Estate Planning Bits

Estate planning checklist: Same-sex marriage (Part 3)

Same-Sex Spouses:

On June 26, 2013the Supreme Court of the United States issued a decision that addressed the legality of the Defense of Marriage Act (DOMA). The court determined that although each state may regulate marriage for its citizens, once married, all spouses are to be treated equally under federal law. 

For planning purposes this impacts not only your federal income taxes, but also social security benefits, FMLA, and health insurance coverage. Retirement benefits from a qualified retirement plan will be required to allow the surviving spouse of a same-sex married couple to withdraw the funds over the surviving spouse’s lifetime. IRAs that allow a spouse to roll over inherited assets into his/her own IRA are now allowed. There are over 1,000 federal benefits that may be impacted by this ruling. Check beneficiary designations as well as federal tax withholding (IRS Form W-4). 

Same-sex married residents no longer need to file separate federal tax returns for each spouse. Married filing jointly or married filing separately is the same for all married couples. In fact, you might want to consider amending your returns for 2011 and 2012. While an amended return is not guaranteed to benefit you, if you do not look into it, you will never know. 

For estate planners, the biggest change is that same-sex couples now are able to take advantage of the unlimited marital exemption to transfer assets between spouses during life, as well as at death. For high-wealth couples, “portability” of the estate tax exemption at the death of the first spouse to a surviving spouse is now allowed. With an estate tax exemption currently at $5.25 million per spouse, this allows a same sex married couple to have a combined $10.5 million estate tax exemption. While you might not think it impacts you, if the surviving spouse wins a large lottery ticket or comes into money for any other reason after the first spouse’s death, portability may result in a significant estate tax savings.

 

Lisa L. Halbert, Esq.

Image credit: Pargon under Creative Commons license

Estate planning checklist: Trust-based planning and beneficiaries (Part 2)

Trust-based planning:

Depending upon your assets, intended beneficiaries, or your own situation, a trust might be a better option to accomplish your preferred distribution scheme than a will. A trust is a document with three major players: the person who creates it (you), the trustee (who could be you and/or others) and the beneficiaries (who could be you and/or others). It provides an instruction manual as to how you want your assets (and debt) addressed. It is especially useful if there are minor beneficiaries and you want to know that instructions are followed long-term, or where another needs some long-term financial assistance or management (such as a special or supplementary needs trust.)

 

Beneficiary Designations:

Confirm that beneficiary designations on your various accounts remain current and in line with your overall estate plan. Types of assets that frequently carry opportunities for beneficiary designations include: insurance, annuity, and retirement accounts, and/or some brokerage accounts (accounts that hold securities and other investments). The benefits to such designations are to completely avoid probate, and there may be some income tax advantages to naming a beneficiary directly, rather than your estate or trust. Keep in mind that the individuals or entities named on the beneficiary designation are the recipients where the assets will be paid. If your estate plan is premised on having assets go through your probate estate, and therefore directed to be distributed through your will, but the beneficiary designation is not changed to be consistent with that approach, your plan will be defeated. 

If you are divorced and intend for your ex-spouse to receive assets via a beneficiary designation that has not been changed since the divorce, revisit the designation. Under the MUPC, divorce effectively revokes certain beneficiary designations to a prior spouse. You may need to take affirmative steps to insure that the designation will be upheld by renewing it post-divorce.

 

Lisa L. Halbert, Esq. 

Image credit: Lars Plougmann

 

Estate planning checklist: assets and your will (Part 1)

Estate planning is not a static project to be finalized and then put on a shelf, never to be reviewed again. In truth, it is a never-ending process; one which requires periodic review in order to remain pertinent. At least every 5 years and upon major life events, pull out the documents and make sure they continue to be relevant. Further, periodic statutory changes dictate that your intentions will be best attained if documents are reviewed.

Over the next several weeks, we will explore some of the areas that might need your attention...

 

Part 1

 

Prepare a List of Assets:

At the core of any good estate plan is a list of all of your assets, with estimated values. Generally this will include bank accounts, securities, real estate, retirement funds, insurances (life or disability), annuities, business valuations, and tangible personal property, just to name a few. Identify whether each asset is owned in your name alone (and with or without a beneficiary designation); jointly with another; or whether it carries a beneficiary designation or is held in trust. This information informs an estate planning attorney as a beginning point. After your estate plan is fully developed, do not be surprised if assets are re-titled or change columns.

