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Individual Retirement Accounts (IRAs) are an investment tool and need to be taken into account when doing estate planning.

It is important to name a beneficiary of an IRA. A spouse is often a beneficiary. A contingent beneficiary should also be named so that the IRA does not pass to your estate and require the opening of a probate administration with the Court in the event that your spouse dies before you.

When a spouse inherits an IRA, he can roll it over into his own IRA. When a non-spouse inherits an IRA, the heir will need to start taking distributions within a year after the IRA owner dies.

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In her article in the Wall Street Journal, Jennifer Hoyt Cummings gives tips regarding setting up a trust so that parents can protect their assets from free-spending or other problem children/ beneficiaries. She advises that a trust should be put in place so that a spendthrift child cannot get title to a home. A trustee can buy real estate on behalf of the child.

She also advises setting up the trust so that the child’s creditors cannot access the inheritance. This is commonly referred to as an asset protection trust.

Ms. Cummings cautions that a trust could go on for a hundred years or more, so language should not be too specific or too narrow. In addition, legal jargon in the trust and the reasons for the trust provisions should be explained with a letter attached to the trust.

And she suggests considering trust distributions for children who want to take on special projects like studying abroad.

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Long-term care can be very expensive, but many long-term care expenses can be deducted from your taxes.

In a decision by the U.S. Tax Court, it ruled that payments to non-medical caregivers are still deductible as medical expenses. In Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011), Lillian Baral suffered from dementia, and her doctor recommended that she get 24 hour care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments of the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.

Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed ten percent of adjusted gross income. The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. Chronically ill means you need help with activities like eating, using the bathroom and dressing, or you require substantial supervision due to a severe cognitive impairment.

The Tax Court agreed with Ms. Baral that the payments to the caregivers for assisting and supervising Ms. Baral are deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personal because a doctor had found that the services provided to Ms. Baral were necessary due to her dementia.

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A tremendous breakthrough in Special Needs Planning is the ABLE (Achieving a Better Life Experience) account. In a recent article in Kiplinger’s magazine, Kimberly Lankford points out that a 2014 federal law allows states to create these accounts. Illinois adopted ABLE legislation in 2015.

The law allows individuals of any age who developed a qualifying disability before age 26 to open an ABLE account. Anyone can add to the account, but the total contributions cannot be more than $14,000 each year, and the beneficiary can have only one ABLE account at a time but is allowed to switch plans.

The money may be used for most expenses to benefit the disabled person. It is tax free, and accounts up to $100,000 do not count toward the $2000 limit for Supplemental Security Income benefits.

The ABLE National Resource Center may be contacted at www.ablenrc.com and the Illinois State Treasurer’s office which administers the program may be contacted at 312-814-2677. Continue Reading

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Most seniors prefer to stay at home as long as possible before moving into a nursing home. For many families, this means eventually hiring a caregiver to look after an aging relative. Caregivers can be hired directly or through a home health agency.

When a caregiver is hired directly, you need to consider all of the tax and liability issues. As an employer, you are responsible for filing payroll taxes, tax forms and verifying that the employee can legally work in the United States. In Illinois, if you pay $2000 or more in wages in 2016 to any one employee, you need to withhold and pay Social Security and Medicare taxes. Unemployment insurance contributions must be made if you paid cash wages of $1000 or more in any calendar quarter during 2016 or 2015. Insurance for an accident which occurs on the job should also be addressed.

The benefit of hiring a caregiver directly is that you have more control over who you hire and can choose someone who you feel is right for your family. In addition, hiring privately is usually cheaper than hiring through a home health agency.

When you hire through a home health agency, the agency is the employer, so you do not need to address the tax and liability issues. The agency takes care of screening the employees, doing background checks and providing insurance. A licensed home care agency must provide ongoing supervision to its employees. It can help the employees deal with difficult family situations or changing needs. The agency may also be able to provide back-up if a regular caregiver is not available.

The downside of going through an agency is not having as much input into the selection of a caregiver. Caregivers may change or alternate, causing a disruption in care and confusion. Continue Reading

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A trust is a legal arrangement where one person (or an institution such as a bank or law firm), called a “trustee”, holds legal title to property for another person, called a “beneficiary”. If you have been appointed the trustee of a trust, this is a strong vote of confidence in your judgment. It is also a major responsibility.

As a trustee, you stand in a fiduciary role with respect to the beneficiaries of the trust, both the current beneficiaries and any remaindermen named to receive trust assets upon the death of those entitled to income now. As a fiduciary, you will be held to a high standard, meaning that you must pay more attention to the trust investments and disbursements than you would for your own accounts.

Your investments must be prudent, meaning that you cannot place money in speculative or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries. For instance, you may have a current beneficiary who is entitled to income from the trust. He would be best off if you invested the funds to generate as much income as possible. However, this would not be in the interest of remainder beneficiaries who would be happiest if you invested for growth of the principal. In addition to balancing the interests of the various beneficiaries, you must consider their future financial needs. Does a trust beneficiary anticipate buying a house or going to school? Will he be depending on the trust income for retirement in 15 years? All of those questions need to be considered in determining an investment plan for the trust.

