October 2019 - K.T. Williams Law

Estate Planning With Retirement Accounts: The Basics

October 25, 2019/in Retirement/by KT Williams

Retirement Accounts: How To Plan When It’s Your Largest Asset?

Many workers have diligently contributed to their retirement accounts for years. And the funds accumulated in the accounts can be substantial, often their largest asset. So it’s important to consider the options that exist for estate planning with them. There are many different types of retirement accounts, but the rules are similar, so they will be collectively referred to as IRAs in certain places in this article.

Retirement Accounts Are Valuable Tools To Accumulate Substantial Savings.

Whether a 401k, an IRA, or some other form of retirement account, the benefits of a retirement account are difficult to overstate. They allow earnings to be saved tax free and to grow tax free until they are withdrawn. No one should pass the opportunity to max their contributions to an available retirement account.

The withdrawal of the retirement savings may be years, even several decades after they were earned. This delay between when the funds were earned by the worker and when they are taxed upon withdrawal has come under close scrutiny by the government. And recently the US House of Representatives passed a bill to shorten the period that retirement accounts can grow without being taxed. This is a helpful article I wrote about the proposed changes. But, even if the proposed changes become law, the benefits of retirement accounts remain. And those people with retirement accounts should structure their estate plan accordingly.

How Should You Plan With Your Retirement Account?

This may be a surprise, but your retirement account is not controlled by your Last Will and Testament. Instead, the distribution of your retirement account is controlled by the beneficiary designation for the account. So you should regularly check your beneficiary designation to make sure it is correct.

A Beneficiary’s Immediate Withdrawal of the Full Balance.

You can name an individual as the beneficiary of a retirement account. The named beneficiary of a retirement account may withdraw the full balance of the account. This means that upon the account owner’s death, the beneficiary can prove to the financial institution holding the account that they are the named beneficiary, then withdraw the full balance for their personal use.

While allowing immediate withdrawal of the full balance may seem like a fine idea, it comes with a few concerns. First, a withdrawal that isn’t part of a “rollover” to a retirement account will be taxed. The tax may be substantial, and the withdrawal may push the beneficiary into a higher tax bracket. Second, the balance of the account is the result of years of work and saving by the person who contributed to the account. The possibility that the fruit of that effort may be quickly consumed by a hefty tax burden and frivolous spending is unsettling. Don’t be lured into believing that naming a specific individual as the beneficiary of your retirement account is your only option. There are other options. In fact, your retirement account can provide years, even decades of financial support and benefit to your beneficiary, yet not be subject to the beneficiary’s temptation to withdraw it quickly and spend it.

A Beneficiary’s Long Term Benefit From An Inherited Retirement Account.

You can protect the retirement account from being immediately withdrawn and spent while providing a long term benefit to its beneficiary. You can do this with the careful use of a trust that is structured to meet IRS requirements.

The IRS allows a trust to be the beneficiary of an IRA, but the trust’s terms must be carefully crafted to meet IRS requirements. If the trust isn’t structured correctly, the IRA must distribute its full balance to the trust within five (5) years. You want to avoid this if possible because this quick five (5) year distribution means the entire IRA balance will be taxed at a high rate within that five (5) year period. On the other hand, if the trust is correctly structured, the IRA won’t have to distribute any quicker than would be required by the IRS’s distribution rules for inherited IRAs. This means lower taxes and a much longer period for the IRA funds to grow tax-free in the IRA account.

You may wonder if naming a trust as the beneficiary of your IRA will impose too large a burden on the person you want to receive the benefits of the IRA. It will not. You can give the trustee specific instructions on how often and how much you want to be distributed from the trust to the beneficiary. And you can set guidelines that will allow the trustee to distribute more if your beneficiary’s needs exceed what you expected or to distribute less if the trustee sees that the distributions are being used for destructive behaviors, such as substance abuse or uncontrolled gambling. Your options with a trust are almost limitless.

What Is Right For You?

