Category: Uncategorized

Make sure you have your Financial/Health Care Power of Attorney and Living Will Executed During this Unprecedented Time

With all that is taking place in our nation at this time, we at the William E. Hesch Law Firm, LLC are trying to emphasize the importance of executing your Financial Power of Attorney, Health Care Power of Attorney, and Living Will so that your family can manage your finances and make your health care decisions if you are disabled or incapacitated.

These three documents are often overlooked by most individuals since 50% of people die without a will. However, if you become disabled or incapacitated without these documents, then your family must go to the probate court and get appointed your guardian in order to manage any assets in your name (e.g. IRA, 401K, etc.)  or make your health care decisions.

The guardianship process is an administrative nightmare for family members, and just ends up generating hefty attorney’s fees especially in Hamilton County Ohio.  First, you have to get a guardian appointed, and then the Court sets a monthly budget and the Guardian needs to get court approval every time an extra expense not in the budget occurs.  Additionally, you must keep an annual accounting to document with a receipt every dollar you spend.  Also, it is a requirement in Hamilton County Ohio that you have an attorney co-sign on every check that you write.

The Financial Power of Attorney is a powerful document that is not costly to create, and it allows whoever you designate to access your assets in order to pay your bills and take care of your finances.  Your family member or friend who is appointed your power of attorney (POA) will be able to take this document to the bank and get listed on your account as your power of attorney. This allows the POA access to the account without court involvement.  Obviously, this is a powerful document and you would only want to designate someone you trust, but it makes things a lot easier on your family.

It is also just as important to execute the necessary health care documents. It is important to note, that in Kentucky the Health Care Power of Attorney and Living Will are combined into one document.  In Ohio, they are two separate documents. You always need a Health Care Power of Attorney, because if you became sick and temporarily unconscious or incapacitated, you would need to designate a health care POA to make medical decisions if you are unable to do so for any reason. The Health Care Power of Attorney allows whoever you designate to make those health care decisions on your behalf.

The Living Will is needed when you are either terminally ill or permanently unconscious and at least two physicians have determined that life support and a feeding tube is not going to help you get any better, rather they will simply prolong the process of dying.  In that situation by having a Living Will, you are directing your doctors that if you are terminally ill or permanently unconscious that you do not want life support or a feeding tube and you do not want your family to have to make that decision.  If you only have a Health Care Power of Attorney in Ohio, and no Living Will, then you are saying that you want your family to make all of your end of life decisions.  If you know that you don’t want life support in those situations, and you do not want your family to have to make those decisions, then you need the separate Living Will document in Ohio. In Kentucky, the section for the Living Will is included in the Health Care directive.

In practice, we have seen those instances where families only had a Health Care Power of Attorney, because they thought they would be able to make those end of life decisions for a spouse or parent and it ended up being very difficult for them.  It is important to keep this in mind when making these estate planning decisions.

Another thing to be aware of is the grey areas, which come up more often.  For example, you are not terminal or permanently unconscious, but your heart stopped.  In this situation would you want to be resuscitated using paddles, use medication to restart your heart, or would you want a DNR?  Although it may be difficult, these are conversations we advise you to have with your doctor and family members so that they know what you would want in these various situations.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

 

 

*** ATTENTION PAYROLL PROTECTION LOAN AND ECONOMIC INJURY DISASTER LOAN RECIPIENTS ***

The COVID-19 pandemic has brought about many changes for businesses which include the Paycheck Protection Program loan (PPP) and the Emergency Economic Injury Disaster Loan Program (EIDL).  We have also seen the Families First Coronavirus Response Act (FFCRA) tax credits with the Employee Paid Sick Leave Act (EPSL) and the Emergency Family and Medical Leave Expansion Act (Expanded FMLA), as well as, the CARES Act Employee Retention Credit.  All of these benefits are a relief to business owners as they deal with the struggles of the Coronavirus with their employees, and their business profits.  This relief is good but can also be overwhelming and confusing.

Be aware that you cannot combine some of the options in order to get a greater benefit.  There are options to cover the many expenses but you are also limited so that you do not double dip.

