Category Archives: Family Finance Law

What to Look for When Buying an Annuity

October 15, 2019

An annuity can be a useful tool for long-term care  planning, but annuities are also complex financial products that are hard to understand. If purchasing an annuity, you need to consider your options carefully.

An annuity is a contract with an insurance company under which the consumer pays the company a certain amount of money and the company sends the consumer a monthly check for the rest of his or her life, or for a certain term. Annuities come in many flavors. They can be deferred (begin paying out at a later date) or immediate (begin paying out right away). They can pay a fixed amount each month or pay out a variable amount based on how the money is invested. While a fixed immediate annuity can be a good Medicaid planning option for a married couple, other annuity products can be quite complex and confusing and are not right for everyone.

If you have decided an annuity is the right choice for your long-term care or retirement plan, you need to shop around to find the right product. The following are some purchasing tips:

    • Check the terms. Be sure to read the annuity contract carefully. Annuities often have surrender charges that penalize you for withdrawing your money too early. You need to understand for how long you won’t be able to access your money and when payouts begin. There may also be other fees associated with the annuity as well as optional riders. Understanding the fees will allow you to shop around to find the best product.
    • Choose your salesperson. Insurance companies often pay generous commissions to the brokers who sell their particular annuities, payments that many of the brokers don’t disclose. They also generally don’t disclose whether they are paid more or less by one insurance company than another or whether the annuity being sold is the best option for the consumer. Ask your broker questions to determine how they are paid. You may want to seek a second opinion to make sure your salesperson isn’t steering you into a product that isn’t right for you.
    • Select a sound insurance company. Annuity payments are often supposed to last a lifetime, so you want an insurance company that will stick around. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moody’s, Standard & Poor’s, or Weiss.

Most Are Taking Social Security at the Wrong Time

October 15, 2019

A new report finds that almost no retirees are  making financially optimal decisions about when to take Social Security and are losing out on more than $100,000 per household in the process. The average Social Security recipient would receive 9 percent more income in retirement if they made the financially optimal decision.

When claiming Social Security, you have three options: You may begin taking benefits between age 62 and your full retirement age, you can wait until your full retirement age, or you can delay benefits and take them anytime up until you reach age 70. If you take Social Security between age 62 and your full retirement age, your benefits will be reduced to account for the longer period you will be paid. If you delay taking retirement, depending on when you were born, your eventual benefit will increase by 6 to 8 percent for every year that you delay, in addition to any cost-of-living increases.

The new report, conducted by United Income, an online investment management and financial planning firm, found that only 4 percent of retirees make the financially optimal decision about when to claim Social Security. Nearly all of the retirees not optimizing their benefits are claiming benefits too early. The study found that 57 percent of retirees would build more wealth if they waited to claim until age 70. However, currently more than 70 percent of retirees claim benefits before their full retirement age. Claiming before full retirement is the financially best option for only 6.5 percent of retirees, according to United Income.

The consequences of claiming Social Security too early can be big. The report found that collecting benefits at the wrong time causes retirees to collectively lose $3.4 trillion in potential income (an average of $111,000 per household). The report also estimates that elderly poverty could be cut in half if retirees claimed benefits at the financially optimal time.

One reason most people do not optimize Social Security is because waiting to collect benefits means their overall wealth may fall during their 60s and 70s. They also may not be aware that collecting benefits before full retirement age means that their benefits will be permanently reduced. According to the report’s authors, policy changes are necessary to get retirees to wait to claim benefits. The report recommends that early claiming be made the exception and reserved for those who have a demonstrable need to collect early. Another recommendation is to change the label on early retirement and call it the “minimum benefit age.”

To read the full report, click here.

For a CBS News article on the report, click here.

