Archive for August, 2011

Recently I met with new clients, Elaine and Bob who told me “Our son is in a bad marriage. What happens if we die and he gets divorced? Does that mean his ex-wife gets some of our estate?” This problem can be solved by sharing one of the major, and often most overlooked, benefits of using a Living Trust — asset protection for the beneficiaries.

“Traditional” Living Trust Planning
The most common benefit of the Living Trust is to avoid the time delay and reduce the legal fees of after-death probate proceedings. The time and dollar savings are significant. In our experience, these benefits are “no brainer” benefits that should be enough to get any family to adopt the Living Trust as their estate planning strategy.

Interestingly enough, this is where a lot of planners stop in their design of an estate plan. Once they are confident that the plan avoids probate, they call it a day and they’re done. It works, but what if there was a bigger benefit beyond savings?

Protection from a Bad Marriage
The power of this benefit is often overlooked in traditional Living Trust planning. If drafted properly, a Living Trust can provide divorce protection to the after-death beneficiaries.

In our case, Mom and Dad are worried that their child is in a bad marriage and they don’t want to have what took a lifetime to build to go to his future ex-wife.

Their son is trying to make it work but it looks rocky. Mom and Dad are losing sleep. What can they do? You should consider including a provision in your Living Trust that when you pass your son can receive his inheritance; but since it’s kept in Mom and Dad’s trust, he never takes ownership of the assets. The son can be in control of the money. He can receive the income and, if necessary, access the principal; but if he gets divorced, his destined ex-wife can’t put a claim on his inheritance.

The power of this idea is astounding. The ability to not only transfer wealth but do so in a manner that protects the assets for the next generation is a strategy that most families should explore in their planning.

The “After-Death Pre-Nuptial”

The use of the Living Trust in this example allows Elaine and Bob to sleep better at night. They can provide their son with his inheritance and know that if it’s especially written to provide extra protection, their Living Trust is providing the legal effectiveness of a pre-nuptial in that rocky marriage.

The flip side of this is if the son is in a good marriage. Is this strategy still relevant? Our answer: absolutely. Relationships change; they can go from good to bad quickly. You can design your plan to provide as much control for your child as is appropriate for his situation and feel secure in knowing that you have helped them protect their children and their assets.

Retirement assets essentially get split in a divorce. In a situation where the husband was the sole bread winner and over the marriage they have built up retirement assets, lawyers will try to equalize both parties.

If there is a defined benefit pension plan involved in the situation, there is something known as a Qualified Domestic Relations Order (QDRO) that is drawn up by the attorneys for the divorcing parties that says that at retirement, a portion of the pension benefit goes to the other spouse.

If there is a 401(k) involved, a QDRO may also apply since those assets are on the table and can be included in part of the negotiated settlement. Those assets can be segregated and kept in the existing 401(k) or they can be eligible to be rolled over to the ex wife’s IRA.

When funds are received from a defined benefit pension plan, they are taxed as ordinary income. In some states, such as Illinois, retirement income is not taxed at the state level so you are just looking at a federal income tax hit. In the case of a 401(k), that may be split as part of a QDRO that doesn’t trigger taxation unless one of the individuals is doing a lump sum distribution, at which time it is all taxed as ordinary income in the year it is received. QDRO distributions are exempt from the 10% early withdrawal penalty for distributions from a qualified plan or an IRA if any of the participants are under age 59 ½.

There is a significant deferred tax liability in almost every qualified retirement account that we see. (The one exception is with a Roth IRA which grows tax-free.) The future value of the account would actually be diminished by the income taxes that will be due when distributions occur. The taxes would be assessed at ordinary income tax rates. At distribution, if it is split up and divided into separate accounts as part of divorce settlement that doesn’t create an immediate tax liability. Assuming you withdraw it all in one lump sum and that pushes you into the top 35% tax bracket, you would have 65 cents on the dollar left. You want to avoid doing an actual cash out distribution. If you leave the assets in the plan however, they are just retitled with the spouse’s name next to it as the alternate payee and that won’t create a current tax liability.

Alimony

The general rule from a tax perspective is that alimony is deductible by the payer and it is taxable as income for the recipient.

There is a difference between child support and alimony—child support is not taxable or deductible by the payer.

