Cheryl Chapman Henderson, LLC

Special Needs Trusts Protect Government Benefits and MUCH More

Unfortunately, many parents of children with special needs wait until their child turns 18 to consider creating a Special Needs Trust. Sometimes, they even wait until their child eventually needs government benefits like SSI or Medicaid. However, Special Needs Trusts do a lot more than just protect the beneficiary’s access to government benefits and should be created as soon as possible.  Below are a few reasons why.

A Special Needs Trust secures the child’s future

The best reason for creating a Special Needs Trust before your child turns 18 is the same reason that parents of children without special needs should have an estate plan – to ensure the stability and security of their family members if something unexpected happens to them. Creating a Special Needs Trust before a child needs it ensures that the Trust will be there during all of life’s transitions. If a parent of a child with disabilities dies unexpectedly and a Special Needs Trust is not established, the direct inheritance could make them ineligible for any government assistance.  The Trust would also allow someone else, called a Successor Trustee, to immediately step in and start helping your child financially without having to wait for the courts to get involved.

They can receive gifts from parents or grandparents

Parents may decide to establish a Special Needs Trust for their minor child so that the grandparents and other relatives can fund it with gifts. Also, older relatives who are planning on leaving an inheritance for the child with special needs can bequest the funds directly to the Trust. Having a Special Needs Trust guarantees that if the child needs government benefits in the future, he or she will not have large amounts of money in their name that could negatively impact eligibility.

Life insurance benefits can be protected

One way that parents sometimes ensure that their child will have money for future care is to purchase a life insurance policy where the payout goes into the child’s Special Needs Trust. The earlier the parents start funding the life insurance policy, the bigger the financial benefit for their child with special needs. This funding can start well before a child turns 18, so it makes sense to create a Special Needs Trust to hold the proceeds even if the child is not yet receiving government benefits.

You can create a care management plan

Special Needs Trusts can provide a care management plan as well as a structure for family involvement in the daily life of the person with special needs. In addition, professional special needs trustees can serve as resources for families that are looking for additional care options for their child.

Creating your child’s Special Needs Trust and keeping it updated can be a very effective planning strategy for reasons that go way beyond preserving government benefits. Even if the Trust is unfunded during the parent’s lives, having it can create a solid, stable foundation for the child if it is needed. If you have not yet created a Special Needs Trust for your child, call our <Insert city> office at <insert number> to set up a consultation today.

Can I Put That In My IRA/Qualified Plan?

“Here are five investments that cannot be used inside IRAs and other retirement plans.”

Traditional and Roth IRAs aren’t limited to the narrow selection of investments that are typically offered inside employer-sponsored retirement plans, like 401(k) or 403(b) plans. Most investments are permitted inside an IRA, including stocks, bonds, mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs) and even real estate.

Investopedia’s recent article, “5 Investments You Can't Hold In An IRA/Qualified Plan,” says that even qualified plans are allowed to hold almost any type of security, but mutual funds, annuities, and company stock are typically the three primary vehicles used in these plans. There are some limitations on the types of investments that can be held inside retirement accounts. Let’s look at them.

Life Insurance. No type of life insurance contract typically can be titled as an IRA or qualified plan or be held in such an account or plan. Qualified plans have one exception to this rule, known as the incidental benefit rule. It says that qualified plans can purchase a small amount of life insurance for a given plan participant. However, because the primary purpose of the plan is to provide retirement benefits, the amount of the death benefit must qualify as "incidental" compared to the plan balance.

Types of Derivative Positions. Any type of derivative trade that has an unlimited or undefined risk, like naked call writing or ratio spreads, is prohibited.

Antiques/Collectibles. Stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry and fine wine can’t be held in these accounts.

Real Estate for Personal Use. You can hold real estate directly inside an IRA, but the IRA owner can’t benefit directly from the property in any sense, such as receiving rental income or living in the property. Therefore, you can’t purchase your house with IRA or retirement plan money. Real estate can be held in an IRA, provided that the investments aren’t in your personal name. The real estate expenses and income must be paid and deposited into your IRA. The IRA also cannot purchase your primary residence or any other vacation home (providing an indirect benefit).