  • Businesses planning on the PPP loan forgiveness under the CARES Act cannot include as eligible “payroll costs” the qualified leave wages paid under the FFCRA tax credit program for the EPSL and the Expanded FMLA employee leave programs. The employer will be receiving the FFCRA tax credits on theses wages so they cannot use these wages in computing the PPP loan to be forgiven.
  • The CARES Act Employee Retention Credit allows employers to get a refundable tax credit against the employer’s 6.2 % portion of the social security payroll tax for 50% of the “qualified wages” up to $10,000 paid to each employee but, this credit is not available if the employer receives the PPP loan or the EIDL loan.
  • The CARES Act allows for a deferral of the employer’s portion of the social security payroll taxes that are due through 12/31/20 to be deferred to 2021 and 2022 but, this deferral cannot be used by an employer that obtains a PPP Loan and the loan is forgiven under the CARES Act loan forgiveness provision. On the other hand, if a business receives an EIDL loan and does not receive loan forgiveness, they are able to defer payroll taxes under the CARES Act payroll tax deferral program.

The COVID-19 changes can help businesses get through these difficult times but employers need to make sure they don’t overlap the benefits and run into problems further down the road.

Employers need to carefully review their April, 2020 payroll to make sure the payroll Retention Credit and payroll tax deferrals are allowable depending on which SBA loan that they obtain.

Blended Family IRA Beneficiary Designation

Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that affects the rules for creating and maintaining employer-provided retirement plans. Whether you currently offer your employees a retirement plan, or are planning to do so, you should consider how these new rules may affect your current retirement plan (or your decision to create a new one).

Here is a look at some of the more important elements of the SECURE Act that have an impact on employer-sponsors of retirement plans. The changes in the law apply to both large employers and small employers, but some of the changes are especially beneficial to small employers. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact. Please give me a call if you would like to discuss these matters.

It is easier for unrelated employers to band together to create a single retirement plan. A multiple employer plan (MEP) is a single plan maintained by two or more unrelated employers. Starting in 2021, the new rules reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services.

New small employer automatic plan enrollment credit. Automatic enrollment is shown to increase employee participation and retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.

Increased credit for small employer pension plan start-up costs. The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of

  1. $500, or
  2. The lesser of:
    1. $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan, or
    2. $5,000.

The credit applies for up to three years.

Expand retirement savings by increasing the auto enrollment safe harbor cap. An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements. One of the safe harbor plans is an automatic enrollment safe harbor plan.

Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10% to 15%, but only for years after the participant’s first deemed election year. For the participant’s first deemed election year, the cap on the default rate is 10%.

Allow long-term part-time employees to participate in 401(k) plans. Currently, employers are generally allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans—like a 401(k) plan—to their employees. As women are more likely than men to work part-time, these rules can be especially harmful for women in preparing for retirement.

However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Looser notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans. The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (referred to as a “401(k) safe harbor plan”), as well as certain required rights and features, and satisfies a notice requirement. Under one type of 401(k) safe harbor plan, the plan either

  1. Satisfies a matching contribution requirement, or
  2. Provides for a nonelective contribution to a defined contribution plan of at least 3% of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the plan.

For plan years beginning after Dec. 31, 2019, the new rules change the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The new rules eliminate the safe harbor notice requirement, but maintain the requirement to allow employees to make or change an election at least once per year. The rules also permit amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time are allowed if the amendment provides

  1. A nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and
  2. The plan is amended no later than the last day for distributing excess contributions for the plan year (i.e., by the close of following plan year).

Expanded portability of lifetime income options. Starting in 2020, the new rules permit certain retirement plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, or IRA, of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.

Qualified employer plans barred from making loans through credit cards and similar arrangements. For loans made after Dec. 20, 2019, plan loans may no longer be distributed through credit cards or similar arrangements. This change is intended to ensure that plan loans are not used for routine or small purchases, thereby helping to preserve retirement savings.

Nondiscrimination rules modified to protect older, longer service participants in closed plans. Starting in 2020, the nondiscrimination rules as they pertain to closed pension plans (i.e., plans closed to new entrants) are being changed to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer-service employees as they near retirement.

Plans adopted by filing due date for year may be treated as in effect as of close of year. Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year. The additional time to establish a plan provides flexibility for employers who are considering adopting a plan, and the opportunity for employees to receive contributions for that earlier year.

New annual disclosures required for estimated lifetime income streams. The new rules (starting at a to-be-determined future date) will require that plan participants’ benefit statements include a lifetime income disclosure at least once during any 12-month period. The disclosure will have to illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant s surviving spouse and a single life annuity.

