Barnes Lipscomb & Stewart PLLC

Lifetime of Caring for a Special Needs Child Costs Millions; ABLE Accounts Can Help

The cost of care during the parent’s lives and care after the parents have passed is a major concern, but there are solutions, including ABLE accounts.

With the right guidance, it is possible for parents of special needs children to plan for the cost of a lifetime of care. That includes the support provided by government programs and the use of ABLE Accounts, which permit contributions of up to $14,000 a year.

CNBC’s recent article, “It can take millions to care for your special needs child. Here's how to do it,” explains how one family needed $3 million to cover the cost of lifetime care for their 23-year-old son who has autism. The family drafted a special needs trust and funded it with life insurance to ensure that they’d provide for him after they’re gone. That's one strategy for families to help cover the cost of  supporting their kids, while preserving benefits from Supplemental Security Income (SSI) and Medicaid.

Another option is an ABLE account. It’s a tax-advantaged savings account for disabled individuals created in 2014 as part of the Achieving a Better Life Experience (ABLE) Act. A plan can include both a special needs trust and an ABLE account.

SSI and Medicaid are critical in special needs planning. However, disabled individuals are subject to "means testing" to receive those benefits. Individuals with more than $2,000 in assets and couples with more than $3,000 don't qualify for the SSI program.  However, a special needs trust can help them work with this requirement. A third-party special needs trust or a “supplemental needs trust” is created by family members and funded with assets that aren't owned by the disabled person. This can be life insurance and other property. These assets don't belong to the beneficiary, so they can go to other family members or to charity after his or her death, instead of going toward Medicaid reimbursement.

An experienced lawyer who is knowledgeable about Special Needs planning should draft this and other related documents. You’ll also need a trustee to administer the funds and an accountant or tax attorney to file the trust's income tax return.

ABLE accounts let families save money for a beneficiary and have it grow on a tax-deferred basis. Distributions are tax-free, if they’re used for qualified disability expenses. Beneficiaries must have been diagnosed with a qualifying disability by age 26.

ABLE accounts can receive up to $14,000 a year in total annual contributions, but for the beneficiary to remain qualified for government benefits, the ABLE account's balance can’t exceed $100,000.

When the beneficiary dies, Medicaid can file a claim for repayment of benefits.  However, before that, the remaining balance of the account can be used by the estate to pay for any outstanding qualified expenses, like funeral and burial costs.

Planning for the care of a special needs child requires a team that includes an experienced Special Needs attorney, a CPA and usually a life insurance professional. You should create a life plan that provides specifics about dietary preferences, social activities, medical needs and any other details that would help a caregiver, when parents are no longer able to provide day-to-day care. Finally, be careful about beneficiary designations. If a special needs individual is the beneficiary of a policy or account, they could lose any government benefits.

Reference: CNBC (June 2, 2017) “It can take millions to care for your special needs child. Here's how to do it”

Understanding the Importance of Estate Planning

People are often surprised when they learn what estate planning encompasses. It’s not just for the wealthy, and it’s more than about distributing assets on death.

Even if your “estate” is a single family home, apartment or condo and your assets include a few retirement accounts and a stack of photo albums from the 1960s, you still need an estate plan. That’s because an estate plan includes more than directions on how assets should be managed after you die.

WMUR’s recent article, “Money Matters: Importance of estate planning,” starts with some basics. An estate includes all of the property that you own.  It is the outright ownership or ownership you share with someone else, like your home, bank accounts, investments and heirlooms. Managing these assets through all of your life events is the objective of an estate plan. It also includes a plan for what you want to happen with your healthcare and finances if you become incapacitated and can’t communicate your wishes. This is done with a healthcare directive and is a part of estate planning.

Here are a few other items that you need to consider with the help of a qualified estate planning attorney:

Financial plan. You should have a firm grasp of your finances and your family situation.

Will. The key document that all plans should contain. A will spells out the property you wish to leave to family, friends, and organizations. You should also name a personal representative to manage the probate process.

Guardianship. Your will should also designate guardians for your minor children, so you can say who will rear your children, if you and your spouse both die.

