New York Trusts & Estates

The Right Way to Make an Early Withdrawal from an IRA.

Many investors believe you can’t withdraw retirement savings before age 59 ½ without paying a 10 percent penalty.

There are a number of good reasons that you might be eying your IRA as it sits there with years to go before you turn age 59-1/2. You could see it as potential, as rescue capital, or if you’re in a really good place you could see it as the start of an early retirement. Of course, there are a few good reasons for leaving it alone – heavy tax hits and penalties – and for that Forbes has recently offered some uncommon advice for withdrawing from your IRA early and penalty free.

The general wisdom is to leave your IRA alone until age 59-1/2 or else pay a 10 percent penalty on withdrawals. But there are allowances for penalty-free distribution in the case of serious financial hardship, higher educational expenses, or the cost of a first home. What is far less known is the 72(t) exception for Substantially Equal Periodic Payments (SEPP). Essentially, the IRS regulations allow annuitization of your IRA, so you can receive distributions straight from your IRA by taking them as a series of “substantially equal periodic payments.” The payments, once initiated, act much like required minimum distributions in that you must take out an amount determined by your life expectancy (or the joint life expectancy of you and your beneficiary) and at regular intervals, at least annually. Once initiated, you must take these distributions for 5 years or until age 59-1/2. You can then reorganize your distribution pattern or hold off entirely until the actual required minimum distributions set in at age 70-1/2.

The process, as you would imagine, is fairly complicated and that probably accounts for its relative under-use. To see it in action you can consult the original Forbes article, but even they found it simpler to reiterate the examples and information from the IRS’s FAQ. It is tricky, and perhaps a little risky, but it is at least an interesting tactic to bring to light, and may be a practical solution to your early-retirement plans.

Now Is a Great Time to Think About Charitable Giving.

 The tax deal reached in December by congressional leaders and the Obama administration is fueling a boost in donations into donor-advised funds.

According to some barometers, there has been a recent surge in charitable giving over these, the first few months of 2011. Apparently, a good number of people have figured out that now is a good time to give.

As a recent article on InvestmentNews.com reports, “The Vanguard Charitable Endowment Program, the nation's second-largest, collected about $129 million during the first quarter, a 60% in- crease over the same period a year earlier. Donations out of the $4.8 billion fund totaled $87 million, a 31.2% increase from $66 million.”

Why the sudden increase? The new tax deal reached in December makes 2011 and 2012 particularly attractive years for charitable giving. Conditions are ripe for estate reduction, and charitable giving is one of the best forms of estate reduction.

There is something counter-intuitive to this giving season, though. If estate reduction is the motivation for charitable giving, and if you should be swayed into practicing it yourself, why is it important to do so now, with the estate tax exemption at an historic high ($5 million) and the rates at generous lows?

You just cannot forget the fact that these conditions are temporary, and set to expire at the end of 2012. President Obama, speaking for most liberals, has already voiced his plans on lowering the Gift and Estate tax exemptions far below their current generous rates as well as increasing taxes on the wealthiest Americans. And with the recent (and long-overdue) focus on debt-reduction, wealth transfer taxes are quite likely to experience a resurgence of popularity in Congress.

Experts are recommending that wealthy individuals and families make the most of the existing philanthropy-friendly tax provisions before they disappear. You can learn more about charitable by contacting my office.  

Choosing a Health Care Advocate to deal with Medical Insurance

 A medical issue can spring up with sudden ferocity, and even savvy patients can find themselves overwhelmed when trying to navigate care and insurance. Private health-care advocates can help — typically for a fee.

 

When a medical issue strikes you or your family, the world starts spinning a bit faster and begins to bear down hard. Even the best of us can’t always keep our heads above the rising tide of bureaucracy, legal snares, and other issues that can arise in the event of a medical-billings problem or an insurance coverage denial. A private health care advocate might be an option worth exploring, according to a recent article in the Wall Street Journal’s MarketWatch.  

