Elder abuse is real and needs to be taken seriously. An estate and trust can help from preventing that. In this article that was published in the Los Angeles Times, there have been recent reports that Marvel Comics founder and creator Stan Lee has been a victim and is placing suit against those responsible.
Article by Tracy Brown
Marvel comics icon Stan Lee has filed a lawsuit against former manager Jerardo Olivarez, alleging fraud, financial abuse of an elder, conversion and misappropriation of his name and likeness.
In a complaint filed in Los Angeles County Superior Court on Friday, Olivarez is accused of being one of many “unscrupulous businessmen, sycophants and opportunists” who sought to take advantage of Lee following the July death of his wife, Joan.
The lawsuit alleges that Olivarez — a former business associate of Lee’s daughter Joan “J.C.” Lee — manipulated Lee into ousting his “banker of 26 years” and his longtime lawyer, signing power of attorney over to Olivarez, loaning $300,000 to a fake nonprofit and buying an $850,000 West Hollywood condo. Olivarez is also accused in the lawsuit of taking nearly $1.4 million from Lee’s accounts “through a series of complicated wire-transfers all initiated” by him and orchestrating a scheme to steal Lee’s blood for use as a “merchandising item.”
The lawsuit follows a report published last week by the Hollywood Reporter detailing the battle over the 95-year-old Lee’s estate. The story revealed Lee’s situation, which also involves Olivarez, as “increasingly toxic and combative … involving broken alliances, abrupt expulsions and allegations of elder abuse.”
Medicaid and Work Requirements
On January 11, the Centers for Medicare and Medicaid Services (CMS) issued a State Medicaid Director Letter providing new guidance for Section 1115 waiver proposals that would impose work requirements in Medicaid as a condition of eligibility.
As of press time, CMS has approved work requirement waivers for Kentucky, Indiana and Arkansas. As many as 13 other states have pending waiver requests and/or have stated they plan to apply. These include Alabama, Alaska, Arizona, Kansas, Louisiana, Maine, Mississippi, New Hampshire, North Carolina, South Carolina, South Dakota, Utah and Wisconsin.
The CMS guidance describes the potential scope of requirements that could be approved and asserts that such provisions would promote program objectives by helping states “in their efforts to improve Medicaid enrollee health and well-being through incentivizing work and community engagement.” It invites proposals that are designed to promote better mental, physical and emotional health or help individuals and families rise out of poverty and attain independence.
Medicaid work requirement proposals generally would require beneficiaries to verify their participation in approved activities, such as employment, job search or job training programs, for a certain number of hours per week in order to receive health coverage. Certain populations, including children, the elderly, disabled, medically frail, pregnant women, caregivers and students would be exempt.
CMS Administrator Seema Verma has stated that she hopes the work requirements will improve enrollees’ health while reducing Medicaid rolls, and that requiring people to work would encourage them to find jobs that offer health coverage or make enough money to afford private plans.
Kentucky was the first state to receive approval to impose work requirements as part of a broader overhaul of the state’s Medicaid program. It is set to go into effect in June. State officials have made it clear that the work requirements are aimed at the newly eligible Medicaid enrollees who gained coverage only after the state’s previous Democratic governor expanded Medicaid. The current Republican governor, Matt Bevin, has said that many of the newly eligible are able-bodied and that they have a moral responsibility to work for their benefits.
Under Kentucky’s plan, able-bodied adults will be required to complete 80 hours a month of community engagement to qualify for coverage. This would include work, education, volunteering/community service or job training. Drug treatment is considered a work activity, not an exemption.
Enrollees can seek “good cause” exemptions if they can verify one of the following in their month of noncompliance: disability, hospitalization or serious illness of the enrollee or immediate family member in the home; birth or death of family member living with the enrollee; severe inclement weather including natural disaster; family emergency or other life-changing event such as divorce or domestic violence. In addition, one primary caregiver of a dependent minor child or adult with disabilities per household is exempt, and caregiving for a non-dependent relative or another person with a disabling medical condition is considered a work activity.
State officials estimate that up to 95,000 people would no longer have Medicaid at the end of five years. While they do expect people to lose coverage, they predict that most would transition off Medicaid by entering the workforce and gaining access to employer-sponsored insurance or private insurance.
While other states may use Kentucky’s Medicaid program as a model, CMS officials said it was not meant to be a template.
Arkansas became the third state to receive permission to compel some residents on Medicaid to work or prepare for a job, but the federal government denied the state’s request to shrink its Medicaid expansion. Instead of including people with incomes up to 138% of the federal poverty line, as designed in the ACA, Arkansas wanted to set its expansion limit at 100% of poverty, a move that would immediately cast out up to 60,000 people from the program.
State legislators required that “shrinking the expansion” be included in the state’s application for the work requirements. Now, with the federal government’s rejection, the state Senate may not have enough votes to approve a budget for the agency that runs the program. (The proposed budget for the coming year does not include any extra money to help people train and look for a job.)
Arkansas’ plan compels people to have a job, be in school or volunteer at least 80 hours per month. The requirements will apply to able-bodied adults unless they qualify for an exemption, which include caring for a young child, being pregnant, being medically or mentally unable to work, or are being treated for addiction.