Fiduciary safe harbor added for selection of annuity providers. When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan “fiduciary,” which generally means that the sponsor must discharge his or her duties with respect to the plan solely in the interests of plan participants and beneficiaries (this is known as the “prudence requirement”).

Starting on Dec. 20, 2019 (the date the SECURE Act was signed into law), fiduciaries have an optional safe harbor to satisfy the prudence requirement in their selection of an insurer for a guaranteed retirement income contract, and are protected from liability for any losses that may result to participants or beneficiaries due to an insurer’s future inability to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a plan.

Increased penalties for failure-to-file retirement plan returns. Starting in 2020, the new rules modify the failure-to-file penalties for retirement plan returns.

The penalty for failing to file a Form 5500 (for annual plan reporting) is changed to $250 per day, not to exceed $150,000.

A taxpayer’s failure to file a registration statement incurs a penalty of $10 per participant per day, not to exceed $50,000.

The failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000.

The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.

 

If you would like to discuss any of the new laws, please call me at 513-731-6612.

 

Sincerely,

 

 

William E. Hesch

 

 

2019 extender legislation – energy credits

In December, 2019, Congress passed legislation to extend some tax provisions until December 31, 2020.  Since some of the provisions had expired on December 31, 2018, congress not only extended the legislation but also resurrected the provisions retroactively to January 1, 2018.  This means that you not only can apply the tax breaks to your 2019 and 2020 tax returns, you can also amend your 2018 return to tax advantage of the tax savings if they apply to you.

The top tax breaks that have been brought back that will affect the individual taxpayer are:

  • The exclusion from income for the cancellation of acquisition debt on your principal residence (up to $2 million)
  • The mortgage insurance premiums deduction as resident interest
  • The 7.5% floor to deduct medical expenses on Schedule A of your individual tax return (instead of 10%)
  • A deduction for above-the-line tuition and fees
  • The deduction for nonbusiness energy property credit when you have energy-efficient improvements to your residence.

In addition to the nonbusiness energy credit, Congress also retroactively reinstated the energy-efficient home credit and the energy-efficient commercial buildings deduction for improvements back to January 1, 2018 through improvements placed in service by December 31, 2020.

The nonbusiness energy property credit and the residential energy-efficient property credit are for residential property owners.  The nonbusiness energy property credit is available when there are improvements for energy-efficient windows, doors, roofs and added insulation.  This credit is applied to the cost of the improvements but not the installation cost.  The residential energy-efficient property credit is applied the cost of qualified residential solar panels, solar water heating equipment, wind turbines, and geothermal heat pumps.  This credit is applied to the cost, as well as, the assembly and installation expenses.

The energy-efficient commercial buildings deduction was originally enacted in 2005 but expired on December 31, 2017.  With the retroactive reinstatement of this deduction (179D deduction), taxpayers may be able to claim the deduction for any qualifying property placed in service from January 1, 2006 through December 31, 2020 without filing amended tax returns.  The credit is applied to commercial property which includes apartment buildings with at least four stories.  The improvements must be made to the heating, cooling, ventilation, or hot water systems; interior lighting system; or to the building’s envelope.  The credit is up to $1.80 per square foot.  The credit is taken in the first year similar to bonus depreciation.

SECURE Act changes to IRA’s

Do you have an Individual Retirement Account (IRA)?  Are you 70 years or older?  If so, congress passed tax legislation late last year in the Setting Everyone Up for Retirement Enhancement Act of 2019 (SECURE Act) with changes that will benefit you in 2020.

Before December 31, 2019, you were not able to make traditional IRA contributions after you turned 70½.  Now the SECURE Act allows you to continue to contribute to your IRA as long as you have earned income. This is a benefit but there are complications if you make qualified charitable distributions from your IRA after 2019.

Another change is related to the IRA distributions.  Prior to December 31, 2019, you had to take required minimum distributions (RMDs) from your IRA or qualified retirement plan in the year you turned 70 ½.  Starting in 2020, you can put off taking the RMDs until you reach 72.  This change is only available to individuals who turn 70 ½ in 2020 or later.  If you turned 70 ½ prior to 2020, you are still required to take the RMDs or be subject to a penalty.

