Patinelli & Chang, LLP

Second Time Down the Aisle? Make Sure Estate Plan Is Ready

“The first thing to realize is that as soon as you marry, your spouse is granted certain inheritance rights under law. However, these rights of inheritance can be waived or modified by using an anti-nuptial agreement, or as its more commonly known, a pre-nuptial agreement.”

It’s always a good idea to review your estate plan, especially when a major life event, like a second marriage, is taking place. The use of a pre-nuptial agreements gives prospective spouses the opportunity to discuss one another’s rights of inheritance, and clarify a great many issues, says nwi.com in the article “Estate Planning: Planning for second marriages.”

There’s a second opportunity to sign an agreement detailing inheritance rights after the wedding takes place, called a “post-nuptial agreement.” The problem is that once the wedding has occurred and you are both legally married, you might get stuck with some surprises and, well, you’re married. For most people, it’s better to set things out before the wedding, rather than after.

There also may have been dissolution decrees in one or both of the couple’s prior divorces that have requirements which must be satisfied. A spouse may be required to maintain life insurance with the ex-spouse as a beneficiary. This can have an impact on the couple’s estate plan. It is recommended that you have everything discussed up front in the pre-nup.

The rest of the steps are those that should be followed for any estate review.

Make sure that the last will and testament reflects your new spouse. If there are any mentions of the prior spouse, you probably want to remove them.

Verify how all of the assets are owned. Will they continue to be owned by just one spouse, or converted to jointly owned? Does your estate plan have a trust, and if so, are assets owned by the trust? Does there need to be a change made to your trustees?

Many people don’t remember how their bank accounts are titled. Fewer still can tell you who their beneficiaries are on their retirement accounts, life insurance policies and bank accounts. Remember: the beneficiary designations are going to determine who receives these assets, regardless of any language in your last will and testament. Once you die, there is no way to contest that distribution. Review your accounts and make sure that the beneficiaries are up to date.

Part of your pre-nup and estate plan review will be to discuss inheritance rights for any children in the blended family. Do you want to leave assets only for your children, or do you want to leave assets for all the children? It’s not an easy conversation to have, especially at the start of the blending process.

Remember also that blended family dynamics can change over the years. When you review your estate plan next—in three to four years—you’ll have the opportunity to make changes that hopefully will reflect deepening bonds between all of the family members. Your estate planning attorney will help create and revise estate plans, as your life circumstances evolve.

Reference: nwi.com (May 5, 2019) “Estate Planning: Planning for second marriages”

A Sensible Look at Social Security

“As people approach the age of 60, many of them start thinking about how and when to access their Social Security benefits. The basic rule is that you can start to receive Social Security as early as age 62 or you can delay taking benefits until age 70.”

If it seems like there are too many different recommendations on when to start taking Social Security, you are right. Every week brings another theory of when to take benefits, when spouses should take benefits, or news about Social Security’s trust fund drying up. The recent article from The Denver Post asks “Road to Retirement: When should you start taking Social Security?” This article breaks down the choices and explains what’s really at stake.

The general rule is that for each year you wait after age 62, benefit payments increase by about 6% to 8%. The adjustment depends upon whether you start before or after your “normal retirement date,” which today is 66 for people born between 1943–1954. The Social Security Administration website gives all the estimates for you when you take benefits from age 62 to 70. The longer you wait, the higher your benefit. However, if you wait, you’ll receive benefits for a shorter period of time.

How can you make sure you’re getting everything you’re entitled to? Unless you know when you are going to die, you really can’t. However, on paper, it doesn’t matter that much. Social Security’s actuaries have done the numbers. On average, the benefit payment options are designed to be actuarially equivalent, regardless when you start taking benefits.

If you took a group of 10,000 retirees and analyzed all of their choices, some taking benefits early, others taking benefits late, they would all receive about the same benefits. Some of those who took benefits early will die early. Some who wait will die without ever taking any benefits. Those who wait until age 70 and live until 100, will get more than projected.

Determining which is best, is dependent upon when you die. Unless you have a crystal ball, there’s no way to know whether taking benefits earlier or later will be best for you.

A better approach: consider what risks you are more concerned about and select the strategy that helps to minimize that risk.