Directives. This includes durable powers of attorney for finances and health care. You can name individuals who you trust to take handle your finances and make health care decisions, if you’re unable to do so. Without these documents in place, the court will appoint someone to manage your finances. This could be someone who is unfamiliar with you and your situation.

Trusts. A trust lets funds be managed by a person or group for the benefit of others pursuant to the instructions in the trust document. Blended families, families that include children with special needs, and situations where control over the funds for an extended period is needed, are all potential scenarios for a trust.

Beneficiary Designations. Life insurance proceeds and retirement accounts will pass via beneficiary designations, so these should be current and aligned with your estate plan.

Funeral plans. You can leave specific instructions about your final arrangements, such as being buried or cremated, as well as electing to donate your organs.

When an estate plan is in place, you gain the peace of mind of knowing that your family doesn’t have to guess what you wanted. If you don’t have an estate plan, the laws of your state will be applied by the court, but it might not be what you had in mind.

A qualified estate planning attorney will work with you to cover all of the basics.

Reference: WMUR (June 1, 2017 “Money Matters: Importance of estate planning”

Don’t Create a Legal Disaster as Your Legacy

Estate planning attorneys often get calls from families trying to untangle the messes created by people who think they can write a will or go online to use a form.

We are a nation of do-it-yourselfers. With the many helpful videos online, people try their hands on everything from kitchen plumbing to farming. There are many instances where DIY works well, and it’s rewarding to look at your handiwork and say “I did that!” But the same cannot be said for estate planning.

People may have a broad idea of estate planning and feel that they can do it for themselves without paying for legal services. Without the background and knowledge required to draft the documents that cover specific circumstances and the requirements of current probate and tax laws, a DIY estate plan is a recipe for disaster.

The Sabetha Herald notes in its recent article, “Estate Planning pitfalls,” that a DIY-er can make  many mistakes.  The article points out several of them.

The first issue is having an outdated estate plan, especially a will that has not be updated to reflect that your children are now married and have children of their own. Perhaps you’ve divorced and remarried. Review your estate plan regularly, at least every four years. If you want to revise your will, you can’t just cross out a part of an old will or simply add information and initial the document. You need to go through the same validation process as a new will.

Another mistake is not coordinating a will and a trust. They should be aligned, so your wishes will be carried out. Along the same lines, many people don’t title their assets correctly and don’t update beneficiary designations on IRAs, 401(k)s, company plans and other accounts.

Failing to name successor or contingent beneficiaries is a common mistake. If you name just one beneficiary on an account and he or she dies, then there’d be no successor to receive the account’s assets. The assets could then go to a person you didn’t want to have them, or they could end up in your probate estate.

A major mistake is not designating an individual to make your healthcare decisions, in the event you become incapacitated. These are known as living wills, medical directives, health care proxies or advance health care directives. A related mistake is relying on an outdated financial power of attorney. Your circumstances or your relationship with that person may have changed, since you signed the document.

Many people don’t think about Medicaid. They wait too long to plan for the costs of nursing home or other long-term care, and then try to apply for Medicaid. This should be addressed long before a person nears the time when such care may be needed.

Because the federal estate tax exemptions are so high, most people don’t worry about estate taxes.  However, state estate taxes have far lower thresholds, and most people do have to pay them.

To ensure that you have an estate plan that will achieve your wishes, speak with an experienced estate planning attorney. They will be able to help you minimize your tax liability, make sure that your assets are distributed in the way that you want and save your heirs from having to devote time and resources to fix the unintended consequences of a homemade will.

Reference: Sabetha (KS) Herald (June 2, 2017) “Estate Planning pitfalls”

What’s Harder than Wedding Seating Charts? The Pre-Nup Conversation

Merging lives also means merging finances, and a pre-nuptial agreement can be used as a roadmap to define and guide the process. The right tone can make all the difference.

Planning a wedding? Today’s bride and groom are busy with the details, from selecting a photographer to writing vows and meeting with the caterer. It can be overwhelming, as you plan your first milestone event together, when you want everything to be just right. How can you add the sensitive issue of a pre-nup agreement into the mix now?

Brides magazine’s recent article, “Here's How to Start That Prenup Conversation,” offers some constructive tips to help ease into that conversation.

