Back to Basics: Special Needs Trusts

November 17, 2014,

If your loved one has special needs or development disabilities, you may want to consider establishing a special needs trust. Also known as a supplemental needs trust, this type of trust is a legal tool used to help disabled people keep more of their income or assets without losing public benefits.

Purpose of Special Needs Trusts

This type of trust was initially created to help parents with disabled children provide for them as they grew up without making them ineligible for public benefit programs, like Social Security and Medicaid. The intent of the trust is to supplement any government benefits that they may receive or to shield excess income for Medicaid purposes.

The Medicaid program requires that participants spend down their assets in order to reach a certain level of need before qualifying for benefits. A special needs trust can be used so that a disabled Medicaid beneficiary can keep the benefit of almost all of their income, instead of using it to pay for care. That income can also be used to qualify a disabled person for the Medicare Savings Program.

If a disabled person under the age of 65 receives a lump sum, from retroactive Social Security or a personal injury settlement, a special needs trust can protect that money and keep that person eligible for government benefits. By transferring the lump sum into a special needs trust the person can remain eligible for all of their benefits and use the money in the trust to supplement their regular income for years to come.

Types of Special Needs Trusts

New York law recognizes three kinds of special needs trusts, but each type of special needs trust comes with its own set of rules, requirements, and registration. The three types of special needs trusts are a first party, third party, and pooled trust.

First Party Special Needs Trust

A first party special needs trust is funded with assets owned by the trust beneficiary. Also known as a "self-settled trust" or "(d)(4)(A) trust," this type of trust can be established to protect current or future income from, for example, an inheritance or personal injury settlement that would bring the disabled person above the limits for government benefits.

The law requires that the trust must be for the benefit of the individual with disabilities, and it must be established by a parent, grandparent, legal guardian, or the court. It must be irrevocable, and the trust agreement must also include a Medicaid payback provision. This requires the state Medicaid program to be reimbursed upon the death of the beneficiary.

Third Party Special Needs Trust

A third party special needs trust is funded by parents, relatives, or friends of the disabled beneficiary. This type of trust is preferred by parents or other friends and relatives who want to leave an inheritance to a loved one with disabilities. Not only does this type of trust shelter an intended inheritance, it can also be used during the parents' lifetimes for ongoing expenses that are not covered by government benefits.

A significant attraction of the third party SNT is that, unlike a first party SNT, when the beneficiary dies, there is no Medicaid payback requirement. The person who created the third party SNT (often a parent) chooses and has complete control over selection of the trust remainder beneficiaries.

Pooled Special Needs Trust

A pooled trust is also funded with assets that are owned by the disabled person, like a first party trust. Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the organization manages a sub-account for the beneficiary. In a pooled trust, the trust beneficiary can establish the pooled trust sub-account on their own.

Acting Now to Lower Your 2014 Taxes

November 13, 2014,

If you want to lower your overall taxes for this year, now is the time to act. The opportunities to cut taxes on your overall bill are reduced dramatically after December 31. Many taxpayers forget about these opportunities or act too late to take advantage. In addition, Congress has yet to enact any intense tax changes this year, unlike the changes made in 2013. In fact, legislators have not moved on dozens of taxpayer friendly provisions that expire January 1.

Provisions that are Ending

One of the most popular provisions on the chopping block is a law that allows owners of individual retirement accounts who are 70½ and older to give up to $100,000 of their IRA assets directly to charity each year. In addition, a federal write-off for state sales taxes instead of state income taxes and a deduction of up to $4,000 a year for qualified expenses for college or other post-high school education may also end this year.

Hopefully, lawmakers will extend these provisions during this year's lame duck session, and if so, they will likely be retroactive to the beginning of the year. However, IRS Commissioner John Koskinen has warned Congress publicly that if they do not enact these extensions before the end of the year it could cause delays in tax refunds this spring.

Key Areas to Consider Reviewing

There are plenty of other issues facing taxpayers, especially given the complexity of the current code, numerous phase-outs, phase-ins, surtaxes and hidden marginal rates. Many taxpayers should consider running their 2014 tax numbers before the end of the year to see how they could benefit from specific strategies. This is particularly important for taxpayers who have had a significant change in their income or a major life event like a birth, death, marriage, divorce, retirement, the sale of a home, or a job change.

Here are some key areas to consider before the end of the year:

Adjusted Gross Income

Phase-outs and surtaxes are attached to different adjusted gross income (AGI) thresholds. One good way to avoid losing benefits or incurred surtaxes is to keep your AGI as low as possible. You can do this by spreading income over more than one year, offsetting capital gains with capital losses, making pretax contributions to a 401(k), IRA or other retirement plan, or by contributing to a health savings account.