If you are worried about living a long time and running out of money, then your best bet is to wait until age 70. You’ll receive about 30% more than if you take benefits at age 66. If you live to 100, then your benefits will come in as long as you are living.

What if you are worried that Congress is going to let Social Security die or change the rules? If that’s your main concern, then you would want to take benefits earlier. That way if benefit formulas change, you’ll know that you got the most you could before the rules changed.

What if you retired at age 63 and a year after that, the markets tanked? Your retirement accounts took a hit and your cash flow is tighter than you anticipated. Social Security benefits could give you the option of taking less from your retirement accounts, while giving the market and your accounts a chance to recover.

What if you are healthy and well and want to enjoy your life to the fullest while you can, including travelling and doing whatever you want while you are well? Then taking your Social Security benefits early makes sense, because you’ll have more income in the earlier part of your retirement.

As you can see, there’s no one right answer for everyone when it comes to taking Social Security benefits early. However, there is one right answer for each person, depending on their lifestyle, retirement account size and personal health.

Reference: The Denver Post (Aug. 4, 2019) “Road to Retirement: When should you start taking Social Security?”

Preparing for the Legal and Medical Aspects of End-of-Life

“We plan for so many transitions in life: births, graduations, weddings, retirement and moves. We want these transitions to go smoothly and be as comfortable and easy as possible.”

Planning for the end-of-life transition is something most people still avoid as a difficult topic. It’s true: for many people this topic is just too sad and scary to talk about, says Flagstaff Business News in the article “Easing the End-of-Life Transition with Advance Care Planning.”

However, planning for one’s death is a kindness to loved ones, family members, friends or even neighbors when others are left to make decisions about medical care, when an individual can’t do it for themselves.

In the estate planning field, this is called advance care planning. It involves learning about the decisions that often need to be made, considering the options and decisions ahead of time, and memorializing those decisions with the correct and enforceable legal documents. This gives a person the ability to think about what they want in the way of treatment or care, and what they don’t want.

It makes things much easier for the survivors, who otherwise have to guess what was on their loved one’s mind or what they would have wanted.

Here are the medical decisions that most frequently need to be made:

CPR, or Cardiopulmonary Resuscitation. This is to get the heart to start beating again, when it has stopped and can range from the use of hands, a defibrillator or chemical means.

Ventilator or Assisted Breathing. This is the use of a machine, connected to a breathing tube that is inserted through the mouth or lungs and down the throat. It is not comfortable, and the patient cannot speak with the tube in their throat.

Artificial Nutrition. This is the delivery of nutrition through an IV (intravenous) or a feeding tube.

Comfort Care. Doing anything to make an individual comfortable at the end of their life. It can include everything from medication to emotional and spiritual counseling. The goal is to provide a person with a dignified end of life, while relieving as much suffering as possible.

Once decisions have been made about these medical treatments, it’s time to get them down on paper.

You’ll need a Living Will. This is a written document expressing your wishes for end-of-life care. If you cannot speak on your own behalf, this is the document doctors will use to guide your care.

Durable Power of Attorney. This is a legal document used to name another person to make health care decisions on your behalf.

In addition, you should have your estate planning attorney prepare a Last Will and Testament, so your property is distributed according to your wishes. An estate planning attorney can help make sure all the details are addressed.

These are not fun topics but thinking about what you would like to have occur and documenting your wishes provides direction for your loved ones, who would otherwise be guessing at what you would have wanted.

Reference: Flagstaff Business News (Aug. 2, 2019) “Easing the End-of-Life Transition with Advance Care Planning”

Why an Attorney Should Help with a Medicaid Application

“Many seniors and their families don’t use a lawyer to plan for long-term care or Medicaid, often because they’re afraid of the cost.”

Elder law attorneys can be very helpful when planning for Medicaid coverage, and they can save money in the long run, ensuring that you (or a loved one) get the best care. Instead of waiting to see how wrong the process can get, says The Middletown Press, it’s best to “Use a lawyer for Medicaid planning” right from the start. Here’s why.

Conflict of interests. When a nursing home refers a family to people for preparing the Medicaid application, very often the person has dual loyalties: to the nursing home who refers them the work, and to the family who will pay them a fee for help with applying for benefits. Whose interests comes first?