In addition, the IRA can’t buy or sell property already owned by you or any other disqualified person, for example, your spouse, children or their spouses, parents, grandparents, and great-grandparents, grandchildren and great-grandchildren. Note that many IRA custodians can’t facilitate the direct ownership of real estate or oil and gas interests, and those that do often charge annual administration fees that are much higher than usual fees.

Most Coins. As with all other types of collectibles, most coins made of gold or any other precious metal aren’t allowed.  However, there are some exceptions. Some allowed coins include American Eagle coins (proof and non-proof), American Gold Buffalo coins (non-proof), American Silver Eagle (proof and non-proof), Austrian Gold Philharmonics coins, and Canadian Maple Leaf coins. To be allowed to be held inside an IRA, the coins must be very pure in their mineral content and not seen as a collector's coin.

The list of investments that may be held in an IRA is far larger than the list of investments that are not permitted. However, you need to know what can and cannot be included, if you wish to venture away from what most people keep in their IRAs: mutual funds.

Reference: Investopedia (March 31, 2018) “5 Investments You Can't Hold In An IRA/Qualified Plan”

Should You Be Concern About Your Social Security?

“Low-income adults’ concerns have receded from post-recession highs.”

A recent Gallup poll found that 51% of pre-retirement American adults age 50 to 64 are very concerned about the Social Security system.

On the other hand, as reported in Think Advisor’s article, “Older Pre-Retirees Worry a Lot About Social Security: Gallup,” just a third of young adults expressed a great deal of concern about the system.

Gallup conducted telephone interviews in March with a sample of about 1,000 adults living in all 50 states and DC. The data showed that 44% of Americans worry a “great deal” about Social Security, 28% worry a “fair amount,” 17% “only a little” and 10% “not at all.” Social Security ranked in the middle of a list of 15 issues or social problems the respondents were asked to rate in the poll. The survey participants said they were most worried about the availability and affordability of healthcare.

Gallup says the percentage of older pre-retirees in the survey who worried a great deal about the Social Security system, had decreased from the 59% record highs recorded in the three-year rolling averages for 2009 to 2011 and 2011 to 2013.

Younger adults in the survey also recorded slightly lower averages than in recent years, and 11 percentage points lower from 2007. Concern about Social Security has also subsided with retirement-aged Americans. Roughly 46% express a great deal of worry—down from an average of 56% for 2010 to 2012.

For respondents in the 30-to-49 age bracket, the percentage expressing a lot of concern about Social Security has remained steady in the range of 46% to 52% since 2005, according to Gallup. In the current poll, 49% said they worried a great deal.

It’s no surprise that majorities of Americans with annual incomes of $30,000 or less have consistently reported a great deal of concern about the Social Security system since 2005. That peaked at 62% as the average for 2009 to 2011. The current 53% who worried a great deal is about the same as the low recorded in the 2007 to 2009 average.

Worries among higher-earning groups have remained steady, with a range of 47% to 53% between 2005 and 2018 for respondents with annual household incomes between $30,000 and $74,999, and 40% to 44% for those with annual incomes of $75,000 or more.

Although Americans’ level of worry about Social Security has lessened, perhaps they ought to be worrying more. Gallup said that no politician wants to tackle changes to Social Security to ensure that it continues to provide benefits. Efforts by both the Bush and Obama administrations were not successful. The program’s financial solvency has long-term sustainability challenges, that does need to be addressed.

Reference: Think Advisor (April 9, 2018) “Older Pre-Retirees Worry a Lot About Social Security: Gallup”

OK, Do I Claim My Social Security Benefits Now?

“Deciding to take benefits that early is only advantageous for limited situations, according to financial advisors.”

If you're getting ready to retire, you're probably already thinking about when to claim your Social Security benefits. Of course, when you turn 62, you’re eligible to file. However, grabbing benefits at the first opportunity will reduce your monthly paychecks and overall lifetime earnings. CNBC explained this in its recent article, “Here's when it makes sense to claim Social Security early.”

However, if you can wait and delay claiming benefits until your full retirement age (either 66 or 67, depending on when you were born), you’ll receive 100% of the benefit available to you based on your personal work record. If you wait until age 70, your retirement benefits will be even more. Delaying past full retirement age, allows your benefits to grow by roughly 8% per year until you reach that age. Therefore, waiting until 70 could increase your benefit amount by to 132%. As a result, most experts recommend that you hold off on claiming for as long as you can. That can be a gamble.

