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Which is Better for My Estate Plan: A Life Estate or An Irrevocable Trust?

Estate law is not for amateurs! One of key parts of an estate plan is determining what to do with one of the family’s biggest assets: their home. Does it need to be protected from nursing home costs or passed to a family member? What about other assets?

Investopedia’s recent article asks “Life Estate vs. Irrevocable Trust: What's the Difference?” The article explains that a life estate and an irrevocable trust are two different ways to make certain that assets are transferred to the right party. Each of these has advantages and disadvantages.

A life estate that’s used to gift property will divide the ownership between the giver and receiver. Some parents create a life estate to reduce their assets to qualify for Medicaid. While the parent still has some interest in the property, Medicaid doesn’t count it as an asset. A life estate lasts for the lifetime of its creator and it prohibits the selling of the asset, without the permission of its beneficiaries. Therefore, a parent can’t sell a home without the permission of his children, if they are beneficiaries of the life estate.

If you’re attempting to be eligible for Medicaid and are concerned that your home will disqualify you, ask your estate planning or Medicaid planning attorney about an irrevocable trust. With this trust, if a husband and wife both own a home, the husband can transfer his portion to his wife, and his Medicaid eligibility won’t include the home.

There must be a five-year gap between the creation of the trust and the application for Medicaid. If there isn’t, those funds will be counted as part of existing assets when determining Medicaid eligibility. Therefore, you can’t start an irrevocable trust right before you apply for Medicaid, if you want to receive those benefits.

One negative of an irrevocable trust is that the founder of the trust relinquishes any rights he has to the home. However, the beneficiary of the trust can’t sell the home, unless he or she is also named as a trustee. Once an irrevocable trust has been created, the trustee can’t take back control of the trust.

Remember that a life estate and an irrevocable trust aren’t always mutually exclusive. It’s possible to place an asset (like a home) in an irrevocable trust and keep a life estate. In that case, you’re irrevocably transferring ownership of your house to the trust. However, you still keep control. In this case, you are permitted to sell the home, remodel, or rent out a room, but the house itself—or the sales proceeds from it—would remain in the irrevocable trust.

In this situation, a parent would also not risk giving their children part of the tax liability that is associated with owning a home. The parent would keep more personal control over the house and wouldn’t need their child’s permission to sell the home. This may be the best option because it would still allow the parents to apply for Medicaid and not have the property count in their assets, but he or she would remain the sole decision-maker for the house.

There are pros and cons to life estates and irrevocable trust. Every situation and every family have their own fact pattern, so an experienced estate planning elder law attorney should discuss the options with the family before moving forward. Mistakes here can be costly.

Reference: Investopedia (June 16, 2019) “Life Estate vs. Irrevocable Trust: What's the Difference?”

A Dynasty Trust Lets Wealth be Transferred to the Next Generation

Making a gift through a trust to a younger family member is often a wiser way to go than to gift assets outright. There are numerous advantages, including protection of the asset, tax planning and being able to maintain control, until the beneficiary is deemed mature enough to have access to the asset.

For multi-generational families with significant wealth, the use of a dynasty trust is a good strategy to extend wealth one generation below that of the grantor, says Forbes in the recent article “2 Reasons To Consider A Dynasty Trust.”

Generation-Skipping Transfer Tax (GST) Exemption. According to the American Bar Association, the GST tax is imposed on asset transfers to grandchildren and more remote descendants that exceed the exemption limits. As a result, the transferor can’t avoid transfer taxes by "skipping" a generation. The GST is imposed, in addition to gift and estate taxes.

A person can give up to $11.4 million in assets (the GST tax-exempt amount) to a trust in 2019. Trust assets are protected from transfer taxation for as long as the trust document and state law permit it. A dynasty trust uses the federal GST tax exemption by taking family wealth out of the transfer tax system for as long as the trust is in existence; income and principal is used to benefit each succeeding generation.

An additional benefit is that the GST tax exemption can often be extended, by transferring assets subject to valuation discounts.

Grantor Trusts Provide More Tax Benefits. In most cases, grantor trusts treat the trust creator as the owner of the trust assets for income tax purposes. This allows the trust principal to grow free of income tax. Creating the trust as a grantor trust adds another level of tax benefit to a dynasty trust.

