Do you have concerns about:
• Running out of money if you (or your spouse) become ill and require significant care
• Having no control over who provides care for you if you need it
• Choosing the type of care you want and where you want to receive it
• Leaving an inheritance to your loved ones, only to have it taken by their creditors
• Your children misusing the property or money you leave to them
• Providing support to a loved one with a disability both during your lifetime and after your passing
• Making sure your wishes about care and your finances are carried out
If you answered yes to any of the questions above, we can help. A long-term care asset protection plan is not a one-size-fits-all set of documents. Each plan is designed based on your concerns, your desires, and your goals.
If you own a small business you should consider providing a health plan for your family and that of your employees. Health plans help workers and their families take care of medical needs–a fundamental need of all humans. These plans can be one of the most important benefits an employer can provide.
There are many reasons to offer a plan. You and your family can receive coverage under the plan, which can help you save money and improve your health in the long run to be sure. But, by starting a plan, you will also help your employees and their families stay healthy. So, productivity and worker happiness remain higher. A health plan may also help you attract and retain talented people. Moreover, having a group health plan can help you gain significant tax advantages. Employer contributions to the health plan are deductible from the employer’s income. Also, small businesses may be eligible for tax credits under the Affordable Care Act. For more information, visit the IRS’ website at irs.gov or consult your tax professional. If you start a plan, there are many protections for your health plan coverage including Pre-existing condition exclusions are no longer permitted. Insurance companies can’t charge higher rates or deny coverage because of a pre-existing condition Insurance companies cannot impose lifetime or annual dollar limits on coverage of essential health benefits And there are 2 new ways to hold insurance companies accountable for rate increases and help keep your costs down.
One option for looking for a plan is the Small Business Health Options Program Marketplace, or SHOP. SHOP offers small businesses an easy way to compare and select plans. For more information, go to healthcare.gov or call 1-800-706-7893.
Another option we advise clients with at least 10 employees is to take a look at a plan that offers significantly discounted premiums, $250,000/year/covered person benefits, $0 deductibles, 43% discounts on in-network providers, a concierge service to find the best physicians at the best prices regardless of whether you want to stay in-network, Teladoc to meet with physicians without having to go to the waiting room and expose yourself to other ill patients, and a Critical Illness rider that pays a lump sum cash benefit in the event a covered persons suffers a catastrophe. With 10 or more employees, these plans offer guaranteed acceptance. They pay cash benefits to the claimant as defined in the plan. So, you know what you’re getting instead of spinning the roulette wheel to find out what the company will cover and what it won’t cover. These plans provide thousands in savings that can be used to grow other cash benefits for owners and employees.
What is a “Stretch IRA?”
The “Stretch IRA” refers to sustaining the tax-deferred status of an inherited IRA for as long as possible when the beneficiary is someone other than a spouse. Under current law, a stretch IRA is a way to limit required distributions on an inherited IRA. Instead of naming the spouse as beneficiary, an account holder names children, grandchildren, great-grandchildren, or even siblings, etc., who can stretch out the withdrawals over their expected lifespan. That ability translates into the possibility that the continued tax deferred status could mean a difference of hundreds of thousands, perhaps, millions of dollars over a beneficiary’s lifetime.
The New Bill for 2017
In 2016, the Senate Finance Committee voted 26-0 to end the stretch IRA for non-spousal beneficiaries. The Committee saw such curtailment as a way to bolster revenues by $5.5 billion over 10 years. The bill has a retroactive provision to apply to IRAs The proposed bill, the Retirement Enhancement and Savings Act (“RESA”), requires beneficiaries of an inherited IRA to pay all taxes due on the account within five years of the owner’s death. To lessen the bite a little, the bill contains a $450,000 exclusion for non-spousal beneficiaries, which means a $1 million IRA would be taxed only on $550,000.
Say, you die and leave a $1.45 million IRA to an only child, the child can claim the exclusion and defer taxes on $450,000 over his lifetime. however, the child must withdraw the remaining $1 million within 5 years subjecting the larger portion of his inheritance to accelerated income taxes. If there are multiple accounts, the exclusion must be prorated over each account.
Decedent had $2 million in retirement assets: $1.2 million in a traditional IRA, a $500,000 401(k), and a $300,000 Roth IRA. So, the proration looks like this:
- Traditional IRA–$1.2/2 = 60%
- 401k–$500k/2mm = 25%
- Roth IRA–$300k/2mm = 15%.