Everyone wants the Medicaid application to be successful, but let’s be realistic. It’s in the nursing home’s best interest that the resident pays privately for as long as possible, before going on Medicaid. It’s in the resident or family member’s best interest to protect the family’s assets for care for the resident’s spouse or family.

An attorney has a duty of loyalty only to her client. She also has an ethical and professional responsibility to put her client’s needs ahead of her own.

Saving money is possible. Nursing homes in some areas cost as much as $15,000 a month. While every market and every law practice is different, it would be unusual for legal fees to cost more than a month in the facility. With an experienced attorney’s help, you might save more than her fee in long-term care and probate cost. Most attorneys will consult with new clients at little or no cost to determine what they need and what they want to achieve before paying a larger fee.

The benefit of experience. It’s all well and good to read through pages of online information, but nothing beats the years of experience that an attorney who practices in this area can bring to the table. Any professional in any field develops knowledge of the ins and outs of an area and applying for Medicaid is no different. Without experience, it’s hard to know how it all works.

Peace of mind from a reliable, reputable source. Today we hear a lot about “FOMO,” or fear of missing out. Consulting with an experienced attorney about a Medicaid application will help you avoid years of wondering, if there was more you could have done to help yourself or your loved one.

There are multiple opportunities for nursing home residents to preserve assets for themselves and spouses, children and grandchildren, particularly when a family member has special needs. However, here’s a key fact: if you wait for the last minute, there will be far less options than if you begin planning long before there’s a need to apply for Medicaid.

Reference: The Middletown Press (July 29, 2019) “Use a lawyer for Medicaid planning”

Why Estate Planning is Essential for Small Business Owners

“Developing a proper business plan, securing financing, marketing, paying taxes and all of the other small, but significant, details will surely be some of the most challenging yet rewarding work that you will perform in your lifetime.”

For the entrepreneurial-minded person, nothing beats the excitement of having a vision for a business, and then making that dream come true. However, have you ever wondered what will happen to that business after you are gone?

A comprehensive estate plan, says Bakersfield.com, in the recent article “Estate planning tips for small business owners,” provides a plan that can protect your life’s work.

It makes sense. You’ve likely spent decades building your business throughout your working life. You’re proud of what you have accomplished, and you should be. You should then protect it with a well-thought-out plan. Your estate planning attorney will be able to help you design a two-pronged plan for your business and your personal life. For business owners, these two are intertwined.

Can you avoid taxes? Reviewing your personal and business assets, as part of an estate plan, is the best way to minimize the tax exposure of your estate and facilitate an organized sale or succession plan for your business. You can’t completely avoid taxes, but good planning will help them from being excessive.

There are a number of IRS sections that can help, and your estate planning attorney will know them. For example, Section 6166 gives your loved ones more time to pay the tax, by paying in ten annual installments. Another Section, 303, lets your family redeem stock with few tax penalties. Talk with your attorney and CPA to find out if your business is eligible for either of these strategies. Create a plan and talk about it in detail with survivors to help them navigate the transition.

Do you have a buy-sell agreement in place? This is critical, if more than one person owns the business. The buy-sell agreement dictates how the partnership or LLC is distributed upon the death or incapacity of one of the owners. Without one, family members may be stuck owning a company they don’t want or don’t know anything about. Alternatively, your former partners may find themselves partnered with people with whom they never intended to go into business.

The buy-sell agreement creates a plan so, when an owner passes, the shares of the company must be bought out by the other owners at a fair market price. The agreement can even establish a sale price, so family members will know exactly what they can expect to receive from the sale. In addition, a buy-sell agreement can be used to block certain individuals from taking a role in the business. For many family businesses, that’s enough of a reason to make sure to have a buy-sell agreement.

How are life insurance policies used by small business owners? Maybe you want the business to die with you. Some small businesses provide a stable income for the owner, but there’s no plan for the business to be passed to another family member or to survive the passing of the owner. If that is your situation, and you want your family to have income, you’ll need a life insurance policy.

A life insurance policy can also be used to help partners with the capital they’ll need to purchase your shares, if that is how your buy-sell agreement has been set up.

As a small business owner and a family breadwinner, you want to be sure your family and your business are prepared for your passing. Talk with your estate planning attorney to make sure both are protected, in the event of your passing.