Requirements will begin in June for people ages 30 to 49, with estimates that nearly 40,000 of the 98,000 Medicaid expansion recipients will need to start complying. (The program will expand to include those starting at age 19 in 2019.) Individuals will need to document every month that they are fulfilling the rules. A person who fails to do so for three months will be removed from the program and locked out until the next year.
Those opposed to the work requirements are voicing some concerns that will need to be addressed and monitored. These include:
Potential loss of health coverage. Many people working full time are still eligible for Medicaid, especially in Medicaid expansion states, because they are working low-wage jobs. For example, an individual working full-time (40 hours/week) for the full year (52 weeks) at the federal minimum wage ($7.25/hour) would earn an annual salary of just over $15,000 a year, or about 125% of poverty. That is still below the 138% federal poverty level maximum targeted by Medicaid expansion.
In non-expansion states with low eligibility levels, meeting Medicaid work requirements through 20 hours of work per week at minimum wage could lead to loss of Medicaid eligibility. For example, in Alabama, adults without children are not eligible for the program, and parents can only qualify if they earn not more than 18% of the federal poverty level, or less than $3,800 a year for a family of three.
Also, low-wage jobs are unlikely to have health benefits. According to the Kaiser Family Foundation, in 2017 less than a third of workers who worked at or below their state’s minimum wage had an offer of health coverage through their employer.
Increased administrative costs. Those who are working will need to successfully document and verify their compliance. And those who qualify for an exemption must also successfully document and verify their exempt status, as often as monthly. States would need to pay for the staff and systems to track work verification and exemptions.
Some states have already decided to not implement waiver authority they have received due to administrative costs. For example, Kentucky amended its waiver application to move from a tiered-hour work requirement to a flat hourly requirement, citing administrative concerns.
Additionally, the CMS guidance states that federal Medicaid funds may not be used for supportive services. This means the states must address and pay for ways to overcome multiple barriers (childcare, transportation, education, training, etc.) that interfere with the ability to work.
Complicated processes can cause eligible individuals to lose coverage. Some eligible people may lose coverage due to their inability to navigate the processes, miscommunication or other breakdowns in the administrative process. This could be especially true of people with disabilities who may not obtain an exemption for which they qualify and end up losing coverage.
Additionally, some people may have trouble getting the documentation to prove they aren’t healthy enough to work. According to a Kaiser study, roughly one-third of non-elderly adults with Medicaid report having a disability, but nearly 60% of those do not receive Supplemental Security Income (SSI).
The impact of work requirements on people with disabilities will depend, in part, on whether states will correctly identify and exempt people who can’t work and what types of support services they provide to help them.
What to Watch
Expect lawsuits. Democrats are expected to argue the Trump administration is trying to undermine ObamaCare’s Medicaid expansion on its own after Congress failed to repeal the health care law. Lawyers for advocacy groups are likely to argue that work requirements don’t promote the objectives of the Medicaid program because they would be a barrier to coverage. The administration is hoping to show a correlation between work and improved health outcomes/independence.
Expect more states to come on board, especially Red states. Requiring work for benefits is a GOP policy staple and most of the states who have applied for work waivers have Republican governors.
Expect ongoing evaluations. CMS is requiring follow ups to determine if the work requirements lead to improved health, well-being and independence. Individuals who experience a lapse in eligibility or coverage because they failed to meet the program requirements or because they gained employer-sponsored insurance will also be surveyed.
Expect refinements. Participating states will be in the spotlight. We should see ongoing efforts to improve their programs as they strive to make them successful and fair.
Public Perception: A new poll from Kaiser shows the public is split on whether work requirements are more to cut spending or lift people up. If people do not see positive results, there will likely be a backlash.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer's particular circumstances.
The federal government is issuing new Medicare cards to all Medicare beneficiaries. To prevent fraud and fight identity theft, the new cards will no longer have the beneficiaries' Social Security numbers on them.
The Centers for Medicare and Medicaid Services (CMS) is replacing each beneficiary's Social Security number with a unique identification number, called a Medicare Beneficiary Identifier (MBI). Each MBI will consist of a combination of 11 randomly generated numbers and upper case letters. The characters are "non-intelligent," which means they don't have any hidden or special meaning. The MBI is confidential like the Social Security number and should be kept similarly private.
The CMS will begin mailing the cards in April 2018 in phases based on the state the beneficiary lives in. The new cards should be completely distributed by April 2019. If your mailing address is not up to date, call 800-772-1213, visit www.ssa.gov, or go to a local Social Security office to update it.
The changeover is attracting scammers who are using the introduction of the new cards as a fresh opportunity to separate Medicare beneficiaries from their money. According to Kaiser Health News, the scams to look out for include phone calls with callers:
For more information about the new cards, click here and here.
For more information about Medicare, click here.
A recent report from the Alzheimer’s Association states that one in nine Americans age 65 or older currently have Alzheimer’s. With the baby boomer generation aging and people living longer, that number may nearly triple by 2050. Alzheimer’s, of course, is just one cause of dementia—mini-strokes (TIAs) are also to blame—so the number of those with dementia may actually be higher.
Caring for someone with dementia is more expensive—and care is often needed longer—than for someone who does not have dementia. Because the cost of care in a facility is out of reach for many families, caregivers are often family members who risk their own financial security and health to care for a loved one.