The Graying of American Debt

October 15, 2019

Document Type

Working Paper

Date of this Version

5-2-2019

Abstract

Between 2003 and 2015, real aggregate debt in the hands of Americans aged 50 to 80 increased by 59 percent. Meanwhile, real debt held by Americans in their twenties and thirties was approximately flat. Using data from the Federal Reserve Bank of New York’s Consumer Credit Panel, we describe the extent of this debt increase and the distribution of debt growth by loan type. Real per capita home-secured debts held by older consumers show the steepest growth, though older borrowers have increased their obligations in all major debt categories. For long-held debts, these developments lead us to ask how such changes emerged: did older borrowers carry more debt through the Great Recession, after which access to consumer credit declined for new borrowers of all ages? Alternatively, have loan originations since the Great Recession favored older over younger borrowers? While our results indicate that the stock of long-held, home-secured debt sits largely with older borrowers, we also uncover evidence of a decisive tilt of new auto and mortgage originations away from younger borrowers and toward borrowers in their fifties, sixties, and even seventies. The motivation behind older consumers’ substantial new borrowing, often with long repayment terms, is the focus of ongoing research.

Keywords

Older adults, debt, home-secured debt, Great Recession

Working Paper Number

WP2019-9

Copyright/Permission Statement

The views and opinions offered in this paper do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2019 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.

Acknowledgements

The authors wish to thank Andrew Haughwout, Henry Korytkowski, Equifax, and seminar participants at the Financial Planning Association for comments.

WP 2019 – 9 – M. Brown et al Online Appendix.pdf (504 kB)
Online Appendix

HUD Releases New Condo Rules for Reverse Mortgages

October 15, 2019

The U.S. Department of Housing and Urban Development (HUD) issued a new Mortgagee Letter (ML) late Thursday updating the origination requirement for FHA mortgages on condominium units, applicable to both the traditional, forward mortgage and reverse mortgage programs simultaneously. The letter provides additional clarification ahead of the rule’s implementation on October 15.

“FHA published ML 2019-17, Home Equity Conversion Mortgage (HECM) Program – Condominium Requirements, which outlines the updated origination requirements for HECMs in condominium projects in accordance with the recently published Single-Family (SF) Handbook guidance,” said HUD in a press release. “It also includes certain borrower eligibility requirements for seniors seeking to obtain a HECM for a condominium unit using FHA’s Single-Unit Approval process.”

Read the FHA INFO notice and the full Mortgagee Letter at HUD for further details on the changes.

Last month, HUD announced a forthcoming rule designed to make it easier for condo owners to get reverse mortgages and other FHA financing. The new rules related to condominiums going into effect next month will expand FHA financing for qualified first-time homebuyers as well as seniors looking to age in place, according to an August press memo released by HUD.

“For seniors, part of our mission is to provide affordable options to age in place. Condominiums can make a lot of sense for many seniors [for reasons of affordability],” said FHA Commissioner and Acting Deputy HUD Secretary Brian D. Montgomery on an August conference call with reporters. “Our single unit review now also includes reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), designed to help seniors age in place.”

FHA estimated the new policy will notably increase the amount of condominium projects that will be able to gain FHA approval. 84% of FHA-insured condominium buyers have never owned a home before, according to agency data. Only 6.5% of the more than 150,000 condominium projects in the United States are approved to participate in FHA’s mortgage insurance programs.

Who’s Charging What for Trust Services?

October 8, 2019

Trust fees are headed higher according to our pricing survey completed this week. Some firms work strictly from a rate card. Others decide what your client will pay when the business is placed on the table. Either way, it’s good to know what the “market value” of trust services.

There’s still a fair amount of mystery surrounding exactly what’s baked into each of those basis points. “It’s never as simple as just lining up the fees,” says Mike Flinn, a Phoenix-based trust consultant. “Once you start drilling down into the basis points, it becomes pretty clear that different firms really do different things,” he added. To find out where the sizzle hits the steak for various types of trust company, The Trust Advisor conducted a survey below of what they’re charging.