Consider having a last will and testament: 

A last will and testament controls only those assets that are held in your name alone, and without a designated beneficiary, at your time of death. These are the only assets that go through the probate process. Your will provides a road map as to who you would like to receive your probate assets. It can also provide for forgiveness of debt or allow someone temporary use of an asset (such as living in a home until X age, or Y event occurs). Generally, a will allows you to control and determine who inherits your estate at your death. 

Under the Massachusetts Uniform Probate Code, (MUPC) which went into effect March 31, 2012, the probate process has now been expedited and no longer requires as much court intervention or oversight, although court supervision is available where appropriate. 

If you pass away without a will, (referred to as dying “intestate”) state law will dictate how your assets get distributed. Historically, if you died intestate, survived by a spouse and children, your assets were allocated between them. Under the MUPC, if you die intestate and are survived by your spouse and children of both you and your spouse, (whether biological or adopted) then your spouse will receive your entire net estate, without any portion specifically allocated to the children of both you and your spouse. 

The MUPC also changes the title of the person appointed to oversee the administration of an estate to a personal representative (PR). Further, the MUPC provides a list of individuals who have priority to serve as your PR. At the top of the list is your spouse, and then a child (over the age of 18), etc.

 

Lisa L. Halbert, Esq.

Image credit: Rowena of the Rants under Creative Commons license

 

Reverse mortgage: Are you up to speed on the advantages and the new regulations for 2014?

A reverse mortgage is similar to a regular mortgage, except that the bank is advancing funds to you either in a lump sum, on an annuity basis, or possibly merely on a credit basis, which means that you can withdraw funds as desired up to the allowed maximum. The loan does not have to be paid back unless your clients dies or lives out of the house for at least six months, possibly in a long term care facility. As long as at least one spouse lives in the home, no payments need to be made, nor does the house have to be sold.

In most cases, your assets and income are not considered for a loan to be approved or denied, as the bank is merely funding it based on the equity in your house. Also, in most cases, the funds received from a reverse mortgage do not adversely affect your eligibility for any governmental benefits, since it is not construed to be income, but rather, merely the withdrawal of equity from their home.

Many of my clients have already transferred their houses to their children and reserved a life estate. In these cases, provided that they (the homeowners) are at least 62 years or older, many banks will consider providing them with a reverse mortgage, but their children will have to sign off on the mortgage also. If this is a concern for your client’s kids, they could deed the house back to you, but this may trigger an additional 5-year waiting period, in the event that you wish to re-transfer the property to your children in order to protect the asset from long term care expenses.

 

Be aware of new regs in 2014

Created by the Consumer Financial Protection Bureau, one of the most important new regulations that go into effect Jan. 1, 2014 prohibit banks from approving mortgages for anyone whose debt-to-income ratio is higher than 43%. This means that borrowers' total debt liability, including housing, should not be more than 43%of their income. A qualified mortgage is one that would be qualified for resale on the secondary mortgage market.

The other new rule requires banks to limit the fees for originating mortgages to no more than 3 percent of the loan amount. (This could discourage many institutions from pursuing loans for lower-priced houses.)

While the Ability-to-Repay rules will now apply to most mortgage loans, they exclude certain types of loans, such as home equity lines of credit, timeshare plans and reverse mortgages.

Until the new rules became effective, almost any homeowners who had equity in a home could qualify for a reverse mortgage. However, starting January 13, 2014, there will be new underwriting standards for new applications to ensure that borrowers have the ability to continue paying taxes and insurance on an ongoing basis. Additionally, homeowners will only be able to draw 60 percent of the available principal limit, unless there are mandatory obligations, such as mortgage payoffs or liens. (A credit card debt is NOT considered a mandatory obligation.)

 

Conclusion

Prior to obtaining a reverse mortgage, the federal government requires that you be counseled as to its pros and cons. This counseling is free, and you may obtain information from the AARP Reverse Mortgage Education Program or by calling 800.209.8085. You may also wish to contact an elder law attorney who is also skilled in advising clients as to the benefits and detriments of obtaining a reverse mortgage.

 

Hyman G. Darling, Esq.

Image credit: Moyan_Brenn under Creative Commons license

Reverse mortgage – is this a good option for you?

Over the past few months, several of my clients have asked me whether it is appropriate or when is the best time to obtain a reverse mortgage. Normally, we suggest to clients that they do not obtain a reverse mortgage unless they are running low on cash or need more funds for care at home.