The estate planning benefits of the asset transfer are increased by the grantor making the income tax payments instead of the trust. In other words, the assets in the trust aren’t reduced by income taxes. Any income taxes paid by the grantor reduce the size of the grantor’s overall taxable estate, when calculating estate taxes.

An experienced estate planning attorney, who routinely represents high net-worth families, should work alongside family members and other advisors to ensure that the family’s wealth continues to be managed and taxes be minimized over multiple generations.

Reference: Forbes (July 23, 2019) “2 Reasons To Consider A Dynasty Trust”

How the Gig-Economy Workers are Preparing for Retirement

Freelancers say they don’t mind the idea of continuing to work after they retire, but the fact is, they may have no choice. On the whole, freelancers don’t save as much as they need to, reports a new study from the Transamerica Center for Retirement Studies (TCRS)

Is it the flexibility of working from a coffee shop or at any hour of the day that makes self-employed individuals think they don’t need to retire? It’s true that for some, work doesn’t feel like work. It does not feel the same way it does for someone who goes into an office five days a week. However, when it comes to retirement, there may be a price to pay for that freedom.

Think Advisor’s recent article, “Many Self-Employed Americans Aren’t Saving Enough for Retirement: Transamerica” reports that 62% of self-employed Americans plan to continue working while they’re retired. Just 26% of the self-employed are “very much” looking forward to retirement, according to the study, “Self-Employed: Defying and Redefining Retirement.” In addition, 68% of self-employed individuals believe that they will work beyond age 65. This includes 40% who anticipate retiring after age 65, and 28% who never plan to retire, the study said.

The number of self-employed people who plan to keep working in their retirement years is unexpected. However, the self-employed may have a false sense of security. They may be overly optimistic about the number of years they’ll be able to keep working or that their business will be viable. For them, retirement could well begin sooner than planned or expected.

Many of the self-employed aren’t making the required preparations for their retirement. While most of the self-employed are saving for retirement to some extent, many are either not saving enough or not saving at all. About half (55%) are consistently saving for retirement, but 30% are saving infrequently. However, a “concerning” 15% say they never save for retirement.

Of the self-employed, 16% said they’d either taken a loan or early withdrawal from a retirement account. Of those individuals who said they weren’t saving for retirement, 20% said they’d done this.

The total household retirement savings among the self-employed is $71,000 (estimated median). However, few self-employed are saving in tax-advantaged retirement accounts, so they may be missing out on an opportunity. Just 31% are saving in a traditional or Roth IRA. About 70% expect income from Social Security, and 54% from other savings and investments. A mere 40% expect retirement income from typical retirement accounts like 401(k)s, 403(b)s, or IRAs.

The study gathered information through a 25-minute, online survey that was conducted with a nationally representative sample of 5,923 adult workers between October 26 and December 11, 2018. 755 people who identified themselves as self-employed workers were broken out for a separate study.

Reference: Think Advisor (July 29, 2019) “Many Self-Employed Americans Aren’t Saving Enough for Retirement: Transamerica”

Retitling Assets to Align with Your Estate Plan

Creating an estate plan is far more detailed than simply creating a will and throwing in a trust or two. If the estate plan includes putting assets in trusts to avoid probate and minimize taxes, it’s critical that the assets be retitled so they are owned by the trusts and not the individuals.

When you purchase a house, you purchase the title to the home. It’s an important legal document concerning the transfer of property. In an estate plan, how accounts are named, or titled, is a critical part of changing the asset’s owner from a person to the legal entity that is a trust. This is an important step in the estate planning process, says The Black Hills Pioneer in a recent article, “Titling of property is just as important as your Will or Trust.”

There are some kinds of property that, depending on how they are titled or who’s the named beneficiary, will flow outside your will or trust.

For instance, if you designate a beneficiary to your life insurance policy or on your retirement account, that money goes directly to the named beneficiary at your death—not in accordance with your will or trust (provided you haven’t named your estate or trust as the beneficiary).

In addition, you could designate another person as payable on death (POD) designee or transfer on death (TOD) designee on your investment account or your bank account. These types of accounts also transfer automatically to the named designee and not with any regard to your will or trust (unless you named your estate or trust as the beneficiary).

