Estate Planning Bits

IRAs rollovers from a deceased loved one – how to achieve tax-free rollover status

The Pension Protection Act of 2006 enacted several provisions that affected Qualified Retirement Plans and also IRAs. Until that time, a beneficiary who was not the surviving spouse was not able to “rollover” retirement funds and had to pay taxes on these funds at their own income tax rate.

The new rule applies to distributions made on or after January 1, 2007 and now permits the beneficiary the ability to defer taxable distributions when received from a person who is deceased. They may have the funds rolled over to a Direct Rollover IRA and may allow the fund to grow while only taking out the annual required minimum distribution from this particular IRA. This has also been frequently called the “Stretch IRA.”

In these situations, if the person does not need the money, they may allow the funds to accumulate tax deferred (not tax-free) which will hopefully will be a greater amount earned on a yearly basis than the minimum distribution. In any event, the full amount of the principal of the IRA as of the date of death will not have to be withdrawn.

However, there are several specific requirements that must be met in order to obtain tax-free rollover status:

• The 20% withholding requirement will not be required.
• The required minimum distribution is not eligible for rollover, but the current year distribution must be taken by the beneficiary prior to the qualified plan being transferred.
• The IRA Rollover account may be established for the benefit of the individual. If there is more than one specific beneficiary named, then the oldest Trust beneficiary must utilize their age for determination of the minimum distributions.
• The funds must be transferred directly from the prior IRA or account to the new one. The beneficiary may not request the funds himself/herself, receive them and deposit them with the new IRA custodian as they could do with their own IRA account.

Please note that this account should not be commingled with any other IRA funds, since a person’s own funds will not have to meet the minimum distribution requirements until at least age 70- ½. This allows the beneficiary another option as opposed to taking the funds in a lump sum and paying taxes or taking the funds out over a five-year period. IRS Publications 575 and 590 are quite helpful in explaining the new requirements and options available under the Pension Protection Act.

By: Hyman G. Darling, Esq.

Elder abuse – a growing problem

In previous posts, I have discussed the issue of elder abuse. Unfortunately, this is becoming a bigger problem as more people become older and their children and other individuals become caregivers. Even agencies or homecare companies sometime take advantage of people as they become less able to care for themselves and their finances.

This unfortunate circumstance appears to be escalating rather than decreasing. In order to attempt to curb the growing abuse of elders, several regulatory authorities have taken initiatives and steps to prevent further abuse by creating more regulations and penalties for violations.

In St. Paul, Minnesota, the police are seeking a grant to initiate a new unit that investigates elder abuse cases. They want law enforcement to pay attention to this type of crime. The impetus for this initiative was a case where a daughter of an elder exploited her mother. When the police investigated the house, intending to locate all legal documents and financial records, all they found was animal feces, trash and dead rodents. The house had to be condemned.

In Michigan, trends are in order to produce a Bill that will protect seniors from predators, increasing the penalties and allowing the prosecutors to have more authority. Not only do the police and prosecutors wish to prosecute predators, they intend to convict them with additional tools available. Included would be loss of an inheritance through abuse, neglect, or theft of an elder. There will be an increase of penalties and sentencing guidelines for a financial exploitation crime. And the sentencing for a crime may be increased based on the amount exploited. In addition, the abused adult will be able to be videotaped to present evidence rather than having to do it in person. In the event of a death in an unlicensed care facility, or if any person obstructs an investigation at an adult care facility, the sentencing guidelines would also be increased.

Contra Costa County, California is considering creating a special court for only elder abuse cases. They believe that crime is growing at an alarming rate and many situations occur where it is not reported. The Adult Protective Services in Contra Costa County saw a 40% increase of reported cases in 2007. However, this is the result of a new law requiring financial institutions to report any activity that may be suspicious regarding elderly customers withdrawing funds from their accounts, financial fraud, lottery scams or caregiver fraud or abuse.

If a person is in fact a power of attorney, health proxy, guardian, conservator, or in any way attending to an elder’s financial and personal decisions, they should be sure to seek out professional advice, be it tax related, financial, social or otherwise, in order to ensure that they are proceeding in the correct and appropriate path so their actions will not be questioned in the future.