Investment Gains and Losses

Be sure to include mutual funds held in taxable accounts because some have announced capital gains distributions before the end of the year. Taxpayers can use realized capital losses to offset realized capital gains, plus $3,000 of ordinary income, every year. Unused losses carry forward for use in the future.

Charitable Giving

All contributions should be made by the end of the year. However, a more tax-efficient move than writing a check is to give the same value in appreciated assets like shares of stock. Donors often get a deduction for the full market value of the asset while avoiding capital gains tax. For a large gift, consider using a donor-advised fund.

Medical Costs

Unreimbursed medical costs are only deductible over ten percent of AGI, or 7.5% for people ages 65 and older. However, some assisted living costs and nursing home costs are typically deductible, in addition to tuition for special schools for students needing special therapies. If you meet the threshold, there are a wide range of other healthcare costs are deductible, as well.

Health Insurance

This is the first year to implement a tax on people who do not have health insurance that meets the Affordable Care Act. To avoid the tax, people need to have been covered by an approved healthcare policy for nine months in 2014. If you were not, the penalty is either a flat amount or one percent of income, whichever is greater.

States Lowering Estate Taxes to Lure Retirees

November 10, 2014,

It's not uncommon to turn on the television and see an advertisement for a state that is enticing visitors to vacation or move there permanently. However, more and more states across the nation are also trying to advertise that they are a great place to die. In 2015, four states are increasing their state-level estate tax exemption, reducing or eliminating altogether the amount of state estate tax that heirs will have to pay.

States Lowering Estate Taxes

As of January 1 next year, Tennessee's estate tax exemption will jump to $5 million from $2 million this year. In addition, Maryland's raised its estate tax exemption level from $1 million this year to $1.5 million next year. Minnesota is increasing to $1.5 million from $1.2 million, and in April 2015, New York's exemption level will rise from $2.062 million to $3.125 million.

And that is not all - in 2016, Tennessee is eliminating its state-level estate taxes. Maryland and New York plan on continuing to increase their exemption levels through 2019, when they will match the federal estate tax exemption level. Minnesota plans on increasing its exemption for state estate taxes by $200,000 every year until it reaches $2 million in 2018.

Reasons Behind the Shift

Legislators in states that have enacted a state-level estate tax are concerned that wealthy retirees will simply move to another state to avoid the taxes, depriving the state of income taxes now. Taxes are the most common reason why retirees move from one state to another, and it is not hard to understand why that is the case.

Hawaii and Delaware have state-level estate tax exemptions that match the federal level. However, fourteen states and Washington, D.C. have lower exemption levels than the federal limit, and their tax rates range from twelve to nineteen percent. New Jersey's estate tax exemption level is only $675,000, which affects heirs that inherit even relatively modest estates.

In addition, seven states have an inheritance tax, which differs from an estate tax. Unlike an estate tax, which is made against an estate before the assets have been distributed, an inheritance tax is paid by the beneficiaries. Maryland and New Jersey have both estate and inheritance taxes with maximum rates ranging from 9.5% to 18%.

What You Should Do

If you live in a state that has an estate or inheritance tax, you can consider moving to a state that does not or that has a high exemption level. If you live in a state that has an estate or inheritance tax and you do not want to move, you should speak with an experienced estate planning attorney about other tax saving strategies for your estate plan. For example, you can take advantage of making gifts during your lifetime to reduce the size of your estate.

In addition, if you already have an estate plan in order, make sure that it is regularly updated to reflect any changes in your state's estate or inheritance tax laws. As more states try to keep or lure more retirees, more changes to the state-level estate tax should be expected.

Safeguarding Your Digital Assets

November 8, 2014,

Part of proper estate planning means safeguarding not only your physical, tangible assets but your digital assets, as well. Many people do not protect these assets for a variety of reasons: a few do not think that it is important, some do not know how, and others simply do not want to think of the prospect of estate planning. However, protecting your digital assets can be easy and doing so will not only give you some peace of mind but will do so for your loved ones, too.

Why You Should Protect Digital Assets

You can do and buy just about anything online nowadays, and most of it you can accomplish with the phone in your pocket. Digital assets are more plentiful than ever, and you might not be aware of how much you have actually amassed in this form. One study by McAfee, a computer protection company, found that the average person has over $35,000 worth of digital assets on various devices that they own.

These assets include everything from sensitive financial records, personal information on social media accounts, music on iTunes and more. Digital estate planning is more than just accounting for what assets you have in digital form; it is also about protecting digital assets that have personal value. And yet, 63% of the participants surveyed in the study admit that they have no idea what will happen to it all once they pass away.