Any jointly owned real estate will typically flow to the surviving joint owner, not pursuant to your will or trust. However, the fact that two people own one piece of real estate doesn’t mean the property will flow automatically to the survivor. It depends on how the property is titled. For example, in South Dakota, language needs to be included in the deed conveying that real estate to both individuals as “joint tenants with rights of survivorship.”

You can, therefore, see how critical it is that you discuss these issues with your estate planning attorney. In addition to questions about wills and trusts, you should also be discussing the titling of your property and the beneficiaries you’ve named on your life insurance and retirement accounts, along with any POD and TOD designees you’ve named on your investment accounts or bank accounts.

By completing this final task of your estate plan, your family will receive the protection that you had wanted. Without doing so, your legacy may go unfulfilled.

Reference: Black Hills Pioneer (August 5, 2019) “Titling of property is just as important as your Will or Trust”

What’s the Right Way to Give a Disabled Child the Family Home?

There are many factors to consider when giving the family home to a disabled son.

For a disabled child who depends upon Social Security Disability for income—about $18,000 a year—a mother’s gift of the family home is generous and kind. However, there are tax considerations that must be planned for, so as not to put his ownership at risk.

nj.com’s recent article, “When giving a home as a gift, why planning matters” asks how will his cost basis and capital gains be determined?

A donor’s basis in the home is typically the amount paid by the donor at purchase, plus the cost of improvements made by the donor. When the son or donee receives the home as a gift, his basis is the donor’s basis.

However, there are some special rules, if the fair market value of the home is less than the donor’s basis at the time of the gift. When the donee wants to sell the property, his original basis is upped by the cost of improvements made by the donee.

A single person can receive a $250,000 exclusion from capital gain on the sale of a personal residence, if she’s owned the residence for two out of the last five years and lived in the home for two out of the last five years prior to sale.

However, a shorter time period— one year out of the last five years—is allowed for individuals who were unable to care for themselves and need nursing home or other care facility services.

If the gain is more than the exclusion, the net capital gain is taxed at 0% for taxpayers in the 10-12% ordinary income tax brackets; at 15% for those in the 22-35% tax brackets, and 20% for taxpayers in the 37% bracket.

While income tax does not appear to be an issue in this scenario, if the son’s mother retained at least a life estate in the home until her death, it would allow the home to receive a step-up in basis to the date of death value on the mother’s death. That would eliminate the majority of the potential income tax gain, provided the son delayed selling it until after his mother’s death.

That’s why it’s important to consider whether a gift now is the right move.

The family would be wise to speak with an elder law estate planning attorney before making any gifts. If the ownership of the home disqualifies the son for government benefits, the gift could have disastrous results. It may be better for the house to be placed in a trust, for instance, with another family member serving as the trustee. The attorney will be able to help the family determine the best way to transfer the ownership of the house from the mother for the son’s use.

Reference: nj.com (August 1, 2019) “When giving a home as a gift, why planning matters”

What Should You Do About Long Term Care?

The cost of long-term care could easily decimate anyone’s retirement accounts. If you don’t plan properly for long-term care, your options will be limited.

Half of people who are age 65 and over will incur the long-term cost of nursing home or skilled facility care. The problem is, according to this article from MarketWatch, “This is how much long-term care could cost you, and don’t expect Medicare to help,” that Medicare doesn’t cover the custodial care necessary for the tasks of daily living.

The length of care needed differs by gender. The U.S. Department of Health and Human Services’ Administration on Aging says that men can expect to need help for an average of 2.2 years, and women will need help for about 3.7 years.

Many will rely on unpaid care from spouses or children, but over a third will spend time in a nursing home, where the median annual cost of a private room is now more than $100,000, according to insurer Genworth’s 2018 Cost of Care Survey. Four out of ten will choose paid care at home; the median annual cost of a home health aide is more than $50,000. Finally, more than 50% of people over 65 will incur long-term care costs, and 15% will incur more than $250,000 in costs, according to a study by Vanguard Research and Mercer Health and Benefits.