When it comes to determining spousal support, attorneys will look at each person’s earning potential and take into account lifestyle to determine the amount. Receiving spouses for alimony will want to build a case that will allow them to maintain the lifestyle to which they have been accustomed to over the years while married.

Social Security

Former spouses would qualify for Social Security based on the ex-spouse’s earnings if you meet certain criteria. The ex-spouse’s earnings record is actually used to calculate the spousal benefit. Typically, if it was a non-working spouse they are looking at roughly 50% of what the working spouse would have been receiving at retirement age. If you have multiple ex spouses you could have benefits being paid from more than one working spouse.

Overall Debt

If a person was not the primary bread winner while married, it is important that he or she will be able to establish credit after the split. If things are kind of rocky it might not be a bad idea to take out a credit card in your own name while you are still married. If it is a joint credit card and one spouse is running up significant charges, you want to distance yourself away from that and indicate that you have been paying your own bills from your own account, but you still may be responsible for the charges.

Read more at How boomers can protect assets in a divorce.

Very many of the people I meet are worried that their life savings won’t be enough for them to comfortably live on for the rest of their life. This concern is especially acute around the fear that they may suffer a debilitating illness that will require expensive and extended long term care. Long term care insurance is the best way to protect yourself from this catastrophic risk but the cost of buying it goes up significantly once you are  in your 70′s or even late 60′s.

What can you do if you don’t qualify for long term care insurance or if you can’t afford to buy it? Here  are some ways you can protect your savings from vanishing if you were to need expensive long term care if you can’t get or can’t  afford long term care insurance.

Nursing home care or the equivalent in at home care is extremely expensive and most people would drain down their assets and then apply for Medicaid.

In Massachusetts the average cost is over $10,000 per month, with many nursing homes charging more than this. But in order to qualify for assistance from Medicaid single nursing home residents must “spend down” their financial resources to $2,000 in Massachusetts.

There are a number of good reasons to preserve some of your assets. If you have a safety net of reserve assets, you won’t be left in the position of being totally dependent on the government and the meager $72 month Medicaid allows for personal need.

Many people feel strongly that they want to pass along at least some of their lifetime savings to children or other family. Here are some of the important things to keep in mind when considering long term care asset protection strategies.

Medicaid Places Restrictions on Gifts

Federal rules place a disqualification or penalty period on gifts made within five years of applying for benefits.

There are a few exceptions to the transfer penalties that may apply depending on your particular situation.

The transfer penalty law has a five-year look-back and penalty start date rules that encourage individuals to plan long in advance of incapacity. To best protect their assets, individuals need to plan a full five years in advance of application for Medicaid long term care benefits. When you plan well in advance of the need for care, you have many more options available to you.

One increasingly popular planning option is to transfer some assets to an irrevocable Long Term Care Asset Protection Trust or “Medicaid trust”.  You can read about the basics of this trusts in this article from our office -  Long Term Care Trusts

If you are in eastern Massachusetts,  you can also call us at 781-535-6490 for a Long Term  Risk Evaluation meeting where you can learn exactly how this planning would help you and your family.

Recent surveys reveal that many people haven’t saved enough, too many boomers will retire without financial security, and we may need to work longer to achieve it — assuming we can hang onto our jobs or find new ones. No wonder that workers and retirees are more pessimistic about their future prospects than they have been in years.

Here’s some ways retirement has changed and some persistent retirement money myths and the true facts.

Medicare covers all important health care costs. One of the most persistent misconceptions about retirement is that health care costs are largely taken care of by Medicare. Medicare was designed to pay for major health care needs, not routine dental or eye care, many prescription drugs, and home-health or nursing home care.

It’s essential, then to include health care costs in retirement planning, to consider long term care insurance and to purchase a Medicare Supplement policy.

Retirees spend much less. The face of retirement has changed. Boomers expect to live a more active lifestyle. That means the amount you spend in retirement can rise due to travel, hobbies, and other leisure activities.

Security is going away. The fear that Social Security will disappear is overblown. Although some fixes are needed, you should not worry about losing this piece of your retirement security strategy.

You’ll be in a lower tax bracket when you retire. This isn’t always the case. For one thing income tax rates are likely to increase as federal and state governments address budget deficits.

Read the whole article here.