How to Protect Digital Assets

To begin, compile a list of all of your digital assets that includes everything from social media accounts, music playlists, email accounts, financial accounts, online subscriptions, retail accounts, digital payment tools like Paypal or Dwolla, and any other information that can be stored on a computer. Afterwards, put together an inventory list of all usernames and passwords that are connected to those accounts.

Once you have created a list of your digital assets, you also need a safe place to store it. You should consider both online and physical storage - whatever you feel more comfortable with. If you want to save the list online, websites like PasswordBox and apps like Dashlane can consolidate all of your online login information. You can pass on the access to these websites and apps to someone in your estate plan. If you opt to keep a physical list of your digital assets and their associated passwords, make sure that you keep it in a safe place like a safety deposit box and tell someone that you trust where to find the list once you are gone.

Extra Considerations for Digital Assets

While you are compiling your list of digital assets, also take time to look at the policies for your social media accounts and emails. For example, Facebook gives family members of deceased loved ones the option to memorialize that person's account, downloading, or deleting it. Google's Gmail has the option to activate an "Inactive Account Manager" that can give access to an email account to another person or delete it after a certain period of inactivity.

You should also consider whether you would like the executor of your estate to also be the executor of your digital assets. A digital executor can be appointed in your estate plan to manage all of your digital assets once you have passed. By naming a digital executor and specifically listing your wishes for your digital assets, you can ensure that your final wishes for them will be fulfilled.

The Resurgence of the Ethical Will

November 7, 2014,

The ethical will, a document with no legal significance but can be supplemented to a regular will as part of the estate planning package, is meant to share personal lessons and advice with loved ones in addition to passing along physical parts of the estate. While the concept of an ethical will has dwindled in recent decades, the concept has seen resurgence in the technological age.

What is an Ethical Will?

Originally an oral tradition, ethical wills date back as far as 3,500 years. These wills have been used for millennia to pass on life lessons and ethics to the younger generation. Beginning around 1000 A.D., ethical wills began being written down and some still exist to this day.

In the modern age, ethical wills are considered nonbinding documents that are added to a person's estate plan that passes down life lessons and advice to heirs and assigns. They are seen as increasingly important estate planning tools because they can convey the estate owner's closely held values and beliefs. Ethical wills can also help avoid inter-family conflicts that may arise after that person is gone.

Using Technology with Ethical Wills

Many people are now utilizing technology to add a more personal touch to an ethical will. Some are creating ethical will in Microsoft PowerPoint that includes pictures, music, humor, and quotes to emphasize her thoughts. It adds an extra dimension to the younger generations viewing the slideshow that would not be there in a typical, written ethical will. Other people are using similar formats in the forms of videos, DVDs, digital scrapbooks, iPhones, and Facebook pages to create their ethical will for their loved ones.

Benefits of Technology and Ethical Wills

An ethical will allows the estate owner to lay out life lessons and moral philosophies. They can be used to explain family history, the hard work that went into building the estate, and an explanation of how the owner hopes the estate will be used. In order to make these points even more personal, the use of video ethical wills is increasing rapidly.

A video ethical will uses a videographer to film the estate owner and edits down the footage between ten and fifteen minutes. Many people have found that seeing their loved one convey these messages creates a stronger bond and understanding of what is being said. Video wills are also so effective because those watching can hear their loved one's voice, their tone, and see their posture.

What Not to Do in an Ethical Will

An important thing to remember when creating an ethical will is that it is not the proper time to scold or blame someone by reaching out from the grave. It should instead be a heartfelt message to your loved ones, conveying the most important lessons and advice that you feel like you can give. Ethical wills are meant to help improve family communication and lift people's spirits.

In addition, a more practical aspect of ethical wills to remember is that an ethical will should not conflict with your wishes in your standard will or other estate planning documents. Other than that, there's no limit to what can go into an ethical will.

Estate Planning Financial To-Do List

November 5, 2014,

With the end of the year approaching, it is good time to review your estate plan and take care of any last minute financial chores before any new tax and estate planning laws take effect for the following year. Here are eight basic items to check off of your to-do list as the end of the year approaches:

Review your Current Retirement Accounts

With the stock market rebounding this year and other market indexes at all-time highs, it is important to revisit your current retirement accounts and consider reallocating your asset distribution within your retirement accounts. It is also a good chance to see if you are on track with your contributions for the year, especially if your employer matches your contribution to the account. Even if you can't make the maximum this year, consider bumping up your contributions until the end of the year.

Prepare for Open Enrollment

With the advent of the Affordable Care Act, employers are trying harder than ever to cut down on healthcare benefits and costs. Consider renewing your usage year to date and your employment-based insurance enrollment materials. Compare and contrast any changes in your coverage.