There was also a change to the Required Minimum Distribution on inherited IRA’s.  In the past, the RMDs could be extended out over several years depending on the beneficiary of the IRA.  The Secure Act has eliminated the RMD each year but the IRA must be fully distributed by the end of the 10th calendar year following the year of death.  There are some exceptions to this rule including distributions to the surviving spouse and minor children but for others, there is the 10 year distribution limit.

If you are near 70 years old or older and have an IRA, give us a call.  Let us help to ensure you are getting the best tax benefits from your IRA.

HOW TO DEDUCT ASSISTED LIVING AND NURSING HOME BILLS

Watch your wallet: the median cost in 2018 for an assisted living facility was $48,000 and over $100,000 for nursing home care.

If you could deduct these expenses, you’d substantially reduce your income tax liability—possibility down to $0—and dramatically reduce your financial burden from these costs.

As you might expect, the rules are complicated as to when you can deduct these expenses. But I’m going to give you some tips to help you understand the rules.

Medical Expenses in General

On your IRS Form 1040, you can deduct expenses paid for the medical care of yourself, your spouse, and your dependents, but only to the extent the total expenses exceed 7.5 percent of your adjusted gross income.  In December 2019, Congress retroactively reduced the 10% adjusted gross income limitation to 7.5% in 2018.  Therefore, taxpayers can file amended personal income tax returns for 2018 and 2019 as a result of that retroactive tax law change.

Medical care includes qualified long-term care services.

Assisted living and nursing home expenses can be qualified long-term care expenses depending on the health status of the person living in the facility.

If you operate a business, your business could establish a medical plan strategy that could make the medical expenses business deductions for your business.

Qualified Long-Term Care Services

The term “qualified long-term care services” means necessary diagnostic,preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which

  • are required by a chronically ill individual, and
  • are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically Ill Individual

A chronically ill individual is someone certified within the previous 12 months by a licensed health care practitioner as

  1. being unable to perform, without substantial assistance from another individual, at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity;
  2. having a similar level of disability (as determined under IRS regulations prescribed in consultation with the Department of Health and Human Services) to the level of disability described in the first test; or
  3. requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

A licensed health care provider is a doctor, a registered professional nurse, a licensed social worker, or another individual who meets IRS requirements.

Activities of Daily Living Test

For someone to be a chronically ill individual, at least two of the following activities of daily living must require substantial assistance from another individual:

  • Eating
  • Toileting
  • Transferring
  • Bathing
  • Dressing
  • Continence

Substantial assistance is both hands-on assistance and standby assistance:

  • Hands-on assistance is the physical assistance of another person without which the individual would be unable to perform the activity of daily living.
  • Standby assistance is the presence of another person within arm’s reach of the individual that’s necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living.

Examples of standby assistance include being ready to

  • catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or
  • remove food from the individual’s throat if the individual chokes while eating.

Cognitive Impairment Test

Severe cognitive impairment is a loss or deterioration in intellectual capacity that is comparable to, and includes, Alzheimer’s disease and similar forms of irreversible dementia, and measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short- or long-term memory; orientation as to people, places, or time; and deductive or abstract reasoning.

Substantial supervision is continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering).

You have much to consider if you face the medical issues above. I’m happy to help you understand if your medical expenses can qualify for the medical deductions and what this means taxwise.

 

William E Hesch

William E. Hesch Law Firm, LLC

William E. Hesch CPAs, LLC

3047 Madison Road, Suite 201

Cincinnati, Ohio  45209

Office:  513-731-6601

Direct:  513-509-7829

bill.hesch@williamhesch.com

www.heschlaw.com

www.heschcpa.com

WINNING TAX STRATEGIES FOR THE SMALL BUSINESS

Will the Newly Released Section 199A Rental Safe Harbor Work for You?
In January, an IRS Notice gave you a Section 199A safe-harbor option for your rental properties, possibly making it easier for you to qualify for this new tax deduction. Now, the IRS has made a number of changes to its original notice and finalized the safe harbor in a Revenue Procedure. We’ll tell you all you need to know about the final version. Then you can decide if you want to use the safe harbor or find other ways to qualify your rentals for the Section 199A deduction.

9 Insights on the New Individual Coverage HRA for Small Business
The new individual coverage HRA (ICHRA) has much to offer a small business (businesses with fewer than 50 employees). Last month we introduced the ICHRA. In this article, we expand on the abilities of the ICHRA to get a smile from the small-business owner who wants to offer health benefits to his or her employees.