Who’s Charging What for Trust Services
Trust Company State Trust account minimum Minimum annual fee First $1 million Next $2 to $3 million $3 to $5 million Above $5 million
Advisory Trust DE $500,000 $3,000 0.50% 0.40% 0.30% 0.25%
Bryn Mawr Trust DE $1 million $6,000 0.60% * 0.45% Neg.
The New Hampshire Trust Company NH None $3,000 0.90% 0.55% 0.45% 0.35%
Northern Trust IL & DE $5 million $20,000 0.40% 0.40% 0.40% 0.20%
Reliance Trust GA None $3,000 0.60% 0.35% 0.35% 0.35%
Santa Fe Trust NM None $4,000 0.75% 0.75% 0.50% 0.35%
Saturna Trust Co. NV None $1,000 0.50% 0.50% 0.50% 0.40%
Summit Trust Co. NV $100 $100 1.00% 0.80% 0.70% Neg.
Wealth Advisors Trust Company SD None $4,000 0.50% 0.50% 0.42% 0.35%
Wilmington Trust DE $1 million $8,000 0.60% 0.40% 0.40% 0.25%
* Breakpoint is $2 million.

One thing we discovered: if you just want a no-frills account, Flinn adds, it’s probably going to cost at least $3,000 a year. “That’s really the minimum anyone can comfortably charge.”

“Maybe $2,500,” he conceded. “But at that level, it’s going to be very difficult to stay in the business.”

While $3,000 happens to be what Advisory Trust charges on the low end, it does seem to be an informal sweet spot within the trust industry. Other companies that start at that level include New Hampshire Trust and Georgia-based Reliance Trust.

There are companies that charge small accounts less (Nevada’s Summit Trust will go as low as $100 a year), but plenty start their fees at $4,000 and up. It all depends on the size of account they’re courting and what makes economic sense, Christopher Holtby, president of Wealth Advisors Trust Company, told me.

“Hitting the sweet spot is part art, part science,” he explains. “There are very specific things that every trust has to do, and everything else is extra.”

Good scale for big fish

Northern Trust doesn’t publish its fee scale, but president Dan Lindley was kind enough to give The Trust Advisor a peek.

Although the $20,000 minimum fee looks steep at first, it makes a lot more sense when you consider that Northern Trust isn’t really interested in personal directed trust accounts with less than $5 million in assets. For a client with that kind of wealth, the $20,000 translates into at most 40 basis points a year—pretty low by industry standards.

(Really big clients get institutional-strength discounts. Once a Northern Trust account grows beyond $30 million, the company will only charge 5 basis points: $500 a year per $1 million.)

The upshot is that by concentrating on high-end clients, a white-glove firm like Northern Trust can build a lot of sizzle into its steak, even though the cost per dollar of AUM is comparable to what bare-bones vendors charge.

“Northern Trust in Delaware charges a reasonable, competitive fee and in return provides comprehensive services to our directed trust clients backed by more than 120 years of experience as a fiduciary,” Lindley told me.

Other high-end trust companies argue that at this level, it’s pointless to advertise your fees because high-net-worth clients and their advisors are happy to pay for the service.

Some vendors refused to participate in the survey because they either work on an a la carte basis (Peak Trust) or figure out what to charge once they see the trust paperwork (Commonwealth Trust). As Peak Trust founder Douglas Blattmachr told me, it’s pointless to advertise how much a generic offering would cost when the fact is that at this level, one size fits none.

“It really does depend on what the client wants us to provide,” he says.

When asked to present a benchmark, he estimated that a relatively bare-bones Peak Trust account might charge 50 basis points a year or an annual minimum of $3,500. That’s about where vanilla Commonwealth trusts start, Jim McMackin, who runs the company’s marketing, told me.

Splitting smaller pies

Naturally, it’s going to cost extra if the trust company also manages the underlying assets. But there are a lot of vendors out there that are happy to offload the investment responsibilities and knock a bit off their fees in return.

Companies like Wealth Advisors Trust, Advisory Trust and Santa Fe Trust, cater exclusively to investment advisors looking for a place to refer their clients who need to open a trust.

Account minimums tend to be relatively low—Wealth Advisors Trust and Santa Fe Trust can theoretically start a trust with as little as $1—but expenses can be a little higher to cover the fixed cost of administering these tiny trusts.

For example, Santa Fe Trust accepts very small accounts, but according to its published fee scale it will still charge them at least $4,000 a year. At an annual fee of 75 basis points, this suggests that a trust really needs to have more than around $533,000 in it to “earn out” that $4,000 minimum fee.

