Estate Planning Bits

Caring for your ailing or aging parent

Often people look at the cup as half-empty when it should be perceived at as half-full. This is certainly the case when caring for a parent, which is often considered a job or a task.

What if your family turned this situation around and looked at it as a rewarding experience that provides you the opportunity to give back to your parent all of the care and nurturing he or she provided while instilling your values and bringing you up? How about looking at this as an opportunity to offer care, love and affection, and to grow in positive ways that otherwise would not be available? While the situation may be a difficult one, what if you regarded it as a challenge that will have positive rewards?

If you see a situation arising in which you parent will need your care, you should begin planning as soon as possible to assess the needs of all parties. This includes communication with your siblings so you are all on the same page. For example, a sibling may mistakenly perceive you to be taking “advantage” of your parent, because you receive financial compensation. This is a very real possibility if you need to provide care for your parent 24/7 in your home or theirs.

Often caregiver children have to take a leave of absence under the Medical Leave Act or perhaps even quit a job in order to stay home and care for their aging or ailing parent. Vacations may have to be postponed, and respite care may have to be provided for your parent if you need to attend an important family function, such as a graduation or wedding.

In order to properly plan, you’ll probably need the input of a geriatric care manager, who will your professional support, giving you assistance and suggesting and coordinating other services as necessary. The focus will have to be on your parent’s needs to assure that no third party will enter the picture and criticize the services provided, such as hygiene, dietary needs, medical needs, etc.

Support for you as caregiver is also important so that you won’t become “burnt out” when your parent’s medical needs progress and increase, and additional services are required. As caregiver, you may need counseling, especially if your parent has dementia or another memory-related disease. There are good support groups that can help you deal with the ongoing issues and preserve your own mental health.

Even the best laid plans sometimes are not as successful as anticipated, and therefore, there should be a backup plan if the initial plan doesn’t work. Examples can be day care, permanent institutionalization or perhaps moving your parent to stay with another sibling. If possible, all children should share in the care process.

Needless to say, it is easy to suggest that adult children should be taking care of their parents, but it is not appropriate for all families. So planning must be attended to as soon as possible to assure the best possible chance of success.

By: Hyman G. Darling, Esquire

Estate Planning Quiz

Here are some simple questions that are often misunderstood. The answers are at the bottom. No cheating!

A) If you die without a will, who gets your money?

1. The state


2. The IRS


3. Your heirs


4. The Governor

B) You may give away the following amount without having to file a gift-tax return in any one year.

1. $10,000 to each person


2. $10,000 by each person


3. $12,000 to each person


4. $12,000 by any person

C) You may give away the following without paying any gift tax.

1. $10,000


2. $12,000


3. $100,000


4. $1,000,000

D) You need a will if

1. You are single


2. You are married


3. You have children


4. All of the above

Answers:
A (3) Your heirs. They will always get the funds before the government.
B (3) $12,000 to each person. You may give away up to $12,000 per donee per year without having to file a gift tax return.
C (4) $1,000,000. You may give away up to $1,000,000 over your lifetime without paying any gift tax, in addition to the annual gifts of $12,000.
D (4) All of the above. Everybody should have a will. Without one, the state will write one for you and determine who your beneficiaries are.

By: Hyman G. Darling, Esquire

Paying for your kid’s college education – UGH!

If you have a child in college or planning to go to college, brace yourself for sticker shock. College expenses have gotten tremendously expensive, even for some state institutions. However, you do have some options to pay these bills.

Hopefully, you established a dedicated savings account. A Section 529 plan or Coverdell Education Savings Account should be the first line of funds available to pay college expenses. In most situations, the withdrawal from these types of special accounts will be deemed to be tax-free when the funds are used to pay for educational expenses.

However, if you have not done your educational funding planning in advance, or if there are insufficient assets available, then you can consider some of the following choices.

Funds may be withdrawn from a traditional individual retirement account (IRA) to fund educational expenses. Withdrawals from IRAs prior to age 59 ½ normally have a penalty, but in these types of cases the penalty is normally waived so long as the funds are in fact used to pay education expenses. Nevertheless, it is important for you to understand that these funds are considered taxable income and add to your tax base for determining itemized deductions and other types of limitations on your tax return. It is important to remember that the additional income earned is added to your ordinary income, and this could potentially push you into a higher tax bracket. Therefore, if IRA funds are withdrawn, attention should be paid to the estimated payment or appropriate withholding to ensure that a significant tax bill is not due in the following year.

Another option to consider is a home equity loan. Interest on it is deductible up to $100,000.00 of the loan itself. But you must remember that this is a debt has to be repaid. With interest rates rising, this may not be as attractive as borrowing from either the college or the government on a deferred loan basis.

If a home equity loan is not available because you don’t own a house with enough equity, then your company retirement plan may be considered as an opportunity for funds. But there may be limitations on this type of situation also. Normally the maximum available is 50% of your vested balance or $50,000.00, whichever amount is lower. The plan itself may allow the loan, and there may be restrictions on how soon the loan has to be repaid. And as with your IRA, funds withdrawn from your company retirement account may then be deemed to be taxable income, and you may be required to pay a 10% penalty to the IRS, (and possibly the state,) on the amount withdrawn in addition to the increased taxable income.

