you own will take precedence over what you say in your will. Review beneficiary designations regularly to be sure the money in your accounts or the death benefit on a life insurance policy goes to the right person.

A trust can be complicated, so talk with an estate planning attorney to see if it makes sense and whether you'll actually benefit from using a trust. If most of your assets are covered by beneficiary designations or owned in joint tenancy, those assets are already exempt from probate, so they won’t necessarily benefit from a trust strategy.

The executor or the personal representative is the person who will be responsible for carrying out the instructions in your will, settling your debts and paying taxes on your estate. As far as selecting an executor, it should be someone with the capacity to carry out the needed tasks of the position. It also needs to be someone who is willing to serve and is familiar with your situation such as a family member or a close family friend.

An estate planning attorney can help guide you to a plan that gives you peace of mind and takes care of your family.

Reference: The Brainerd (MN) Dispatch (Sept. 23, 2016) “3 common estate planning questions, answered”

Let’s Face It, You Need an Estate Plan

Estate planning is a need, but too often it gets moved down to the list for tomorrow.

An estate plan is something everyone needs but is often put off until tomorrow to avoid thinking of one’s own death, according to The (Memphis TN) Daily News article “Estate Planning – It’s a Need.”

The article also points out that it is possible your choice of guardian, trustee, power of attorney or executor may not be available. What if a person named in the will needs to be removed later? What if estate laws change or your circumstances change and there’s a better option?

There will always be changes in our lives. We may live to see our children grow to be adults when they no longer need a guardian. Then again, about that time our parents will age and may need a guardian. We switch jobs, get promoted or get laid off. Investments go up and down. Laws will change, and new legislation will be enacted. These are all important factors on the list of what needs to be addressed in estate planning.

Estate planning is important and it requires significant time and effort. Without a comprehensive estate plan much or all of what you’ve achieved in your life could be lost or given to unintended beneficiaries.

A good way to plan is to draft your will like you were going to die today. Once you have that done, create a review system to ensure your will remains relevant and up-to-date. Talk with a qualified estate planning attorney and let him or her guide you through the process.

Effective estate planning will typically reduce your taxes and those of your estate. In addition, it can save time and expense when settling an estate.

Develop a good working relationship with an experienced estate planning attorney.

An estate planning attorney can help guide you through the process of creating an estate plan that meets your individual needs.

Reference: The (Memphis TN) Daily News (Sept. 23, 2016) “Estate Planning – It’s a Need”

Spending Millions Easy for Heirs to Media Fortune

Family turns on one another after spending millions on war memorabilia and strip clubs.

Melissa Scripps, heir to a media fortune, bought Queen Elizabeth II's coronation chair and Queen Victoria's nightgown. Her son Michael enjoyed acquiring war memorabilia and guns.

The Scripps family they simply spent the millions they inherited. According to an article on CNBC.com, “The Greed Report: Not a billionaire? You still need an estate plan,” they took luxury cruises around the world and family outings to strip clubs. Son Michael even married a stripper.

When the well ran dry, the family started to fight. Mother and son turned on each other; one family member went to prison and tarnished a name once associated with entrepreneurship and philanthropy. This tragedy provides some lessons for the rest of us.

Everybody needs estate planning in some form or another—it doesn't need to be complex in many situations but everyone needs a plan, even those with social problems, financial problems and marital problems.

A good estate plan will consider all of those problems and keep your assets in the family and away from the government and taxes.

Estate planning doesn’t have to be complex or expensive. Estate planning is sometimes 95% social work and 5% legal, some attorneys say. The legal part they know—it's the social part that takes time. The Scripps family probably should have spent more time on the social part as well: Melissa Scripps' attorney said that at the time she inherited the family fortune, she had never held a real job and only had a high school education.

Consulting with an estate planning attorney can help you perpetuate your legacy and circumvent a family feud.

Reference:  CNBC.com (Sept. 22, 2016) “The Greed Report: Not a billionaire? You still need an estate plan”

Plan Carefully for Marriage in Golden Years

Seniors need to be wary of the impact of marriage on financial plans.

A marriage late in life can unravel your estate plans as well as personal finances and any advance directives for your end-of-life health care, according to The Hartford (CT) Courant in its recent article “Fit to Be Tied? Think Twice About Marriage in Your Golden Years.”

There is nothing wrong with seniors marrying but they need to be aware of the impact it may have on their plans. Elder law attorneys advise that those thinking about marriage later in life, at the time when personal wealth is typically the highest, understand the laws on the property rights of both spouses.

Property owned jointly or exclusively by either spouse is deemed to be marital property when it comes to divorce settlement or settling an estate in many states. If you understand the applicable property rights before the marriage, it’ll let you modify your wills, powers of attorney, health care proxies and designated beneficiaries to avoid legal conflicts in the future. Those who marry later in life must face several estate planning issues younger couples don’t. For example, there may be an accumulation of considerable assets or both may have children from earlier relationships.

Marriage is a legal contract between two people that can only be ended by death, annulment or divorce. The laws concerning marriage typically aim to protect the rights and interests of both spouses. One spouse can’t entirely “disinherit" their surviving spouse, regardless of what he or she writes in a will. Under the law of some states, a surviving spouse is entitled to the income generated from a third of their late spouse’s estate for the rest of their life after all its liabilities are settled.

An elder law attorney or estate planning attorney could be helpful for planning should you decide to start over in later years.

Reference: The Hartford (CT) Courant (Sept. 24, 2016) “Fit to Be Tied? Think Twice About Marriage in Your Golden Years”

Even Racecar Drivers Need Life Insurance

“So no matter what your skillset is, those things just happen. Absolutely it is a risk.” - Danica Patrick, racecar driver.

Danica Patrick, who has been racing cars at 200 MPH since she was in her early 20s, has become an advocate for nonprofit consumers group Life Happens, according to the Forbes’ article, “Danica Patrick: You May Not Drive a Racecar, But You Still Need Life Insurance.” The nonprofit group was formed to help consumers make informed decision on life insurance.

It’s a rite of passage to buy life insurance before your first race. However, Patrick has more personal reasons. Her parents were in favor, as each lost their fathers during childhood and witnessed the financial stress placed on their families. They managed the risk with life insurance and saving six months’ worth of expenses for an emergency.

As far as Patrick is concerned “she didn’t want to leave people with bills they can’t pay, and not only dealing with the sadness of a loss, but trying to figure out how you’re going to manage the rest of…life.”

Life insurance allows us to deal with personal loss without compounding it with financial stress. The suggested policy for most families is a term life insurance policy with a death benefit that is approximately 15 times their annual income.

With term life insurance, many life insurance needs will expire, assuming that a family is on track to reach financial independence around retirement age. The specific term of your policy should last at least through the children’s college years—and at most through the age at which you can reasonably expect to be financially independent.

If you want to create an estate, fund charitable bequests, replace an estate lost to taxes or build cash value, you will need some type of permanent life insurance—whole life, universal life, or variable life. Note that permanent life insurance creates additional financial complexity and can be expensive.

If you have a spouse or minor children, you have loved ones relying on you financially. Term life insurance can be pretty inexpensive. And even if you’re not a racecar driver, you face one of life’s most common risks—riding in or driving a motor vehicle.

As Patrick remarked, “It’s probably pretty uncommon to come across someone that hasn’t been in some kind of a car accident. Now, there are surely varying degrees, but you’re not wearing a six-point harness with a helmet on and an ambulance sitting nearby. So, it’s a risk no matter what you do if you’re driving anything.”

Reference: Forbes (Sept. 23, 2016) “Danica Patrick: You May Not Drive a Racecar, But You Still Need Life Insurance”