Update Other Estate Planning Documents

This is also a great time to reflect on any events or life changes that have happened in the last year, and adjust your estate plan accordingly. This could mean adding or removing beneficiaries from accounts, heirs from your will or trust, or adjusting the allocations of the estate between existing members. Remember that an estate plan also includes retirement accounts, life insurance policies, annuities, and other assets besides your will and any trusts.

Set Up Retirement Plan if Self-Employed

Options for self-employed retirement plans include a simplified employee pension (SEP-IRA), a Solo 401(k), a SIMPLE IRA, or a pension plan. If you can establish a plan by the end of the year you can contribute up until you file your annual tax return next April.

Check Social Security Statements

The Social Security Administration recently announced plans to start mailing statements again after stopping the paper mail practice years ago. Make sure to review the statement to ensure that you have been given credit for all of the years that you worked and that you understand all of the benefits that you are entitled to receive.

Review and Update Old Pension and Retirement Accounts

Be sure that you are aware of any and all old retirement accounts or pensions that you had in previous jobs. If you find an old retirement account, consider what you wish to do with the funds. Most will allow you to roll it into a new employer plan or roll it into an IRA.

Review Investments and Strategies

Similar to reviewing the asset allocation in your retirement account, also review your current investment holdings in the markets. Check to see how your assets did in the market, and consider how much risk you want to take with your investments moving forward.

Create or Update the Estate's Financial Plan

Whether you are in the earlier stages of your career or at the twilight of your retirement, you should sit down with an estate planning attorney and financial advisor to review your estate's financial plan. Be sure that they know about your financial goals for you and what you would like to pass to your heirs.

Social Security Recipients Receive Raise

November 3, 2014,

Millions of elderly and disabled Americans receiving Social Security benefits will see a small increase in their government payments next year. The Social Security Administration announced earlier this month that it will be adding a 1.7% cost of living increase for the nearly 58 million Americans receiving federal retirement or disability benefits.

2015 Increased Social Security Benefits

On average, this increase would add $22 per month for retirees, and this makes for the third straight annual increase in Social Security benefits in as many years. The cost of living increases have all been between 1.5% and 1.7%, and this year's increase matches the 1.7% rise in consumer prices in September. This is according to the data released by the U.S. Labor Department last week. According to the American Federation of Government Employees, more than 2.5 million federal government retirees will also receive a 1.7% cost of living increase.

The monthly maximum federal amounts for 2015 are now increased to $733 for an individual, $1,100 for an individual with a spouse, and $367 for an essential person. In general, monthly amounts for the next year are determined by increasing the unrounded annual amounts for the current year by the cost of living increase effective for January of the next year. The new unrounded amounts are then each divided by twelve and the resulting amounts are rounded down to the next lower multiple of one dollar.

According to the Social Security Administration, as a result of this year's cost of living adjustment, the average retired worker's Social Security $22 increased benefit will raise the average benefits to $1,328 per month. This cost of living raise will be the Administration's fourth in a row. Because of a lack of inflation, retirees did not receive increases in 2009 and 2010.

For Social Security recipients who are less than full retirement age and have earnings from work, the annual maximum amount of exempt earnings will rise next year by $240 to $15,720. For every two dollars earned above the maximum, one dollar in Social Security benefits will be withheld. There is no limit on earnings beginning the month a person attains full retirement age.

The Need for the Increase

More than 58 million Social Security retirees, dependents, and survivors will receive the cost of living adjustment beginning with benefits payable in January, while more than eight million Supplemental Security Income recipients will begin receiving it on Dec. 31 of this year. Some beneficiaries receive payments under both programs.

The small increase for cost of living nonetheless limits the ability of beneficiaries, around twenty percent of the U.S. population, to step up spending. According to the AARP, the majority of the people ages 65 and older rely on Social Security benefits for at least fifty percent of their retirement income.

Other Social Security Changes

Some other changes that take place in January each year are also based upon the increase in average wages. Based on the increase, the maximum amount of income subject to Social Security tax also rises from $117,000 to $118,500. Of the estimated 168 million workers who pay Social Security taxes, around ten million people will be affected by this change.

The New Rules for Estate Planning

October 31, 2014,

The federal estate tax is no longer the biggest concern for many people going through the estate planning process. However, this was not always the case. In 2004, any estate worth more than $1.5 million, or whose estate owner made gifts above that limit while alive, were subject to federal tax at top rates of almost 50%. There was extreme uncertainty as the federal tax levels bounced around from year to year and even disappeared entirely in 2010, which made effective planning exceedingly difficult.