Cost of Care for the Patient with Dementia—And How to Pay for It
As the disease progresses, so does the level of care the person requires—and so do the costs of that care. Options range from in-home care (starting at $46,332 per year) to adult daycare (starting at $17,676 per year) to assisted living facilities ($43,536 per year) to nursing homes ($82,128 per year for a semi-private room). These are the national average costs in 2016 as provided by Genworth in its most recent study. Costs have risen steadily over the past 13 years since Genworth began tracking them.
Care for a person with dementia can last years, and there are few outside resources to help pay for this kind of care. Health insurance does not cover assisted living or nursing home facilities, or help with activities of daily living (ADL), which include eating, bathing and dressing. Medicare covers some in-home health care and a limited number of days of skilled nursing home care, but not long-term care. Medicaid, which does cover long-term care, was designed for the indigent; the person’s assets must be spent down to almost nothing to qualify. VA benefits for Aid & Attendance will help pay for some care, including assisted living and nursing home facilities, for veterans and their spouses who qualify.
Those who have significant assets can pay as they go. Home equity and retirement savings can also be a source of funds. Long-term care insurance may also be an option, but many people wait until they are not eligible or the cost is prohibitive. However, for the most part, families are not prepared to pay these extraordinary costs, especially if they go on for years. As a result, family members are often required to provide the care for as long as possible.
Financial Costs for the Family
Women routinely serve as caregivers for spouses, parents, in-laws and friends. While some men do serve as caregivers, women spend approximately 50% more time caregiving than men.
The financial impact on women caregivers is substantial. In another Genworth study, Beyond Dollars 2015, more than 60% of the women surveyed reported they pay for care with their own savings and retirement funds. These expenses include household expenses, personal items, transportation services, informal caregivers and long-term care facilities. Almost half report having to reduce their own quality of living in order to pay for the care.
In addition, absences, reduced hours and chronic tardiness can mean a significant reduction in a caregiver’s pay. 77% of those surveyed missed time from work in order to provide care for a loved one, with an average of seven hours missed per week. About one-third of caregivers provide 30 or more hours of care per week, and half of those estimate they lost around one-third of their income. More than half had to work fewer hours, felt their career was negatively affected and had to leave their job as the result of a long-term care situation.
Caregivers who lose income also lose retirement benefits and social security benefits. They may be sacrificing their children’s college funds and their own retirement. Other family members who contribute to the costs of care may also see their standard of living and savings reduced.
Emotional and Physical Costs to Caregivers
In addition to the financial costs, caregivers report increased stress, anxiety and depression. The Genworth study found that while a high percentage of caregivers have some positive feelings about providing care for their loved one, almost half also experienced depression, mood swings and resentment, and admitted the event negatively affected their personal health and well-being. About a third reported an extremely high level of stress and said their relationships with their family and spouse were affected. More than half did not feel qualified to provide physical care and worried about the lack of time for themselves and their families.
Providing care to someone with dementia increases the levels of distress and depression higher than caring for someone without dementia. People with dementia may wander, become aggressive and often no longer recognize family members, even those caring for them. Caregivers can become exhausted physically and emotionally, and the patient may simply become too much for them to handle, especially when the caregiver is an older person providing care for his/her ill spouse. This can lead to feelings of failure and guilt. In addition, these caregivers often have high blood pressure, an increased risk of developing hypertension, spend less time on preventative care and have a higher risk of developing coronary heart disease.
What can be done?
Planning is important. Challenges that caregivers face include finding relief from the emotional stress associated with providing care for a loved one, planning to cover the responsibilities that could jeopardize the caregiver’s job or career, and easing financial pressures that strain a family’s budget. Having options—additional caregivers, alternate sources of funds, respite care for the caregiver—can help relieve many of these stresses. In addition, there are a number of legal options to help families protect hard-earned assets from the rising costs of long term care, and to access funds to help pay for that care.
The best way to have those options when they are needed is to plan ahead, but most people don’t. According to the Genworth survey, the top reasons people fail to plan are they didn’t want to admit care was needed; the timing of the long-term care need was unforeseen or unexpected; they didn’t want to talk about it; they thought they had more time; and they hoped the issue would resolve itself.
Waiting too late to plan for the need for long-term care, especially for dementia, can throw a family into confusion about what Mom or Dad would want, what options are available, what resources can help pay for care and who is best-suited to help provide hands-on care, if needed. Having the courage to discuss the possibility of incapacity and/or dementia before it happens can go a long way toward being prepared should that time come.
Watch for early signs of dementia. The Alzheimer’s Association (www.alz.org) has prepared a list of signs and symptoms that can help individuals and family members recognize the beginnings of dementia. Early diagnosis provides the best opportunities for treatment, support and planning for the future. Some medications can slow the progress of the disease, and new discoveries are being made every year.
Take good care of the caregiver. Caregivers need support and time off to take care of themselves. Arrange for relief from outside caregivers or other family members. All will benefit from joining a caregiver support group to share questions and frustrations, and learn how other caregivers are coping. Caregivers need to determine what they need to maintain their stamina, energy and positive outlook. That may include regular exercise (a yoga class, golf, walk or run), a weekly Bible study, an outing with friends, or time to read or simply watch TV.