It’s best to try to have a productive conversation about a pre-nup, by positioning it in the right light. There’s so much negative emotional energy surrounding the idea of a premarital agreement. However, you can begin by asking your fiancé about how you'll address your finances in marriage, like investing and joint banking accounts. This can put it all in a more positive light. Think of a premarital agreement as a financial planning tool to help you have discussions about what your finances will be like during your marriage.

With that in mind, you can approach it as working to prevent a divorce, not preparing for what things will look like when you get divorced. Talk about a pre-nup in terms of fears and goals, so that when you and your fiancé understand the rationales of the request for a pre-nup, it’s generally more accepted and less emotional.

You should also talk with an experienced estate planning attorney and see how your state law applies to your marriage in the event of a divorce. A pre-nup allows you to discuss and draft an agreement that’s focused on both spouses. Find out from your attorney what protections you’d have under state law, and make sure that they're included.

It is important to think of a pre-nup not as an ultimatum before the wedding, but instead as part of preparations for a marriage, which is at its essence a long-term working partnership. Start talking with your intended and your attorney, months before the wedding celebration. You’ll want time to work through the issues, negotiations and the emotions that accompany the discussions. Your attorney will be able to explain why the pre-nup works to protect you both, and you’ll be able to get clear on how you will handle finances, retirement accounts, home ownership, investments and other assets.

Start these discussions before you begin planning the wedding, so that you and your beloved can focus on planning a joyous occasion, with the business side already taken care of.

Reference: Brides (June 2, 2017) “Here's How to Start That Prenup Conversation”

Five Facts to Consider for Second Marriage Estate Planning

It’s not unusual today to be in a second, or even a third marriage. But when it’s not your first venture into wedded bliss, estate planning issues can get a little more complex.

Things are different for blended families, from step-parenting and scheduling holiday gatherings to financial and estate planning. A recent article in Forbes, “Second Marriage and Estate Planning: 5 Things You May Not Have Considered,” examines key issues that should be kept in mind.

Expenses and ownership. Commingled income and assets may be at risk,  since many remarried couples set up joint accounts to pay for living expenses. Keeping money separate may be crucial, if you’re still financially entangled with your ex. Remember that divorce decrees do not necessarily bind creditors. As a result, an ex’s default could leave you responsible for an old debt.

Community Property and Common Law. Make sure that you understand the implications if you reside in a community property state. In those jurisdictions, the assets you bring to the marriage or receive individually will stay yours. However, what you earn or acquire during the marriage is owned equally by both spouses. This can be compared  with a common law state. In those states, titles, registrations, or ownership documents control ownership. If you have property in another state, you may need to consider both scenarios. These differences in state property laws show how important it is to work with an experienced estate planning attorney.

Remarriage. If your spouse gets remarried after you pass away, the assets can become commingled. A good option in this situation is a trust to protect assets for each spouse's children, if that is your wish.

Inheritance. Consider what would happen to inheritances for the children of the first spouse to die. Would they be required to wait for the second spouse to die? The best answer is a trust that can give specific instructions in that scenario. If you die before your new spouse, and you own assets jointly, it may effectively disinherit your children from a prior marriage. It may not be your intent, but your new spouse will have the authority to decide who inherits any jointly-owned assets.

Use of the home. When you are in a blended family, you must determine whether the surviving spouse will be allowed to live in the home and for how long. One option is to place the home in a trust for the benefit of the surviving spouse.

Don’t overlook updating your estate plan after you remarry. No matter how great the plan was for your first marriage, it’s no longer applicable. An estate planning attorney will be able to guide you through the issues that are unique to blended families so that your new spouse and children from a prior marriage and children from your current marriage are all protected.

Reference: Forbes (June 2, 2017) “Second Marriage and Estate Planning: 5 Things You May Not Have Considered”

Prior Planning Prevents Poor Performance: That Goes for Estate Planning too!

How do you want to be remembered by your family? One way to be remembered in a positive light is to take the time to plan out how you want your assets and possessions to be distributed. You may only need a will, or you might need estate tax strategies or succession planning for a family-owned business.