By comparison, Wealth Advisors Trust’s scale “earns out” at a slightly higher level ($800,000 in the account), which indicates that its platform is built to support a somewhat more affluent clientele. Others on our list (Advisory Trust, Reliance, Saturna, New Hampshire Trust) justify their minimums at lower levels.

Whatever happens, says Kathy Roberts, the CEO of Santa Fe Trust, small accounts shouldn’t be loss leaders.

“We don’t take a trust that isn’t going to be profitable,” she told me.  While she’ll take on a tiny trust if the grantor insists, she warns that advisors should recognize that the trust company will pass on the cost of running it and sometimes it just doesn’t make sense.

Where we go from here

Most of the people I talked to say the cost of running a trust has already gone about as low as it can go.

Mike Flinn from Advisory Trust and Douglas Blattmachr of Peak Trust agree that the cost of fiduciary compliance and routine service probably isn’t going any lower than around $3,000 per trust any time soon, especially given the current trend toward higher regulation.

“It’s expensive to be a fiduciary,” Blattmachr acknowledged in our conversation. “So that provides a floor on what people can offer.”

But beyond that level, technology keeps improving and letting efficient trust companies bring down their overall cost proposition. Blattmachr says low-end players can use technology to better serve the mass market. Kathy Roberts of Santa Fe Trust agrees.

Either way, Christopher Holtby of Wealth Advisors Trust told me that there’s always room for enthusiastic competitors.

“Wherever fees go,” he says, “there are going to be a lot more entrants in the trust service business.”

Scott Martin, contributing editor, The Trust Advisor.  

What Type of Burial Assistance Does the Government Provide?

September 3, 2019

August 20, 2019 | by the National Care Planning Council

General Observations

Death and dying are issues typically overseen by the states. There are very few federal programs to help with burial as compared with numerous federal programs for eldercare. Only when death is a consequence of participation in a federal program is it covered. For example, assistance for burial is covered by Social Security, the Department of Veterans Affairs for veterans, the Department of Defense for military and some minimal support from Medicaid through Medicaid matching funds for states.

States, counties and cities themselves typically offer little assistance for burial unless the deceased is indigent and no funds can be found to pay for cremation or burial. And in many states, the only indigent people who are covered are those who die and the body remains unclaimed. In these cases, local county governments have no recourse but to cover the cost of a cremation. There are some exceptions to this general practice of no support with some states, but over the years more and more states have opted out of programs to help families with burial costs.

By and large, responsibility for funerals and burial or cremation rests with the family. It is therefore very important when planning for the final years of life to have money set aside or available for death. We will discuss below a number of community support options for those who do not prepare. In general, very few community or government assistance programs will pay for a burial. Cremation is generally the rule. A funeral service is optional for the family but typically not paid for with assistance funds.

Social Security Death Benefit

You may receive a one-time payment of $255 when a family member dies, depending on your relationship to them and how long they have worked. Generally, only surviving spouses and children of deceased workers qualify for the one-time death benefit. In addition, the deceased family member must have worked long enough to be insured under Social Security, but it doesn’t matter if they were already collecting Social Security or not.

The death benefit payment is made to the surviving spouse living with the deceased person at the time he or she passed, or if there is no surviving spouse, the payment is made to a child of the deceased person. Spouses who are not living together when one spouse dies may still receive the death benefit if they were eligible for benefits on the deceased spouse’s earnings in the month the spouse passed. If there is no surviving spouse or child who qualifies for the payment, then no payment will be made.

This is a one-time, lump sum benefit; however some survivors may qualify for a monthly benefit in addition to the one-time death benefit. You must apply for the lump-sum death benefit within two years of the family member’s death.

In addition to the one-time payment, certain family members may receive a monthly benefit for a deceased person. For widows or widowers without dependents, this amounts to receiving the larger of the two social security benefits if both were receiving benefits or receiving the deceased person’s benefits if the survivor was not receiving any. The following family members may qualify for Social Security survivor benefits:

  • a widow or widower, beginning at age 50 if disabled or 60 is not disabled;
  • a widow or widower who is caring for your child under the age of 16, regardless of the age of the widow or widower,
  • unmarried children of the deceased also qualify if they are under age 18 (or age 22 if they are disabled).
  • in some cases, even grandchildren, step children or adopted children may qualify for survivor benefits.