In prior years, it was fairly expensive to get a reverse mortgage, as the fees were considerably higher than those of a typical mortgage or home equity loan. A reverse mortgage, also known as a home equity conversion mortgage, becomes a good solution for our clients who may wish to cash in on the equity in their house. This is sometimes referred to as a person who is house rich but cash poor.

If you need additional funds for home care or possibly to pay the costs of living in your house, including heat, taxes, insurance, etc., then a reverse mortgage is a valuable alternative, since it does not need to be paid back during your lifetime. One of the problems, however, is that once the limit is reached on the withdrawal amount of the loan, further funds are not available, and you may have to either sell the house or attempt to obtain a new reverse mortgage if the value of the home has increased sufficiently enough.

A reverse mortgage is similar to a regular mortgage, except that the bank is advancing funds to you either in a lump sum, on an annuity basis, or possibly merely on a credit basis, which means that you can withdraw funds as desired up to the allowed maximum. The loan does not have to be paid back unless you die or live out of the house for at least 6 months, possibly in a long term care facility. As long as at least one spouse lives in the home, no payments need to be made, nor does the house have to be sold.

In most cases, your assets and income are not considered for a loan to be approved or denied, as the bank is merely funding it based on the equity in your house. Also, in most cases, the funds received from a reverse mortgage do not adversely affect your eligibility for any governmental benefits, since it is not construed to be income, but rather, merely the withdraw of equity from your home.

Many of my clients have already transferred their houses to their children and reserved a life estate. In these cases, provided that you (the homeowner) are at least 62 years or older, many banks will consider providing you with a reverse mortgage, but your children will have to sign off on the mortgage also. If this is a concern for your kids, they could deed the house back to you, but this may trigger an additional 5-year waiting period, in the event that you wish to re-transfer the property to your children in order to protect the asset from long term care expenses.

Prior to obtaining a reverse mortgage, the federal government requires that you be counseled as to its pros and cons. This counseling is free, and you may obtain information by contacting the AARP Reverse Mortgage Education Program at 1-800-209-8085. You may also wish to contact an elder law attorney who is also skilled in advising client as to the benefits and detriments of obtaining a reverse mortgage.

 

Hyman G. Darling, Esq.

Photo credit: James.Thompson under Creative Commons license

Saving for college expenses – your options and some tips

There are many incentives available for paying for higher education. I will attempt to list a few of the more popular ones, but in most areas, you can obtain all of the benefits by contacting a person who is dedicated solely to providing educational services. This individual usually charges a fee, but the fee is usually nominal compared to what the savings will be when you qualify for the benefits. You may also contact a local estate planning council to see if they have a member who provides these services, as opposed to merely selling products. 

1. 529 Savings Plan
   With this plan you contribute money as a gift, (and the amount may be up to the annual exclusion for gift purposes - currently $14,000 per year in 2013) without having to file a gift tax return. The distribution is not taxed for federal income tax purposes so long as the funds are used solely for educational purposes, as defined. In addition, you may be able to transfer this account to other family members if the primary and intended initial beneficiary does not utilize the funds, for instance, if they do not attend school or they obtain a full scholarship. However, the assets in the fund may be assessed against you (the parent) for purposes of determining the formula for obtaining financial aid. This may be also be counted against you if a grandparent has contributed. It may also be assessed against your child, which is a different rate of assessment by the financial aid calculation. 

1. Educational Savings Bonds
   These are bonds that are purchased from the U.S. Treasury, which must be owned by your (the donor’s) dependent. Again, these are not taxed if used for educational purposes, but if not, then the recipient of them will be taxed when they are cashed in. These also are limited, based on income, and they should be  cashed in another year, rather than the year where the assessment is needed, as they are then counted towards the assessment for financial aid. Remember that although they are not going to be taxed if cashed in and used for education purposes, they are still utilized in the calculation for assessment for financial aid purposes. 

1. UGMA/UTMA –
   These are Uniform Gifts to Minors Act / Uniform Transfers to Minors Act, which are assessed by the formula for financial aid. They could be converted to a 529 Plan if that would be beneficial for calculation of the assessment. However, when the beneficiary (child) comes of age, depending upon the state the plan is established under, then the beneficiary becomes the owner and can withdraw the funds at his or her discretion. 

 

Hyman G. Darling, Esq.

Image credit: Microsoft

Understanding your charitable giving options before the end of the year

Now is the time to consider making your charitable gifts, before the end of the year. If pledges were made during the year, this is the time to make the gift. If you pass away prior to the end of the year and the gift is not made, it will not qualify as a charitable gift for deduction purposes on your income tax return. 

