Trusts, Estates and Succession

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The Problem Heir

Let’s face it – there is always a family member who causes concern, disappointments or heartache.  Embarrassing, isn’t it?  But you are getting ready to do your estate planning or thought you had it done until something comes up that causes you to think about the situation. So, what do you do?  How do you best handle the situation? 

Well, the worst thing you can do is to hide these issues from your estate planner.  As I have mentioned before, a good estate planner will ask questions about situations within your family so that they can best create an estate plan to meet your desires and concerns.  There is nothing to be embarrassed about.  Chances are very likely that you are not the first clients they have that has had a similar situation. 

The following are some options which might be helpful for you to consider:

Make gifts indirectly.  You can make up to $15,000 of gifts tax free to each of any number of people in 2020. Spouses can give jointly up to $30,000 per recipient. These gifts don’t use your lifetime estate and gift tax exemption. Gifts greater than the annual exclusion reduce your lifetime estate and gift tax exemption.

Fortunately, you don’t have to give money or property directly to a person. Instead, you can pay bills for the problem child, purchase things for him or her, pay for family vacations or take similar actions.  Further, unlimited tax-free gifts when directly paying for qualified education or medical expenses are available. Make payments directly to a school or to a medical professional, and you can give an unlimited amount without worrying about gift taxes or how the child might spend cash.

Custodial accounts When the child is still a minor, you can put money or property into a custodial account, known as either a Uniform Gift to Minors Act (UGMA) or Uniform Trust to Minors Act (UTMA) account. The gift qualifies for the annual gift tax exclusion, but an adult has control of the account. The adult is in control only until the child reaches the age of majority, which is 18 in most states. After that, the child has legal control of the money which may or may not be what you wish.

Create family limited partnerships (FLP). The FLP primarily was popularized to remove assets from an estate at a reduced gift tax cost.  The FLP provides for dealing with a problem situation. Assets can be placed in the FLP and limited partnership shares can be issued. Because you and your spouse are the general partners, you control what is done with partnership assets. You manage them and also decide on distributions from the partnership. The problem child has an ownership share but can’t do much with it. In addition to avoiding misuse of the assets, the FLP might be a way to help the child learn to be more financially responsible by becoming somewhat involved in decisions.

Protective trusts Perhaps the most common and comprehensive way to plan when faced with an unfortunate situation is to put assets in a trust with protective provisions. There are a number of different provisions that can be put in trusts.

  • Spendthrift clause: This clause says creditors of the beneficiary can’t force payouts from the trust. If the beneficiary is bankrupt, the creditors cannot invade the trust. However, once distributions are paid from the trust to the beneficiary, the creditors can try to claim them.
  •  Discretionary clause: This clause gives the trustee discretion over when to make payments of income or principal to the beneficiary. The trustee determines both the amount and timing of all payments. This provision can work when the trustee knows your wishes well and especially when you provide written guidelines. The trustee also needs to monitor the beneficiary. The choice of trustee is a key to effective use of this clause.
  • Milestone or stepping stone trust: Trusts with this provision initially pay only income to the beneficiaries. The annual income payment might have a limit or might be restricted to payments for certain expenses, such as education and medical care. The beneficiary receives additional income or principal distributions when certain milestones are met, such as reaching a certain age, graduating from college, being employed for a certain number of years, or virtually any milestones you set. The entire trust might be distributed upon reaching one milestone or in stages as different milestones are reached.

There are no guarantees that the problem heir won’t waste money. But if you want an opportunity to help with protecting the wealth, these strategies may be helpful.

Getting an Income Tax Refund

If you haven’t already completed and filed your income taxes, you are getting items together to do so.  You anticipate a refund, so why not get your taxes done and get the refund? 

Even though the IRS issues most refunds in less than 21 days, it’s possible a taxpayer’s refund may take longer. Several factors can affect the timing of a taxpayer’s refund after the IRS receives their tax return. Here are a few things taxpayers should keep in mind if they are waiting on their refund but hear or see on social media that other taxpayers have already received theirs.

  • The IRS and its partners in the tax industry continue to strengthen security reviews. This helps protect against identity theft and refund fraud. This means some tax returns need additional review, taking longer to process them.
  • It can take longer for the IRS to process a tax return that has errors. Therefore, taxpayers should consider filing their return electronically. The e-file software walks the taxpayer through the steps of filling out the return and does all the math.
  • E-file software can also help make sure a tax return is complete. This is important because it can also take longer to process an incomplete return. The IRS contacts a taxpayer by mail when more info is needed to process the return.
  • By law, the IRS cannot issue refunds for people claiming the earned income tax credit or additional child tax credit before mid-February. The law requires the IRS to hold the entire refund. This includes the portion of the refund not associated with EITC or ACTC.
  • It can take banks or other financial institutions time to post the refund to the taxpayer’s account. It can take even longer for a taxpayer to receive their refund check by mail.