So, the beneficiary gets to stretch $270,000 of the traditional IRA (60% x $450,000); $112,500 of the 401k ($450,000 x 25%); and $67,500 ($450,000 x 15%) of the Roth IRA.
The accelerated tax rules would apply to the remaining $930,000 of the traditional IRA; $387,500 of the 401k; and $232,500 of the Roth IRA. These amounts must all be distributed within 5 years. But, the amounts out of the Roth wouldn’t be subject to tax.
Likelihood of Implementation
Leading experts like Ed Slott are on record that this is going to happen in 2017. While most agree that the bill won’t move along as a stand-alone provision according to Brigen L. Winters, a principal at Groom Law Group in Washington, DC, the RESA “can easily be inserted into any tax bill, especially since Congress is being told that this provision will produce billions in revenue,” says Slott. While Slott maintains that the RESA won’t generate any revenue, to the contrary is more likely to lose revenue, since Trump has promised comprehensive tax reform, odds are good that some type of tax legislation is coming. Slott’s rationale for the lack of revenue generation is that the majority of beneficiaries won’t stretch the IRA anyway, they’ll “go through them like water…it’s human nature.”
Inherited IRAs Aren’t Exempt Assets Under ERISA
A United States Supreme Court decision in 2014 unanimously ruled that inherited IRAs cannot be considered a retirement fund and thus are not subject to exemptions under bankruptcy laws. So, that means inherited IRAs are open to creditor claims in the event of fortuitous financial problems occurring.
Need for Detailed Planning Analysis
It’s important to note that any unused exclusion cannot be transferred to a surviving spouse. Thus, you can’t just leave everything to your spouse if you have a lot of money in retirement accounts without losing the chance to exclude a portion of the account from accelerated tax. This knowledge should serve as a wake-up call to married people who have a lot of money in retirement accounts. It only makes sense to take advantage of both exclusions, else they will lose the opportunity to take advantage of enormous tax savings.
So long as the family’s combined IRA balance is less than $450,000 and isn’t likely to grow beyond $450,000, no special planning will be needed unless Congress decides to use a different exclusion amount. if the combined balance of the IRAs is greater than the exclusion amount, then strategic planning will be needed to protect families from a harsh new tax structure. One option is to establish enormous flexibility in the estate-planning documents with extremely liberal disclaimers. Perhaps allowing the surviving spouse to disclaim to children and provisions allowing children to disclaim to trusts created for the benefit of their children are low-hanging tactics obviously to be employed. Roth conversions are another powerful strategy to be employed. Discussions on the Roth conversion will be the subject of a different article–stay tuned!
HB 221 overwhelmingly passed both houses under the Golden Dome this 2017-2018 session. The bill was heavily promoted by the State Bar of Georgia via its Fiduciary Section, which also worked as a wordsmith of sorts on the bill. This legislation seeks to modernize Georgia’s power of attorney statute by outlining the duty, liability and authority for agents, co-agents and successor agents. The bill also provides for the applicability, meaning, effect and termination of a power of attorney. To be titled as OCGA §10-6B-1:81 upon signing by the Governor, the new legislation also contains a statutory form. The new law will also amend OCGA §10-6-7 and OCGA §16-8-10 concerning affirmative defenses to criminal charges related to misuse of power over another’s property. If the Governor signs it, the law will become effective by its terms on July 1, 2017. You can review the legislation for yourself here.
Since LBJ signed into law health insurance for elderly people in July, 1965, Medicaid has grown from an oversite, thought to care only for the poor, to the providence of some 74 million Americans–1 in 5–covering their needs from the womb to the grave. Thus, Medicaid is now central to the nation’s healthcare system.
Moderate Republicans were unwilling to gamble with deep cuts in Medicaid and therefore helped doom the GOP’s drive to “Repeal & Replace” the Affordable Care Act (“ACA”) aka “Obamacare.” Representative Frank LoBiondo (R-NJ), a centrist, noted that almost 1 in 3 of all his constituents were covered by Medicaid. Likewise, Senate Republicans and Republican state governors expressed worry about jeopardizing care for the working poor, children and people with disabilities, and reducing funding for the care of elderly people in nursing homes.
Last week’s doomed GOP bill that would largely have undone the ACA would have ended the open-ended federal funding of the largest share of states’ Medicaid costs and replaced the same with block grants. Block grants were not precisely stipulated, thus the concern that some states would be treated differently or more unfairly than others (see Georgia’s Nathan Deal’s expressed concerns). Moreover, the unanswered question of what states would do if their block grant money ran out in say, month 9 of a 12-month period–simply tell recipients that their care wouldn’t be covered for the last 3 months? Block grants or a fixed-annual sum per recipient were the two options available and either would have clearly led to major cuts in coverage over time.