2019 Last-Minute Year-End General Business Income Tax Deductions
Your year-end tax planning doesn’t have to be hard. This article takes your daily business activities and identifies easy year-end tax-planning moves you can make today. Our five strategies will increase your tax deductions or reduce your taxable income so that Uncle Sam gets less of your 2019 cash.

2019 Last-Minute Section 199A Strategies That Reduce Taxes, Too
Remember to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with a big fat $0 for your deduction amount. We’ll review four year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time.

2019 Last-Minute Year-End Tax Deductions for Existing Vehicles
Yes, December 31 is just around the corner. That’s your last day to find tax deductions available from your existing business and personal (yes, personal) vehicles that you can use to cut your 2019 taxes. In this article, you will learn how to find and release tax deductions that the tax code trapped inside your existing business cars, SUVs, trucks, and vans. And you will learn how the Tax Cuts and Jobs Act makes it possible for you to find a big deduction from your existing personal vehicle.

2019 Last-Minute Vehicle Purchases to Save on Taxes
Here’s an easy question: Do you need more 2019 tax deductions? If yes, continue on. Next easy question: Do you need a replacement business vehicle? If yes, you can simultaneously solve or mitigate both the first problem (needing more deductions) and the second problem (needing a replacement vehicle), but you need to get your vehicle in service on or before December 31, 2019. This article helps you find the right vehicle for the deduction you desire.

2019 Last-Minute Year-End Tax Strategies for Your Stock Portfolio
When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2019 income taxes. The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies. In addition to saving taxes with the game of offset, you can also avoid paying taxes on stock appreciation by gifting stock to charity, your parents, and your children who are not subject to the kiddie tax.

2019 Last-Minute Year-End Tax Strategies for Marriage, Kids, and Family
If you are thinking of getting married or divorced, you need to consider December 31, 2019, in your tax planning. Here’s another planning question: Do you give money to family or friends (other than your children who are subject to the kiddie tax)? If so, you need to consider the zero-taxes planning strategy. And now, consider your children who are under age 18. Have you paid them for work they’ve done for your business? Have you paid them the right way? You’ll find the answers here.

2019 Last-Minute Year-End Medical and Retirement Deductions
When you get busy with your business, it’s easy to forget about your retirement accounts and medical coverages and plans. But year-end is approaching, and now’s the time to take action. This article gives you six action steps for 2019 that can help you reduce your taxes and pocket extra money.

 

If you are not yet a subscriber, CLICK HERE. You’ll get a no-obligation 7-day FREE trial during which you can read, not only the November articles, but all of our helpful tax-saving tips. This trial is absolutely free and there are no strings attached. That’s a personal promise.

 

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Sincerely,

 

Murray Bradford, CPA

Publisher

Tax Reduction Letter

 

www.bradfordtaxinstitute.com

 

November 4, 2019

Prince’s Legacy: Harsh Lessons From Estate Planning Errors

The unexpected death of Prince shocked everyone around the world. To those of us in the financial and estate planning world, it was even more shocking to learn that he seemingly died without an estate plan. Even a month after his death, Prince’s family is still unable to locate evidence that he died with an enforceable Last Will and Testament. As a result of such a major blunder, the fate of his estimated $300 million estate lies in the hands of Minnesota state law. Rich or poor, we can all use Prince’s errors as a harsh lesson in the importance of implementing even the most basic estate plan.
Prince’s Property Rights

Prince was known to have been very controlling of his music. He fought to keep his music off of Youtube and other streaming sites and stood up to his record label when he felt his music was not being treated properly. Those close to Prince also believe he kept a trove of unreleased records at his Paisley Park mansion. Without specific instructions in a Will or Trust, the court-appointed Administrator of his Estate will have the sole authority to decide what happens with his property rights. How the Administrator decides to control his property rights may be inconsistent with what he would have wanted to do.

A Fight for Control

It is likely that several of Prince’s relatives will fight for the Administrator appointment. The Administrator is the person responsible for collecting and valuing the assets, managing how the assets are managed and distributed, and periodically reporting to the court. Having so much power over Prince’s property rights will make the Administrator appointment a very enticing job for one of his family members. As a cherry on top, the Administrator will also be entitled to a large fiduciary fee. Had Prince died with a Will, he would have been able to control who could serve as his Administrator by naming a trustworthy individual to serve in that capacity to honor his wishes. Instead, the appointed Administrator may only have his or her best interests in mind.