Receive Your Federal Tax Refund Faster

The tax season is officially upon us and if you anticipate receiving a refund, you want to get that refund as quickly as possible.  The best way to receive your refund is to have it directly deposited into your checking or savings account.

It is simple, safe and secure and can be deposited into as many as three different accounts, including an Individual Retirement Account, if desired.  Eighty percent of taxpayers use this method, which is used by other federal agencies such as Social Security and the Veterans Administration.  This avoids the possibility of a lost or stolen check or a paper check being returned to the IRS as undeliverable. 

So, how do you use this preferred method for refunds?  When your return is prepared either by yourself or by a tax preparer, the selection of the direct deposit method for the refund is made on the return and the account and routing numbers are provided.  However, make certain that the account and routing numbers are accurate or you may be giving a gift of your refund to someone you don’t know!  Seriously, you should only have your refunds deposited into accounts that are in the name(s) of the taxpayers on the return generating the refund. 

Another handy option is that a portion of your refund can even be used to purchase up to $5,000 in U.S. Series I Savings Bonds.  If you select this option, you must use IRS Form 8888 – Allocation of Refund (including Savings Bond Purchases), if a paper return is filed.

Bear in mind that no more than three electronic tax refunds can be deposited into a single financial account or prepaid debit card. Taxpayers who exceed the limit will receive an IRS notice and a paper refund will be issued for the refunds exceeding that limit.

All taxpayers are encouraged to file their returns electronically. This is a safer, more efficient manner to file.  Plus, you get the added bonus of typically receiving any refund with 21 days from date of filing as compared to waiting approximately six to eight weeks if you file a paper return. 

Refunds can be tracked using “Where’s My Refund?” on IRS.gov or by downloading the IRS2Go mobile app.  “Where’s My Refund?” is updated once daily, usually overnight, so there’s no reason to check more than once per day or call the IRS to get information about a refund. You  can check “Where’s My Refund?” within 24 hours after the IRS has received your e-filed return or four weeks after receipt of a mailed paper return. “Where’s My Refund?” has a tracker that displays progress through three stages: (1) Return Received, (2) Refund Approved, and (3) Refund Sent.

Regardless of the method used to prepare your taxes, electronic filing vastly reduces tax return errors, as the tax software does the calculations, flags common errors and prompts for missing information.

Happy tax preparation.

Is Wifi Your Friend? Wi Not?

There cannot be enough said these days about protecting yourself and your electronics.  We have conditioned ourselves to the need to have access every minute, it seems.  But, do we really stop and think about safety and security when we are using free public WiFi?  Should we?

We should be very concerned when using free public WiFi because it is not secure, as the communications are not encrypted.  Without the use of encryption, accessibility is easy and convenient.  This opens the door up to technology being used that allows wireless computer communications within range of your device to see what you are doing, information you are passing along and your user names and passwords. You are helping the bad guys.  Is this personal information of so little importance to you? 

So, what is the answer?  Use VPN or Voice Protocol Network.  The use of a VPN encrypts and routes wireless communications to a secure channel for your computer to communicate.  Also, using secure websites – those with ‘https” indicates that it is a secure website.  Although, if you are accessing a website with ‘https’ via a VPN, your communication is secure. 

It is good practice to take as many precautions as you can to protect yourself and your information.  This is something we shouldn’t be lax about.  All you need is one little tidbit of you to get out before damage can be done. 

The SECURE Act

Congress recently passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act which affects our nation’s retirement system significantly.  It is hoped to help Americans save more by making it easier for individuals to fund their retirement with their own savings.

There is concern that with Americans living longer, a significant portion of Americans risk outliving their retirement savings. 

Previously, when a person reached the age of 70-1/2, it was mandatory that they begin to take required minimum distributions (RMD) from their retirement plans.  The SECURE Act increases that age to 72 years.  (This applies to people who turn 70-1/2 after December 31, 2019.) 

If you are between the ages of 59-1/2 and 72, you are able to take distributions without penalty.  However, if you are younger than 59-1/2, you can take hardship withdrawals subject to a 10 percent penalty.  All withdrawals are subject to income tax, regardless of age.

 Provided you have earned income to contribute to a traditional IRA or Roth IRA, the contribution cut-off age has also been raised from 70-1/2 to 72, which enables people an additional 18 months to contribute. 

Another major change is that people who inherit tax-advantaged retirement accounts in 2020 and beyond must receive distribution of the entire account inherited within ten years and pay any taxes owing.  Previously, beneficiaries inheriting a retirement account could spread the distribution over their respective lifetimes. 