Note that Medicare and private health insurance typically don’t cover these “custodial” expenses. This means that such costs can quickly deplete the $126,000 median retirement savings for people age 65 to 74. People who exhaust their savings could wind up on Medicaid, the government health program for the indigent that pays for about half of all nursing home and custodial care.

People who live alone, are in poor health, or who have a family history of chronic conditions are more likely to require long-term care. Women face special risks, since they typically outlive their husbands and, as a result, may not have anyone to provide them with unpaid care. If husbands require paid care that erases all of the couple’s savings, women could have years or even decades of living on nothing but Social Security.

The earlier you start planning, the more choice and control you’ll have. Let’s look at some of the options:

Long-term care insurance. The average annual premium for a 55-year-old couple was $3,050 in 2019, according to the American Association for Long-Term Care Insurance. Premiums are higher for older people, and those with chronic conditions might not be eligible. Policies typically cover part of long-term care costs for a defined period, like three years.

Hybrid long-term care insurance. With life insurance or annuities with long-term care benefits, money that isn’t used for long-term care can be left to your heirs. These products typically require you to commit large sums or are paid in installments over 5 to 10 years, although some now have “lifetime pay” options.

Home equity. People who move permanently into a nursing home may be able to sell their houses to help fund the care. Reverse mortgages may be an option, if one member of a couple remains in the home. This type of loan lets them use their home equity. However, it must be repaid if the owners die, sold, or they must move out.

Contingency reserve. People with a great deal of investments could plan on using some of those assets for long-term care. Their investments can produce income, until there’s a need for long-term care, and then can be sold to pay for a nursing home or home health aide.

Spending down for Medicaid eligibility. If the worst case scenario hits and long-term care wipes out all retirement assets, then the only recourse is to apply for Medicaid. It would be better to do some advance planning with an elder law attorney, to see if there is any way to protect some assets for a surviving spouse, if there is one.

In all cases, advance planning in mid-life to purchase a long-term insurance plan is optimal.

Reference: MarketWatch (July 19, 2019) “This is how much long-term care could cost you, and don’t expect Medicare to help”

What Can an Irrevocable Life Insurance Trust Do in an Estate Plan?

Families with young beneficiaries or significant assets might want to consider the use of an Irrevocable Life Insurance Trust (ILIT) to provide more control over a life insurance policy than a typical last will and testament. The peace of mind is worth the investment. However, it’s not for everyone.

Before investing in an irrevocable life insurance trust, understand that you won’t be able to make any changes. Therefore, the word used is “irrevocable.” There are some advantages to this type of trust. However, many people opt for a revocable trust instead, because they prefer knowing that they can make changes, if they wish.

KAKE.com’s recent article, “How an Irrevocable Life Insurance Trust (ILIT) Works,” explains that a revocable trust lets the grantor change or even end the trust. An irrevocable trust permits no modifications from the trust creator once it’s been drafted. The only ones allowed to make and approve changes are the beneficiaries. However, these trusts have some benefits despite their inflexibility.

With an irrevocable trust, death benefits will not be part of your gross estate, so they aren’t subject to state and federal estate taxes. However, while your estate is exempt from estate taxes, they may be subject to taxes in your beneficiaries’ estate, which can shift your tax burden onto them.

An irrevocable trust allows restrictions to be put in place for minors who may not be responsible or equipped to handle large amounts of money. You can set up terms, so beneficiaries have to attain a certain age to gain assets or accounts.

An irrevocable trust can also protect you and your family from creditors.

The IRS says that life insurance payouts are usually not included in your gross assets, but there are exceptions. If you’ve earned interest on a life insurance payout, any interest you received is taxable. In addition, if a life insurance policy was transferred to you by another individual for money, only the sum you paid is excluded from taxes.

There are some drawbacks to an ILIT. Some of the tax benefits of an ILIT only work in if you live three or more years after transferring your own life insurance policy to the trust. Otherwise, the IRS will include life insurance proceeds in your estate for estate tax purposes. The ILIT can buy the policy and avoid that rule, but you’ll have to fund the trust to pay premiums.

Giving the trust money for that policy may also make you subject to gift taxes. However, if you send beneficiaries a letter after each transfer telling them that they don’t have immediate access to the money, gift taxes won’t apply.