No Will Means State Law Determines Beneficiaries

Under Minnesota law (much like other states), if you die without a Will, the state creates a Will for you. It assumes that you want your estate divided equally among your next closest relatives, which in Prince’s case, is to his siblings and half-siblings. If a sibling is deceased, that sibling’s share goes to that sibling’s children. Reports indicate that Prince was very generous to his long-term friends and charities while he was living. It’s likely that he would have wanted some of his fortune to go to those individuals and organizations. Unfortunately for them, they will likely inherit nothing. Instead, his wealth is subject to the claims of relatives with whom he may or may not have wanted to share his estate equally. In Prince’s situation, distant relatives are coming out of the woodwork to make their claims. As recent as last week, an alleged granddaughter of one of Prince’s deceased half-brothers made a claim for her grandfather’s share. This half great-niece is probably a person whom Prince never even knew existed. If the Court determines that the half great-niece is in fact related and is a rightful beneficiary under state law, she will inherit millions. Do you think Prince really wanted unknown distant relatives, such as half great-nieces, inheriting his estate and taking control of his music rights?

The Real Winners

At the end of the day, the real winners in Prince’s death are the US government, the state of Minnesota, and the attorneys. The federal government assesses a 40% estate tax on estates valued over $5.45 million. In addition, Minnesota implements a 16% estate tax rate in its highest tax bracket – likely making Prince’s total estate tax liability 56% of the value of the estate. Attorney fees will also be alarmingly high. A complicated estate such as this one will take years to be resolved and the attorneys involved will be compensated significantly.

In conclusion, a basic estate plan could have prevented the problems Prince created. Even if you never become as wealthy as Prince, you should still have fears of your wishes not being fulfilled, an untrustworthy Administrator getting appointed, distant relatives making claims to your estate, and paying significant estate taxes and attorney fees. Contact an estate planning attorney to review these issues and get peace of mind.

 

Bill Hesch is an attorney, CPA, and PFS (Personal Financial Specialist) who is licensed in Ohio and Kentucky and helps clients get peace of mind with their tax, financial, and estate planning. He focuses his practice in the areas of elder law, corporate law, Medicaid planning, tax law, estate planning, and probate in the Greater Cincinnati and Northern Kentucky areas. His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer: Bill Hesch submits this blog to provide general information about the firm and its services. Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel. While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog. Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

IRAs and The Retirement Beneficiary Trust

Baby Boomers: Protect your Biggest Asset From Creditors and the IRS!

IRAs and the Retirement Beneficiary Trust

I often find that the single largest asset my baby boomer clients have is in the form of an IRA or 401(k).  When that’s the case, I always counsel my clients about the importance of properly listing the beneficiaries on those accounts so that their estate plan operates the way they want it to. Typically, baby boomers name their spouse as the sole beneficiary of their retirement accounts. When the account owner dies, the surviving spouse has favorable tax laws and a lot of flexibility to decide what happens to their inherited IRA, including rolling it into their own.  However, what does a single or widowed person do with their IRA when they die?

Non-Spouse Inherited IRAs: A Lesson in Asset Protection

When your children (or any other non-spouse beneficiaries) are listed as beneficiaries of your retirement account and they inherit it outright, you might be exposing your account to your children’s creditors.  The US Supreme Court recently held that creditors can attach their claims to any non-spouse inherited IRA.  For example, when the beneficiary of an IRA is not the surviving spouse, the Federal Bankruptcy Act does not protect the IRA during bankruptcy if it is in the form of an inherited IRA.  Furthermore, when a child beneficiary goes through a divorce, the divorcing spouse may be able to attach a right to your child’s inherited IRA.  In addition, a person your child injured in a car accident may also be able to attach a right to the inherited IRA.  If you are concerned about exposing your retirement accounts to your children’s creditors, divorcing spouse, or in bankruptcy, it may be in your best interests to name a Retirement Beneficiary Trust as the beneficiary of your largest asset instead of your children individually.

What is a Retirement Beneficiary Trust?