The calendar, as well as the weather, says that summer is finally here! Outdoor plans with friends and family are taking shape for the summer, but don’t forget to include some serious work for the future this summer, as recommended by an article in the Middletown, NY Times Herald-Record, “After Memorial Day, think about your estate plan.” Consider these “what if” scenarios:

What if you die unexpectedly?

How will he be remembered?

Will she be memorialized by her family?

What about future generations?

Will they know the legacy of their grandparents?

Many folks, regrettably, do little or nothing about their estate plan. We can group these individuals’ excuses into three common reasons called “Three Ps:” Procrastination, Pitfalls and Paralysis.

Procrastination

 This is the practice of delaying until tomorrow what needs to be done today. This is especially common when we’re talking about thinking about and planning for your own death. It’s easier to say to yourself, “There’ll be plenty of time to do it later.”

Pitfalls

These are the issues and obstacles that keep you from moving ahead. This includes thinking that estate planning is just for the very wealthy and that the main reason for creating an estate plan is to reduce your estate taxes. This is not true. Estate planning provides an organized transfer of your assets to your loved ones and heirs.

Paralysis

This happens when we’re confused. We don’t even try to figure out what needs to be done. For example, young couples can’t decide who to name as the guardian for their children, if they were to die. Therefore, they do nothing. Nothing is the wrong option in estate planning, especially when it involves the future of your children.

An experienced estate planning attorney can help you overcome these three obstacles to doing an estate plan. Once that’s done, you can enjoy the summer with the peace of mind of knowing that you’ve taken care of those you love and have planned for the future.

Reference: (Middletown, NY) Times Herald-Record (May 27, 2017) “After Memorial Day, think about your estate plan”

Are You Planning to Leave a Problem or a Legacy Behind?

The details are what makes the difference between a legacy that is remembered as a blessing or one that becomes an expensive and stressful burden to loved ones. One example: opening a joint account for funeral expenses and failing to fund it.

Sad but true—one day, we’re all going to be the star at our own funeral. For those we leave behind, the goal is to create an estate plan that avoids the common mistakes that so many people make because, frankly, they don’t want to think about their own death. Save your loved ones some trouble and pay attention to the details.

Legacy planning is as crucial as your final wishes. Kiplinger’s recent offering, “Some of the Biggest Estate-Planning Mistakes People Make,” notes that it’s often the smallest things that can come back to haunt you. Here’s what you should discuss with an experienced estate planning attorney to help create and maintain your legacy and some of the common mistakes people make when planning (or not planning!) for their estates, when they die.

No see-through provision in a trust. A “see-through trust” is a trust that satisfies certain legal requirements and serves as the named beneficiary of an IRA. Therefore, the IRS will “see through” the trust and treat the trust’s beneficiaries as if they were the IRA’s direct beneficiaries, and their life expectancies will be used to calculate the IRA’s required minimum distributions. A see-through provision also allows these distributions to be taxed at the individual beneficiary’s tax rate instead of that of the trust.

A schedule that’s blank or incomplete. These are attachments to the trust document that have crucial details about the trust, like the inventory sheet of the trust. This will spell out what assets have been transferred into the trust. All schedules must be complete and accurate—never blank! Work with your attorney to see that your trust actually owns the assets you intend for it to own.

POD/TOD accounts. POD is “payable on death,” and TOD means “transfer on death.” These designations permit the beneficiary to receive assets without probate. Bank accounts, including checking, money market, savings, and CDs should have POD and TOD instructions.

Too many accounts. The FDIC imposes a limit of $250,000 per depositor, per bank on the amount that it’ll insure, so you may want to consolidate your bank accounts if you have more than you actually need, so that you’re protected. If not, you may make your estate overly complex.

No inventory of assets. Even with a meticulous system with all the right documents, it’s to no avail if no one knows where they’re located when you die. Give your family a checklist that says where they can find your birth certificate, Social Security card, marriage license, pre-nuptial agreement, military records, estate planning documents, burial instructions, bank and credit documents, mortgage papers, personal financial documents and safe deposit box and keys.

Think of this as the last impression that you’re going to leave your loved ones with. Take the time to keep it organized and complete the tasks associated with your estate plan. Let your family devote their energy to remembering you as a person who loved them enough to take care of the details.