An advocate cannot offer medical advice or address legal issues (like malpractice lawsuits) but they can help resolve medical billing problems, fight insurance-coverage denials, aid in complex medical decision-making and find the right specialist or hospital for a particular condition. Some even accompany patients to doctors’ offices and other care settings. Many are or were nurses or social workers – and can help push through a problem when you really need assistance or guidance. Most hospitals employ similar representatives that can help during your stay, but private advocates are often small businesses that can be called upon in far more circumstances.

Advocates typically charge $50 to $200 an hour, says Joanna Smith, president of the National Association of Healthcare Advocacy Consultants (NAHAC), a professional group in Berkeley, CA. If you are looking to hire a health-care advocate, you should expect a written estimate of costs and services, and feel comfortable with the advocate’s style, experience and expertise before signing on. The NAHAC has designed a code of ethics, which you can find on their website. Be sure to ask about those when interviewing an advocate.

 While it is not generally cost effective to use an attorney unless you actually have to sue, I can recommend several advocates who will do this work for you at a reasonable rate. If you have any questions, please contact my office by clicking here.

How Much of Your Life Insurance Will Go to Uncle Sam?

 Having enough life and disability insurance should be a key element of your personal financial game plan. Hopefully, with some advance planning, you can collect life and disability insurance proceeds free of taxes.

Since most of just finished filing our annual income tax return, we may not be in the mood to further discuss the topic of taxes … unless it’s all about avoiding them. Which is why now is a good time to turn to the topic of life insurance, taxes and your estate plan.

The primary purpose of life insurance, for most people, is to replace income that would be lost should you die prematurely. The good news is that life insurance death benefits are generally received by your beneficiaries free of any federal income tax (and usually free of any state income tax as well).

But what about the federal estate tax? Contrary to popular belief, the death benefit of life insurance could be subject to estate tax. If the tax rules treat you as the owner of a policy on your own life, the death benefit is included in your taxable estate – unless the money goes to your surviving spouse (they then will become part of his or her estate). If you are the owner of the policy and the death benefits go to anyone else, a child or sibling even, then money is included in your estate.

The estate tax exemption is currently set at $5 million through 2012, and although this is historically quite high, a large life insurance policy could push an otherwise non-taxable estate above the limit. And don’t forget that the current rule is in place only through 2012, and there are quite a few who believe lowering the exemption might be the answer to reducing our federal debt.

Smart Money last week laid out pretty clearly how the life insurance / estate tax scenario plays out. To quote them: “The tax rules say you own a life insurance policy if you possess so-called ‘incidents of ownership.’ You have them if you retain the power to change policy beneficiaries, change coverage amounts, cancel the policy and so forth.”

So, how do you avoid these “incidents of ownership”? You can establish an irrevocable life insurance trust (ILIT) to purchase a new policy on your life. If that’s not possible, you could consider transferring an existing policy. But there are some potential land mines in that strategy. First, if you transfer the policy and die within three years, the IRS pulls the proceeds back into your estate as if the transfer had not occurred. Second, if you transfer a policy with cash value in excess of $13,000, it could trigger adverse gift tax consequences.

 

 

New Medical Information on Alzheimer's

 For the first time in 27 years, the definition of Alzheimer’s disease is being recast in new medical guidelines that reflect fast-mounting evidence that it begins ravaging the brain years before the symptoms of dementia.

No real breakthrough has been reached yet but, as The New York Times reports, science is ready to rewrite the books on Alzheimer’s disease in a way that may usher in earlier detection and with it the possibility of earlier, more effective treatment.

The National Institute on Aging and the Alzheimer’s Association have come together to issue a new definition and medical guidelines for Alzheimer’s, the first serious reworking of the definition in 27 years. The full onset of dementia, what we classically define as the hallmark of the disease, is now thought of as the final of three progressive stages. Research indicates that the disease affects the brain long before the onset of dementia, and the first stage often shows no outward symptoms at all even as the brain begins to change. The second stage is an intermediary phase where neurological symptoms begin to set in but with little indication of the full extent to come.

The most striking addition to the guidelines concerns methods that assess brain changes, including brain scans and tests of cerebral spinal fluid. These methods measure biomarkers, the physiological indicators that someone is likely to develop dementia eventually, just as cholesterol and blood pressure are biomarkers of impending heart disease.