Finally, last year Congress set up a new estate and gift tax rate, topped at 40%, and raised the exemption level to $5.34 million per person. Each year that number is adjusted for inflation and the level is expected to be set at $5.43 million per person next year.

New Tax Saving Opportunities

Many people are completely unaware of the new rules regarding estate planning, especially since some advice is completely contradictory to what has been suggested in the past. For example, in the past avoiding the estate tax often meant sacrificing efforts to minimize long-term capital gains taxes, which had a much-lower top rate of 15%. However, now many people who will not owe estate tax can reap substantial tax savings on capital gains by choosing which assets to hold within their estate until death.

Reviewing Estate Plans for More Savings

People that are covered by the new federal estate tax exemption should review their plans and see if there is more room for tax savings. Here are some important factors to consider when reviewing your estate plan:

Reset capital gains:
The federal code allows for a "step-up" in the value that cancels the long-term capital gains tax on assets that a person holds until death. The step-up automatically raises the owner's cost basis for such assets to its full market value as of the date of death, negating the taxes on the appreciated value of the asset.

This means that if the owner holds the same asset until death, the capital gains tax vanishes. The asset will be included in the estate plan at full market value, where the federal exemption level could shelter it from federal estate tax as well, in addition to skipping capital-gains tax of up to 23.8% on any appreciation.

Using the right assets:
To meet cash needs in retirement, it may make sense to take out a loan rather than selling appreciated investments in taxable accounts, especially with the current interest rates so low.

Another possible strategy is to state making withdrawals from traditional individual retirement accounts or other retirement plans. Because such assets are in tax-deferred accounts, they don't get a step-up in basis like other assets that you should keep.

Rethinking trusts:
Up until Congress created a provision known as "portability" in 2011, spouses often needed trusts to provide their estates with the full value of two federal estate-tax exemptions. However, now a surviving spouse can claim the unused portion of a partner's exemption as long as the survivor files Form 706 with the Internal Revenue Service within nine months of their spouse's death.

However, some couples can still benefit from the use of trusts in their estate plan. Many couples in states with death taxes can benefit from the use of a trust, and trusts can be crucial for married couples in which one spouse is a U.S. citizen and the other is not. Some estate planning attorneys are using a tool called an "estate trust." It provides a double step-up on a highly appreciated asset to a married couple after the first spouse dies.

More Advocates Pushing for Stronger Standards of Elder Care

October 29, 2014,

Despite the strong standards that are set by the state and federal governments that are supposed to ensure that our elderly nursing home residents receive good care, a recent federal study found that over one third of all short term patients who enter a nursing home for rehabilitation are harmed. Moreover, the study found that almost sixty percent of the harm caused to these residents could have been preventable.

Federal Nursing Home Study

The report, published by the Office of the Inspector General of the U.S. Department of Health and Human Services, studied the number of adverse events occurring in skilled nursing facilities across the United States. The experts discovered that an estimated 22% of Medicare beneficiaries suffered an "adverse event" during their stay at a nursing home facility, and an additional eleven percent suffered a temporary harm during their time at a facility.

Physician reviews determined that 59% of all of the adverse events and temporary harm were clearly or likely preventable. Much of this preventable harm was attributed in the study to substandard treatment, inadequate monitoring of the residents, and a failure or delay in necessary care.

Over fifty percent of the residents who suffered an adverse event or temporary harm had to return to a hospital for treatment, which cost Medicare an estimated $208 million in one month alone. In total, Medicare spent an extra $2.8 billion on hospital treatment for harm caused by adverse events or temporary harm in nursing home facilities.

Federal Study Recommendations

Because the majority of the adverse events and temporary harm was deemed preventable, the experts of the study concluded the need and opportunity for skilled nursing facilities to greatly reduce the incidents of resident harm. They suggested that other federal agencies like the Centers for Medicare and Medicaid Services and the Agency for Healthcare Research and Quality begin campaigns to raise awareness of nursing home safety and look to reduce the incidents of harm through methods used to promote hospital safety standards.

In addition, the researchers suggested creating and promoting a list of potential nursing home events that lead to these adverse events in order to help nursing home staff better recognize potentials for harm. Federal agencies were also encouraged to instruct state agencies to review nursing home practices in order to identify and reduce the number of adverse events.

Federal Nursing Home Law

The federal government has enacted laws that are supposed to prevent the number of adverse events in nursing homes and achieve a high level of care for each patient. Part 483 of Title 42 of the federal code, otherwise known as the Nursing Home Reform Law, sets forth strong standards for care in long-term care state facilities.