One of your jobs as trustee is to keep track of all income of the trust and expenditures by the trust. You must give a periodic account of this information to the beneficiaries.

Depending on whether the trust is revocable or irrevocable and whether it is considered a grantor trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes. In many cases the trust will act as a pass through with the income being taxed to the beneficiary.

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Amy Winehouse’s death at age 27 illustrates the importance of having a Will, at any age. Ms. Winehouse and Blake Fielder-Civil were married briefly. Under English law, marriage negates any Wills made before the marriage, but if a couple divorces and there is no new Will, the ex-spouse is the favored beneficiary. Ms. Winehouse updated her Will to ensure that Fielder-Civil, who is currently in jail for burglary and possession of an imitation fire arm, would not inherit any of her estate. Under Winehouse’s Will, her estate estimated at $16 million, will go to her parents and her brother.

In Illinois, if you die without a Will, state law will determine who will inherit from you. If you are married, your spouse gets one-half of your estate and the rest is divided equally among your children.

If you have young children who will need a guardian, a Will is an important document to put in place to allow you to nominate that guardian. Planning your estate with a Will and a Trust is the best way to ensure that your assets are distributed as you want without the value of your assets and the beneficiaries who receive them made public. Continue Reading

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When making gifts to charities, keep in mind the following:

  • Give away appreciated stock which you have held for more than a year. You can deduct the market value of the stock, and you do not owe capital gains tax.
  • Get receipts in writing from the donee for gifts over $250.
  • If you are over 70 1/2 years old, transfer up to $100,000 from an IRA to charity and none will be included in your income. It will also count toward the required minimum distribution.
  • If you donate a car, you can deduct only what the charity actually sells it for.

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More and more seniors are living together without getting married. According to U.S. Census date, the number of cohabitating seniors nearly doubled between 1989 and 2000. For some seniors, marriage is not financially worth it or they do not want to lose their former spouses’ military pension or Social Security benefits. Other seniors do not want to have to pay their partner’s medical expenses or deal with the objections of children worried about their inheritance.

If you and your partner plan to live together without getting married, you can take a number of steps to ensure that you are protected and your wishes are followed.

Sign a cohabitation agreement. The agreement can state your intentions not to marry or to make any claims against each other. It can also specify the division of household expenses and what will happen to your house in the case of death or breakup.

Provide access to health care decision making. If you are not married, you have no right to participate in your partner’s health care decisions or even, in some circumstances, to visit your partner at the hospital. To avoid this situation, you need several documents. You can sign a Health Insurance Portability and Accountability Act (HIPAA) medical release to allow each other access to the other’s medical information. In addition, a Power of Attorney for Health Care allowing your partner to make health care decisions will give the partner those health care decision making rights.

Sign a durable power of attorney. A Durable Power of Attorney for Property allows your partner, or whomever you appoint, to make financial decisions for you if you become incapacitated. Without a Durable Power of Attorney for Property, the court will have to appoint a guardian to make those decisions. Annual filings with the court regarding your estate’s assets will be required along with other filings with the court.

Update your will. Your will should be clear about what happens to your possessions when you die, including your house and its contents. It is particularly important to specify what will happen to your house if it is owned by only one partner. Continue Reading

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Natalie Choate, widely recognized as the authority on IRAs and estate planning, turns 70 1/2 this year. This age is key as it is the time when required IRA payouts begin.

At 70 1/2, each year owners typically must withdraw a percentage of their total IRA assets. This percentage increases every year, and IRA owners have until April 1 after the year they turn 70 1/2 to take their first required withdrawal. After that, the annual deadline is December 31.

If you are considering making charitable gifts, a transfer from your IRA may be highly tax-efficient. IRA owners are allowed to give up to $100,000 in cash from an IRA to charity and have the donation count as part of their required withdrawal. The advantage is that Adjusted Gross Income (AGI) is  a trigger for many tax provisions like the 3.8% surtax on net investment income. It is also used to determine payments for some Medicare premiums and taxes on Social Security payments. Lowering Adjusted Gross Income can lower these taxes.

Laura Saunders cites an example in a recent article in the Wall Street Journal: A single IRA owner has AGI of $210,000, including $160,000 of investment income. The person, who has a $50,000 required IRA payout, will write checks for $15,000 to charities this year. Under current law, $10,000 of the investment income would be subject to the 3.8% surtax because the owner’s AGI is above $200,000.

If this IRA owner makes the $15,000 of charitable gifts from his IRA, the result is different. The owner’s taxable portion of his IRA payout drops to $35,000 and the AGI to $195,000 so there is no 3.8% surtax. Continue Reading