In any event, there are several options for making gifts, as follows: 

1. You may make a specific gift of an item or dollar amount to a charity. For instance, you may give your vehicle (that you own) at the time of your death to the charity.
   
   
2. A further general bequest is one as stated as a dollar amount, such as “I give $50,000 to XYZ charity.” Again, provided that the assets are includable in your estate and that you have those assets left, then the charity will receive the funds.
   
   
3. A residuary bequest could be a percentage or dollar amount of your estate when you die. For instance, you could leave the greater of 1% of your estate or $10,000 to the charity, regardless of the amount that you have left. You could also specify that the charity would only receive that gift if your gross estate was of a certain sum. For example, I give 5% of my estate to XYZ charity so long as my estate is $500,000 or more. If my estate is less than $500,000, then the charity shall receive the sum of $10,000. 

You can either restrict the gift or keep it as an unrestricted gift. A restricted gift is one that for which there is a purpose or specific designated use of the funds, such as to add to a building for the charity or to add to a scholarship fund. (A recent client of mine wished to add a specific dollar amount to a fund for flowers at her church for Sunday Mass every week.) However, some charities will not accept a restricted gift if it is too limiting or if the fund is too small to make it productive, such as having only the income from a very small bequest be used for the intended purpose. Before making a restricted gift, you should contact the charity to be sure that they will accept the gift under the terms that you want. 

As most charities’ uses and needs change over the years, an unrestricted gift (one basically without any conditions) is the most useful, since the charity may then utilize the funds for the whatever purpose it feels is most important and appropriate.

 Finally, often a client wants to set up funds for a scholarship, but the scholarship fund is relatively small, and therefore, the income would not make a significant difference. In this type of situation, you should check with the charity to be sure that they would accept a gift under the terms of whether the funds may be added to an existing fund where all funds may be co-mingled to make a more significant gift. If not, then the Community Foundation in the local area servicing you may be available to administer the gift, as it may already have in place the appropriate guidelines and committee to review requests for scholarships funds as well as attend to any investments of the assets. 

Most charities, colleges, etc. have planned giving staff members available or at least volunteers to assist with the acceptance of gifts, and these individuals should be contacted before finalizing your intended donation.

 

Hyman G. Darling, Esq.

Image credit: Microsoft

What you need to know about organ and tissue donations

It is reported that at least approximately 80 people receive an organ transplant every day. However, unfortunately, approximately 20 people per day die because they are unable to have one.

Organ donation is a critical part of our medical system, but some people are concerned that if they to become an organ donor, there will be a hastening of their death, as a surgeon will attempt to “harvest” their organs sooner rather than later. This is incorrect, as organs cannot be taken without permission from the family. Sometimes a family is reluctant to agree to have their loved one be an organ donor though because the individual has not made his or her wishes known to them. In such cases, the prospective organ donor’s wish could possibly be frustrated.

A Gallop poll suggests that when family members know that their loved one wishes to be an organ donor, 94% will honor the request. When they do not know though, only slightly more that 50% will donate the relative’s organs. Of all the causes for organs being unavailable from people who wanted to be donors, 37% are lost due to the family’s refusal to consent. That is a lot of lives that could have been saved.

There are a couple ways to document your desire to become an organ donor. Normally, when you renew your license, you can determine if you wish to be an organ donor, and a notation or symbol will be added to your license indicating that intention. Very often, however, people don’t take the time to think through this option, and what it could mean to others, so they don’t check the box. In addition, most elder law attorneys and estate planning lawyers discuss this option with their clients, in companion with other things, such as whether they want to be buried or cremated.

Basically, you can become an organ donor if you are at least 18, and if under 18, then with your parent’s consent. There are no age limits. Your health and physical condition really determine whether you are able to do so.

The most popular organs to be donated and the greatest need is for kidneys, hearts, pancreas, lungs, livers, intestines, cornea tissue, bone marrow, and heart valves.

In most cases, there is no cost to your family for organ donation, as costs are paid by the recipient, unusually through insurance, Medicare, or Medicaid. One of the best ways to insure that your intentions and desires are carried out will be to include organ donation language within your health proxy, power of attorney, or living will, as part of your estate plan.

Your family should also be informed of your decisions and you should be sure that they are willing to carry them out. If you don’t believe that they could or would honor your wishes, then perhaps you should select an alternate decision maker for if and when the time comes to make end of life decisions and carry out your directives relative to organ donations. This will spare your family of making this burdensome and personal decision at a very emotional time. 