Reference: Bakersfield.com (July 15, 2019) “Estate planning tips for small business owners”

How to Plan for Long-Term Care Costs

“A one-bedroom apartment in an assisted-living facility will cost you $194 per day–or about $71,000 per year. A home health aide will set you back $25 per hour, or $1,000 for a 40-hour week. Not scared yet?”

The odds are that most of us will need long-term care. At least 52% of those over age 65 will need some type of long-term care at some point in our lives, according to a study conducted by AARP. As most of us are living longer, we’ll probably need that care for a longer period of time, as reported in the article “It’s best to plan for long-term care” from the Times Herald-Record.

Here’s the problem: ignore this issue, and it won’t go away. This is a fairly common response for people 55 and older. The size of the problem makes it a bit overwhelming, and the cost to tackle it seems unsolvable. However, not addressing it becomes even more expensive. How can we possibly pay for long-term care insurance?

Here’s a simple example: a 64-year-old woman who broke her ankle in three places. She was healthy and mobile. However, a badly broken ankle required extensive rehabilitation and she was not able to stay in her home. She has been living at a rehabilitation center and the costs are mounting. What could she have done?

There are two basic ways (with a number of variations) to pay for long-term care.

The first and most obvious: purchase a long-term care insurance policy. Only 2.7 million Americans own these policies. They are wise to protect themselves and their families.

Most families put off buying this kind of insurance, because it’s expensive at any age and stage. The average cost is about $2,170, according to the Kiplinger Retirement Report, for about $328,000 worth of insurance. That rate varies, and it should be noted that if you have a chronic condition, you may not be able to purchase a policy at all.

If a local nursing home costs $216,000 per year and you have $328,000 of coverage, you’ll run out of coverage. The average nursing home stay is about two years. As boomers age, the cost of long-term care insurance is rising, while benefits are becoming skimpier, says Kiplinger.

There are some alternatives: a hybrid life insurance plan that includes long-term care coverage.  However, those can be more expensive than regular long-term care insurance. Try about $8,000 a year for a 55-year-old, about $13,000 for a 65-year-old.

Another choice: a Medicaid Asset Protection Trust. You’ll need to work with an estate planning attorney to create and fund this trust long before you actually need it. Your assets must be placed in the trust five years before an application to Medicaid, which will then pay for your care. You don’t have to live in poverty to do this. If the care is for one person, the applicant is permitted to keep about $15,450 of assets. The spouse may also keep a home worth up to $878,000 and assets up to about $120,000. In New York State, you can keep the principle of retirement funds like an IRA or 401(k), as long as you are taking the required distribution withdrawals.

However, what if you have money to pay or need long-term care before you put assets in trust? If you live in New York, Florida and Connecticut, you have what is called “spousal refusal.” The spouse of the person in long-term care can choose not to pay for their cost of care. This can get complicated, and Medicaid will try to get funds for the care. However, an estate planning elder law attorney can negotiate the amount of payment, which may leave the bulk of your estate intact.

These are complicated matters that become very costly, often at a time when you are least able to deal with yet another issue. Speak with an estate planning attorney before you need the care and learn how they can help you protect your spouse and your assets.

Reference: Times Herald-Record (July 22, 2019) “It’s best to plan for long-term care”

Can a Transaction Occur if One Spouse is Incapacitated?

“The wife did not have a durable power of attorney authorizing her spouse to act as her agent in selling the property and now apparently lacked the capacity to sign one.”

An elderly married couple wished to sell their home, but they had a big problem. The notary public refused to notarize the wife’s signature, because she clearly did not understand the document she was being asked to sign. Because there was no power of attorney in place that could have authorized her husband to represent her, the transaction came to a halt.

This situation, as described in Lake Country News’ article “When one spouse becomes incapacitated,” is not an uncommon occurrence. The couple needed to petition the court for an order authorizing the transaction. When community property is concerned and one spouse is competent while the second is not, the competent spouse may ask the court for permission to conduct the transaction.

The request in California requires the following:

The incapacitated spouse must have an examination by a physician and a capacity evaluation form must be filed with the court. This is the same as a conservator proceeding.

The court must appoint a “guardian ad litem” to represent the incapacitated spouse’s interests. The person might be an adult child, or an attorney. That person must then file a written report with their recommendation to the court.

