Illinois Estate Planning and Elder Law Blog

As outlined in U.S. News and World Report, Roth IRAs have many appealing characteristics. They grow income tax free. Owners are not required to take minimum distributions at age 70 1/2 so long as the account has been in place for five years. The income limit has been removed on Roth conversions, so anyone can convert a regular IRA to a Roth IRA. If tax rates increase, the benefit to converting now will be even greater.

It is important to remember that it is not your will or trust that determines who will inherit your Roth IRA. Roth IRAs, like all IRAs, include their own beneficiary designation. The owner of the Roth stipulates the beneficiaries of the account. In some cases, it will be the most advantageous to stipulate individual beneficiaries so that those beneficiaries can create their own Roth IRAs and stretch the tax savings over their lifetimes. Continue Reading

Congress put in place the kiddie tax to prevent individuals from putting assets in the names of their children who typically have far lower tax rates than their parents. As Laura Saunders points out in a recent article in the Wall Street Journal, this tax needs to be kept in mind when making gifts to children and grandchildren.

Under this tax, a child’s unearned investment income (interest, dividends and capital gains) which exceeds $2100 (in 2015) is taxed at the parents’ top rate. The tax applies to all children under age 18 and up age 24 if they can be claimed as dependents on the parents’ return.

The first $1050 of a child’s investment income is exempt from tax. The next $1050 of investment income is taxed at the child’s rate, which is usually very low or zero.

The tax does not apply to earned income such as wages from a job.

The kiddie tax does apply to taxable investment income so investing in growth stocks which do not pay dividends can help avoid the tax.

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You execute your Durable Power of Attorney for Property while you are competent. Your agent is given power to act on your behalf. Because it is durable, the Power of Attorney document can still be used if you become incompetent.

A Power of Attorney for Property includes many speficially referenced powers.

1) Real Estate Transactions – allowing the agent to buy, sell, exchange, rent and lease real estate

2) Financial Institution Transactions – allowing the agent to open, close, continue and control all accounts and deposits in any type of financial institution including banks, trust companies, saving and loan associations, credit unions and brokerage firms

3) Stock and Bond Transactions – allowing the agent to buy and sell all types of securities including stocks, bonds, mutual funds and all other types of investment securities and financial instruments

4) Tangible Personal Property Transactions – allowing the agent to buy and sell, lease, exchange, collect, possess and take title to all tangible personal property

5) Safe Deposit Transactions – allowing the agent to open, continue and have access to all safe deposit boxes

6) Insurance and Annuity Transactions – allowing the agent to procure, acquire, continue, renew, terminate or deal with any type of insurance or annuity contract

7) Retirement Plan Transactions – allowing the agent to continue to withdraw from and deposit funds in any type of retirement plan

8) Social Security, Unemployment and Military Service Benefits – allowing the agent to prepare, sign and file a claim or application for Social Security, unemployment or military service benefits

9) Tax Matters – allowing the agent to sign, verify and file all of the principal’s federal, state and local income, gift, estate, property and other tax returns

10) Claims and Litigation – allowing the agent to institute, prosecute, defend, abandon, compromise, arbitrate, settle and dispose of any claim in favor of or against the principal or any property interest of the principal

11) Commodity and Option Transactions – allowing the agent to buy, sell, exchange, assign, convey, settle and exercise commodities futures contracts and call and put options

12) Business Operations – allowing the agent to organize or continue and conduct any business in any form

13) Borrowing Transactions – allowing the agent to borrow money, mortgage or pledge any real estate or tangible or intangible personal property

14) Estate Transactions – allowing the agent to accept, receipt for, exercise, release, reject, renounce, assign, disclaim, demand, sue for, claim and recover any legacy, bequest, devise, give or other property interest.