According to the law, each resident must be provided the care needed to attain and maintain their highest practicable physical, emotional and social well-being. All skilled nursing home facilities are required to have sufficient staff to achieve this, and unnecessary drugs are prohibited. However, with this most recent study released, it may signify the need for stricter rules regarding our senior's nursing home care.

What to Do When You Inherit Your Parent's Home

October 27, 2014,

According to the Boston College Center of Wealth and Philanthropy, the Baby Boomer generation stands to inherit over $27 trillion in the United States alone over the next four decades. A large portion of that wealth is invested into your parent's home, but when you inherit the house it can come with emotional and financial issues. When siblings are involved in the decision making process, deciding what to do with the home can be even trickier.

There are three options that you can elect after you have inherited your parents' home: sell it, move in, or rent it. Each choice comes with its own advantages and disadvantages, emotionally and financially, for you and your siblings.

Selling the House

One of the biggest benefits of selling the home is called a "stepped up basis." This helps heirs avoid paying large taxes on the sale of the home. The stepped up basis of a house is the fair market value on the date of your parent's death. When you sell the home, you only pay capital gains tax on the amount that is above the stepped up basis, and that tax rate can be as high as twenty percent.

The best way to go about selling the home is to look at comparable homes in the area and deciding on a minimum price. You should also make sure that the homeowner's insurance, utilities, and property taxes are paid up and the estate or trust is named as the insured. This negates any issues that may arise between the dates of your parent's death and the sale of the home.

Moving into the House

If you or a sibling is planning on moving into the home after your parent passes away, the best thing to do is establish advance planning through a family legacy book. This book provides clear instruction on how the assets of the house will be administered while the parent is alive in order to avoid sibling squabbles after death.

Another advantage of moving into the home is that it gives you and your family more time to sort through any belongings or family heirlooms left in the home. However, it is important to keep in mind that your property taxes may increase if your parent had a senior citizen tax break for the home.

On the bright side, there is another advantage down the road if you later decide to sell the home. You may be able to qualify for a capital gains exclusion if you have lived in the home for at least two of the last five years before selling. You can pocket up to $250,000 in profit as a single person or $500,000 as a couple without paying capital gains taxes.

Renting the House

If you do not wish to sell the home, but you also do not want to move in, a third option for your parent's home is to use it as rental property. You or your siblings can act as a property manager if you live nearby, or you can hire a private company. Another important thing to remember is to change the insurance to a landlord policy to cover any accidents by guests.

However, having the property as a rental can mean a large tax break for you as a depreciation expense. A certain amount of the property can be deducted every year, and improvements to the home can be deducted, as well.

The Importance of Knowing the Location of Estate Planning Documents

October 24, 2014,

Not only is it important to create an estate plan that documents your final wishes for your estate and medical choices, but it is equally important to remember where those documents are when they are needed. Family members or close friends need to know where they can locate your estate planning documents in the time just before or after your passing. If someone does not know where these documents are kept, it could mean that your final wishes are not fulfilled.

Problems with Lost Documents

Being unable to find estate planning documents can have a drastic effect on your final wishes. One man wished to be buried at Arlington Cemetery after he had died, but his son could not find the paperwork after his passing. The cemetery offered to place his father in cold storage for six months while the son tracked down the proper forms documenting his military discharge. He eventually found it being used as a bookmark in his father's home.

Another example came from a mother who belonged to the Neptune Society, which cremates its members and spreads the ashes out at sea. However, after the mother's passing the Society informed her children that it had no record of their mother's membership and therefore could not accept her body. One child had even seen the paperwork that her mother had of registering with the organization, but it was nowhere to be found. Had the children known where the documentation was, this issue could have been avoided.

How to Avoid Lost Documentation Problems

Communication is vital when creating an estate plan. You should go over your plan with your children, spouse, or other loved ones that will be taking care of your final wishes after you are gone. Distribute copies of vital documentation or give specific details about where it can be found. Be sure to let your heirs know where to find all of your important documentation, including your living will, healthcare proxy and durable power of attorney forms, bank account information, password log-ins, and more.

In addition to those documents, consider also adding information regarding a list of all subscriptions you have, both online and in the mail. Also consider placing tax documents in the same location along with any credit card or debit card information. One final piece to add to estate planning documents is a medical history for you, your spouse, and your parents so that your children and theirs will know if there is a history of any medical issues in the family.

Another recommendation is to place all of these important estate planning documents in the same location. This avoids the problems of tracking down separate pieces of paper in order to put together your entire estate plan. Consider placing all of the documents into a safety deposit box, filing cabinet, desk drawer, or on the computer in a single folder.

Preparing for your own death can be tedious and unpleasant, but if something happened to you would your loved ones know what you have, where it is, and what your wishes are? That is why the creation and location of your estate planning documents are vitally important for you and for your loved ones.