If you are divorced, you may qualify for survivor benefits on an ex-spouse if you were married for at least 10 years, and you are age 60 or older when your ex-spouse passes (you only need to be age 50 if you are disabled).

You should notify Social Security and apply for Social Security benefits right away after a family member has passed. To do so, you can call the Social Security Administration or visit the closest office to you. You will need to provide proof of death (death certificate or proof from a funeral home), your Social Security number and your deceased family member’s Social Security number, your birth certificate, marriage certificate if married, divorce papers if you are divorced, and income information for the deceased family member (from W-2s or income tax returns) for the most recent year

Veterans Death Benefits

These monetary benefits are for veterans who were receiving disability income from either Disability Compensation or Veterans Pension.

SERVICE CONNECTED DEATH

$2,000

NON-SERVICE CONNECTED DEATH (Reimbursement; veteran dies while hospitalized by VA)

$762.00

NON-SERVICE CONNECTED DEATH (Reimbursement for Veterans not hospitalized by VA)

$300.00

NSC DEATH STATE CEMETERY (Paid to a state veterans cemetery for the plot/burial)

$762.00

NSC DEATH PLOT ALLOWANCE (This amount will be paid to reimburse for a private-paid plot)

$762.00

A service-connected death is one where the veteran was receiving monthly payments for Disability Compensation and the death was due to the disability or condition for which the veteran was receiving pay. It is also possible to receive a service-connected death if the disability or condition was not the direct cause but the disability or condition contributed substantially to the death.

A non-service-connected death is one where the veteran was receiving monthly payments for Disability Compensation or Veterans Pension but the death was due to some other cause not related to the disabilities or conditions for which the veteran was receiving pay.

It should be noted that generally a non-service-connected death can produce $1,062 a month if the survivors have to pay for a funeral plot. Note that if the veteran died while hospitalized by VA and the survivor has to pay for a funeral plot the total amount available is $1,524.

Disaster Associated Burial Benefit

The most tragic disaster-related loss imaginable is that of a loved one. Under the Individuals and Households Program’s (IHP) Other Needs Assistance (ONA) provision, an applicant may qualify for certain eligible funeral expenses.

FEMA Funeral Assistance is provided to help with the cost of unexpected and uninsured expenses associated with the death of an immediate family member when attributed to an event that is declared to be a major disaster or emergency.

Eligible funeral expenses may include:

  • Cost of casket
  • Mortuary services
  • Transportation of the deceased and/or up to two family members into the area to identify the decedent (if required by state/local authorities)
  • Two Death Certificates
  • Burial plot
  • Interment or cremation
  • Cost of re-interment if disinterment is a) caused by the declared disaster, and b) occurs in a family cemetery on private property
  • Eligibility Criteria

Typically, federal and state personnel at the FEMA Joint Field Office review the supporting documentation from the applicant and payments are approved by the Federal Coordinating Officer (FCO) or designee and his/her state counterpart.

To be eligible for funeral assistance, applicants must provide:

  • A death certificate for the decedent
  • Documentation from a designated, authoritative state or local entity (attending physician, Medical Examiner’s office, or Coroner’s Office as appropriate) that attributes death or the injury causing death to the declared emergency or major disaster
  • Proof that the applicant is the official “next of kin” as defined by the appropriate state or local authority
  • Confirmation that funeral expenses have not been paid for by other resources (Social Security and Veterans Affairs benefits, for example, would duplicate Funeral Assistance and would be subtracted from an award)
  • Evidence of an unmet funeral expense (a receipt from a service provider)
  • Ineligible Costs

Not all applicants reporting funeral expenses will be eligible for Funeral Assistance. Some common reasons for ineligibility include:

  • The death was not attributed to the declared incident
  • Funeral expenses are fully covered by other sources of assistance
  • Insufficient and/or incomplete documentation
  • If disinterment was the result of the disaster, FEMA will provide Funeral Assistance only for a disinterred coffin under the following conditions:
  • The unearthed coffin(s) were located in a family cemetery on their private property
  • The coffin(s) were removed from the ground by the declared disaster

Private Sector and Community Programs

There are a number of ways where the private sector and certain community groups or church denominations will help cover a burial and possibly a funeral.