Nevertheless, many GOP governors and members of Congress intend to continue efforts to curtail Medicaid due to budgetary concerns. In 2015, the total cost of Medicaid nationally was more than $532 billion. The federal government funded about 2/3 (63%) of that and the states picked up the remainder. But, last week’s defeat of the GOP’s AHCA shows how difficult it is to take away an entitlement. This reality prompted Vermont’s Bernie Sanders to again promise to introduce a single-payer act in Congress. Indeed, California is actively considering a single-payer system for its healthcare needs. States often have different names for the program, but whether you know it as Medi-Cal, MassHealth,or TennCare in Tennessee, it’s just Medicaid by another name. And the percentage of people who support cutting Medicaid spending has never exceeded 13%. Even Donald J. Trump recognized Medicaid’s political potency during his campaign, when he declared that Medicaid should be saved “without cuts” and repeatedly Tweeted support for Medicaid, stating as “wrong” Republicans who wanted to cut Social Security and Medicaid.
Medicaid pays for nursing home care and other long-term care for more than 6 million Americans older than 64 years. But the Republican bill, the AHCA, would have only allowed Medicaid payments to grow per recipient at an inflation rate less than the true inflation rate of health care costs. Thus, the AHCA would have eroded benefits over time. Beneficiaries would have had to re-enroll every six months instead of annually. This threat to the elderly led Florida Representative Daniel Webster to vote “No” on the legislation. Central Florida constituents in one retirement center alone, The Villages, number greater than 150,000 residents. So, even as Medicaid has gained some hint of a stigma with all the political polarization from the Obama years, the reality that some people can’t afford health insurance whether or not they were “able-bodied” and working has caused even Republican-led states to expand Medicaid coverage. The expansion has helped with the opioid epidemic, birth defects, and the fact that 10,000 Baby-Boomers per day are still turning age 65. So, despite the stigma that, “people don’t deserve [free care],” no one wants to see someone they know lose their healthcare due to unaffordable costs. Perhaps equally as important, Republicans recognized that any bill that would lead to drastic cuts in Medicaid would simply hurt too many of their constituents.
Last week, the House and Senate committees that oversee health policy and GOP leadership released a white paper detailing initial structure of the replacement of large sections of the Affordable Care Act (“ACA” or “Obamacare”). Importantly politically, the plan allows its most critical provisions to be passed through a special budget process that requires only 50 Senate votes. These procedural mechanisms will allow fulfillment of Trump’s promise that repeal and replacement would occur “simultaneously.”
Currently, it appears that the major changes will be to expand the number of Americans who could benefit from federal assistance in buying health insurance coverage. But, the plan will change who benefits most from that federal assistance.
The ACA extended health coverage to 20 million Americans by expanding Medicaid for low income and needy in participating states, and by offering income-based tax credits for middle-income people so they could buy their own insurance. Effectively, Obamacare redistributed wealth from the rich to the poor.
This new GOP plan would alter both those two existing mechanisms. First, it will drastically cut funding for states in providing free insurance through Medicaid to the low income and needy. Secondly, it will change how tax credits are distributed by giving all American not covered through their employment a flat credit. But there’s the sticker: the credit will be determined by age, not income levels, the latter being entirely disregarded in the calculus.
So, the larges financial benefits will go to older Americans. For example, Warren Buffett will get the same amount of financial assistance as someone his age, living in poverty. Likewise, a Trump Cabinet member, 64 year-old multi-millionaire Secretary of State Rex Tillerson, if he didn’t have access to government coverage, will get substantially more money than a poor, young person, but the same amount of financial assistance as any given 64 year-old American living in poverty.
To be sure, older people tend to have higher medical bills and so are charged more by insurers even under the ACA. So, matching tax credits to age has a rational basis–to a degree. And the new plan would simplify the current system in that verification of applicant income to optimize just the right amount of financial assistance would be eliminated. And, it would also eliminate incentives for low-income people to avoid earning more to avoid facing a reduction in benefits. But the GOP plan will result in more low-income people losing coverage if they can’t find the money to pay the difference between their tax credit and the actual cost of their health insurance. The ACA is set up to ensure low and middle-income Americans can afford the premiums charged for healthcare insurance.