The bet is that you’ll live longer and get more money. The government is asking you to make a calculated risk decision on what you had been mandated to pay into while taking a risk on the back end.

Taking Social Security at 62 may be wise, if you're single and terminally ill, and know for a fact that you’re not going to live very long.  However, in most other situations, it doesn't make sense to claim early and take that permanent reduction. If you're married, claiming early could decrease the number of benefits your spouse will have, after you're gone. The spouse’s survivor benefit is permanent.

Survivor benefits are determined by the age a person dies and the amount of Social Security credits they’ve accrued. If you wait to claim benefits, you’ll have a greater number of credits, and thus a larger benefit to pass on when you die. How much of that amount survivors can access, is based on when they claim the benefit. A person can file for widow or widower benefits starting at age 60. However, that benefit amount will be reduced. If a surviving spouse waits until his full retirement age, he is eligible to receive 100% of their spouse's benefit amount.

Those eligible for survivor benefits can decide between claiming those funds and their own retirement benefits if they are eligible for them. That can include taking the survivor benefit while letting their own benefit grow up to age 70. Those born before January 2, 1954, and who’ve reached full retirement age, can opt to receive their spousal benefit and delay taking their own retirement benefit. That would allow their retirement benefit to continue to grow. However, if you’re born after that date, you don’t have that option. You must choose between one benefit or the other.

Delaying will also help you with annual cost-of-living adjustments (COLA), which will be based on that higher benefit amount. This decision can be complicated, so speak with an estate planning attorney.

Reference: CNBC (March 10, 2018) “Here's when it makes sense to claim Social Security early”

 

How Do I Maximize My HSA For Retirement?

“Aging creates unique circumstances for those with health savings accounts (HSA). Generally, the impact of approaching age 65 is to limit the ability to contribute to your HSA.”

While hitting 65 can limit HSA contributions, there are some ways to squeeze every dollar into your HSA even as you approach retirement age.

A recent healthsavings.com article, “Approaching Retirement? Five Tips to Maximize Your Investment HSA,” explains that it’s pretty clear healthcare costs in retirement will be one of the eight largest expenses. Fidelity estimates that the average couple will need $275,000 in today’s dollars to cover health care expenses throughout retirement. However, it’s key to remember that your HSA (Health Savings Accounts) can be used to pay for Medicare parts B and D, long-term care premiums, long-term care, and normal medical, vision, and dental expenses in retirement.

Both you and your spouse should have your own HSA, the year you turn 55. This lets you get all the catch-up contributions you deserve. IRS regulations require that each HSA catch-up contribution is associated with one Social Security number, so you and your spouse each need an HSA to max out your contributions. It’s not important which spouse has more. This is because you can each spend your HSA dollars to pay the other’s eligible medical expenses.

Even if you’re prohibited from contributing to your HSA because you’re enrolled in Medicare, you can still grow that account by moving it to an investment-focused HSA. There may be a transfer fee to move your money to the new HSA, but the receiving HSA may be willing to offset that transfer out fee. Just ask.

In many married couples, the breadwinner and the insured party is often the older of the two spouses and that older spouse will usually enroll in Medicare as soon as possible. However, in some instances, he or she continues to carry the family health care policy at work to cover his or her spouse. This can be an opportunity because the spouse has family coverage, and in the eyes of the IRS, can make the family contribution to her, or his, HSA. The older spouse who’s on Medicare can’t contribute to an HSA.  However, as a family, they can make the family contribution to the HSA and one catch up amount of $1000 (assuming the contributing spouse is 55 or older). If both spouses have their own HSA’s for catch up purposes, it’s easy to shift who makes the contribution from the spouse covered by Medicare to the spouse who is primarily covered only by the high deductible. However, it can’t be payroll deducted from the ineligible spouses’ income, so you may sacrifice the FICA savings.

If you are employed and covered by your employer’s health care plan, you may be able to delay enrollment in Medicare. If you’re currently receiving any kind of Social Security or railroad retirement benefits, you’re automatically enrolled in Medicare Part A, so this won’t apply to you.

Postponing your enrollment in Medicare and your acceptance of Social Security retirement benefits lets you extend your eligibility to make contributions to your HSA.  However, you must be employed and covered by health insurance through your current employer. Your insurance must also be what is known as creditable coverage. In addition, if you postpone your Medicare enrollment, there are some specific timing requirements you must meet when you do a transition from your employer plan to Medicare.