If the main caregiver currently works outside the home, they can inquire about resources that might be available. Depending on how long they expect to be caring for the person, they may be able to work on a flex time schedule or from home. Consider whether other family members can provide compensation to the one who will be the main caregiver.
Seek assistance. Find out what resources might be available. A local Elder Law attorney can prepare necessary legal documents, help maximize income, retirement savings and long-time care insurance, and apply for VA or Medicaid benefits. He or she will also be familiar with various living communities in the area and in-home care agencies.
Caring for a loved one with dementia is more demanding and more expensive for a longer time than caring for a loved one without dementia. It requires the entire family to come together to discuss and explore all options so that the burden of providing care is shared by all.
We help families who may need long term care by creating an asset protection plan that will provide peace of mind to all. If we can be of assistance, please don’t hesitate to call.
Do you have an estate plan? If not, you are not alone. Fewer than half of Americans have an estate plan—the percentage varies between 55 percent and 70 percent, depending on which survey you rely upon. For those of you with an estate plan, there are mistakes that can be easily avoided. In this article, I will specifically address the issue of retirement plans and beneficiary designation forms.
Most people think that a will is the only document you need for an estate plan—not true! A will directs how your “probate assets” are distributed. Probate assets are assets that are owned solely by you (i.e., no joint owners) and have no beneficiaries named on the account. A retirement plan, such as a 401(k) or IRA, is not a probate asset. Your retirement plan is to be distributed in accordance with the beneficiary designation forms that you complete. It is possible for your will to direct your assets to be distributed to one person, and your beneficiary designation form to direct your retirement plan assets to a different person. Sometimes, this is intentional, and if so, generally done for purposes of minimizing tax consequences. However, many other times, this is a mistake that is overlooked and has unintended consequences.
Why is it important to complete the beneficiary designation form?
Control Who Inherits
Without a properly completed beneficiary designation form, the contractual provisions of your retirement plan will control who inherits your retirement assets. In most cases, the default beneficiary is your estate. However, other retirement plans may state that other persons directly inherit your retirement plan.
You have worked hard during your lifetime to save this money. You should be the one to decide who inherits the funds.
Protect the Funds From Your Creditors
If you intend for the same people to inherit both your probate assets and your retirement assets, it might seem easier simply to name your estate as the beneficiary of your retirement assets and allow all of the assets to be distributed in the same manner. Be warned—by doing so, you are putting your retirement assets at risk of your creditors.
Assume that you die with $100,000 of probate assets (bank accounts, equity in a house, vehicle) and $200,000 of retirement assets. Also assume that, upon your death, you have creditors (credit card companies, a nursing home and medical providers, or even a plaintiff in a lawsuit who obtained a judgment against you). Generally, those creditors can be paid only from your estate. So, if you owe more than $100,000, and if you properly completed your beneficiary designation forms for your retirement assets, those creditors can take only the $100,000 from your estate while your beneficiaries receive all $200,000 of your retirement assets. However, if your retirement assets are distributed to your estate, either because you named your estate on your beneficiary designation form, or your estate is considered the default beneficiary, then your creditors can also be paid from the retirement assets that become part of your estate, and your beneficiaries will not benefit from your hard work.
Protect the Funds From Your Beneficiary’s Creditors
Many people are concerned about protecting beneficiaries from themselves and their creditors. For this reason, many people set up a trust to manage the funds for the benefit of the intended beneficiaries. For example, you could name a local trust company to manage the funds for the benefit of your children until each child reaches the age of 35.
A common mistake with this plan is to name the children instead of the trust on the beneficiary designation forms for the retirement plans. What is the result? Assume the previous situation where you have $100,000 of probate assets and $200,000 of retirement assets. If you establish a trust for your children under the age of 35, but name the children (rather than the trust) as beneficiary, you end up having $100,000 held in trust until they turn 35, and the other $200,000 going to them directly as early as age 18.
Having a will in place is a great start for an estate plan, but the planning should not stop there. Reach out to your lawyer to discuss the next steps, and make sure all of your beneficiary designation forms are completed properly.
Written by Liz Weston
Estate planning mistakes can be expensive to fix — that is, when they can be fixed at all.
That’s the thought that haunts New York attorney Mari Galvin whether she’s creating an estate plan for a client or confronting the aftermath when people didn’t properly plan.
“People think, ‘Oh, I have a simple life,’ but you have to understand [that if] you make a mistake and you have unintended results, you can’t bring the person back to sign a new will,” says Galvin, a partner at Cassin & Cassin law firm.
Galvin is currently sorting out the $12 million estate of a man who thought his situation was straightforward enough to plan with do-it-yourself software. His mistakes left his executors without enough cash to pay the estate’s taxes, which has led to conflicts among the heirs, delays and considerable lawyer fees.
“It’s an absolute mess,” she says.
For many, though, do-it-yourself options may be better than not having any plan. A 2016 Gallup Poll survey found that only 44 percent of Americans have a will, which means most don’t have a plan to guide their families or determine who will take care of minor children. People who don’t have estate plans are stuck in denial, sure, but many are also intimidated by the perceived complexity and cost.
“There’s so many people out there who are just too afraid of the process, don’t understand it, don’t know where to start, don’t know where to go, that they’re doing nothing,” says Chas Rampenthal, general counsel for the self-help site LegalZoom. “That right there is a real tragedy, in my view.”