Smaller employers now have the option to join with other companies to establish 401(k) plans to enable them to offer their employees a way to save for retirement. 

The SECURE Act will also permit people saving in a 529 college savings plan to use up to $10,000 to pay off student loans.

Certain part-time workers are now eligible to participate in 401(k) plans. 

These are but a few highlights and, as with any major changes, it may take some time for everyone to incorporate the changes.

Protecting Important Documents

You are getting organized and one of the areas you think about is protecting your important documents and where you should keep them.  Let’s take a look at some possibilities. 

If you have completed your estate planning, the attorney with whom you worked may offer to keep your documents safeguarded for you.  They may have either a fireproof vault or bank safe deposit boxes where they can hold the documents for you.  This is not a bad idea because you know where your original documents are, know that they can be retrieved if needed and are better safeguarded if subjected to a fire or water damage.  However, not all attorneys have the facilities to offer such a service.  Be certain to ask your attorney if they can hold your original documents if they don’t offer. 

In the event you have your original estate planning documents as well as other important papers, where should you place them for safekeeping? 

Many individuals think that a bank safe deposit box is the best location.  However, while they may be safe, they may not be easily accessible.  Perhaps there would be a need for the documents at such time as the bank is closed.  Or the documents are needed and you are unable to visit the bank to retrieve them yourself.  Being that the bank will allow only authorized individuals to enter a safe deposit box, this may create problems.  Authority will be needed.  Further, while most banks will allow the intended executor to enter the safe deposit box of a deceased person to retrieve the Last Will and Testament and a cemetery deed, some banks will not allow this without a Court Order. 

An alternative is a fireproof safe.  I am not talking about one of those little “fireproof” boxes that many people have, thinking that their documents will be safe. Those little boxes are fireproof only to a certain temperature.  If investing in a fireproof safe, make certain that your selection protects to the highest temperature possible. 

Regardless of where you place your important papers, it is always a good idea to have copies of documents or at least the important pages in an alternative location.  Most of the time, attorneys will retain a copy of the signed documents electronically but it is not likely they would have any information regarding insurance policies, annuity contracts, etc.  You could always place these documents in a sealed envelope and give them to a third party for holding.

Electronic records are wonderful as they don’t take up space, but are they accessible?  You should have a “cheat sheet” of where to locate and access your electronic records.  This can be placed in a sealed envelope and marked with an indications such as “to be opened in the event of my death or disability” and placed in an easily found location in your home.    

Remember the saying that “an ounce of prevention is worth a pound of cure”. 

Starting The New Year Off In A Positive Way

We are into the new year and have possibly made resolutions to improve certain aspects of our lives in one way or another.  One of the most common areas is with regard to finances.  So, if you are one of those resolution makers, let’s look at some things to consider:

First of all, take a look at your 2019 financial resolutions – were you able to accomplish those resolutions or did they get cast by the wayside?  Examine your progress, or lack thereof, and evaluate your savings and spending habits, set some realistic goals and consider any life changes which may have occurred or will be occurring. 

Remember to take advantage of contributions to whatever type of retirement plan you may have.  Check with your employer for employer-sponsored plans or your financial advisor for IRA contributions.  Remember that if you are of a more seasoned in age, you may be able to make catch up contributions. 

If you have a Flexible Spending Account through your employer and participate in the same, make sure you know how to take advantage of the Account with co-pays, medications, etc.  If you forget to use this benefit on the spot, familiarize yourself with ways to file claims for reimbursement. 

Take time to review your estate planning documents.  Many people think that this is something they don’t wish to think about because it deals with death, but think again.  Estate planning includes powers of attorney and health care directives which are effective during lifetime and have no effect post-death.  Also, you may have a living trust or may be able to benefit from a living trust.  Make certain the parties you have designated as executors or agents are still desired or able to handle these duties.  If you have special situations in your family – a special needs individual, a family member in an unsteady marriage, a family member which substance abuse issues or financial issues, you may wish to make certain that your estate plan reflects your intentions and protects the potential individual who may benefit from your estate. 

Laws change as does life and as a general rule, you should review your estate planning documents at least every five years.  While older documents may set forth your intentions, there may be instances where a new document or two may better serve you if revised. 

Also, it never hurts to review any life insurance policies you may have.  A review of the beneficiary designations on insurance and retirement-type assets can proactively avoid any potential problems that may exist with incorrect or out-of-date beneficiary designations.             

Let’s be positive and proactive in the new year.

Why Do I Have To Pay Taxes?

HAPPY NEW YEAR!

Thoughts of a new year also bring thoughts of taxes.  So much for the festive holidays when we begin to think about taxes. 