The biggest downside to an ILIT is that you can’t change it once it’s established. You give up control of assets and can’t dissolve the trust unless you simply stop making payment for premiums. Although the trust rids you of certain taxes, your beneficiaries may take on a big tax burden, once they get the assets in your estate.

Even if there is no life insurance policy involved in trusts, these important estate planning strategies can become complex, especially with regard to tax planning. An estate planning attorney licensed to practice law in your state will be able to review your situation to see what kind of trusts would work best for you.

Reference: KAKE.com (July 19, 2019) “How an Irrevocable Life Insurance Trust (ILIT) Works”

Be Prepared for the Risks of Retirement

Just as being flexible during your working life can make the bumps along the way easier to manage, a retirement plan that assumes a certain level of risk can give you peace of mind.

The ability to adapt to change is an important skill at any stage of life. During retirement, there are financial risks that may require changing your original plan, from where you live to how you spend your days. Being unable to make changes, could make a bad situation worse.

The Bay City (TX) Tribune’s recent article, “5 hidden risks in Retirement” says that once you have a retirement plan in place, it’s not etched in stone. Circumstances change, and you may add or lose family members, your retirement objectives may shift, the economy may create new considerations and financial innovations may present new opportunities.

Be sure that your retirement plans (and beneficiaries) are current. Review these at least once a year.

Retirees and those making retirement plans should know about these five risks:

• Running out of money before you die is a primary concern of most retirees. This is even a greater concern, as the average life expectancy has increased.
• Be certain that both you and your spouse are protected from the unexpected, such as the financial impact of the loss of one spouse. The surviving spouse will only get the higher of your two Social Security checks. Life insurance and estate planning are important to protect survivors.
• A longer life expectancy could result in high costs in a long-term care facility. Look into long-term care insurance.
• Know that a 50% gain doesn’t let a portfolio recover from a 50% loss. It takes a 100% gain to restore a 50% loss. Common stocks have substantially out-performed other investments over time and are usually recommended for retirees, as part of a balanced asset allocation strategy.
• Finally, plan on prices for food, goods, and services to increase during retirement, which reduces your buying power incrementally because you’re living on a fixed income. You must factor that in.

Planning with the knowledge that there may be changes needed to your plan and building in flexibility, like being open to part-time work or a less expensive living situation, can protect your retirement in the long run.

Reference: The Bay City (TX) Tribune (July 19, 2019) “5 hidden risks in Retirement”

A Checklist for Retiring Early

Retiring early always sounds like a good idea, until something happens and suddenly, you’re back in the workforce again. Before you give up steady income from working, make sure you are really prepared to retire.

How many people do you know who retire early, only to find themselves back in their old jobs because they ran out of money or starting a new venture because they couldn’t get a job and needed to work? Here are six things to keep in mind before you announce your retirement, courtesy of Investopedia’s recent article, “6 Signs You Are Ready to Retire Early.”

1. Debts Paid Off. If the mortgage is paid off, and you don't have any loans, big credit card balances, or other debt, you won't have to worry about writing out big checks for bills in retirement. Therefore, your savings and retirement income will be available for you to enjoy life after work and free to use, in the event of an emergency.
2. Savings. If your investments meet or exceed the amount you were hoping to save, it’s another good sign you could take early retirement. However, if you didn't line up your retirement savings plan for early retirement, you’ll have to recalculate the length of your savings with these additional years. Depending on your age, you may not yet be eligible for Social Security or Medicare. As a result, your savings will need to cover expenses, until you reach the eligible age.
3. Early Withdrawal Penalties Avoided. If your 59th birthday was six months ago or longer, you're eligible to take penalty-free withdrawals from any of your 401(k) plans. This typically applies to other qualified retirement plans but check with the IRS to be sure yours is included.

If you’re a wannabe early retiree with a 401(k), if you continue working for your employer until the year that you turn 55 (or after), the IRS lets you withdraw from only that employer's 401(k) without penalty when you retire or leave, provided you leave it at that company and don't roll it into an IRA. However, if an employee retires before age 55 [except as noted above], the early retirement provision is forfeited, and the 10% penalty will be incurred for withdrawals before age 59½. You can also set up a series of substantially equal withdrawals over at least five years, or until you turn 59½, whichever is longer. However, similar to withdrawals from a 457 plan, you'll still have to pay the taxes on your withdrawals.