Moreover, older people without employer-based insurance typically earn more than young people starting out their careers. Independent estimates of similar tax credit plans from Speaker Paul Ryan and Secretary of HHS Tom Price show changes based on tax credits will result in millions losing coverage.
Now, in moving resources from the poor to the rich, limits to deposits in Health Savings Accounts (“HSAs”) will increase. Generally, those with higher incomes paying more in taxes tend to benefit more from HSAs and recent studies show that HSAs are disproportionately held by families with higher earnings. The new program will also eliminate a number of taxes on the health care industry at large.
Curiously, the new plan omits changes to any of the Obamacare regulations the GOP have argued drive up costs of health insurance: the rules including mandates that every plan cover a standard package of benefits, and those requiring companies to charge the same prices to healthy and sick Americans (removal of pre-existing condition penalties). These rules can’t be changed through the budget process and so will require 60 votes in the Senate. It is yet unclear how these proposals will affect Aged, Blind & Disabled Medicaid assistance programs, if at all.
The new plan will undoubtedly change as it moves through committee hearings. But the above seems to set forth the outline of the discussion. So, against this backdrop essentially approved by every major committee working on health care in Congress, it seems that President Trump’s promises to provide a beautiful plan of health insurance for “everybody” are truly speculative.
Retirement plans offer some long-term protection even in the event of a Black-Swan event such as a bankruptcy. While the discussion of 401(k) plans and Roth IRAs generally revolve around tax-deferred growth benefits, these devices, along with insurance-based vehicles, really show their true potential in terms of their respectively available asset protection features–even in the event of a bankruptcy.
OJ Simpson has had a judgment of $33 million plus against him since 1997. Yet, Simpson’s NFL defined benefit plan still holds over $4 million that is sheltered under ERISA law from his creditors on that judgment: the Ronald Goldman and Nicole Brown-Simpson families.
Similarly, Lance Armstrong has faced several lawsuits from entities seeking to recoup their payments to him after Lance admitted to doping while winning seven Tour de France races. These creditors even include the US Government and the US Postal Service! Yet, because Armstrong did a lot of asset protection planning in the form of trusts to help shield his assets, his retirement assets will likely stay away from the reach of creditors.
Currently, 401(k) plan assets are protected in an unlimited dollar amount against creditors in bankruptcy proceedings. Upon retirement, if the employee/investor transfers the 401(k) balance into a rollover IRA, and doesn’t commingle those same funds with personal contributions to the same IRA, the protection from creditors remains unlimited. But, IRAs comprised only of traditional IRA contributions and IRAs comprised of rollovers from an employer plan commingled with personal IRA contributions are capped at a maximum of $1.245 million (continues to be inflation-adjusted from 2005 basis).
Several states like California have become increasingly aggressive in pursuing traditional IRA assets in liability cases. So, investors should seek to keep as much as possible in segregated ERISA-sponsored retirement investments, as they still provide unlimited protection for the assets in the plan, even against these aggressive states.
Bottom line: good asset protection planning can start with such a simple move as keeping proper form in your retirement plan assets.
For the first time in history, two generations are downsizing simultaneously: Boomers and their parents. And millennials don’t want “heavy” assets tying them down in case they need to relocate for a job opportunity. So, it’s best to start facing the inevitable and address the disappointments and sentimentality early on, so you can make appropriate arrangements ahead of the time you’re going to have to take action. Here’s a great article that provides some tips, insights, and solutions: http://www.forbes.com/sites/nextavenue/2017/02/12/sorry-nobody-wants-your-parents-stuff/#1c10cd5f3afe
5. Lack of Planning: What To Do?
The most important first step is planning, but not necessarily estate planning. By the time one of these situations has begun, it’s too late for thorough estate planning. Indeed, many of these situations occur despite good estate planning. Instead, your client needs to prepare for battle. That does not mean racing to the courthouse to sue everyone in sight. It does mean thinking through your options and taking initial steps to prepare for a potential fight.
The second step is to remember that the loved one’s will is not the only issue. In fact, for most people, the will is much less important than other documents. A last will and testament controls only assets belonging to the deceased’s estate. Most people, however, do not have significant assets in their estate. Instead, most people’s sizable assets pass outside the estate, probate and are not controlled by the will.
For example, most retirement accounts, investment accounts, and life insurance policies use payable-on-death beneficiary forms which designate who gets the particular asset at issue. The will does not override these forms.
So, as an estate dispute is simmering, it is vitally important to make sure that these non-probate assets are considered. Otherwise, there is a great risk of winning the battle over the will, but losing the war over the real assets.