Next, the transaction must involve the couple’s community property. The order may affect additional separate property interests in the same transaction. If there is no community property, it is permissible for the well spouse to change some of the well spouse’s private property into community property to meet the requirements for community property.

The transactions must also be for one of several allowed purposes, including the best interests of the spouses or their estates, or for the care or support of either spouse.

In the example that starts this article, the purpose was to authorize the sale of their home, so they could move out of state to live with their children. Another example could be to transfer property, so an incapacitated spouse may become eligible for government benefits.

Finally, the notice of hearing and a copy of the petition must be served on all the incapacitated spouse’s children and grandchildren. Any of these individuals are permitted to object and could set the proceedings back months or even years.

How much easier would it be to simply meet with an estate planning attorney long before there are any health or mental capacity issues and have a power of attorney document created for each of the spouses?

Speak with an experienced estate planning attorney to have your estate plan, which includes the power of attorney document, and have all these important documents created before you need them.

Reference: Lake Country News (July 27, 2019) “When one spouse becomes incapacitated”

Should I Roll a 401(k) Into an IRA?

“What should you do with the money in your 401(k), when you leave your job?”

Your first instinct when leaving a job, for retirement or a new opportunity, may be to take your money with you, by rolling it into an Individual Retirement Account (IRA). That may not be such a bad idea. However, keep in mind that the financial advisor telling you to do so may be getting a commission or fee when you take that action. However, just as there may be reasons to take your 401(k), says AARP in the article “What to Do With Old 401(k) Accounts,” there are also some good reason to leave it exactly where it is. Consider these questions before making a decision:

What does it cost to stay or to leave? Small plans, by which we mean those with fewer than $10 million in assets, charge an average of 1.1. percent annually for administrative fees and investment management, according to a 2018 study that focuses on the costs of 401(k)s from BrightScope. If you are in this type of plan, you may do better by rolling money into a low- or zero-fee IRA at a no-load mutual fund and buying inexpensive funds.

Big plans, with $250 million and more in assets, can be competitive with IRAs. They offer low-cost index funds or target date funds that allocate assets between stocks and bonds and shift those mixes as you age. Your plan in one of these might cost less than 0.5 of your assets per year.

For a complete picture, note that funds suggested by a broker may cost more than that. A financial advisor will also have a higher fee, since most are paid by a percentage of your total assets. There once was a law that required advisors to compare the cost of your current 401(k) with any new investments they recommend, but that law was squashed. Therefore, investors have to do the homework to get clear on their costs.

Do you have enough choices? The average 401(k) fund today offers about twenty-four mutual funds to create a balanced portfolio. It might also offer a stable value fund, like a money market account, that pays higher interest rates than you might get in other products. With IRAs, you have many more choices, but that may not be much of a factor.

How easily can you access your money? A prior employer’s plan may give you the option of a withdrawal at any time, or at least a monthly withdrawal. If that’s not available, an IRA may be better.

Do you need the money? Are you 50 or older? For most people, rolling a 401(k) into an IRA and then making a withdrawal before turning 59½, means a 10% tax on the withdrawal plus regular income taxes. If you leave work the same year you turn 55 or later, you can withdraw money out of the employer’s 401(k) without paying that extra tax.

Are you in debt? Most creditors cannot access a 401(k) account. However, if you live in a state that permits it, they might be able to get to an IRA account.

How is your plan working for you so far? If your account has low-cost funds and you like the way things are going, there may be no point in making any changes. Stay the course.

Reference: AARP (June 10, 2019) “What to Do With Old 401(k) Accounts”

Estate Planning Basics Everyone Needs

“For many of us, the thought of our own death or incapacity is uncomfortable to consider. Fear of the unknown and uncertainty of things to come, can be frightening and difficult to think about.”

The discomfort most people have with the knowledge of their own mortality makes it challenging for some people to do the estate planning that needs to occur before an emergency occurs. However, according to the Gettysburg Times’ recent article “Essentials necessary for estate planning,” the best course of action is to do the planning now, when there is no urgency. Having detailed plans in place to protect loved ones from possible complications, costs and added stress in the future, is a gift you can give to those you love.