Taxpayer Interment Benefits

Local taxpayers in many cities and counties qualify for reduced interment costs in cemeteries.

Church Members and Members of Civic Organizations Benefits

Church members and members of civic and other organizations may qualify for funeral assistance or for reduced costs. Some church denominations will also provide burial for their members in the church cemetery. This is principally for Greek Orthodox, Jewish and Catholic faiths but may include other faiths as well.

Crime Victims’ Compensation Fund

A Crime Victims’ Fund often provides funeral benefits in instances of death by a criminal act. There are many crime victim funds across the United States. Most are funded by the state or county. Ask the prosecutor’s office in your area or do a computer search using the name of your county or city and the term “crime victim fund”.

Death Benefits from Pensions, Societies and Other Organizations

Organizations affiliated with some professions, such as the Railroad Retirement Board, as well as some social groups, unions and pensions, offer allowances to defray funeral costs. Some organizations and pension funds include an automatic group life insurance policy on their members. This may include unions and other fraternal organizations as well as veterans service organizations. These may be small amounts of coverage such as $1,000, but adding up benefits from a number of sources might produce enough for a burial or cremation. Here are some examples of funds that will defray costs.

  • Workman’s compensation, if death was work-related,
  • Civil service (federal, state, county or local) retirement pension fund,
  • Federal Employees Life Insurance (Includes a lifetime benefit even after retirement)
  • Railroad fund,
  • Teacher’s fund,
  • Miner’s benefits fund,
  • Trade union fund,
  • Credit union fund,
  • Fraternal organizations fund.

Discounts or Gratis Services from Funeral Homes

For families who simply cannot come up with enough money to bury a loved one, funeral homes may be surprisingly accommodating. Even though they may not advertise it, funeral homes may offer charity for a number of people in the community when no other way to bury a loved one is possible. This might include steep discounts, extended monthly payment plans, extremely affordable economy plans and possibly even providing the burial — in this case very likely a cremation — for free.

Medicaid’s Gift to Children Who Help Parents Postpone Nursing Home Care

September 3, 2019

In most states, transferring your house to your children (or someone else) may lead to a Medicaid penalty period, which would make you ineligible for Medicaid for a period of time. However, there are circumstances in which transferring a house will not result in a penalty period.

One of those circumstances is if the Medicaid applicant transfers the house to a “caretaker child.”  This is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s entering a nursing home and who during that period provided care that allowed the applicant to avoid a nursing home stay.  In such cases, the Medicaid applicant may freely transfer a home to the child without triggering a transfer penalty.  Note that the exception applies only to a child, not a grandchild or other relative.

Each state Medicaid agency has its own rules for proof that the child has lived with the parent and provided the necessary level of care, making it doubly important to consult with your attorney before making this (or any other) kind of transfer.

Others to whom a home may be transferred without Medicaid’s usual penalty are:

  • Your spouse
  • A child who is under age 21 or who is blind or disabled
  • Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
  • A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home

Got a Question About Social Security Retirement?

August 30, 2019

NAELA eBulletin:

By Rebecca C. Morgan Stetson Law

The New York Times recently ran an article, 7 of Your Most Burning Questions on Social Security (With Answers).

The questions include the future of Social Security, spousal and survivors benefits, the length of benefits, delayed retirement vs. “break even” claiming,  the lowered amount of benefits for those who temporarily leave the work force for caregiving, taxing benefits, and self-employment.

These are all really good questions (I hope they do another article, cause we all know there are more than 7 burning questions.)  The answers are clear and to the point. I plan to have my students read the article before we cover the topic this fall semester (which will be starting before we know it!) You should read it, too!

A Final Retirement Account Distribution Must Still Be Made After Death

July 30, 2019

Federal law requires that beginning on April 1 of the year after you reach age 70 1/2, you must begin withdrawing a minimum amount from your non-Roth individual retirement account (IRA) or 401(k) accounts. These withdrawals are called required minimum distributions (RMDs).