Fortunately, there’s middle ground between doing it all yourself and paying thousands of dollars for a lawyer.
LegalZoom, for example, offers users the option to consult with an independent attorney while using its software. A basic will without legal advice costs $69, while a bundle that includes advice is $149. At Rocket Lawyer, another self-help service that runs on a subscription model, users pay $40 a month for planning software and unlimited access to attorneys.
Prepaid legal plans, often offered by employers, may be another alternative. (Quicken Willmaker, among the best-known software products, doesn’t offer advice as part of its $70 cost, but its publisher, Nolo, offers a directory of lawyers that users can hire to review their wills.)
Going straight to an attorney will be costlier, but prices vary. A basic will might be $300 to $1,000. The cost for a living trust, which is an alternative to wills designed to avoid probate, starts at about $1,500 and goes up from there, depending on an estate’s complexity.
Jennifer Sawday, an estate planning attorney with TLD Law in Long Beach, California, says people can save money by asking CPAs or other tax professionals for referrals and looking for attorneys who advertise, since they may still be building their practices.
“Understand that most estate plans are actually drafted by software programs so what you are paying for is the advice on the documents you need, having the documents prepared correctly and having the deeds for your real estate recorded for you,” Sawday says.
One of the most valuable services an estate planning attorney can provide, Galvin says, is the opportunity to discuss your situation with an expert who has seen many estate plans in action and who knows what can go wrong.
“With an online form, you have choices, but what you lack is this consultation of being able to say to someone… ‘Walk me through this. Let me get this comfort level of how this would play out for me really for my family,’” Galvin says.
Even those advocating self-help options warn that some situations aren’t appropriate for DIY. These cases can include people with multimillion-dollar estates, disabled children who require special needs trusts, blended families (especially where there may be animosity between the kids and the new spouse), property in foreign countries and complex family businesses, Rampenthal says.
Other people can use software to at least get started on the process, with the idea that they can hand it off to an attorney, if necessary. What’s most important is to get it done.
“One of the most loving things you can do,” Rampenthal says, “is not make people guess at what you wanted.”
The Tax Cut and Jobs Act (TCJA) is now officially law. Both the House and Senate passed the new tax reform bill in December with straight party-line votes and no support from Democrats. President Trump signed it into law right before Christmas. It is the first overhaul of the tax code in more than 30 years.
In this issue of The Elder Counselor, we will mostly look at how this tax law is likely to impact seniors and persons with disabilities.
It’s Good News for Most Americans
Retirees, most of whom are on relatively fixed incomes, are probably the most concerned about what the new tax law will mean for them. But, generally, they will be less affected than others because the changes do not affect how Social Security and investment income are taxed. In fact, many will benefit from the doubling of the standard deduction and, with the new individual tax brackets and rates, will be paying less in taxes when they file their tax returns in April, 2019. (Most of the changes will apply to 2018 income, not 2017 income.)
Key Individual Provisions to Know
Here are main provisions in the tax law that could particularly affect retirees and persons with disabilities. These individual provisions are set to expire at the end of 2025 so Congress will need to act before then if they are to continue.
(Mostly) Lower Individual Income Tax Rates and Brackets
There are still seven individual tax brackets and rates, but most are lower. Current rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Here are the new rates and how much income will apply to each:
Rate Individuals Married, filing jointly
10% Up to $9,525 Up to $19,050
12% $9,526 to $38,700 $19,051 to $77,400
22% $38,701 to $82,500 $77,401 to $165,000
24% $82,501 to $157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000
35% $200,001 to $500,000 $400,001 to $600,000
37% $500,001 and over $600,001 and over
Standard Deduction is Almost Doubled
For single filers, the standard deduction is increased from $6,350 to $12,000. For married couples filing jointly, it increases from $12,700 to $24,000. Under the new law, fewer filers would choose to itemize, as the only reason to continue to itemize is if deductions exceed the standard deduction.
Personal and Elderly Exemptions
Currently, you can claim a $4,050 personal exemption for yourself, your spouse and each dependent, which lowers your taxable income and resulting taxes. The new law eliminates these personal exemptions, replacing them with the increased standard deduction.
The blind and elderly deduction has been retained in the new law. People age 65 and over (or blind) can claim an additional $1,550 deduction if they file as single or head-of-household. Married couples filing jointly can claim $1,250 if one meets the requirement and $2,500 if both do.
Medical Expenses Deduction
Currently, people with high medical expenses can deduct the portion of those expenses that exceeds 10% of their income. For example, a couple with $50,000 in income and $10,000 in medical expenses can deduct $5,000 of those medical expenses.
The new law increases this to medical expenses that exceed 7.5% of income. In the example above, the couple would be able to deduct $6,250 of their expenses. Note that this part of the new law applies to medical expenses for 2017 and 2018.
State and Local Tax (SALT) Deduction
The amount you pay in state and local property taxes, income and sales taxes can be deducted from your Federal income taxes—and the amount you can currently deduct is unlimited. The new law limits the deduction for these local and state taxes to $10,000.
Residents in the vast majority of counties in the U.S. claim an average SALT deduction below $10,000. Most low- and middle-income families who currently itemize because of their SALT deduction will likely take the much higher standard deduction unless their total itemized deductions (including SALT) are more than $12,000 if single and $24,000 if married filing jointly.
