Johnson County Estate Planning

Prepare for Changes in Tax Laws and Possible Retroactivity

“As we enter into a new era of tax code proposals from the Biden administration, it’s important to be thinking about what those changes may mean when planning for the upcoming tax season and retirement.”

The proposed tax increase on capital gains may be applied to taxpayers with annualized realized gains over $1 million, with those high net families paying a higher tax rate of 39.6%, nearly double the current 20% rate for individuals, explains the article “Capital Gains Strategies to Keep Clients on Track for Retirement” from Wealth Management.com. Unlike previous tax proposals, there is now talk of making these changes retroactive to April 28, 2021.

Congress has historically never affected tax bills on a retroactive basis, but these are uncertain times and Congress is very divided. While fundamental tax and estate planning should continue as the final tax legislation is far from being decided, there are some steps to consider.

First is an accelerating gain realization to a period before the effective date of any legislation. If legislation is made retroactive but the start date is January 1, 2022, this won’t be needed, but could still be helpful.

The second planning strategy is charitable giving with appreciated securities. For families who are philanthropic, making donations with appreciated securities have several benefits. The taxpayer receives an income tax charitable deduction for the value of the security and the capital gain is not realized when the security is transferred to a charity. This strategy also benefits the family in a high tax situation.

Finally, investors may find it best to hold on to investments for extended periods to avoid realizing capital gains.

Retirement planning is being impacted by the discussions happening on Capital Hill as well. The negotiations and research on limiting a step-up in cost basis of an inherited asset after a person’s death is being watched carefully by estate planning attorneys and accountants. The step-up in cost basis often dramatically reduces the capital gains owed by the recipient. If this does happen, estate planning attorneys may need to become more aggressive with planning for gain realization.

If this change does come to pass, increasing fixed income investments in taxable accounts may become more valuable.

What can you do while waiting to see what action Congress takes? Reevaluate your risk profile and consider your retirement budget and cash flow needs. Equally important, check in with your estate planning attorney. While there’s no way to know exactly what the final form of these legislative changes will be, they will have an impact on your estate plan. Make sure you are as prepared as possible, so your estate plan changes can be made in a timely manner.

Reference: Wealth Management.com (Sep. 3, 2021) “Capital Gains Strategies to Keep Clients on Track for Retirement”

What If Only One Parent Is Willing to Plan?

“My parents are in their 70s and they don’t have anything planned. I’ve spoken with them about the importance of planning.”

Making matters much worse for one family, is the fact that while the mother is willing to speak with an estate planning attorney and make a plan for the future, the father won’t even discuss it. What should this family do, asks the article from nwi.com titled “Estate Planning: Can one spouse plan?”

Planning for your eventual demise and distribution of your worldly goods isn’t as much fun as planning a vacation or buying a new car. For some people, it’s too painful, even when they know that it needs to be done. There’s nothing pleasant about the idea that one day you won’t be with your loved ones.

 Although contemplating the reality is unpleasant, this is a task that creates all kinds of problems for those who are left behind, if it is not done.

Unfortunately, it is not unusual for one parent to recognize the importance of having an estate plan and the other parent does not consider it to be an important task or simply refuses. In that case, the estate planning attorney can work with the spouse who is willing to go forward.

Some attorneys prefer to represent only one of the spouses, especially in a case like this. Spouses’ interests aren’t always identical, and there are situations where conflicts can arise. When a couple goes to the estate planning attorney’s office and wishes the attorney to represent both of them, sometimes the lawyer will ask for an acknowledgment that the lawyer is representing both of them as a couple. In the event that a disagreement arises or if their interests are very different, some attorneys will withdraw their representation. This is not common, but it does happen.

The estate planning lawyer usually prefers, however, to represent both spouses. Married couple’s estates tend to be intertwined, with real property jointly owned as husband and wife, or husband and husband or wife and wife. Spouses are usually named beneficiaries of life insurance and retirement accounts. Even in blended family situations, this holds true.

If the father in the situation above won’t budge, the mother should meet with the attorney and create an estate plan. The problem is, she may not be able to plan effectively for the two most common and usually the most valuable assets: their jointly owned home and retirement accounts.

If the home is owned by the spouses as “entireties property,” that is, by the couple, she can’t make changes to the title, without her spouse’s consent. One spouse cannot sever entireties property, without both spouses agreeing. Some retirement plans are also subject to the federal law ERISA, which requires a spouse’s consent to change beneficiaries to someone other than the spouse.

Even with these issues, having a plan for one spouse is better than not having any plan at all.

The only last argument that may be made to the father, is that if he does not make a plan, the laws of the state will be used, and few people actually like the idea of the state taking care of their estate.

Reference: nwi.com (Nov. 17, 2019) “Estate Planning: Can one spouse plan?”

Don’t Be Surprised by Taxes during Retirement

Retirement accounts usually have the largest impact. However, there are also other income streams.

One of the surprises that can catch you unaware, is that taxes during the working years are usually much simpler than taxes during retirement, according to The News Tribune in “Implement an efficient tax strategy to make sure your retirement income keeps you financially secure.”