But what if you die after age 70 1/2 and before all the account funds have been distributed? In the eyes of the law, death is no excuse not to take RMDs from an IRA or 401(k). Your heirs must take the final RMD before they can take control of the account.

Congress created the rules governing the minimum distribution of retirement plan funds to encourage saving for retirement and to allow retirement assets to build up tax-free during the plan owner’s working years. But lawmakers built in provisions so the money wouldn’t simply keep accumulating tax-free forever. The funds you withdraw are treated as taxable income in the year you take the distribution. If you don’t start taking the RMDs from your retirement accounts and pay taxes on the withdrawals, you will face a 50 percent penalty on what should have been withdrawn but wasn’t.

The rules for inheriting an IRA as a spouse are different than the rules for a non-spouse beneficiary, but regardless of who is inheriting the IRA, the heir must take the RMD for the year the account owner died. The full RMD must be taken by December 31 in the year the account owner died, even if he or she died at the beginning of the year. To take the RMD, beneficiaries must contact the custodian of the account and submit a death certificate. If the account owner died before he or she was required to begin distributions, then the beneficiaries do not need to take an RMD.

The money from the RMD will go directly to the beneficiary listed on the account, not the estate. That means it will be taxable income for the beneficiary. If there is more than one beneficiary, it will be split evenly.

To find out the best way to deal with an inherited IRA, contact your attorney.

Tips on Creating an Estate Plan that Benefits a Child with Special Needs

July 1, 2019

Parents want their children to be taken care of after they die. But children with disabilities have increased financial and care needs, so ensuring their long-term welfare can be tricky. Proper planning by parents is necessary to benefit the child with a disability, including an adult child, as well as assist any siblings who may be left with the caretaking responsibility.

Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). The trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits.

There are three main types of special needs trusts:

  • A first-party trust is designed to hold a beneficiary’s own assets. While the beneficiary is living, the funds in the trust are used for the beneficiary’s benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care. These trusts are especially useful for beneficiaries who are receiving Medicaid, SSI or other needs-based benefits and come into large amounts of money, because the trust allows the beneficiaries to retain their benefits while still being able to use their own funds when necessary.
  • The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the “payback” provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in the trust can pass to other family members, or to charity, without having to be used to reimburse the government.
  • A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.

Life Insurance
Not everyone has a large chunk of money that can be left to a special needs trust, so life insurance can be an essential tool. If you’ve established a special needs trust, a life insurance policy can pay directly into it, and it does not have to go through probate or be subject to estate tax. Be sure to review the beneficiary designation to make sure it names the trust, not the child. You should make sure you have enough insurance to pay for your child’s care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents’ estate intact for other family members. When looking for life insurance, consider a second-to-die policy. This type of policy only pays out after the second parent dies, and it has the benefit of lower premiums than regular life insurance policies.

ABLE Account
An Achieving a Better Life Experience (ABLE) account allows people with disabilities who became disabled before they turned 26 to set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. This money can come from the individual with the disability or anyone else who may wish to give him money.

Created by Congress in 2014 and modeled on 529 savings plans for higher education, these accounts can be used to pay for qualifying expenses of the account beneficiary, such as the costs of treating the disability or for education, housing and health care, among other things. ABLE account programs have been rolling out on a state-by-state basis, but even if your state does not yet have its own program, many state programs allow out-of-state beneficiaries to open accounts. (For a directory of state programs, click here.)

Although it may be easy to set up an ABLE account, there are many hidden pitfalls associated with spending the funds in the accounts, both for the beneficiary and for her family members. In addition, ABLE accounts cannot hold more than $100,000 without jeopardizing government benefits like Medicaid and SSI. If there are funds remaining in an ABLE account upon the death of the account beneficiary, they must be first used to reimburse the government for Medicaid benefits received by the beneficiary, and then the remaining funds will have to pass through probate in order to be transferred to the beneficiary’s heirs.

Get Help With Your Plan
However you decide to provide for a child with special needs, proper planning is essential. Talk to your attorney to determine the best plan for your family.