Originally lawmakers in the House and Senate wanted to repeal SALT entirely, to help pay for the tax cuts, but lawmakers in high-tax states (specifically CA, IL, NY and NJ) fought to keep it in. Those in higher income households in high-tax states will benefit from the SALT deduction.
Lower Cap on Mortgage Interest Deduction
Currently, if you take out a new mortgage on a first or second home, you can deduct the interest on up to $1 million of debt. The new law puts the cap at $750,000 of debt. (If you already have a mortgage, you would not be affected.) The new law also eliminates the deduction for interest on home equity loans, which is currently allowed on loans up to $100,000.
Temporary Credit for Non-Child Dependents
Under the new law, parents will be able to take a $500 credit for each non-child dependent they are supporting. This would include a child age 17 or older, an ailing elderly parent or an adult child with a disability. It is temporary because it is set to expire at the end of 2025 along with the other individual provisions.
Higher Exemptions for Alternative Minimum Tax (AMT)
The AMT was created almost 50 years ago to prevent the very rich from taking so many deductions that they paid no income taxes. It requires high-income earners to run their numbers twice (under regular tax rules and under the stricter AMT rules) and pay the higher amount in taxes. But because the AMT wasn’t tied to inflation, it has gradually been affecting a growing number of middle-class earners. The new tax law reduces the number of filers who would be affected by the AMT by increasing the current income exemption levels for individuals from $54,300 to $70,300 and for married couples from $84,500 to $109,400.
Federal Estate Tax Exemptions Doubled
The new law does not repeal the Federal estate tax, but it eliminates it for almost everyone by doubling the estate tax exemption to $11.2 million for individuals and $22.4 million for married couples. Amounts over these exemptions will be taxed at 40%. The new rates are effective starting January 1, 2018 through December 31, 2025.
Eliminates Individual Mandate to Buy Health Insurance
With the elimination of the individual mandate to purchase health insurance, there will no longer be a penalty for not buying insurance. This is expected to help offset the cost of the tax bill and save money by reducing the amount the federal government spends on insurance subsidies and Medicaid.
The Congressional Budget Office expects that fewer consumers who qualify for subsidies are expected to enroll on Obama Care exchanges and fewer people who are eligible for Medicaid will seek coverage and learn they can sign up for the program. (Estimates of those who are expected to have no health insurance by 2027 are all over the place, ranging from 3-5 million to 13 million.)
Critics, including AARP, claim that eliminating the individual mandate will drive up health care premiums, result in more uninsured Americans and add $1.46 trillion to the deficit over the next ten years, which could trigger automatic spending cuts to Medicare, Medicaid, and other entitlement programs unless Congress votes to stop them.
Some claim the individual mandate helps to encourage younger and healthier Americans to sign up for coverage. Without it, the individual market might lean more toward sicker and older consumers, which might lead some insurers to drop out of the market. 29% of current enrollees on the federal exchange already have only one option in 2018. Others maintain that the mandate is not a key driver for obtaining insurance. About 4 million taxpayers paid the penalty in 2016.
Inflation Adjustments Slowed
The new tax law uses “chained CPI” to measure inflation, which is a slower measure than that currently used. This means that deductions, credits and exemptions will be worth less over time because the inflation-adjusted dollars that determine eligibility and maximum value would grow more slowly. It would also subject more of your income to higher rates in the future.
529 Plans Expanded
529 plans have been a tax-advantaged way to save for college costs. The new tax law expands the use of tax-free distributions from these plans, including paying for elementary and secondary school expenses for private, public and religious school, as well as some home schooling expenses. Educational therapies for children with disabilities are also included. There is a $10,000 annual limit per student.
ABLE Accounts Adjusted
ABLE accounts, established under Section 529A of the Internal Revenue Code, allow some individuals with disabilities to retain higher amounts of savings without losing their Social Security and Medicaid benefits. The new tax law allows money in a 529 education plan to be rolled over to a 529A ABLE account, but rollovers may count toward the annual contribution limit for ABLE accounts ($15,000 in 2018). The new law also changes the rules on contributions to ABLE accounts by designated beneficiaries who have earned income from employment.
What to Watch
Expect some clarifications and strategies as the experts weigh in. There will also undoubtedly be some adjustments as the new tax bill goes into effect. Please don’t hesitate to reach out if you have questions about these new provisions and how they may impact you or those you work with.
Written by, CRAIG W. SMALLEY, MST, EA
For most practioners the estate tax hasn’t come into play for many years. Instead of eliminating the estate tax, the estate tax exemption has been raised to $11 million for an individual, and $22 million for a married couple that elects portability. For a majority of people the estate tax doesn’t come into play. However, let’s take a moment to explain how the estate tax exemptions and gift tax works.
The estate tax exemption and the gift tax work together in a sense that you have a unified lifetime credit for gifts, which match the estate tax exemption. The unified credit increases each year, along with the estate tax exemption. Each year there is an amount that you can gift, in a sense that you are removing assets from your taxable estate. For instance, in 2018 the amount that you can gift is $15,000. If you are married and elect to split your gifts, you can give someone $30,000. These amounts can be given without having to file a gift tax return. If you give a person an amount over the exemption, then you must file a gift tax return, and the amount over what you could give is deducted from your unified lifetime credit. If you go over this unified lifetime credit then you have to pay a gift tax of 40%.