Also known as a Standalone IRA Trust or an IRA Inheritance Trust, a Retirement Beneficiary Trust is an estate planning tool that controls the distribution of your retirement accounts to your loved ones upon your death.  It provides a level of asset protection for your children that they otherwise cannot attain when inheriting your IRA outright.  An added benefit to the Retirement Beneficiary Trust is that the trust can mandate your children to “stretchout” their inherited IRA’s required minimum distributions (RMDs) rather than cash out the IRA completely.  The longer the IRA distributions can be stretched out over a child’s lifetime, the more wealth is transferred to the child over time.  If a child were to cash out the IRA or if they had to use an older beneficiary’s life expectancy, that child would be subject to larger income tax payments and would be given a greater opportunity to recklessly spend the money or poorly invest it.

How does a Retirement Beneficiary Trust Work?  Conduit v. Accumulation Trusts

To properly establish a Retirement Beneficiary Trust, four basic requirements must be met:

  1. The trust must be valid under state law;
  2. The trust must be irrevocable or become irrevocable upon the Grantor’s death;
  3. The beneficiaries must be identifiable from the trust agreement; and
  4. The plan administrator is provided documentation of the trust.

The Retirement Beneficiary Trust will also be one of two types of trusts: a conduit trust or an accumulation trust.

A conduit trust receives the RMDs from the IRA and then distributes those RMDs to the trust beneficiary.  This type of trust does not accumulate and hold excess IRA distributions in trust like an accumulation trust.  As a result, a conduit trust does not provide much asset protection for the trust beneficiary because a creditor can simply attach to the RMDs when they are distributed from the trust to the beneficiaries.  However, the advantage to having a conduit trust is that the beneficiaries are easily identifiable (requirement 3, above). The beneficiaries must be identifiable because the IRS uses this information to determine the RMDs for the inherited IRA using the oldest beneficiary’s life expectancy.  If an older beneficiary’s life expectancy is used, the stretchout will not be maximized to its fullest potential.  A conduit trust easily prevents this situation because it is not holding assets in trust and does not have unintended contingent beneficiaries.

On the other hand, an accumulation trust allows IRA distributions to be accumulated in the trust and distributed to the beneficiaries under the terms of the trust. This allows greater asset protection; however, under an accumulation trust, the IRS will consider the life expectancies of all remainder and contingent beneficiaries when determining the RMD amounts for the inherited IRA.  For example, if there is some unintentional contingent beneficiary who is 85-years-old, that person’s life expectancy will be used for income tax purposes and it will minimize the stretchout for the intended younger trust beneficiaries.  Accumulation trusts can be more complicated than conduit trusts because the drafting attorney must consider every contingency in the trust to prevent the IRS from identifying older contingent beneficiaries.

Drafting Retirement Beneficiary Trusts, especially accumulation trusts, requires advanced tax law knowledge.  If you have concerns with asset protection and whether or not your children will maximize their stretch IRA, a Retirement Beneficiary Trust might be right for you.  Meet with your attorney, CPA, and financial advisor to learn more about Retirement Beneficiary Trusts.

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

 

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

Top 3. Estate Planning Docs. Can Devastate-Pt. 4

The Top 3 Reasons How Online Estate Planning Documents Can Devastate Your Family and Leave Them In Financial Ruin – Money Can Be A Curse!!

Reason 1: The Pitfalls of Not Getting Legal Advice from an Attorney Can Cause Your Estate Plan to be Defective Because of Wrong Heirs, Wasteful Spending, and Worthless Investments

Arguably one of the biggest reasons why online estate planning documents can devastate your family’s estate plan and leave them in financial ruin is because you don’t get legal advice with do-it-yourself documents.  What most people don’t realize is that the value of an estate plan isn’t just in the documents – it’s in the advice and counsel you get from your estate planning lawyer.  An estate planning lawyer can identify issues that are unique to your financial and personal life that will affect your estate plan.  Some of those issues might include: blended families, predeceased beneficiaries, family drug/alcohol problems, problems with the in-laws, careless spending, worthless investments, and Medicaid planning opportunities. Part I, Part II, and Part III of this series addressed the concerns you might have if the wrong heirs inherited your estate, concerns you might have with wasteful spending and worthless investments, and concerns with outliving your money.  This blog, which addresses the last part of Reason 1, will present an unfortunate, but all too common case study on how do-it-yourself documents can ruin your estate plan.

Part IV.  Don’t get false peace of mind! A case study on how do-it-yourself documents can ruin your estate plan!