Reference: Kiplinger (May 2017) “Some of the Biggest Estate-Planning Mistakes People Make”

Is It Expensive to Have a Trust Created?

The cost of a trust is a lot like purchasing a custom-fit, tailor-made suit. How much it will cost depends on a lot of different elements. Without knowing some of the details, it’s hard to determine the cost.

There are many different kinds of trusts and many different kinds of families and circumstances.  That’s the simple reason why there’s no “one-size-fits-all” answer to the question “What does it cost to create a trust?”, as posed by a recent post on NJ.com. An estate planning attorney will need to have a clear understanding of the family’s situation, before they can even begin to recommend the type of trust that’s needed, or determine if a trust should be part of the estate plan.

The state Rules of Professional Conduct typically say that attorney fees must be reasonable—when taking into account factors such as the time and labor required, the novelty and difficulty of the issues involved and the skill required to perform the services. Attorneys may charge for estate planning services by the hour or a flat fee, again considering the specific client various factors. The fees aren’t determined by or related to the total value of the assets in the trust.

Those interested in a trust, should ask the attorney about and understand the fee arrangement before signing an engagement letter to retain him or her. The written engagement letter will lay out how the fee for services is determined.

Creating a trust is complex, and it should be created to match the specific needs of the settlor (the individual who creates the trust) and beneficiaries (those who benefit from the trust).

A revocable trust can be amended or ended for whatever reason, but an irrevocable trust is more rigid and is difficult to amend or terminate. That trust must be prepared to allow for unforeseen circumstances and maximum flexibility.

Another type of trust is a testamentary trust. This trust is created in your will and is effective upon death for the benefit of a surviving spouse or minor children. It may be less expensive to establish than an intervivos trust, which is a trust created and effective during your lifetime, for a specific purpose or with more specific terms.

Trusts that are created to protect the beneficiaries who are receiving governmental assistance, such as a special needs trust or a Medicaid trust, must have exact language prepared by experienced attorneys in trust and estates law. As a result, a special needs trust may cost more to have prepared.

An experienced estate attorney will walk you through the different scenarios and explain how they might apply to your family, before getting involved with a cost estimate. Once you and the attorney have discussed the details, he or she will be able to make recommendations, and that may be when the attorney is able to give you an idea of the cost of a trust.

Reference: NJ.com (May 26, 2017) “What does it cost to create a trust?”

Tax Deferred Accounts Are Great, Until They Aren’t!

Here’s an example of how the best made plans can be undermined. Your 401(k), 403(b) or IRA accounts are robust and healthy, and then a tax law changes.  As a result, there’s less money for your retirement.

A serious retirement planning challenge for anyone with a tax deferred retirement account is detailed in an article in Kiplinger, “Your 401(k), 403(b) and IRA: Tax Shelter or Tax Nightmare?” Every tax dollar that has gone into the Treasury since last year, has gone to pay for Social Security, Medicare, Medicaid and paying down interest on the national debt. That’s it. With more Baby Boomers retiring every day, they won’t be putting money into Social Security and Medicare. Instead, they’ll start taking money out. When they do, the costs for these four programs will skyrocket.

In the last several years, the percentage of tax dollars going to Medicare and Medicaid has increased. In 2016, 29.1% of every tax dollar went to cover health programs (such as Medicare and Medicaid), as opposed to just 20% of every tax dollar in 2012.

Let’s look at where you may see changes and need to plan ahead.

Tax-Deferred Savings. Many retirees and pre-retirees have the majority of their savings in 401(k) and IRAs. Traditional accounts typically haven’t paid taxes. If you have the majority of your savings in one of those retirement accounts, remember that not all of that money is yours. The federal government can increase its share and reduce yours with new legislation in the tax code. Here are a few other things that the withdrawals from your 401(k), 403(b) and IRA accounts can impact:

• The government will tax every dollar that comes out at your highest tax bracket;
• Each distribution has the potential to move you into the higher tax bracket;
• Every dollar you withdraw may increase the tax you pay on your Social Security; and
• Each distribution can increase your exposure to the 3.8% surtax on investment income.

This means that you may need to include more of your Social Security benefits as taxable income, and your Medicare Part B premiums can increase. You also will have required minimum distributions, or RMDs, that begin at 70½. There are major penalties, if you forget to withdraw funds.