4. Healthcare Costs. Early retirees must have a plan in place to cover health costs during the years after retiring and before becoming eligible for Medicare at age 65. If you have coverage through your spouse's plan—or if you can continue to get coverage through your former employer—it’s another signal that early retirement could be an option. COBRA may also extend your healthcare coverage for a period after leaving your job. However, without your former employer's contributions to your insurance coverage, your bills with COBRA may be higher than other options. You can also buy private health insurance. If you have a Health Savings Account (HSA), you can use tax-free distributions to pay for your out-of-pocket qualified medical expenses, regardless of what age you are. Note that if you leave your job, you won't be able to keep making contributions to the HSA.
5. The Ability to Live on Your Budget. Retirees on fixed incomes, like those with pensions and/or retirement plan withdrawals, typically have lower monthly incomes than they did when they were working. Practice sticking to a retirement income budget for at least several months and test your reduced retirement budget to get a feel for how hard living on a fixed income can be.
6. You Have an Action Plan. Why bother retiring early, if your only goal is to drive your spouse crazy? Without a purpose, many people find themselves spending more than they can afford on travel, shopping as a leisure activity and dining out more often than they ever did before. That’s not necessarily a bad thing, but there needs to be a reason for early retirement other than overspending. Have a plan and a purpose that will keep you engaged with the larger world and lead to fulfillment. Some people find themselves busier during retirement because of their many charitable and recreational activities, and that’s a great reason to retire early.

Reference: Investopedia (May 16, 2019) “6 Signs You Are Ready to Retire Early”

Can We Talk About Money and Your Parents?

The difficulty your parents had with talking with you about the birds and the bees when you were young, is about the same you face when talking with them about finances. The topic is awkward, but the conversation is very important.

Waiting until your family experiences a health, legal or a financial crisis, is the last time you want to discover that Mom and Dad have no money—or that they have millions stockpiled and no plan for their estate. A GOBankingRates survey found that 22% of survey respondents said their parent’s finances are none of their business and had no intention to speak with their parents about this topic.

That’s a big mistake, for a number of reasons.

Forbes’ recent article, “What You Don’t Know About Your Parents’ Finances Could Ruin Yours” says that if you don’t take the time to chat to your parents about their finances, your own finances could be affected. This is because there’s a good chance you’ll have to get involved with your parents’ financial lives, as they age. This can impact your own financial well-being, if you aren’t ready for that task.

As Americans are living longer, there’s an increased risk of health issues. About 80% of older adults have at least one chronic condition like heart disease, diabetes, dementia or Alzheimer’s disease. Alzheimer’s disease is becoming increasingly prevalent as people live longer. The number of Americans living with Alzheimer’s disease is expected to more than double to 14 million by 2050, according to the Alzheimer’s Association.

However, just 5% of adults ages 55 to 60 have long-term care insurance, and only 11% of adults 65 and older have it. Long-term care insurance helps cover the cost of care in an assisted-living facility, nursing home or even at home. Medicare doesn’t pay for this sort of care–which easily runs well over $8,000 a month.

If you and your parents don’t talk about how to pay for any care they might need, you could become your parents’ long-term care plan. That could mean you pay these expenses or stop working to help care for a parent.

Those who haven’t had detailed discussions with their parents about their finances, can anticipate facing a larger burden than those who’ve been able to help their parents start managing their money better, by having discussions with them.

If you have siblings, it is important for all the children to be on the same page regarding the parents’ finances. This will help everyone involved be better prepared.

Talk with your parents about their finances. Find out if they have an estate plan that includes a will, power of attorney and a living will or advance health care directive. If they don’t, explain how you have planned for your family’s protection, and offer to help them find an estate planning attorney who they would be comfortable with. Life throws curve balls often, and waiting is always a bad idea. Don’t wait until it’s too late.

Reference: Forbes (July 17, 2019) “What You Don’t Know About Your Parents’ Finances Could Ruin Yours”