There are a ton of steps that you can take to eliminate the estate tax, if you are subject to it. I used to help clients with their taxable estates, back in the days when the estate tax exemption was $600,000. However today, estate planning serves a couple of purposes.
First of all, if you make no plans at all, you die intestate, which is a legal term that means you had no will or estate plan. Your estate goes through a probate process and your assets pass according to the laws of the state, and no one wants that. Another reason to do estate planning would be to avoid as much of the probate process as possible.
Each state is different and probate works differently in each one. Generally, every estate is probabated in some form. In probate, the hearing is made public, so that creditors or anyone that feels that they have a right to the assets of the decedent can make a claim against your estate. For example, if you have a will, and that is your estate plan, the will must be probated before the assets can be disbursed. If you specifically exclude someone that has a legal right to the assets of the estate, they can contest the will, and tie up the distribution of your assets until the probate court determines what will happen to them.
Famous probate cases would be Anna Nicole Smith, who married a wealthy man, who changed his will to leave all of his assets to his new wife. Her husband’s adult children, who were excluded in the will contested the will, and the case was tied up until Anna Nicole Smith’s death.
There are two ways that assets can pass. One is through probate, and the other is through an act of law. For instance, if you formed a revocable living trust, and titled your biggest assets to that trust, there can be no claim made against the trust, because a trust is a legal document, and the assets passed to the intended beneficiaries by an act of law.
A revocable living trust is a legal document that has three parties. Then grantor, or trustmaker is the person(s) making the trust. The trustee is the person or entity that controls the assets, and the beneficiaries are the ones that are inheriting the assets.
Revocable means that the document can be changed during the grantor’s lifetime, living is because you are alive, and trust is a legal document. Typically, during your lifetime, you are the trustee of the trust. At death, a contingent trustee will become the trustee. The trust becomes irrevocable, meaning that it can’t be changed, and the assets are protected from creditors or anyone else that is not named as a beneficiary. Then it becomes a taxable entity. During your lifetime, the grantor is responsible for any taxes due on the income earned while in the trust. At death, if the assets aren’t distributed, then the beneficiaries are responsible for any taxes due.
For the smaller assets, like personal effects, you would have a pour-over will, that would be probated, but the probate process doesn’t matter too much, because you have removed the biggest assets already through the trust.
The other reason for estate planning for an estate that isn’t subject to the estate tax, is for the person that is self-employed, and wants to pas their business to someone else, in the most tax advantageous way possible. For instance, if you own a business and you want to pass the business to your children, it would be a taxable event unless you have made some arrangements.
One of the most popular ways to pass a business on to someone is through a grantor retained annuity trust or a GRAT. Basically, the owner of the business, the grantor in this case, would form an irrevocable trust, and transfer their shares of stock if a corporation, or membership units if an LLC to the trust. The trust would have a trustee, other than the grantor to protect the assets from creditors and to remove the assets from the taxable estate, if it exists.
The trust would have a term of ten to twenty years. The ownership vehicle would be placed in the trust at a value determined by the grantor. The trust would then pay the grantor an amount each year, as an annuity, until the end of the trust term. When the trust ends, the ownership of the business would pass to the beneficiaries.
The problem a GRAT creates is that the annuity amount that is paid to the grantor is taxable to the grantor, and if the grantor dies while the GRAT is in effect, the assets are removed from the trust and added back to the estate, and could be taxable if the grantor is subject to the estate tax, and will pass through probate.
There are other ways to pass the business to the beneficiaries, that is a little more complicated, but protect the assets, and the owner retains control of the business, and the profit of the business is used to pay the grantor for the assets, and the tax to the grantor is better than that of a GRAT.
Most businesses are set up as S-Corporations, now that can change with the new tax law, but the theory behind this’d way of passing along the business would remain intact. The grantors forms an intentionally defective grantor trust (IDGT). What make the trust defective is that it is irrevocable, unlike most grantor trusts that are revocable. In the case of an S-Corporation, you can only have one class of stock, and its common stock. You would split the stock, into voting and non-voting shares. This split does not create a separate class of stock, it just has to do with voting rights. You would take 99% of the shares and make them non-voting shares. You would transfer those shares to the trust, and the beneficiaries would be the ones inheriting the stock. The left over 1% of stock, would be the voting shares, and remain with the grantor.
The point of this is to pass the majority of the business to the beneficiaries, and the owner of the business to retain control of the business.
The 99% of the stock that was transferred would be transferred at whatever amount the grantor determines. The grantor would become a passive owner, not required to pay themselves reasonable compensation, however the owner would take distributions from the S-Corp, until such a time as owner is paid for the business, and then relinquishes their stock, the shares in the trust are distributed to the beneficiaries, and the business is removed, and passed to the intended beneficiaries.
Just because most of your clients are not subject to the estate tax, doesn’t mean that estate planning is a dying skill. Estate planning is a hard sell to a client, partially because the estate tax isn’t a big deal to most people, and with estate planning a client has to come face to face with their own mortality. However, knowing the ins and outs is still important.
There are two types of Special Needs Trusts (SNTs), commonly designated as first-party and third-party SNTs. It is important to determine which type of SNT you have or need. This depends upon whose property is funding the SNT. If the property funding the SNT originates with the SNT beneficiary, then it is a first-party SNT. However, if the property funding the SNT always belonged to someone other than the SNT beneficiary, then it must be drafted as a third-party SNT.