There are any number of legal documents and strategies used to accommodate the varied situations of life, including family dynamics and asset levels. An estate planning attorney licensed in your state will have the ability to create a plan and the documents that suit your personal situation. The three documents discussed in the following section are generally considered to be the most important for anyone to have.

Power of Attorney or POA—This document gives legal authority to another individual or entity named by the signer to perform certain acts on your behalf, when you cannot do so because of illness, injury or incapacity. There are many different types of POA, from a “full” POA with no limitations, to a “limited” POA that is created solely for a specific purpose. This document comes into action, when you are incapacitated and becomes void upon your death.

Living Will—This is a detailed health care directive that allows you to list your wishes regarding several medical procedures and life-sustaining treatments. These treatments include resuscitation, breathing assistance, feeding tubes and similar medical matters. You want to have this in place to spare your loved ones the emotional anguish of trying to decide what you would have wanted. They’ll know, because you specifically told them in this document.

Last Will and Testament—When prepared correctly, and that includes signed, witnessed, and notarized, a will is used by the “testator” (the person making the will) to provide the legal wishes regarding what should happen to their minor children (if any) and assets upon death.

What happens if you don’t have these documents? It is likely that your loved ones will need to go to court to have someone named as your executor, which is the person who is in charge of your estate. Depending upon the laws of your state, that person may be a family member, or it may end up being a family member who you haven’t spoken to in decades. It is far better to take the time to have a will created properly with an estate planning attorney, so your family is protected, and your wishes are fulfilled.

The best time to do this, is when there is no crisis. Estate plans also require regular monitoring and updating. Life circumstances change, estate and tax laws change, and new opportunities may present themselves. Speak with your estate planning attorney now and create your plan for the future.

Reference: Gettysburg Times (July 27, 2019) “Essentials necessary for estate planning”

Do Annuities in 401(k)s Work for Retirement Income?

“Proposed U.S. legislation would make it easier for employers to offer annuities in 401(k) retirement plans that provide retirees fixed payments for as long as they live.”

The role of annuities in retirement planning is one aspect of the Secure Act that was passed by the House in May and is still awaiting a vote in the Senate. The Secure Act is supposed to make retirement better for communities, as is implied in its name—The Setting Every Community Up for Retirement Enhancement Act. But, says Barron’s “Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why.”

Annuities are legally allowed in 401(k) plans. However, they are found in only about 10% of the many 401(k) plans offered to employees. Americans hold $8.2 trillion in employer sponsored defined benefit contribution retirement plans (as of the end of March 2019), and $5.7 trillion is in 401(k) accounts.

Employers have been reluctant to offer annuities in retirement plans, mainly because of liability issues. They are concerned that employees might sue their companies, if the insurance company in the plan goes out of business or fails to pay claims, for whatever reason.

The Secure Act provides a “safe harbor” for employers, if something should happen to the annuity company they select. That may be good news for employers, but not such good news for employees.

An immediate annuity turns a lump sum of money into a stream of payments right away, while deferred annuities provide payments at a designated date in the future. The advantage of an annuity is that they offer investors a guarantee of income for the rest of their lives and it removes the risk of market fluctuations. The general consensus about annuities is that they are very expensive, with high commissions and fees that take big bites out of the benefits. It must be said that there are also low-cost annuities.

One concern about the language in the Secure Act is that it is overly broad. It would easily allow an employer to offer high-cost annuities. The provision applies to all annuities. Some are more accessible and better understood by the average consumer. However, there are others that are complex financial instruments, with high costs, which may not be understood by everyone.

The Consumer Federation of America and the Center for Economic Justice are two associations that have sent a letter to the Senate seeking to change some of the language of the bill. They want to see it revise the definition of annuities to include only “simple fixed annuities” and not variable and fixed-indexed annuities that are focused on accumulation. Another point is to add a requirement that employers review the financial well-being of the insurance companies, before choosing to allow their employees to purchase financial products from the companies.

Many people are also watching the provision regarding the change to the ability to stretch IRAs distribution for non-spouse beneficiaries. Some say the best bet right now is to wait and see what the final version of the legislation is, at which point many people will need to review their estate plans for determining the best way to pass assets to the next generation, while minimizing costs and taxes.

Reference: Barron’s (June 28, 2019) “Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why”