A retirement account trust is right for you if you want to see your family benefit from your retirement account over a number of years, and you don’t want to see the retirement account used up quickly, frivolously, and generating a large tax burden. Additionally, a retirement account trust can be right for you if you want to benefit your surviving spouse with the retirement account, but not see it used for their new significant other or new spouse. If you want to learn more about your options for planning with your retirement accounts, contact us.

Living Will and Other Health Care Directives: The Basics

October 18, 2019/in Health Care Planning/by KT Williams

The Living Will directs our health care providers about specific procedures we want or don’t want. It only comes into play if we are incapacitated and can’t express our wishes directly to our nurse or doctor. Our Living Will does not direct our family or anyone else about our property. Our Last Will and Testament (our Will) does that. Because the names are similar, however, some confusion occasionally arises.

The Living Will has a Narrow Scope.

The Living Will relates to important health care procedures that we might face, such as the need for feeding tubes, life support, and comfort measures. It isn’t a Do Not Resuscitate (DNR) Order, and it will not prevent health care providers from trying to resuscitate you. So, if you want to prevent resuscitation, you should have a DNR in your medical records and perhaps even a Medical Order for Scope of Treatment (MOST). You can get more information about the importance of a MOST in this helpful article.

In your Living Will, you can say whether you want the other health care procedures that could prolong your life. But there isn’t an option to say “it depends.” Most of us, though, don’t feel convinced that we want to prohibit life support under all circumstances. We realize that our need for life support could be temporary. And a fulfilling, quality life could follow the temporary use of life support. So we may be reluctant to say in our Living Will that we don’t want life support.

However, most of us are also certain that we don’t want to be kept on life support indefinitely. So how do we express this “it depends” attitude about life support and other procedures covered by a Living Will? Well, the Living Will allows us to leave the decision to our Health Care Surrogate. We can give our Health Care Surrogate the authority to listen to our health care providers, then decide what they believe we would choose if we were listening with them. If they think we would allow life support based on the medical report, then they will allow it. It they don’t think we would allow life support based on the medical report, then they won’t allow it. And, if they allow it, but the prospect of a fulfilling, quality life after life support becomes unlikely, they can remove the life support.

But keep this in mind: if you place the decision on your health care surrogate, they must live with the decision, and that can be difficult. Many people I’ve served don’t want to put the burden of that decision on anyone else. So they express clearly in the Living Will whether they want the procedures or not, and they accept the consequences of that decision.

The Health Care (or Medical) Power of Attorney has a Broader Scope.

While the Living Will is narrow in scope and typically relates to end-of-life health care decisions, the Health Care Power of Attorney relates to health care decisions that we might face at other times in our life. Of course, like the Living Will, the Health Care Power of Attorney isn’t needed if we can express our wishes directly to our nurses and doctors. But when we can’t, such as if we are in the middle of a medical procedure, the Health Care Power of Attorney gives our Health Care Surrogate authority to make health care decisions for us. For example, imagine we are having a surgical procedure for which we must be asleep. While we’re asleep, the surgeon discovers something unexpected and knows immediate action should be taken. But the physician may be reluctant to proceed without authorization. So the physician could explain the situation to the Health Care Surrogate, get approval to proceed, then take the action without further delay. Suffice it to say, we should all have a Health Care Power of Attorney that names a Health Care Surrogate we trust to make wise decisions for our health.

You Should Have a Living Will and Other Advance Directives.

Make no mistake that I believe everyone should have up-to-date and thorough health care directives, such as the Living Will and Health Care Power of Attorney. Also, if we don’t want to be resuscitated, we should be clear to our nurses and doctors that they should place a DNR order in our medical record. And everyone should consider the Medical Order for Scope of Treatment (MOST). It will help give our nurses and doctors a clear picture of our wishes in a way that is easy for them to understand. Contact us for help with your Living Will, Health Care Power of Attorney, or other estate planning needs.

Special Needs Trusts: The Basics – Continued.

October 11, 2019/in Asset Preservation, Estate Planning/by KT Williams

It’s difficult to overstate the benefits of a Special Needs Trust when one is needed. Often it covers a loved one’s unmet needs that remain after government benefits and family resources are exhausted. And it accomplishes this without causing the loved one to lose their government benefits, which might include SSI (Social Security Income), Medicaid, or housing benefits. You can find a deeper discussion of this here in an earlier article about Special Needs Trusts. In this article, I continue the explanation of Special Needs Trusts, describing the three (3) most common: First Party Special Needs Trusts, Third Party Special Needs Trusts, and Pooled Special Needs Trusts.