For most retired people, the biggest assets are their retirement accounts, whether 401(k)s or IRAs. There are also Social Security benefits, any pensions or annuities and Medicare premiums. These all present tax-related decisions that need to be considered.

Tax deferred retirement savings accounts were introduced in 1974 and 401(k) accounts debuted in 1978. For members of the Baby Boom generation, this was the standard for retirement savings.  There are now 10,000 Boomers retiring every day, and almost all of them have a retirement account. However, every withdrawal of an IRA account requires a tax payment (unless it’s a Roth IRA, where taxes are paid when contributions are made).

If you were a disciplined saver and amassed a significant amount of money in your retirement savings but not a lot in non-taxable accounts, you may find yourself in a financially sticky and non-tax savvy situation. This is especially true after age 70 1/2, when Required Minimum Distributions must start from those accounts. Your income will go up and might put you into a higher tax bracket than you expected.

When your retirement account income is combined with Social Security, it can cause the amount of Social Security income subject to taxation to rise. If the total of one-half of Social Security benefits plus other taxable income is more than $34,000 (or $44,000 if you are married filing jointly), you’ll have to pay ordinary income tax on as much as 85% of the Social Security income, instead of 50%. That’s not a fun surprise.

On the other hand, you’ll be making payments on Medicare premiums, which for most people are netted out of their Social Security payments. Higher income earners pay more for Medicare. Think of it as a stealth tax. Therefore, you’ll need to manage your income around the Medicare premium thresholds. You don’t want to see your premiums double from one year to the next.

Unless you run the numbers very closely with an experienced advisor, you may find yourself with a higher tax burden than you expected during retirement. All this planning needs to be done in concert with a professional advisor who can help you manage your tax liability, maximize your Social Security benefits and make sure that you have enough money to enjoy your retirement. That may include trips around the world or leaving a substantial legacy to children.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: The News Tribune (Jan. 4, 2019) “Implement an efficient tax strategy to make sure your retirement income keeps you financially secure”

What Does It Take to Have a Happy Retirement?

Strong finances and a full social life can often be the keys to success.

There can be happy retirements and there can be challenging and perhaps even unhappy retirements. However, the state of those years is often created long before retirement age arrives, according to U.S. News & World Report in “Retired and Loving It? The Differences Between Happy and Unhappy Retirees.”

Here are some reasons to be cheerful—or not:

Debt freedom or debt burden? Retirees with no or little debt don’t worry about money, as much as those who have debt. Paying off a mortgage is the biggest burden to retirement. That’s a big amount to cover, when you are not working. If you have big credit card bills and high interest rates, that can make matters worse.

Knowing what you spend. Knowing how bills will be paid in retirement starts with tracking and monitoring how bills are paid before you retire. Having a budgeting system, regardless of how you do it, will give you the information you need to know how much income will be needed each month or each quarter to pay bills. It can be as simple as a notepad or as complex as an accountant-level system, but this knowledge is really powerful.

Both spouses up to speed on money. It’s not enough for one person to know how everything works. Both need to understand their financial status and communicate their concerns and wishes. Eventually, the harsh reality is that one or the other will die, leaving the other to either struggle to catch up or be ready to take the reins.

Multiple sources of income. The most content retirees have saved well and wisely. They have income from a few different sources. You don’t want all your income to come from a tax-deferred retirement plan, because you will be paying taxes on that income. For many, converting an IRA to a Roth makes sense, so that their withdrawals are not taxed. Work with a professional to accomplish this.

It’s not all about money. Having an active social life, pursuing interests, and enjoying day to day activities is key to enjoying retirement. Sometimes that comes about when people move from their single-family home into an active community, where there are full schedules and facilities that promote a variety of interests. An active network, especially one that is purpose driven, elevates the spirit and provides a strong connection to the community.

Reference: U.S. News & World Report (Nov. 9, 2018) “Retired and Loving It? The Differences Between Happy and Unhappy Retirees”

Only One of You Involved in the Finances?

There are ways to make both members of the couple knowledgeable about finances.

There can be a high cost to the surviving member of a couple, if the member who passed away was the person who handled all of the household finances, according to The Wall Street Journal in “When One Spouses Handles Finances.”

The cost of not knowing where the money is, how investments are structured, the state of retirement savings, or the daily details of how bills get paid, can be quite high, when one spouse is unexpectedly put in charge.

Spouses are urged to take a more active role in the family’s investments and to be certain they are comfortable with the family’s advisors. If they are both are not comfortable with the professionals handling their money and legal matters, it may be time for a change. If the change is made after a spouse dies, it should be seen as a move towards independence, and not a betrayal of the spouse’s legacy.

Studies conducted by financial service companies have found that despite gains in education and, to some extent, compensation, women still let their spouses handle financial decisions. Even millennial women, those born between 1980-1996 (roughly sixty percent) leave those investment decisions to their husbands.

Women are controlling more wealth and are more likely to divorce or outlive their husbands than at any other time in history, so taking the financial reins is very important.