Roth IRA Conversion as a Tax-Reduction Strategy. If you convert to a Roth IRA, you may protect your savings from a future tax increase by paying tax at today’s rates. With a Roth IRA, the distributions in retirement are tax-free (if you’re at least 59½ and have held your Roth account for at least five years). Therefore, they typically won’t impact other things tied to your income, such as taxable Social Security income and your Medicare Part B premiums or health insurance subsidies.

Another plus for the Roth IRA: there are no required minimum distributions, while you are living. That means your Roth IRA can continue to grow tax-free, unlike the traditional IRA or 401(k) plan. If you need the money, take it. If not, leave it in and let it grow for your heirs.

Reference: Kiplinger (May 2017) “Your 401(k), 403(b) and IRA: Tax Shelter or Tax Nightmare?”

Deciding Factors for Different Types of IRAs

The different kinds of IRAs are complex but not impossible to understand. The biggest difference is all about the taxes.

There are pros and cons for both traditional IRAs and Roth IRAs. It is possible that you might end up using both of them in your retirement planning. The important factors that you need to consider are well-outlined in a recent article from Motley Fool, “Which IRA Is Best for Me -- Traditional or Roth?”

The most significant difference between traditional IRAs and Roth IRAs is how they are taxed. Traditional IRAs typically tax up-front with a deduction on the amount contributed. This means that there is an immediate tax savings in the year in which you make the traditional IRA contribution. Roth IRAs don't have an up-front tax deduction, so you must use after-tax money to make your contributions.

However, in retirement, the tax benefits are flipped: traditional IRAs aren't as great in retirement, because you have to add any withdrawals to your taxable income when you take them. By contrast, Roth IRA withdrawals are usually tax-free, creating no impact on your taxes in retirement.

Forced withdrawals in retirement. Another difference is how they address required minimum distributions (RMDs). Traditional IRAs typically require withdrawals as soon as you reach age 70½, with the amount based on your life expectancy. If you don't take these withdrawals, you'll owe the IRS a penalty of 50% of the amount you should’ve withdrawn! Roth IRAs don't have this requirement, so you can keep money in the Roth as long as you’d like. That can be useful if you're using your retirement account assets for estate planning. Stretch IRA strategies can extend the tax-free treatment of Roth IRAs for generations after your death.

Income prevents you from having the IRA you want. Income limits prevent taxpayers from making contributions to a Roth IRA, and a phase-out exists in which you can contribute only a portion of the maximum that most savers can contribute. In 2017, it’s $5,500 for those under age 50 or $6,500 for those 50 or older. Here are the income limits.

Filing Status	Contributions are reduced if income is above this amount...	…and contributions are not allowed if income exceeds this amount…
Single, head of household, or married filing separately if you didn't live with your spouse during the year	$118,000	$133,000
Married filing jointly or qualifying widow or widower	$186,000	$196,000
Married filing separately if you lived with your spouse at any point during the year	$0	$10,000

Source: IRS.

There's no income limit on contributions for traditional IRAs, so you can deposit the full contribution amount. But you may not be able to deduct your contributions from your taxable income, if you or your spouse is covered by an employer-sponsored retirement plan at work. Here are the income limits:

Filing Status	Limits If You're Covered	Limits if Your Spouse is Covered but You're Not Covered
Single or Head of Household	$62,000 to $72,000	N/A
Married Filing Jointly	$99,000 to $119,000	$186,000 to $196,000
Married Filing Separately	$0 to $10,000	$0 to $10,000

Source: IRS.

To pay the least amount of tax possible, try to see if your current tax rate is higher or lower than what your tax rate will be in retirement. It’s not easy to guess, especially if retirement is years away.

If you are in a high tax bracket now, you will want a deduction now. That means you should choose a traditional IRA.  However, if you are in a low tax bracket, take a look at what a Roth can do, because the deductions that a traditional IRA yields won’t do you much good right now. In either case, understanding how both of these retirement accounts work, will help you make the best decision.

Reference:  Motley Fool (May 29, 2017) “Which IRA Is Best for Me -- Traditional or Roth?”