What Is a First Party Special Needs Trust?

A First Party Special Needs Trust is a Special Needs Trust created with the assets, or property, of the special needs beneficiary. In other words, the person with special needs owns or receives assets. If the assets would disqualify them from SSI, Medicaid, or other similar program, the assets can be placed in a First Party Special Needs Trust. When properly drafted, a First Party Special Needs Trust will permit the beneficiary to receive benefits from the trust without losing their government benefits, such as SSI or Medicaid.

While the First Party Special Needs Trust is a helpful tool, it comes with a trade-off. At the death of the special needs beneficiary, any assets left in the First Party Special Needs Trust must reimburse Medicaid for the benefits Medicaid provided the special needs beneficiary. In most instances, this payback obligation could have been avoided with careful advance planning. The assets could have been better preserved if a Third Party Special Needs Trust was used.

What is a Third Party Special Needs Trust?

A Third Party Special Needs Trust is a Special Needs Trust created with the assets, or property, of someone other than the special needs beneficiary. In other words, the person who wants to benefit the special needs beneficiary transfers assets, or property, into a trust established to benefit the special needs beneficiary. Through this Third Party Special Needs Trust, the special needs beneficiary can derive all of the benefits that he or she could derive from a First Party Special Needs Trust without the obligation to reimburse Medicaid at the special needs beneficiary’s death. Instead, the remaining assets can be distributed without restriction to other beneficiaries or charities, exactly as the family would want.

What is a Pooled Special Needs Trust?

A Pooled Special Needs Trust is similar to a First Party Special Needs Trust, but its unique characteristics make it a better option for many people. Occasionally, it’s difficult to find someone to serve as trustee of the special needs beneficiary’s First Party Trust. Perhaps, it’s difficult because the family is small or doesn’t have anyone capable of tending to the beneficiary’s needs. Or maybe it is difficult because the amount to be placed in the trust is so small that it isn’t practical to create a single trust for such a small amount. In those instances, a Pooled Special Needs Trust may be the best option.

A Pooled Special Needs Trust is a Special Needs Trust that is made up of the assets of many different special needs beneficiaries. The assets are “Pooled” and managed as a single trust with subtrusts, or accounts, set up for each beneficiary who contributed assets to it. Through the accumulation of many small contributions from a variety of special needs beneficiary’s, a Pooled Special Needs Trust is able to cover the cost of managing the assets and the special needs beneficiary’s needs at a lower cost to each beneficiary than if the beneficiary’s assets were the only assets in the trust.

Like the funding of the First Party Special Needs Trust discussed above, the Pooled Special Needs Trust is usually funded with the special needs beneficiary’s own assets, or property. And the similarity between the First Party and Pooled Special Needs Trust doesn’t stop there. In addition, at the special needs beneficiary’s death, the beneficiary’s family will not have control of the funds remaining in the subtrust, or account, or be able to direct where they are spent or distributed. Instead, the funds remain in the Pooled Special Needs Trust to cover operating costs, fees, and other administration expenses so that the cost to the other trust beneficiaries remains as low as possible.

Which Special Needs Trust Is Right For Your Family?

A Third Party Special Needs Trust is the best way to benefit a special needs family member or friend. It has all of the benefits of the First Party and Pooled Special Needs Trusts, yet allows remaining assets at the beneficiary’s death to pass to whomever the family directs rather than reimburse Medicaid (First Party Trust ) or remain in the trust to cover ongoing trust expenses (Pooled Trust). The First Party and Pooled Special Needs Trusts have their place and provide valuable benefits, but we only resort to those when we must. Be that as it may, we’re fortunate to have them available. If you want to learn more about how to set up a Special Needs Trust or simply have questions about other ways to benefit someone with special needs, contact us. We want to help.