Financial advisors are trying to bridge the gap. Some encourage spouses to create lesson plans, exploring one topic per session and then go to dinner afterwards (without the kids) to discuss wills, insurance and investment basics or whatever the topic of the week was. Others hold quarterly meetings.

It can be frustrating for one spouse to deal with a non-involved spouse, who either doesn’t want to learn or has trouble grasping some of the concepts. In that case, getting a non-related person involved might be a good tactic. Set up meetings with your estate planning attorney, financial advisor, and CPA that are geared to reviewing your family’s assets and estate plan, with the focus on bringing the non-involved spouse up to speed.

Make it personal and rewarding. It’s far more fun for someone to open their own “50^th Wedding Account” and learn by investing, than to get drilled on a textbook lesson. If one spouse dreams of travel, turn working together on budgets and investments with specific trips in mind into a motivating force.

Reference: The Wall Street Journal (Oct. 22, 2018) “When One Spouses Handles Finances”

Want Help from Your Kids in Planning Retirement?

As it turns out, your adult children may be helpful in making the transition to retirement.

Your adult children may be interested in helping you create a retirement plan that works best for you and your family, according to Next Avenue in “How Your Adult Children Can Help You Plan for Retirement.”

Here are three ways your kids can help you.

Talk about your hopes and dreams for retirement.

You may have spent much of the last three or four decades listening to your kids express their wishes. However, now it’s time for you to share yours. Let your children know what you’d like to do and be as clear and specific as you can. The more they know, the more they may be able to help you.

For one family, the discussion centered on when the parents wanted to retire, where they wanted to live during retirement and how they envisioned spending their time. Questions like what would add value to your life, and what would take away from it, are good starting points. Would you choose to live in the same area as your adult children, so you could be part of their lives and their children’s lives?

The topic of grandchildren is a frequent discussion. Do you want to be a regular part of their day-to-day activities or are a few visits a year for holidays enough for you?

Can your adult children be part of your plans?

Many retirees chose to make being of service to others a large part of their retirement. Having your adult kids or grandchildren involved in the same organization as you, albeit on a different level, might make everyone’s life more fulfilling.

Communication with adult children is sometimes a challenge. Remember that you have to keep up your part of the dialogue. If your kids are more comfortable with texts than with long phone calls, be flexible.

Have the real talk about estate planning and caregiving.

Allowing your grown children to be involved with estate planning and discussing caregiving plans for later in life can allay a lot of general fears about aging and eventually, death. It’s not the most fun conversation you’ll ever have. However, having these conversations now, will make your later years more comfortable and less stressful for all.

Where do you want to live if you can’t live on your own? Do you want your children to take care of you or would you rather be in a care facility?

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: Next Avenue (Aug. 21, 2018) “How Your Adult Children Can Help You Plan for Retirement”

The Benefits of Hiring an Elder Law Attorney

“Many Americans confess that they are confused when faced with the myriad Medicare choices available to them. Others are simply not planning, nor saving enough to meet the challenge of health care costs in old age. In response, a whole new industry has sprung up nationwide.”

A recent iberkshires.com post, entitled “The Independent Investor: Elder Care in an Age of Confusion,” explains that it's called "life care planning." This is a corollary discipline for those attorneys who are practicing elder law. Elder law attorneys are, in effect, advocates for the elderly and their families. They handle a wide range of legal issues commonly experienced by seniors. Some of the issues deal with Medicare, Medicaid, Social Security, retirement, long-term care insurance and nursing home care costs. These lawyers can also draft wills and trusts, help families with special needs children, handle probate proceedings and issues, along with a host of other estate planning matters.

The concept of life care planning focuses on the level of care that’s required when someone becomes disabled or reaches a certain age. Life care planners identify the level of care the person needs, finds the appropriate care givers and then maps out the necessary private and public resources necessary to help pay for these expenses.

Realistically, when an individual reaches a certain age—or his or her health issues become more severe—someone has to monitor his or her well-being and anticipate the next level of care required. In many cases, those responsibilities are thrust upon a family member. But most of them are not equipped to make the proper, necessary medical and financial decisions. As a result, our loved ones don't get the care they need or, if they do, they pay an excessive amount from the family savings for it.

Life care planners are involved throughout the process. They help make those decisions for you and anticipate what will be needed in the future. These professionals will adjust your life care plan accordingly and find the best methods to pay for it.

Some elder law attorneys work with registered nurses and public benefits coordinators either “on staff” or on call. These attorneys also provide life care planning, such as sorting through benefits for those who are veterans and might qualify for aid.

Elder care can impact an entire family and future generations. If just one member of a family develops a debilitating illness, has a lengthy hospital stay, enters a nursing home or requires 24-hour nursing care, then life savings can evaporate in just a few years.

Speak with a qualified elder law attorney and address what could be one of the biggest risks to your retirement and well-being: a lack of planning in elder care and estate planning.

Reference: iberkshires.com (June 1, 2017) “The Independent Investor: Elder Care in an Age of Confusion”