The Smartest Ways for Grandparents to Help Pay for College

October 22, 2014,

More and more grandparents are now using some of the money that they have tucked away using retirement and estate planning to help their grandchildren pay for college. According to a study done by Sallie Mae, 17% of families in the United States relied on relatives to help pay for college. This percentage is expected to increase as more grandparents use their estate plans to help benefit their families.

However, it is important that grandparents should be smart about how they help their grandchildren pay for school because it can have major tax consequences for them and their loved ones if the correct steps are not taken.

Understanding Estate Planning Gift Taxes

One of the biggest tax implications for grandparents and grandchildren are the federal gift tax rules. In 2014, the federal gift tax exclusion is $14,000. This means that each grandparent cannot gift more than that amount to a single person during the year without incurred taxes. At most, grandparents can gift one grandchild up to $28,000 without being taxed.

However, these is an exception to the gift tax rules if the grandparents are contributing the gift to a "529 plan." Up to five years of gifts, or $70,000 per grandparent, can be contributed at once if paid directly to a 529 plan for a total of up to $140,000.

Establishing a 529 College Savings Plan

Estate planning experts usually recommend setting up a 529 college savings plan for grandparents that wish to help pay for their grandchildren's college. One of the main benefits is that the grandparents maintain control of the account and the funds within it. The grandchild is named as a beneficiary of the account, but the grandparents remain the account holders. This allows them to transfer assets out of their estate into the account for estate planning purposes.

If the grandparents own the 529 plan, the account is treated like a student asset and is assessed as such. In addition, FAFSA assessed student income at 50% from the 529 plan which can seriously reduce the amount of aid given. However, if the grandparents transfer the account into a parent's name before their grandchild applies for aid, all of these problems are avoided.

Disadvantages of Other Plans

A lot of grandparents assume that setting up a UGMA account for their grandchildren is the best course of action when helping pay for college, but the rules have changed drastically for these types of accounts over the years. The tax benefits that the accounts used to receive are now almost completely eliminated.

Additionally, the grandchild owns all assets in the account and can technically do what they wish with the funds, even if they were gifted for the purposes of paying for college. Because the grandchild owns the assets in the account, it can also dramatically impact the amount of financial aid that they receive through FAFSA and other government programs. This is because federal aid programs typically take into consideration twenty to 25% of the student's assets, which includes any money gifted through a UGMA account.

When Heirs Collide: Minimizing Fights over the Estate

October 19, 2014,

Battles over estates can intensify underlying issues between siblings and ultimately tear families apart. However, there are ways to lessen the chances of infighting among your heirs before you pass on. Advance planning can drastically help minimize conflicts among your children, spouse, and other heirs.

Not Just About the Money

According to a prominent wealth management group, around $30 trillion of wealth will be passed to the younger generations over the next thirty to forty years. Roughly 70% of those families will lose a chunk of their inheritance, mostly due to estate battles.

Battles among heirs are not always about the money. Estate planning attorneys almost always have a story about a wealthy estate where the children are fighting over a simple piece of jewelry or other item in the house. It isn't uncommon for fighting families to spend more on paying for legal fees battling the other heirs than they actually stand to inherit.

What is Fair May Not be Equal

One of the most common issues among people creating their estate plans is that they assume that equal means fair. However, when it comes to property and other possessions that are not cash, it is almost impossible to apportion an estate equally.

A good place to start is to determine what means "fair" within the context of your family. If there is one child better off and one child struggling financially it may make more sense to leave one more than the other. If there is a child with special needs, that child may benefit more from money than a piece of real estate. On the other hand, you may not think it is fair to leave a significant amount to an estranged child or someone that you have given a chunk of your estate to during your life.

Preventing Heir Battles

Communicating your final wishes regarding your assets, possessions, and estate is vital in deterring family feuds after you are gone. Expressing your wishes explicitly in a will is the most common way to prevent fighting. Many people also create an addendum to their will or trust explaining why they divided their estate in the way that they did. The less ambiguity that you have in your estate means the less chance that there is for heirs to misconstrue your wishes.

Some people find it easier to make a list of all of the beneficiary accounts, bank accounts, and big ticket items in the estate as well as a corresponding list of who will inherit what. Having the visual lists can make it easier to see who is getting what in their inheritance.

One of the easiest ways to avoid fighting heirs is to speak with them and ask for their input in your estate plan. You never know what your heirs might really want or what they have no desire to hold on to once you are gone. The key to family discussion is equality. If one heir gets a say in what they inherit then they all should, and you should explain your reasons for disproportionate division of assets, as well.