Power of Attorney: The Basics

October 4, 2019/in Estate Planning/by KT Williams

One of the most important tools for making sure help will be available when we need it is the Power of Attorney. The idea that we can take care of ourselves and won’t need help is a common one. Whether we were raised that way or simply don’t want to bother anyone with our needs, we resist the idea that we’ll need help. Nevertheless, the day is likely to come when we won’t be able to do everything for ourselves. Our limits might be physical, but they could be mental. Regardless, the Power of Attorney paves the way to allow others to help us with a variety of things, including physical activities, banking, shopping, driving, or paying bills just to name a few.

What Is A Power of Attorney?

The Power of Attorney is a document that gives someone, called an Attorney in Fact, the authority to do certain things for us. We can’t give them more authority than we have. But we can authorize them to do anything for us that we could do ourselves.

Does the Power of Attorney Expire If We Become Incapacitated?

The Power of Attorney should not expire if we become incapacitated. If it is a “Durable” Power of Attorney, the authority we gave our Attorney in Fact will continue after we are incapacitated. This allows our Attorney in Fact to help us regardless of our condition and throughout the rest of our life.

Does the Power of Attorney Extend Beyond Our Death?

The Power of Attorney terminates at the death of the principal. The Attorney in Fact is the “agent” for the principal and will no longer be able to use authority under the Power of Attorney when the principal dies. An Executor or Trustee will be required to take care of things after the principal’s death.

What Power(s) Does The Attorney in Fact Have?

The Attorney in Fact has all of the power(s) described in the Power of Attorney. We want our Attorney in Fact to have all of the Power and authority we can give them. Otherwise, they may not be able to do something for us that needs to be done. If we worry that our Attorney in Fact may misuse the authority we give them, we shouldn’t choose them as our Attorney in Fact. Instead, we should choose someone we trust to do what is in our best interest. The Attorney in Fact’s duty is to do what they believe in good faith to be in our best interest and what we would want them to do. Otherwise, they are acting outside the scope of their authority.

What Powers Should Be Obvious In A Power of Attorney?

In recent years, technology has changed rapidly and so have our laws. With those changes, the provisions of a Power of Attorney must change to keep up. If you aren’t certain that your Power of Attorney includes these provisions, you should consider having it reviewed and changed.

Your Power of Attorney should authorize gifting, estate planning, and asset protection planning. This is important so that your estate distribution and asset protection goals can be carried out. Most people want to protect their assets and to see their assets used to benefit their loved ones. With these powers, your Attorney in Fact can take steps with your estate planning/elder law attorney to accomplish these goals.

Your Power of Attorney should authorize your Attorney in Fact to sign other Powers of Attorney on your behalf. Many financial organizations, such as banks, investment offices, brokerage firms, and other professionals, require their own proprietary Power of Attorney to be signed in addition to the Power of Attorney you created with your estate planning/elder law attorney. By permitting your Attorney in Fact to sign these proprietary Powers of Attorney on your behalf, you are keeping the door open so that your Attorney in Fact can work with your financial advisor, accountant, and bank to take care of your needs.

Your Power of Attorney should authorize your Attorney in Fact to access all of your electronic accounts, assets, and resources. Over the last several years, most people have embraced or, at least, accepted that technology is an inevitable part of our lives. We may have email accounts, online or mobile banking, investment, and credit card accounts. We may have a variety of social media accounts, and perhaps we have health tracking programs. All of these will have access restrictions, and the restrictions may vary from one account or program to another. So it’s very important that your Power of Attorney clearly state that your Attorney in Fact be able to access all of your accounts, apps (applications), programs, and email platforms.

Final Thoughts.

Changes in the law and technology will continue. If your Power of Attorney hasn’t been reviewed in the last 2-3 years, you should have it reviewed and consider having it redone. And every 2-3 years afterward it should be reviewed to be confident it keeps up with the changing times. Contact me to see if your Power of Attorney is up to date and contains the provisions it needs.

Estate Planning With Retirement Accounts: The Basics

Living Will and Other Health Care Directives: The Basics

Special Needs Trusts: The Basics – Continued.

Power of Attorney: The Basics

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