Reference: healthsavings.com (not dated) “Approaching Retirement? Five Tips to Maximize Your Investment HSA”

Should My Parents Give Me Title to All of Their Property Before They Die?

“There's a big difference between gifted and inherited assets, and it could cost you in taxes.”

What if parents at retirement age, insist on transferring their assets under their children’s name to avoid estate taxes when they pass away? If they have a primary home, an investment property, and savings accounts that total south of $1 million, are there really any tax advantages to making the changes?

nj.com’s recent article, “This estate planning mistake could mean huge tax bill,” cautions against these drastic moves. These transfers have serious tax consequences, and most of them are not good.

Seniors frequently transfer assets to their children to be eligible for Medicaid, avoid probate, and eliminate estate and inheritance taxes. In New Jersey, until this year, residents were potentially subject to three taxes at death: the federal estate tax, the New Jersey inheritance tax, and the New Jersey estate tax. In 2016, and for the 15 years before that, the New Jersey estate tax was imposed on transfers to children, only if the total estate exceeded $675,000. In 2017, that amount was increased to $2 million. Beginning in 2018, the New Jersey estate tax was repealed.

There is also the inheritance tax in New Jersey, which wasn’t repealed. That tax is only imposed upon inheritances by individuals other than “Class A” beneficiaries. A spouse, child, grandchild, and parent all qualify as “Class A' beneficiaries.” If the child in this example inherits those assets from his parents, there would be no New Jersey inheritance tax. The federal estate tax is not an issue, because it doesn’t apply until an estate exceeds $11.8 million (or $22.36 million for a couple).

There could be the significant harm in making the transfers now rather than waiting for the parents’ deaths. The tax basis of any asset held until death is stepped-up to fair market value. Therefore, if the parents owned the property for many years, paid significantly less than it is worth today, and the building has been completely depreciated, then their tax basis is probably significantly lower than the fair market value.  However, if it were sold today, there would be a significant capital gains tax to be paid. That’s the difference between the sales proceeds received and the owners’ tax basis.

If parents gift the property to the children during their lifetimes, then the kids take the property with a carry-over basis—they’d have the same basis the parents had and would have the same capital gains tax due when sold. However, if the parents hold on to the investment property until their deaths, the children inherit the property with a stepped-up basis. The children could sell the property the next day and completely avoid any capital gains tax. Another option is to hold on to the property after the parents' death and begin to depreciate the building again to decrease any taxes the kids would pay on any rental income. It works the same way for the parents’ primary residence.

Don’t allow parents to make these kinds of decisions, without speaking to an experienced estate planning attorney in your state. They will know the long and short-term tax consequences and help the family plan properly.

Reference: nj.com (April 10, 2018) “This estate planning mistake could mean huge tax bill”

Can You Believe That Half of Americans Have Saved Nothing for Retirement?

“Nearly half of Americans have less than $10,000 stashed away for retirement, according to a report by GoBankingRates.”

For half of us, the serious lack of retirement planning, along with longer life expectancies has wreaked havoc with retirement dreams.

CNBC’s recent article, “42% of Americans are at risk of retiring broke,” notes that retirement may be more fantasy than reality for many individuals in America.

Roughly 42% of Americans have fewer than $10,000 saved for when they retire. That’s according to a study by GoBankingRates released recently.

From 2016 to 2017, the percentage of Americans with $0 saved increased. However, this year, it dropped significantly.

The percentage of adults with nothing saved has gone down. However, the percentage of those with $300,000 or more in a retirement fund has increased.

The top reason that most people cited for not saving, was because they simply didn't earn enough to save. The next reason given was that they were already struggling to pay bills, according to GoBankingRates. The personal finance site interviewed more than 1,000 adults online in February.

For those with little or no savings, a significant lack of proper investment income and planning and the fact they’re expected to live longer lives has made the concept of retiring practically impossible.

Millennials are most likely to have fewer than $10,000 saved, but older Americans are also becoming steadily more negative about their future economic prospects. This is according to another study by United Income, a start-up that is applying big-data analysis to financial planning.

Reference: CNBC (March 6, 2018) “42% of Americans are at risk of retiring broke”