Considerations When Selling Your Business for Retirement

October 17, 2014,

Far too many entrepreneurs, despite their successes in business, have put far too little time into planning for the eventual sale of their business for retirement. In fact, more often than not business owners do not start planning the sale of the business until the day that they sit down with a potential buyer. Starting this late almost always means that money is left on the table, and it is far too late to make a meaningful difference in the money that you will be able to keep when you sell your business.

Talk to Estate Planning Attorneys

One of the most important people to speak with when planning the sale of your business is an estate planning attorney. After explaining the financials and structure of your business as well as a timeline for when you wish to sell, your estate planning attorney can review your tax situation and explain what your options are to save the most money in an estate plan.

There are many different estate planning tools at your disposal to mitigate the amount that you will owe in taxes after you sell. Keeping more money from the sale is essentially the same as selling your business for a higher value.

Craft a Narrative Through Your Financials

Many business owners believe that their financials are good enough for them. However, those financials are not always good enough for potential buyers. To maximize the amount that you can sell your business, you need to tell your buyers a story through your financials that will resonate.

Consider making sure that your financial statements is GAAP (General Accepted Accounting Principles) compliant. In addition, it is also good practice to have your financials audited before starting the selling process.

Institutionalize Your Management Team

Small business owners tend to wear many hats in their business: CEO, Accountant, Payroll Manager, and janitor to name a few. However, buyers want a sustainable business that will not fall apart the second that you walk away, and if you fill all of those roles the business is probably not sustainable without you.

You need to take time to institutionalize your management team so that the business will still be standing after you sell. The alternative is that you sell your business for less value and stay on until the new buyer can build the team that needs to be put in place to fill the void.

Manage Your Risk

You should try to reduce as much risk as possible before selling your business. Common examples include solidifying client relationships, contracts, leases, and suppliers that will last after the business has been sold. Don't forget to think about solidifying employee relationships, too, so that most of the workers do not leave after you do.

Talk to an Attorney

In addition to speaking with an estate planning attorney, also consider speaking with a mergers and acquisitions advisor, as well. Getting a professional assessment of your business can make a huge difference when it comes time to sell.

Medicare Tax: What You Need to Know

October 14, 2014,

When you hear about Medicare taxes, you probably do not also consider how it affects investments. However, these new taxes can impose higher costs both on wages and net invested income. If you are concerned about how the Medicare tax may affect your estate or retirement plan, speak with an experienced estate planning attorney today.

Medicare Tax and Payroll Income

Medicare tax on payroll income is 2.9%. It applies to all earned income, which includes payroll from your employer in addition to any tips. Half of the tax is paid by you, and the other half is paid by your employer. For high wage earners, Medicare tax imposes an additional 0.9% tax on individuals who make over $200,000, $250,000 for couples filing taxes together, or $125,000 for spouses filing separately. Your employer is required to withhold the 0.9% from your paycheck once you exceed the $200,000 limit.

Medicare Tax and Net Invested Income

In the past, taxpayers were not required to pay Medicare tax on any net invested income generated from assets like capital gains, dividends, and taxable interest. However, since 2013 the rules have changed, and you could owe up to 3.8% Medicare tax on some or all of your net invested income.

The amount that you owe is based upon the lesser of two amounts: your total net invested income or the amount of your modified adjusted gross income (MAGI) that exceeds $200,000 for individuals, $250,000 for couples filing together, or $125,000 on spouses filing separately. You owe 3.8% on the amount of investment income that exceeds those thresholds. If your income wages alone already exceed the limits, you will owe the 3.8% Medicare tax on the lesser of net investment income or MAGI that exceeds the thresholds.

How to Prepare Wisely

The best thing for you do to prepare is to know the Medicare tax law or speak to someone who does. If you are married, filing jointly, and your income will exceed the limits you will want to make sure that your joint Medicare tax bill for the year is not higher than what you initially anticipated.

It is important to note that your employer will not take your spouse's income into consideration when figuring your Medicare tax withholding, but you can use a W-4 form to have the additional amount deducted from your pay to cover the additional 0.9% tax on the amount over the limit for combined income.

Reducing your MAGI can be more difficult, but many people have used successfully reduced their amount owed by maximizing their investment in pretax retirement plans like traditional 401(k)s or 403(b)s. Also, qualified distributions from retirement accounts like a Roth IRA are not included in your MAGI.

The more complex challenges come from reducing the amount of net invested income, but there are ways to reduce the amount based on sound investment strategies. One option is to move some investment income into municipal bonds or municipal bond funds. Another option is to place investment income into a tax deferred account like an IRA. Investing in a permanent form of life insurance can also reduce the total of net investment income, as the cash value of the policy when withdrawn is not considered investment income anymore.