By: Hyman G. Darling, Esq.

Social Security “File and Suspend” – What this means to you

There are various options you can choose when determining whether to claim Social Security for full retirement benefits, early benefits or deferred benefits. If you merely wish to receive your benefits as soon as possible, you can file a claim, take a reduced portion and lock into that amount forever, as well as your spouse.

However, there is an often forgotten option known as “file and suspend” that may provide for a higher combined benefit for you and your spouse in the event that one of you dies sooner than you plan on. This one is a little tricky to explain, so forgive me if it’s a bit technical.

Depending upon various circumstances, you or your spouse may wish to take benefits as early as possible, at age 62, and the other may opt to wait until full retirement benefits are available, i.e., in 2010, at age 66. Therefore, the working spouse would still be contributing to the Social Security system.

The higher earning spouse would then file a request to “file and suspend.” This means that a claim is filed for full retirement benefits, but with an immediate request that they be voluntarily suspended. In this situation, the applicant for Social Security could wait until age 70 and use other benefits such as IRAs, retirement plans or other sources of income to supplement retirement.

One of the purposes for doing this would be that the retired spouse would become eligible for the spousal benefit, up to 50% of the amount that would have been received at full retirement age, which is probably less than the benefit of their working record. In addition, the benefits for the Social Security applicant at age 70 will be considerably higher than at age 66. This provides an estimated 8% per year increase on top of annual costs of living increases for benefits for each year the claim is not paid.

In the event that the applicant for Social Security dies prior to his or her spouse, then the surviving spouse would receive a survivor benefit of whatever the spouse was getting or entitled to.

In the future, Social Security benefits could be significantly increased and more valuable to a retiring couple. Between the tax favored status, inflation protection, survivor benefits and protection for longevity, you must consider Social Security options when considering retirement. Usually, the Social Security Administration is helpful in providing you with information regarding the options available so you can make your most intelligent decision. But it is important for you to understand that you must make the right decision, because once it is made, it is usually irreversible.

By: Hyman G. Darling, Esq.

Why women need an estate plan

Women experience unique economic realities. They tend to live longer and move in and out of the workforce due to career interruptions for child birth and elder parent care. This means that women often qualify for much lower pension benefits and receive lower Social Security benefits due to their years employed and salaries attained, which cannot be increased by the husband’s pension or social security if he experiences an untimely death.

Fewer years in the workforce, fewer years with a single employer, and lower pay are all factors that may contribute to a lower average pension for females, and Social Security benefits are calculated based on a person’s highest 35 years of earnings. If a benefit recipient does not have 35 years in the workforce, the Social Security Administration will add zero-earnings years to his or her record to equal 35 years.

Moreover, women often have diminished retirement savings due to the health care costs for the spouse who dies first, (usually the male.) Women most often become the caretaker for their husbands, which reaps immeasurable financial benefits by delaying the significant expense of nursing home care. But, who is there when the widowed wife needs assistance, as the average nursing home cost in Massachusetts is approximately $7,500.00?

Women must work with their husbands to implement a plan to ensure that the total health care and estate planning needs of their family is addressed. They should be guarded against the incapacity and the death of their spouse.

There are certain documents that are regarded as necessities for life in today’s active, uncertain society to protect loved ones:

• Durable Power of Attorney: This document that establishes who will attend to your financial decisions in the unfortunately event of your incapacity.
• Health Care Proxy: This document that ensures that medical decisions are carried out in accordance with your intentions in the event that you become mentally or physically disabled to the extent that you cannot make informed decisions on your own behalf.
• Will: This document provides for an orderly distribution of your assets.

However, the above documents are just the tip of the estate planning spectrum. It is also important that to consider Medicare and Medicaid (MassHealth in Massachusetts) planning, interplay between long-term care and financial planning, use of long-term care insurance and housing options and alternatives to nursing homes, to name a few.

By: Todd C. Ratner, Esquire