 

Hyman G. Darling, Esq.

Photo credit: born1945 under Creative Commons license

Return of premium life insurance policies – is one right for you?

Since the 1990’s, life insurance companies have offered special riders to term life insurance policies called Return of Premium (ROP). In the event that you choose to purchase a term life insurance policy with a ROP rider, 100% of the money paid into the policy is paid back to you as long as you keep the policy in force for the full term.

Of course, if you die during the life of the term policy the net death benefit is paid to your designated beneficiaries. Since statistics provide that most individuals who purchase term life insurance outlive the term, this may be an attractive option. However, it is prudent to put pencil to paper to determine if a ROP is right for you.

Since the premium is usually higher for ROP term life insurance than traditional term life insurance, the rider is not free. Also, the insurance company retains the additional premium payments, including any interest on the rider-related premiums, during the course of the 20-30 year term of the policy. As such, you will not have the ability to earn interest on the money provided to the life insurance company for premium payments.

As always, when you are considering life insurance products, it is always prudent to discuss the options with a life insurance agent together with an experienced estate planning attorney to ensure that both the policy and the beneficiary designations are proper for you.

 

Todd C. Ratner, Esq.

Image credit: Microsoft

Necessary additional estate and tax planning relative to same sex marriages after DOMA

The Supreme Court’s recent decision relative to the determination that the Defense of Marriage Act was unconstitutional leaves many to believe that planning for all individuals will now be the same. This is not true. Each situation needs to be reviewed to determine the best plan and approach for each individual/couple.

There are still many people who are living together and do not wish to marry, and many people, (heterosexuals as well as gays) are inquiring as to whether they should get married or merely live together. There are lots of decisions that have to be made, including those regarding health, insurance, income and estate taxes, family relations, social security benefits, etc.

Income tax is one of the major issues that has to be reviewed for each person individually and as it relates to both as a marital couple. Normally, an accountant will be engaged to work out and estimate the projected income tax cost if the couple gets married or remains single. This mathematical formula can display a significant change in taxes due, especially when one person makes a significant amount of money and the other does not. Sometimes the net benefit is substantial, and other times, it is a detriment to have two people earn more money, and then be placed in a higher income tax bracket, where itemized deductions are limited and the Medicare surtax may be imposed. While there is no right or wrong decision, tax is an important consideration when deciding whether or not to marry.

Likewise, the issue of estate taxes needs to be reviewed, not only for federal purposes, but also for the state. As the federal exemption between spouses is unlimited, it may not be so much of an issue on the first death, but on the second death, the surviving spouse has an exemption of $5.25 million dollars, which could trigger an estate tax. However, at the current time, the process of utilizing portability is available, where the first spouse’s exemption of $5.25 million (as indexed for inflation) may be made available to the surviving spouse if the first spouse’s estate filed a timely return with the IRS claiming portability.

In addition, a state’s law relative to estate taxation may be a consideration if the state recognizes same sex marriages, since if a couple is not married and there is a tax due on the first death, it may be preferable to eliminate the tax with the use of the unlimited marital deduction, which does not apply to cohabitants.

If the couple has already married, and had filed separate income tax returns, it may be beneficial to amend those returns, going back three years, to receive a refund. Even if the state does not permit a same sex marriage at this time, it may be preferable to file the federal return as an amended return and also file the state return, so that if and when a state may legalize same sex marriages, the statute of limitations will not be lost.

Additional questions relative to the effect of the new law on tax issues follow:

1. Does the couple have a marriage that is deemed to be legal for federal purposes?
2. Does the state currently allow the same sex marriage, and if not, would the couple consider moving to a state that allowed the same sex couple to marry?
3. What are the federal income tax obligations, and do they increase or decrease as a married couple or remaining single?
4. Should federal and state returns be amended, and is there a risk in doing so?
5. What other employee benefits are available or mandated to be available for a same sex spouse?
6. What changes should be made to estate plans, including health proxy, power of attorney, wills, trusts, etc.?
7. Should the couple consider a pre-nuptial agreement in the event that the marriage does not work?

Again, there is no right or wrong as to what a person should do in these situations, but at least there are choices to be made at this time that did not exist previously. With the advent of legalization of marriage for federal purposes, individuals must review their plans to determine how their lives will be affected legally, emotionally, and otherwise.

 

Hyman G. Darling, Esq.

Image credit: fibonacciblue Under Creative Commons license