Third-Party Special Needs Trusts
Third-party SNTs are commonly used by persons planning in advance for a loved one with special needs. Typically, the parents of an individual with disabilities or special needs will be the persons who establish a third-party SNT, although a grandparent, a sibling, or any other person (other than the beneficiary) may establish the SNT. Third-party SNTs can be included in a Last Will and Testament, established within an inter vivos trust that is designed to avoid probate ("Living Trust"), or drafted as a stand-alone SNT. These SNTs are typically funded upon the death of the beneficiary's parents or the other individual(s) who established the SNT.
SNTs created under a Will or as a subtrust within a Living Trust do not come into existence (and therefore cannot receive gifts) until after the death of the individual whose Will or Living Trust created the SNT. Therefore, a stand-alone SNT may be more useful if there are multiple donors who wish to fund the SNT. A stand-alone SNT exists during the lifetime of the person establishing the SNT, which allows the SNT to receive gifts from grandparents, family friends or even the person establishing the SNT, prior to the death of the SNT's creator. Such an SNT is available as a receptacle for lifetime and post mortem gifts from any third-party source.
This type of SNT does not have to be irrevocable in order to preserve the eligibility of the SNT beneficiary for means-tested public benefits. However, if the SNT beneficiary has the power to revoke the SNT, the SNT assets would be considered an available resource for Supplemental Security Income (SSI) and Medicaid purposes. The beneficiary's ability to revoke the SNT or otherwise exercise control over the SNT may render the beneficiary ineligible to receive public benefits that have an income or asset limit. The SNT agreement should authorize the person establishing the third-party SNT and/or the trustee to amend the SNT to address later changes in the law or the circumstances of the beneficiary. Allowing for such limited amendments helps ensure that essential government benefits are preserved if an agency challenges the terms of the SNT.
The most important difference between third-party SNTs and first-party SNTs (described below) is what happens to SNT property when the beneficiary dies. Upon the beneficiary's death, the third-party SNT is not required to use the remaining assets to reimburse any state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime. As a result, this type of SNT is a useful planning tool for people who want to set aside property for a beneficiary with disabilities, preserve essential public benefits during that beneficiary's lifetime, and remain in full control of where all of the remaining SNT assets will go upon the beneficiary's death.
First-Party Special Needs Trusts
First-party SNTs are most often used when the person with a disability inherits money or property outright, or receives a court settlement. These SNTs also are useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation. These SNTs are creatures of federal law, specifically (i) individual first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(A), and (ii) pooled first-party SNTs are authorized under 42 U.S.C. § 1396p(d)(4)(C). First-party SNTs also are commonly called self-settled SNTs, Medicaid payback trusts, OBRA '93 trusts, and d4A or d4C trusts.
Until the Special Needs Trust Fairness Act became law late in 2016, the only persons or entities authorized to "establish" (create) an individual first-party SNT were the SNT beneficiary's parent, grandparent, legal guardian, or a court. Since December 13, 2016, federal law also authorizes a mentally and legally competent SNT beneficiary to establish an individual first-party SNT. A first-party SNT is funded with property that belongs to the beneficiary, or to which the beneficiary is or becomes legally entitled. Property in a first-party SNT can only be used for the "sole benefit" of that beneficiary. Individual first-party SNTs may be created (and funded) only for individuals who meet the government's definition of "disabled" and are under sixty-five years of age when the SNT is established (and funded).
While a pooled first-party SNT (described below) can be established by individuals over sixty-five years of age in many states, a significant number of states do not allow a person over age sixty-five to establish or transfer property to a pooled first-party SNT without penalty. Pooled first-party SNTs can be established by the beneficiary, the beneficiary's parent, grandparent, or guardian, or a court. If the SNT beneficiary is not mentally and legally competent, then court approval must be obtained to fund the SNT with the beneficiary's property.
All first-party SNTs must specify that after the beneficiary's death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback may any balance be distributed to other remainder beneficiaries.
A legally competent person with a disability may have a first-party SNT established and funded without court involvement. However, annual accountings should be provided on an informal basis to the beneficiary and to the applicable Medicaid agencies. When a minor or mentally incompetent adult is legally entitled to receive funds from a lawsuit, an inheritance, or from any other source, then court approval to establish and fund the first-party SNT is required. Often, the court must make specific findings to ensure that the SNT is considered "exempt" when determining the beneficiary's eligibility for public benefits that have income or asset qualification thresholds. These findings could include:
Pooled Special Needs Trusts
Pooled SNT programs can be used to establish both first-party and third-party SNTs. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries. Pooled SNT programs have the following features:
Both first-party and third-party SNTs must be properly drafted in order to protect a beneficiary's right to receive means-tested public benefits. The tax consequences of SNTs are not addressed in this article, but also are very complex. (Visit the index of prior issues of The Voice to discover those which specifically address various SNT tax issues.) To best protect the government benefits for which an individual with disabilities may be eligible, it is important to discuss which type of SNT should be used in a specific situation with an attorney who is proficient in special needs planning, including any of the Special Needs Alliance members found on the SNA website (www.specialneedsalliance.org).