Kim’s Financial Situation

Kim is a resident of Ohio.  She is 72 years old, widowed, retired, and has two independent adult children.  Her estate consists of two main assets: a large retirement account and a $75,000 checking account.  When Kim set up her retirement account many years ago, she listed her husband as the beneficiary but never updated it when he passed away.  She also added her son as a joint owner on her checking account to help pay her bills.

Kim’s Plan

Like most people from Kim’s generation, Kim does not like talking about end of life planning with her children and thinks lawyers are a waste of money.  She decides to use a popular do-it-yourself legal website to set up her estate plan.  Kim recently heard a statistic that 80% of lottery winners go broke within 18 months.  She wants to limit the amount her two children inherit to annual payments over ten years to avoid wasteful spending and bad investments.  She also knows that she wants her children to inherit everything equally and she wants to avoid probate to save money and keep her finances private.

Kim’s Online Documents

Kim decides to implement a Trust in her estate plan because a Trust will satisfy all of those concerns.  Her Trust ultimately provides that her two children shall receive equal distributions of her Trust assets in annual installments for ten years.  The website also suggests that Kim needs to implement a Last Will and Testament.  She executes a Will and Trust which simply lists her two children as equal beneficiaries.  Kim feels confident that her “basic” website documents were done properly and can’t understand why anyone would spend the money to consult with a lawyer.  She puts her executed documents in a desk drawer and never thinks about them again.

What Happened When Kim Died

A few years later, Kim passes away.  Her deceased husband is still listed as the primary beneficiary of her retirement account and no contingent beneficiary is listed.  Her son is also still a joint owner on her checking account.  While cleaning out Kim’s house, her children discover Kim’s Will and Trust.  They consult with an estate planning attorney to find out how they need to proceed.  The attorney tells the two children that the Will and Trust are valid.  He further explains that any assets titled in the name of the Trust would have passed equally to the two children over ten years pursuant to the terms of the Trust.

The attorney indicates that Kim’s Will governs all probate assets which are owned in Kim’s name individually.  Such assets will have to pass through probate and will be distributed to the two children outright, pursuant to the terms in the Will.

After reviewing Kim’s assets, the attorney determines that the retirement account will pass to the children outright under the Will through probate because the account has no living designated beneficiary.  He also concludes that the checking account will not pass under Kim’s Will through probate at all, but will rather pass to the joint-owner child individually.  The attorney confirms that the Trust does not hold or will not hold any of her assets and it will not govern how her estate is to be administered.

Kim’s Estate Plan Flaws

In this example, Kim tried to accomplish her estate planning goals to make things easier for her family, but she ultimately failed to properly memorialize her wishes in several different ways:

  • She does not avoid probate. By failing to remove her deceased husband and failing to add her Trust as beneficiary of her retirement account, her estate becomes the beneficiary of the account, resulting in probate. When an estate is probated, it becomes public record.
  • Failing to review and update her retirement account beneficiaries resulted in her children inheriting her retirement account outright rather than in Trust over ten years. If Kim had named the Trust as the beneficiary of her retirement account (no probate) or named the Trust as the sole heir under her Will, her retirement account would have been owned by her Trust rather than by her children outright.
  • Her children will not inherit her estate equally. Kim added her son to her checking account for convenience purposes but failed to provide that the account would be payable on death to her children equally.  What seemed like a simple means of convenience for Kim ended up with a $37,500 inequality for her one child who inherited none of the checking account.
  • Kim wasted money using online documents. She tried to save money using online documents, but she ultimately paid for a Trust that was never used and her estate plan failed because none of her goals were accomplished.

In conclusion, Kim got a false sense of peace of mind by preparing her own documents.  If she had met with an estate planning attorney, she would have received invaluable advice on how to avoid probate and make sure that her estate plan was set up properly.  Her attorney would have also identified the estate flaws detailed above.  Unfortunately, Kim’s example is all too common in the estate planning world.  What should have been a fairly simple estate plan turned out to be something completely different than what she wanted.

Bill Hesch is an attorney, CPA, and PFS (Personal Financial Specialist) who is licensed in Ohio and Kentucky and helps clients get peace of mind with their tax, financial, and estate planning.  He focuses his practice in the areas of elder law, corporate law, Medicaid planning, tax law, estate planning, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)