So, why do we have to pay taxes?  Some may claim taxes are illegal.  False and misleading statements and advice may be heard.  However, if you look at the United States Constitution, it clearly states in Article 1, Section 8 that “The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises to pay the Debts and provide for the common Defense and general Welfare of the United States.”.  And the Sixteenth Amendment to the Constitution states that “The Congress shall have the power to lay and collect taxes on income, from whatever source derived without apportionment among the several States, and without regard to any census or enumeration.”.  As a result Congress delegated the responsibility of administering the tax laws to the IRS.  

Here are some myths that have formulated over the years:

  • Filing an income tax return violates our rights against self-incrimination, privacy, involuntary servitude and moral or religious beliefs. 
  • The filing and paying tax is voluntary because I am not a government employee or a resident of a sovereign state.
  • Certain ethnicities are entitled to a special tax as reparations for slavery and other oppressive treatment.
  • Establishing a business trust to shelter your income and assets will avoid taxes.
  • Establishing a trust will allow you to reduce or eliminate your tax liability.

If you believe in any of the above myths, please think again.  It has been consistently upheld in courts that filing a tax return does not incriminate an individual or invade their privacy.  We are each responsible for filing a tax return when required and paying the correct amount of tax.  Only when income is below a certain level is one not required to file a return.  Our tax system is based on self-assessment and reporting and compliance with tax laws is mandatory.  The establishment of a foreign or domestic trust for the sole purpose of hiding income and assets and avoiding taxation is illegal and does not absolve you from tax liability. 

Anyone who fails to comply with the filing of income tax returns when necessary face civil and criminal sanctions, including prosecution and prison sentences.  In my opinion, why would you want to take any chances.  Best wishes for a healthy and happy 2020!

Medical Equipment Scams

There have been so many fraudulent claims to Medicare for durable medical equipment (DME) — wheelchairs, walkers, braces and other devices prescribed by doctors to help patients deal with an injury or chronic illness at home that have been in excess of $6 BILLION, yes Billion, a YEAR! Yikes. This is yet another way older Americans are being exploited.

You get a phone call for “free” medical equipment – Medicare will pay for it.  You may even see an advertisement or be approached at a health fair.  The call may sound real as someone claiming to be from Medicare calls to say you’re eligible for a free knee or back brace, and they need your Medicare or Social Security number to process the benefit. You may or may not get a brace, but the crooks get what they need to steal your identity.

Using telemarketing and hard-sell tactics, unscrupulous equipment suppliers lure you into ordering their wares, get your health care information, obtain bogus prescriptions (by paying kickbacks and bribes to doctors or by forging their signatures) and file false claims. They stick Medicare with the bill for costly devices that are not medically necessary, not properly prescribed or not delivered to patients at all.

Don’t let your health concerns make you an unwitting accomplice to fraud. Take these steps to avoid medical equipment scams.

  • Hang up on unsolicited calls offering you a medical device that will be billed to Medicare.
  • Carefully review MSNs and EOBs. Call Medicare (800-633-4227) or your insurance company if you see claims for supplies or services you don’t recognize.
  • Be aware that if you accept an offer of medical equipment, you could be responsible for up to 20 percent of the Medicare-approved cost of the item.

And by all means,

  • Don’t give your Medicare or insurance number to strangers. Share it only with trusted health care providers.
  • Don’t order durable medical equipment over the phone unless advised to do so by your physician.
  • Don’t accept delivery of medical equipment unless it was ordered by your doctor.
  • Don’t be swayed by scare tactics, such as claims by an equipment provider that you should get a device now because Medicare is running out of money. Charging Medicare for equipment for future use, before your doctor certifies it as medically necessary, is illegal.

Fiduciary Compensation

In past BLOGS, we have been focusing on estate planning.  You have made some big decisions or have at least started to think about your planning.  As you have been thinking, the thought may have crossed your mind about your fiduciary receiving compensation for their efforts.  Well, think no more about it. 

In New Jersey and New York, there are formulas in the statutes as to compensation for executors/administrators, for agents under a power of attorney, and for trustees.  Commissions are calculated on the value of the assets at specified times as well as on income earned. 

Since the commissions are statutory, there is little room for disputing the payment unless the fiduciary has failed to carry out their duties. 

However, in Pennsylvania, there is no specific formula in the statutes.  They go by a “reasonable” standard which is patterned after a case referred to as the Johnson Estate decided several years ago. 

These calculations will produce the maximum amount of commissions allowable.  The fiduciary can opt to take less than the maximum.  While the commission can be a deduction for an estate or a trust, any commission payment becomes taxable as ordinary income to the fiduciary for income tax payments. 

If there is a corporate fiduciary, they are entitled to a commission which may be calculated slightly differently than an individual fiduciary.

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