Estate Planning Bits

2006 Medicare change highlights

If you are a recipient of Medicare, you know that the Medicare Part B premium increased by 13.2% in 2006. Medicare Part B provides coverage for doctors, a small amount of medication, if prescribed and administered by the physician in their office, and some outpatient expenses. However, individuals with low income may be entitled to receive assistance for the Medicare Part B premium if they also qualify for Medicaid, which covers the cost of the Medicare Part B premium as deductibles and co-payments.

Medicare Part A will also be increasing. This covers inpatient hospital care, some nursing home care and some health care. There is really no money paid for this, but it is a deductible that is privately paid if you have no other insurance to cover it. The 2006 increase is $952.00 per year. Many disabled individuals and seniors who obtain Medicare Part A coverage pay the premium personally if they have not met the requirements for Medicare qualification.

Medicare Part D, the new drug prescription benefit, will not be discussed in any great detail here, since it is probably as confusing to this writer as it is to any of the participants, enrollees and administrators.

By: Hyman G. Darling, Esquire

Preparing for an inheritance

Parents seldom speak to their children about the money that they are planning to leave to the next generation. In some cases this is a good decision because unscrupulous children may look “differently” at their parents if there is a significant inheritance and a parent is terminally ill. If that child has the decision-making authority regarding life support or removal of medical equipment to maintain a person’s life, and inheritance could affect judgment.

However, if a child is responsible and trustworthy child, and parents feel that they want to discuss financial matters with him or her, then awareness of an estimate of what amount of money will be inherited, the type of property that exists and tax implications on the receipt of these assets could be extremely beneficial.

For example, if a parent has a significant IRA or 401K plan, the child should be aware of the consequences of the receipt of these assets prior to electing to take them in a lump sum. There are several options available, and it is important to note that in most cases, all of the income received will be income taxable to the child. In addition, if the threshold for estate taxes is exceeded, then some of these funds may also be included for estate tax purposes in the gross estate of the decedent, and they may be subject to estate taxes as well as income taxes, both at the federal and state level. The beneficiary must be prepared for taxes upon receipt of an inheritance, as well as possess an understanding as to whether the assets received will be passing through probate or not. If the assets pass through probate, it could take longer to receive them than if they are in a trust or are paid directly to the beneficiary. Often, the beneficiary has the inheritance spent before receiving it, and this is a problematic situation as the beneficiary expects to have the money almost immediately and does not understand that creditors must be paid first. The probate process must be initiated, and until estate taxes are established, no distributions should probably be made.

Although it is difficult to discuss money with a child, sometimes it is important and helpful for the child to have a good understanding of what he or she may receive outright, from a trust, or through retirement funds.

By: Hyman G. Darling, Esquire

Smart tax planning strategies

Tax season is safely tucked away for another year. You are probably either happy with your refund or still grumbling about what you paid in. The smarter concern would be in making an effort to adjust withholdings with the goal of reaching a break-even point on April 15th. If you got back a significant refund, then you probably had too much money taken out of your paycheck every week. Exceptions would be a large contribution, medical expense or other substantial change of circumstances that caused a one-year refund spike.

A refund is nothing more than the return of your own overpayment to the government in most cases, unless you are qualified for one of the credits against a tax. Otherwise, you are merely getting your own money back; and you could have had it during the course of the year. Some people like the psychological benefit of a refund however, and they may then use it to pay off a credit card, pay for a trip, pay down on a home equity loan or put the money into a savings account. If you are unable to save money during the year, then this may be considered a forced savings account.

Since the IRS does not pay interest on refunds in most cases, this really becomes an interest free loan to the government. Consider instead what would have happened if you had put this money aside on a weekly basis by direct deposit to a savings account, or put additional funds into a 401K plan or some other tax deferred retirement plan.

If you are one of the unfortunate people who had to pay in money this year, a good strategy may be to have more funds withheld weekly from your paycheck.

Planning time is not between January 1 and April 15 of the year that the tax return is due, but in the year prior. Prepayments can made for mortgage, taxes, charitable contributions and other deductible expenses that could reduce your taxable income. Possibly, income could be deferred to the following year to at least postpone the payment of that tax. In addition, payments and contributions to qualified plans like 401K plans and IRAs in the year the income is received will normally help reduce tax due, as normally contributions are deducted from income prior to calculating tax due. An additional benefit is that many plans allow these payments to be matched with employer funds.

The moral of the story is that tax planning for 2006 should begin now, not in 2007.

By: Hyman G. Darling, Esquire