Another opportunity is to transfer income tax liability to your child rather than keeping it for yourself. Consider gifting funds to your child. You may transfer appreciated securities to your child, who may then sell them and pay taxes at his or her income tax bracket. Although capital gains taxes are only at the 15% bracket for federal purposes, your child may be in an even lower or a no-tax bracket. You and your spouse may each gift up to $12,000.00 of securities to your child on an annual basis without having to file a gift tax return.

Again, as with all tax related planning techniques, a qualified tax advisor should be consulted to review all of the options and opportunities available before making a final decision.

By: Hyman G. Darling, Esquire

Top 3 Medicaid Planning Myths

It’s amazing how many non-legal “estate planning experts” are out there. Perhaps some of them are your friends and relatives. There are a lot of stories about what “they did” to save assets for a family member when that person was about to enter a nursing home. Here are the top 3 myths that I wish to dispel in the hope that I can help present a clearer understanding of the rules:

“I have to sell my house because my husband/wife is in a nursing home.” Even under the Deficit Reduction Act of 2005, which changed the rules dramatically, a house is exempt so long as there is a spouse, disabled child or dependent child living in it.

In some cases and in some states, the state will put a lien on the house that will have to be paid back after the surviving spouse dies or moves out. However, there are exceptions that allow the surviving spouse to sell the house and buy another home or buy into a continuing care retirement community or other, similar situation.

In any event, the state does not take the house, but rather, the house may have to be sold to pay nursing home expenses if the person is single and was living in it. Again, there are exceptions to the rule about the requirements for a single person to sell the house, but the proceeds are used to pay the nursing home, not the state.

Upon the homeowner’s death, if the house is not exempt, it may have to be sold to pay back the state for the amount of care the state paid the nursing home while the resident was on Medicaid.

“My bank account is joint, and therefore, it is protected.” No! This is absolutely not true. The amount of money in a bank account held by a joint owner is deemed to be joint for convenience only. Unless it can be proven that the co-owner, (probably a child,) contributed his or her own money into the account, it will be deemed 100% to be owned by the parent, and all funds have to be used to pay nursing home expenses.

One-half of the account balance is not exempt unless it can be proven that the child’s money actually was deposited into the account. The legal implication of a name added to an account, (even if that happened more than 5 years before the person entered the nursing home,) is that the parent still has the right to withdraw all of the funds from the account, so it is not a gift. The gift does not really occur until the parent dies, at which time the funds are then transferred to the co-owner. Since the parent has not parted irrevocably with the assets in the account, none of the funds are exempt.

“I can give away $10,000.00 free.” Once again, this is not the case. The $10,000.00 threshold was the amount a person could give away tax-free on an annual basis to as many people as he or she desires. This amount is currently $12,000.00, but it has nothing to do with asset protection planning, as any amount gifted now has a 5-year waiting period before the funds are protected for long-term care expenses to be paid by the state. As reported in prior postings, the taxing authorities and Medicaid authorities have different sets of rules, which are mutually independent of each other. Therefore, a gift of $12,000.00 to a child is not protected for Medicaid expenses until 5 years have passed since the date of the gift.

Naturally, there are exceptions and exemptions to all of the general rules, which should be viewed by a professional, not your friend, neighbor or relative. Many techniques successful implemented as planning standards many years ago are no longer protected by the ever-changing rules.

By: Hyman G. Darling, Esquire

Charitable withdrawals from your IRA – the clock is ticking

For the balance of 2007 only, you have the right to withdraw funds from your IRA and have them transferred to a qualified charity without reporting the withdrawal as taxable. However, there are certain required qualifications that should be noted:

1. The assets must transfer directly from your IRA into a qualified charity. If they are in any other type of qualified plan, they must be transferred to the IRA before being transferred to the charity.
2. The maximum transfer allowed is $100,000.
3. The person withdrawing the funds must be at least 70-1/2 years old at the time that the gift is made. The transfer may not go to a charitable trust or any other type of entity does not directly benefit the charity. It must be an outright transfer to the charity.
4. The gift does not qualify as a charitable income tax deduction and it will not be declared as income either, however, the transfer may count toward your minimum distribution requirement in 2007 to alleviate withdrawing other funds, which otherwise would be taxable.
5. If the funds withdrawn are deductible contributions and earnings, the transfer to the charity is deemed to be composed first of these types of funds to the extent that any are withdrawn.
   

There are definite benefits if you qualify for this charitable donation of your IRA funds. These withdrawals will not be construed to be part of your adjusted gross income, so this doesn’t limit your itemized deductions. Additionally, if you are in a state that does not allow itemized deductions, this loophole allows an otherwise disallowed charitable deduction.

Please note that the benefit is only available for the balance of 2007 before it expires, so you must take advantage of it soon. The clock is ticking.

By: Hyman G. Darling, Esquire