15) All Other Property Powers and Transactions – allowing the agent to exercise any powers of the principal regarding any types of property and interests in property except to the extent limited by the principal by striking out a category on the power of attorney document or including a specific limitation in the power of attorney document

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In his article titled Estate Planning for a Family with a Special Needs Child, Sebastian V. Grassi, Jr. lists five estate planning options for parents of a special needs child

1. Distributing assets directly to the special needs child;

2. Disinheriting the special needs child;

3. Leaving property to another family member;

4. Establishing a third-party discretionary support trust for the special needs child; and

5. Establishing a third-party created and funded Special Needs Trust for the child.

Only number 5, establishing a third-party created and funded special needs trust, is recommended because it will not disqualify the child from receiving means-tested government benefits, it is legally enforceable and it does not subject the assets to creditors of family members.

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You can withdraw your original contributions to a Roth at any time. But you must wait five years to avoid paying the tax on earnings on regular contributions and you must be 59 1/2 years old.

If you inherit a Roth from your spouse, the taxable period ends either five years after the account was opened by your spouse or five years after the surviving spouse opened his own Roth, whichever is earlier.

A surviving suppose can name his children as equal beneficiaries of the same Roth. It is in the children’s interest to do so. Any heir other than a spouse who treats the Roth account as his own must take the required distributions from the Roth beginning by December 31st of the year after the year of the previous owner’s death. If the children keep the account intact and they want to stretch the withdrawals as long as possible, they are restricted to using the oldest child’s age. However, if they split the account, each sibling can stretch the distributions across his own lifetime. This means younger siblings can spread withdrawals over more years, leaving more assets in the account for a longer time and most likely realizing more tax-free earnings.

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The components of Medicare are:

1) Part A, mainly hospital coverage;
2) Part B, outpatient coverage; and
3) Part D, drug coverage.

Medigap coverage pays the uncovered portions of most Medicare bills.

There is also Medicare Advantage coverage which provides most of the coverages in items 1), 2), 3) and Medigap coverage combined in one package. When creating your estate plan, medical bills and their coverage by insurance need to be addressed.

Medigap coverage is important because Medicare is not enough coverage for people with average to above-average medical costs.
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Anne Kates Smith discusses in her article in Kiplinger’s magazine a law enacted at the end of last year which authorizes tax-advantaged savings accounts for individuals with disabilities knows as ABLE (Achieving Better Life Experience) accounts.

Anyone can open an ABLE account for an eligible beneficiary. This is someone who has a disability that was present before age 26 and that is “marked and severe” functional limitations. Individuals who have met the disability standards for Supplemental Security Income (SSI) will qualify as will those with conditions such as autism, Down syndrome or blindness.

A beneficiary can have only one ABLE account.

Contributions to the account are after-tax, and earnings and distributions from the account will not count as taxable income. Annual contributions must be under the federal gift-tax exemption ($14,000 in 2015), and the total account cannot exceed state-based limits for 529 accounts.

The expenses covered include educational expenses, assistive technology, transportation costs, specialized housing and job training.

Account assets generally will not affect eligibility for other programs with the exception of SSI which may be impacted if account assets exceed $100,000.
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In the November 2015 issue of Kipplinger’s magazine, an article points out that it is common for families to distribute assets through the use of trusts, which come in more flavors than Jelly Belly jelly beans.

Trusts can minimize estate taxes, protect assets from mistakes of heirs or avoid probate keeping information private.

A revocable living trust allows the creator to maintain control over the assets while he is alive. This type of trust avoids probate, and if a husband and wife put revocable living trusts in place, they can include credit shelter provisions which allow each of them to use his/her Federal Estate Tax Exemption ($5.43 million in 2015) thereby passing over $10 million free of Federal Estate Tax.

Asset protection trusts can be used if there are concerns about the spending habits of beneficiaries. This type of trust protects beneficiaries from creditors, bankruptcy and future ex-spouses because assets belong to the trust, not the beneficiary.

A personal message by the trust creator included in the trust often makes an otherwise impersonal document far less sterile. A story behind family heirlooms can be included, or the trust creator can express why he values education or entrepreneurship.
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