Will this affect medical practice just yet? Not quite. For now, the guidelines specify that Alzheimer’s biomarkers should not yet be put into widespread use, but used only with patients enrolled in clinical trials. That is because scientists cannot yet standardize the test results.

The importance, according to Dr. Pierre Tariot, director of the Banner Alzheimer’s Institute in Phoenix, is that we understand the disease to be a very long process. “The notion that Alzheimer’s disease is a continuum that has an extensive pre-symptomatic phase is a very important message to get out.”

If you or a loved one are coping with or care-giving for someone with Alzheimer’s disease, please visit our website. Consulting with an elder law attorney sooner rather than later could help preserve your future options … and assets. 

 

 

THE ILIT IS DEAD - LONG LIVE THE ILIT

 With the expansion of the Federal Estate Tax Exemption to $5 million, I often hear from financial advisors that there is no reason to do an Irrevocable Life Insurance Trust (“ILIT”). Usually in the form of “Guess that business is gone” Naturally we remind everyone that this extension is only for two years and that it could go back to the pre-2000 limit of $1 million.

 But let’s assume that the Federal Estate Tax Exemption remains at $5 million for the foreseeable future, there are still reasons for clients to get an ILIT for their life insurance policies. Let’s remember the main reason a person has a life insurance policy is to insure that after they pass away, they are able to leave some money as a legacy for their family. We also know that more and more life insurance products are there to give peace of mind to the insured that they no longer have to worry about living frugally so that they will have no money to leave to their family. Good Financial advisors explain to their clients that they can enjoy their money while they are alive, knowing that their life insurance can leave a legacy to the family. That legacy remains at risk from New York State Taxes and Nursing Home costs unless it is protected in a vehicle such as the ILIT.

New York State has not eliminated its Estate Tax

New York State has always had an Estate Tax and its Exemption amount is $1 million the same as the old federal law. New York State gives a full deduction for any amount paid on the Federal Tax but since anyone with $1 million to $4.99 million will not pay federal taxes, then state taxes apply. The taxes are on a progressive scale but will still meaningful tax bite for any client that falls within this range. If, in 2011, an individual passed away with $2 million, the taxes owed to New York State could be as high as $100,000. Given the State’s financial troubles it is unlikely that they will change that Exemption in the future regardless of what the Federal Government does. Since life insurance is counted as part of the decedent’s Federal Estate Tax calculation, taking the policy out of their estate eliminates this tax burden. That has historically been the goal of the ILIT.

What about nursing home care?

 So let’s say you have a client who took your advice and bought a policy of a million dollars so that the client could spend their money on themselves. Ten or fifteen years go by and they have significantly depleted their estate. But there is no need to worry about the kids because there is a million dollar policy for them. However, now the client has Alzheimer’s and will need long term care in the foreseeable future.  Their entire plan is at risk because of their long term care needs.

 Why - Did you know that Medicaid requires that life insurance policies with a cash surrender value of more than $1,500 must be cashed in before an individual can qualify for Medicaid?

 The ILIT can protect the policy so that it is not only taken out of the estate for tax purposes but also taken out of the estate for Medicaid purposes. This protection should be done sooner than later because unlike the gift provisions for the IRS, the transfer of the policy for the ILIT is subject to the five year lookback rule. However, even if the client is looking at a long term care issue in less than five years it is still possible to protect the policy as long as there are other assets with which the client can privately pay.

 Historically the greatest threat to legacy preservation was the tax bite of the federal estate tax but more recently, especially for the middle class, the threat of losing one’s asset to nursing home costs is becoming highest concern on the minds of many clients.

 As an estate planning attorney more and more of my practice is devoted to the creation of special Medicaid trusts that allow my clients to qualify for government assistance for long term care while protecting their hard earned assets for their family. The ILIT can be an important part of any estate plan or asset protection plan.

 So before we declare the ILIT dead, remember, understanding a client’s concerns and the purpose for the estate plan means there still are reasons to place an insurance policy in an asset protection trust.

 If you have any questions about ILIT’s or any other estate planning issues, please feel free to call me at 914-862-0580 or 845-368-0845.